Shiv Kapoor

Inflated Prices, Equity Bubbles: When Fools Rule

Mangiamill - in India I follow TCS, Bharti, Biocon, Sterlite, Hindalco, DLF, Unitech, GMR, Infosys, JP, Tata Power, RIL, Cairn, ICICI Bank, Suzlon, HDFC Bank, Axis Bank, GVK, Sesa Goa, CIPLA, LUPIN, M&M, Tata Motors, TS and Gujrat NRE Coke. As of now I have long positions in these companies either directly or via funds.

The ones where I have high conviction and am willing to hold for the very long term (multi-cycle or secular holdings) are Bharti, Infosys, RIL and Tata Steel. Other good cycle core holdings are Cairn, Hindalco, Tata Power, Sterlite, TCS, ICICI Bank, HDFC Bank, Axis Bank, CIPLA, LUPIN, M&M, Tata Motors, Sesa Goa and Gujrat NRE Coke.

DLF, Unitech, GMR, GVK, JP Associates are stocks which I trade; these are liquid stocks which offer good potential for beta returns.

Keep in mind that this post and comment are no more than my own views; it is not advice; nor is it an an offer, solicitation or recommendation of any security in any specific jurisdiction - you should research the stock yourself to decide an appropriate entry price and whether it is right for you.

I also neglected to respond to your question on TCK and ITW - I follow neither; not because I do not like them, its simply because I do not have the time to cover them.

On Aug 07 08:13 AM mangiamillie wrote:

> I follow Shiv Kapoor because I find his remarks sensible and insightful.
> Food for thought: invest in companies that supply emerging markets'
> needs as opposed to investing in emerging markets.Mr. Kapoor points
> out that there are exceptions. In his Disclosure he mentions that
> he's long several Indian companies. I'd appreciate knowing which
> ones.

Market Rally: Secular Bull or Cyclical?

The way I look at it is an economic cycle normally averages 6.5 years. A secular cycle is made up of approximately 3 economic cycles. A generational cycle is made up of approximately 3 secular cycles. My guess is that we are in a economic cycle trending upwards; the secular cycle trend is less clear, because on the one hand we have seen US markets (SP500) in a down turn since 2000; but at the same time, the global trend has been in a secular uptrend. I think if you look at what Grantham calls "High Quality", US is in a secular uptrend. What is in a downtrend is that part of the market which is largely leveraged to the domestic US economy.

This article is interesting as it demonstrates the point over a genarational cycle (1950-2009). What would be interesting to know is the absolute return potential. If someone invested after the market traded 10% over the 200DMA following a fall of 10% below the 200 DMA; what total return whold be made 365 days after the investment date. I am assuming your 365 day % is the % over the 200 DMA; but the 200 DMA will have risen from the investment date too; so I guess it is silent on absolute return.

I enjoyed the post - thanks.

Fractured Wall Street Fairy Tales #1: Buy and Hold is the Best Strategy

Joseph - I think you misunderstand buy and hold as a concept; a chart can never illustrate the success of a buy and hold investor, because the value of a stock at any point in time is irrelevant to his thinking - you see their return they earn comes substantially by way of dividends.
Buy and hold investors will not normally buy at any old value with a view to holding forever. They are typically investors who buy deep value and then hold forever. The most successful have an attitude which attributes no value to the future value of the share - i.e. even if the share value goes down substantially it does not matter, so long as the share continues to payout an income.
One such investor known to me has a simple buy policy; he buys when the dividend of a stock together with a 3% annual growth assumption can be had at a value which delivers him a 15% rate of return expected in perpetuity - for example if a stock pays a dividend of $1 and he is very confident it can grow this dividend at a 3% rate over the very long term, then he will buy it when it is selling for $8.58 {Dividend * 103%/[115%-103%]}. On rare occasions he will sell; but only when he has lost confidence in a stocks ability to continue its dividend together with growth at 3% annual. The index is not relevant - for instance at this point in time, he feels the index (SP500) would only represent deep value at 420 levels; because at that level a dividend payout of $24 (his estimate of dividend trough) will give him a return of 15% assuming 3% annual dividend growth. While the market has not got near his levels, several stocks have.
Twenty years on he receives a dividend which yields him 30% of his original cost. And yes, he sits on a huge capital gain; but to him that is meaningless.

