P/E Study: Past history

I did a study of the Nifty P/E Ratios from the NSE site.

What is a P/E ratio? It is the price to earning ratio. It is the number of times premium you are willing to pay for a current year profit.

Another thumb rule is your P/E ratio should be the % growth expected.

IT stocks had a P/E well in excess of 50-60 during their golden years.

On Jan 8th 2008, when the bull market peaked the P/E ratio was 28.3. In Oct'08 it bottomed out at 10.58.

During the period September 2007 to Jan 08, when the market got overheated, P/E was between 21 to 25.

At the time, world economy was motoring along.

Now, how much is the P/E now?

At Nifty 4300, a P/E of 20.5.

If you are expecting a growth of 21 pc going forward, then buy else sell and stay out.

21 pc means, basket of Nifty stocks will show a growth of 21 pc Y-0-Y.

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Elections over: What next?

The public has voted. All the votes have been counted and the winners take away the spoils. It was the best possible verdict (other than clear NDA victory).

The people who held the country to ransom have been shown the door. Manmohan Singh has proved to be a much better politician than most. First the nuclear deal and then this. If we break the results down, the Congress has won mainly because of UP, Kerala, WB, rajasthan and AP.
The real surprise has been AP and they deserve to win, they saved Satyam. Satyam going down would have been real bad news for Indian IT.

The real worry is now that the Congress should not fritter away this mandate like they did in 1984. The next big event lined up domestically is the Budget and the Monsoons. Busget will take at least 2 months to be prepared, and good monsoons should be here in a months time.

Domestically, things seem to well settled now. The Budget would be interesting because all the freebies will have to be balanced out.

The only missing puzzle are global cues. This rally has been fueled by FII money and till they stop pumping in, the markets will keep rallying.

Monday, the markets will gap up 700-800 points. Now, what do you do at this point?

Typically, it is classic sell on news. The smart money had already poured till this stage. At 13000 sensex, nifty 3950, the trailing P/E would be around 19.

Just look at the charts after the Nuclear deal vote of confidence, the markets peaked the next day. We still have not reached nifty 4620 after that.

It would be best to wait for markets to cool in. It would now be retail money jumping in. They are typically the last to get in. There would be definitely corrections on the way.

If the global cues, remain good we are headed to 14500 by July (factoring in good monsoons, which they should be, after all monsoons have failed only only 1-2 times in last 20 years).

If I had bought at lower levels, I would book some profits.If I have not bought, I would sit quietly. The markets always remain here. They do not go anywhere. Markets always give everyone a chance to buy.

There would be a dip after the euphoric rally on Monday.

I would wait for that dip to buy.

Remember the primary goal of investments should be capital preservation. At 13,000, valuations would look stretched. (8K to 13 K in 2 months)

For the moment, time to celebrate.

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GM Results, Stress Test results and Great Expectations

This was an eventful week in the US. This week probably sowed the seeds of a bear market rally in the US for at least till the end of June.There are several factors for this.

The Stress Test results were out. It portrayed a hunky dory picture for the US banks. Obama is doing well to play up the sentiment. The banks need help but not too much. We are on our way to recovery. Throwing money at Banks has helped. There is always a free lunch out there. We just have to print US dollars and the only cost to pay is the cost of printing those notes. That's Obama's message for the world.

The Stress Test results will buy time till the next wave of failures. I don't see that happening very soon. The Banks managed to show good results by accounting jugglery. Wells Fargo for instance, saw NPAs jump by 40 pc but Reserves to accommodate the same were increased only by 5 pc. This especially at a time when the NPAs are increasing.
If the value of the banks debt decreased from 100 cents to 60 cents and banks took a gain of 40 cents on their books.

The Investors are not really bothered by all this. It time to herald a new dawn and keep buying the shares of banks. The only fly in the ointment is that banks make money from their customers. The Customers are the US citizens who have lost their jobs. GM just made a loss of 6 billion dollars last quarter. Even Toyota made an annual loss. These jobs are going to disappear and they are not going to come back. Who will pay the loans of these people. Who will hold the bucket for these losses which will come later on. Remember the US unemployment is now 8.9 pc highest in 25 years. Bankruptcy now looks inevitable for GM. You cannot keep losing billions of dollars every quarter.