Why Decoupling Failed

I do not think either country trying to crush the economy of the other is what this is all about. This is about mutual collaboration to optimize global allocation of resources and capital; to facilitate mutual prosperity. Having said that, I do note your point - like efforts at global military domination exist, so too will efforts at economic domination.


On Jul 13 10:45 AM Alex Filonov wrote:

> It would be a good idea to look at all financial flows when analysing
> international financial system. True, lots of countries and institutions
> invested in US Treasuries. It looks like huge US trade deficit is
> financed by debt. But at the same time a lot of US companies earn
> huge money abroad and don't repatriate in in US. China buys Treasuries,
> but Chinese affiliates of US companies don't repatriate profits from
> China, they reinvest them on site. There is a lot of crying that
> China can crash the market of Treasuries by selling them all at once.
> Well, US can crush Chinese economy by requiring all US companies
> to repatriate profits. Or even by taxing profits which are not being
> repatriated.

Why Decoupling Failed

Old Trader

Actually what I am angling for is transparency. For example, a US entity raises debt for unrestricted investment in India. The US entity infuses the debt as equity into a Mauritius entity, which in turn invests into India. The Indian entity then levers itself. At a group level the business is twice levered; but in India the degree of leverage looks okay because the seed capital is all characterized as equity. Something as simple as a globally agreed lifting of the corporate veil and disclosure of the full substance of a transaction will help regulators at both ends.

Also do not see China as having a choice; they have to float. Once they understand the unintended adverse consequences of a controlled currency, they will have no choice other than to float. I believe this is a lesson they will have learnt as a result of the risk to the value of their portfolio of US treasuries.

On Jul 13 11:05 AM Old Trader wrote:

> "Some of these methods can lead to excessive risk taking with sound
> domestic regulation at both ends; for policy to achieve its objective
> regulation will need to be globally coordinated."
>
> A valid point, but does the author believe the individual countries
> can put aside their various conflicting interests to make this happen?
>
>
> Re: Chinese currency, it appears China has been taking some steps
> to loosen their stranglehold on it, by allowing its use to settle
> accounts with various trading partners.
>
> On balance, a good article....thanks.
> On balance, a good article....thanks.

Why Decoupling Failed

I could not agree more. I think what is happening with Rio Tinto is shameful as is the human rights record. It still remains my view that China will have to lead the way out. I also think (more like hope) China will over time be forced to change.

On Jul 13 06:09 AM Ryu Mei Co wrote:

> "We see China as being the single most important economy to lead
> the world out of the crisis. "
>
> We all know China may lead the world out of the crisis. However,
> I am a little skeptical of the overbought recovery hype coming out
> of China while at the same time horrified at the Chinese government
> holding Rio T.'s top "hostage" over the Chinalco-Rio Tinto deal.
> Moreover, the closing down of Google, the attempt to manipulate the
> internet content and shutting down Chinese bloggers are some of those
> things that does not sound positive as a businessman's point of view.
> The Urumqi riots every day and the Tibetans are not far behind too.
>
>
> What I am simply saying is China may lead the world out of the crisis
> if we like China pointing guns at their own citizens. If China does
> not maintain stability among its many ethnic people, troubles brew
> hotter and we may see a Chinese 9/11 by its own people. Yikes!

Wall Street Breakfast: Must-Know News

Sure it is disappointing. But think about it $14 billion is not going to rescue GM or C unless the Unions accept lower wages immediately. If they do not, $14 billion might see both companies through two quarters max after which they will be insolvent once more. I do not think TARP provides a solution either, the Unions have to come back to the table and hopefully they will if it is clear that their agreement is worth diddly squat if they do not rationalze their compensation structures to parity with Japanese manufacturers in US. A proper Union agreement will greatly improve survival and perhaps even prosperity as the economy recovers. The alternative is a large increase in unemployment; should rise to 9.8% anyway but with this perhaps it could get a bit worse. Statistically, for employment to fall above 9.8% is a remote probability cause it is the level of mean less 3 standard deviation; but statistic modelling does not always work; all it can do is signal a near zero probability. An event can make 100% of that remote liklihood become reality, no matter how improbable. Not sure what the Unions are thinking here; do they want to work for another few months or a lifetime?

Welcome to a New Bull Market

Sure, and the world could end tomorrow. But nothing would matter then. Political instability, civil unrest & war are opportunities - look at US history.


On Dec 09 11:19 AM robert.b.ferguson wrote:

> Economic upheaval isn't all it's crcked up to be. Political instability,
> civil unrest and war could be show stoppers in emerging markets like
> India and China. I like Brazil at this juncture and recently took
> positions in (NETC) and (VIV) as they look to be poised for growth
> going forward.

Why It Is Important to Start Reinvesting Now

Timothy - I do not think energy has bottomed just yet. I think OPEC will cut. And I think the cut will cause oil prices to fall further because it will confirm an expectation of falling demand. The falling demand also means that as production grows in the future, there is existing supply which can satisfy it (because an OPEC cut will be of production not production capacity). Initial gut reaction will possibly be a hike in oil prices, but once things are thought through, it should fall. My guess is energy will bottom with oil very near $60; from here oil prices might well fall a bit further, but energy stocks will likely bottom before oil prices do (see magical pairs on maxkapital.blogspot.co... As far as the broader SP500 index is concerned, it may have bottomed at 840. But there is a chance that it will reach for 740 (740 is the level where SP500 will trade at a 20 year dividend multiple low which is indicative of an economy in outright panic; and even in such an environment I have a fair value of 1247 on the SP500, so for an investor it is a good time to be accumalating). Also did a post on the oil bull which sort of explains why I am not constructive on energy right now but am very positive on the sector longer term; its on maxkapital.blogspot.co...).

On a Return to Normalcy: Dow 8,500

This is a very nice article. However, I believe the market will, on occasion, trade at a premium to the long term normalized PE ratios. At other times it will trade at a discount to the long term normalized PE ratios. It will seldom, if ever, trade at long term normalized PE ratios. When the market does trade at a discount, perceived risks are elevated while real risks are low. When it trades at a premium, perceived risks are low, while real risks are higher.
Whether we will now trade at a discount to the long term normalized PE is an open question. My view is that once the panic subsides, the market will pay a premium on normalized PE's for several decades.
There have rarely, if ever been the kind of triggers for growth that are in place today. The urbanization and industrialization of India and China has a long way to go; as an aggressive investor with access to capital, intellectual property and management skills, the United States will be a significant beneficiary.
Global GDP has grown and is continuing to grow at a rate in excess of historic norms. Global capacity is short and investment is required. Now that the bank crisis has been addressed by the world community, the healing process has begun. From it will emerge a more responsible financial services industry, which will hopefully focus more on credit quality and will not over-leverage as in the past. Once the de-leveraging is done, growth will recommence, perhaps at a more sedate pace, but nonetheless at a rate of growth higher than the long term average.
If demographics are studied, China will start having an increase in the aged population as a % of the working population only after 2030. In India, it is not expected to happen until closer to 2050. The standing army as it is today is under-served, so there is a big catch up to be done. Once that is done, growth needs to be sustained to serve the accelerating population.
Demographically, United States is an aging nation and as the baby boomers retire, it is perceived that (a) consumption will decrease (lesser demand from older people) and (b) there will be dis-savings as older people withdraw savings from pension funds and social security.
However, thus far United States has maintained an excellent demographic balance through immigration (more recently supported by high birth rates amongst the Hispanic and Asian communities). I expect this to continue because United States continues to attract the best of the globe to its educational institutions and thus they are able to preserve that competitive edge arising through home grown and imported intellect.
With the balance between the working and retired being maintained, there should be no unimaginable dis-savings. I would argue that a lesson will have been learnt from past excesses and consumption funded by debt will reduce considerably. This reduced consumption will lower the burden on future generations. The savings that arise as a consequence of lower consumption will be invested. I expect considerable investment within the United States as she strives to re-assert her supremacy as a producer nation. I also expect considerable capital outflows from a capital resource surplus country to capital constrained societies.
As far as I am concerned this is not the end of the world; the problem is making the world believe it.

Advice for Investing in Turbulent Times

ThoenTBrite - Thanks for the kind words. The ugly slob image is carefully cultivated; been seen as the (under) dog it gives a massive advantage in negotiation! Besides my brother took all the family looks even though he came after me.

But seriously, since there are economic students at stake, I will point one fact out which is not raised by any readers. In addition to use of operating earnings as a divsor to calculate multiples, I use earnings + dividends as a divisor in calculating alternative mutiples; no one asked why. Since earnings are before dividends, it is somewhat illogical to use a sum of the two as a divisor. It works best because at market bottoms yield and valuation together become the key investor criteria; so an absolute value gives the information most relevant for investment decisions being made.