The 1 part of the problem of credit availability has been solved but the second part of demand creation remains. Till jobs are created there will be no demand creation.

For now, it is time to party. Recession is ending and get in before the Dow moves to 10000 seems to be the feeling.

The real problems will start a few months down the line. The next results in July and August September onwards. Things can get nasty if institutions start failing. The whole so called solution till now is print more dollars. This will work only till the dollar remains attractive. The 10 year T bill is already upto 3 pc which is bad news as everything from Mortgages to credit card debt is linked to the T-Bill rates.

As and when Inflation rears its head, the central banks will have to start raising interest rates. The main problem the US faces is the lack of jobs for its citizens. That has to be fixed. Obama's tax plans to curb of shoring will back fire in a big way. If the companies dont move jobs to low cost areas they become unviable and leading to more bankruptcies.

Obama is like a typical idealist. he positions himself like a Robinhood, the defender of the common man. All that has come about now is lofty promises.

In India, the elections hold the key. Looks like UPA + Left support and a Pranab Mukherjee or Shiela Dikshit as a probable PM. I would buy on dips if the market dips post results while a government is being formed.

Last time all Opinion polls were wrong and who knows this time. NDA might just squeak in. Prakash Karat has now started talking of supporting Congress led government.

I would buy because the global problems have taken a pause for now, monsoons look to be on time.

Its a traders market not an investors market. Till we get clarity on the long term, buy low and sell high.

Cheers,
Nishit

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U, V, W or L

Hi,

Its time to take a break from stocks and re-learn the alphabets.

Have you guessed it?

We are looking at the types of recovery possible for the US economy and the World Economy.

1. V Shaped Recovery
In this type of recovery, there is a rapid deterioration in the economy and before you know it there is a sharp recovery as well. V-Shaped recoveries are less painful and are are the mild recessions last for about 1 year. We are way past this stage to say that there would be a V-Shaped Recovery this time.

2. U Shaped Recovery
In this type, things go downhill then flatten for a bit. For maybe 6 months or so there is no further deterioration in the fundamentals of the economy and then a recovery starts taking place. This type of recovery includes a dull phase of maybe 5-6 months where nothing much happens in the economy, but we do start recovering. We may be in a U shaped Recovery mode. The next 3-4 months may make it clear.

3. L shaped Recovery
This type of Recovery is a variation of the U-Shaped recovery, only that things get prolonged. Thing stop deteriorating but do not get better either for a long time to come. This may take up to a year when things are pretty dull. I would say we have more chance of a L shaped recovery.

4. W shaped Recovery
This is the most dreaded form of recovery. As the letter suggests, there is a sharp fall, then a recovery which flatters to deceive. Things fall down again and then we are again on the upward part. This is basically 2 recessions almost back. The second recession may or may not be as bad as the first one but it devastates sentiment.
People lose hope in this type of recession. The second recession may be smaller in magnitude but leaves everyone shattered. (George Bush's middle name is also W, which should give you an idea of the havoc it can wreck ;-) )

So, U, L or W, take your pick. Next 3-4 months will make things clear. I would say 25% changes of U shaped, 35% chances of L-shaped and 40% chances of W shaped recovery.

The implications for the world equity markets:

1. U shaped - the worst is over. We have hit whatever lows we had to hit. (Dow should be at 10000 by Jan 2010)
2.L shaped - the worst is nearly over. Slow consolidation for the next year or so. (Dow should be at 8000 by Jan 2010)
3. W shaped - You aint seen nothing. This was just a trailer. Picture abhi Baki hain. (Dow should be at 5000-6000 by Jan 2010)

The toxic assets are coming out slowly. In the US, 32 banks have failed so far. That's more than what failed in entire 2008.

Chrysler has filed for bankruptcy, GM is next in the queue. Obama has made it clear. GM is almost sure to file in for bankruptcy.

The US economy is showing some signs of stabilizing. The rate of deterioration is not as bad as it was earlier. Next 3-4 months will give us clear indications whether Spring is here or the onset of Autumn for the markets has come.

In the immediate future, the results are out of the way in the US. The next key thing is the Stress Test results. I think they should not be too bad.