VIX: How The Past May Help Us Understand Our Present

I have had my eye on this predictive piece for a few days; interesting piece of analysis. Looks like it is playing out as you thought. I generally do not try to time market bottoms (mainly because I cannot do it with reliable consistency). So I buy value when I see it and buy more as value gets better.

In the mean time I try to find the man in form for short term market direction. This time I think it will have to be you both on quantification of the extent of further decline and possibly timing of the bottom (assuming we bottom in the second half of October).

Not sure VIX is reliable just now cause its levels are abnormally high probably because short sellors need to hedge using put options. I guess 30=40 and 40=50 for historic comps. What do you think?

U.S. Weekly Leading Index Indicates Economic Growth Downturn Continues

Makes sense. We are well into a recession.

Consumer confidence appears to have bottomed recently. Unemployment has been rising the past year. And continues to rise; during August, the rate rose to 6.1%. In terms of where we are in the present cycle, GDP growth has been 2.3%, 3.5% and 4.1% in current $ and -.2%, .9% and 2.8% in chained 2000 dollars. During 2007 and thus far during 2008, annualized inflation levels have remained elevated at over 4%; thus GDP growth (Current$) adjusted for inflation has been negative 3 quarters running.
Industrial production showed signs of stabilization during June and July, but contracted sharply during August; on an August 07 to August 08 basis it is down 1.5%.
Real interest rates are in negative territory while the yield curve has steepened with short term yields nearing 0%.
In normal circumstance, rising consumer confidence after a significant fall is indicative of an economy in full recession. Industrial output continuing to fall indicates early recession; it will typically bottom out during full recession. Three quarters of GDP contraction is indicative of being in full recession. Real interest rates falling are also indicative of an economy in full recession. A normal yield curve (short term yield less than long term), is indicative of full recession. A steep yield curve such as we see today, is normally indicative of early recovery; I suspect that the steep yield curve today, is more a function of sheer terror in the financial services sector than of the stage of recession. People will accept no yield on a short maturity, not so much in anticipation of better upcoming opportunities; the instinct is capital preservation. On balance, I would conclude that the economy is in full recession. It is likely well past the beginning and early contraction and into the middle late contraction; perhaps poised to enter the late stage of contraction.The late stage of contraction within an economic cycle will typically last six months. This time around I believe that it could take considerably longer. For an economy to recover, the first sector which must heal is financial services. With the bail-out package now enacted, the healing process has begun. The length of time spent in the healing process will be influenced by the effectiveness in implementation. In addition the problems are of such historic significance, that despite the bail-out package, I cannot contemplate a quick turn around. All said and done, I expect the late contraction to continue with the economy emerging from it during q2 09.

Global Market Roundup: Will the Bailout Work?

The rescue package will take time to work its magic. And while people watch for indicators of success from implementaion of the rescue package, there is a possibility that better opportunities might emerge. This is time when perceived risks are higher than real risks. In the short term, corporations may well find earnings potential fall below long term earnings potential; and this might cause better entry points. However several economic risks are already priced in. This is a market for long term investors (5/6 years). Sector allocation is important, overweight positions need to determined based on which sectors will benefit most during the next cyclical upswing; also to consider is over-weighting the presently undervalued sectors; and finally consider the sectors which outprform based on where we are in the economic cycle today. Investors should also not forget to rebalance portfolios more frequently than in normal times. Finally, do not forget diversification across asset classes. Its a good market for traders too; volatility is high which is good for day traders. Positional traders can also look forward to an up quarter followed by a re-test of lows. This is one of those times when there is opportunity for everyone, regardless of style - short term/long term/trader/bull/bear. The only styles I would say might feel a bit left out is growth; because I think this is a time value will outperform and off course, small caps should lag large caps.

Searching for Support Levels

SP500 performance following VIX readings over 40 has been consistent. In the 4 other times when the VIX hit over 40, the market was mixed during the week immediately following. It was up during the month & quarter following. Yet, historically such intense selling as new 52 week lows are hit is unusual. Such events are rare, but have invariably been followed by a subsequent lower low. Based on history we can look for a 1-3 month rally followed by a lower low.