The Dow looks to be stabilizing for the months of May and June. The Quarterly results in July will set the tone.

For Global markets, next 2 months should be serene.

Above. I have tried to outline the probable scenarios which could play out and the implications for the global markets.

Thanks,
Nishit

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Elections - The Trend Decider

PFA the presentation for this month.

I still believe:

1. This is a bear market rally.

2. We will go higher 12500 before elections is quite possible.

4.By the end of 2009, we will see new lows, re-test of the old lows.

5. The eye-wash which is happening in America will get exposed and the falls will be much severe after that.

6. Buy only only at 10K or below, and stay out during elections.

Presentation Link:

http://nav-files.googlegroups.com/web/Elections+%E2%80%93+The+Trend+Decider+v1.pdf?gda=7Z142mAAAAAI7LF3ZJLiY8OkAnMfVvRfC8TAN-FJ0P1kfzJWvstkF9bHlnILGItBpRIkU-p5p_FRxoKduXbRotMXCDhJvoLB9iSYxdJafsQbV1kNnkaJyqEfD8gizBqda3A8nb_OSkc

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Infy : Guidance suggests Caution

Infosys came out with its full year results. EPS was around Rs 104, slightly above its guidance. The ineteresting factor was its guidance going forward.

Infy suggests a decline of upto 10 pc in profits in dollar terms (less in rupee terms).

Infy has also given zero increments and sharp cuts in variable pay. Its attrition was hardly 11 pc. All this means a tough year ahead for IT.

Infy results usually show the path ahead in the results. Infosys CEO has gone on record saying that these are worst times in our lifetime.

If Infy gets an eps of Rs 100, current P/E would be 14. This is the P/E for no growth. I would say Infy is more than fairly valued at these levels.

The stock markets have rallied and rallied hard. The disconcerting feature of this rally is that the cats and dogs have rallied. Stocks like Jai Corp and Essar Oil.

If the bear market had ended then it would have slow rise led by the large caps. I would still be very cautious at these elevated levels. the Risk reward ratio is heavily skewed in favor of the risk.

My strategy is simple, buy only levels near 10000, remain in cash when the election results are declared.

If the UPA comes back to power or the NDA, then we may see the rally extending to 12500 or even 14000.

The global news flow has stopped giving bad news but I still feel its only a pause. Obama admin can keep giving good news about the banks, and have the banks change their accounting to marked to fantasy instead of marked to market accounting.

I would be very cautious at levels, where the cats and dogs start hitting upper circuit.

I read 1 statistic today, saying 5 stocks accounted for the sensex gains and Reliance alone was responsible for 25 pc of the sensex rise.

If a Third front govt comes to power, there would be no time to exit and we will be back at 8000 before you can blink.

Mayawati as PM and Sitaram Yechury as FM. Ponder over it.

In a nutshell,

1. Buy around 10000, if we see the levels in next 1 week. Trade till the election results. Remain on cash during election results.

2. watch the result. Even if a stable government comes to power, we can buy stocks 10 pc more expensive.

Today DII sold 1200 crores of stock. I wonder if it had anything to do with the end of first phase of polling.

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The Rally Continues.......

It was a super Thursday, the markets just rose and rose on good volumes.

Is this the new bull run?

The Markets has rallied on lots of dollars being pumped. Now, 1 more trillion is going to be pumped in as per the G-20.

Either Obama is going to spectacularly succeed or spectacularly fail.

The Toxic asset waste if the government wanted to solve it, they could have bought the entire toxic asset. Now its a gamble with the private sector being a party to the deal. So who will do the valuation. Some one will be left holding the baby again. Will it be the Buyer or the Seller?

We just need some derivatives on this bundled toxic assets to start the game again.

The next trigger points are Results season in US and India. In India, Infy will kick it off around April 10-13th and on Monday, Alcoa kicks it off in the US.

The markets in 4 weeks have gone from 2539 to 3228. I dont believe the fundamentals have changed so fast.

The auto sales have been good last 3 months on lower commodity prices. The auto results should be good so as the IT on rupee depreciation. I would like to see Infy guidance though.

My sense is the markets will take a breather come to Nifty 2800-2950 range and then take off again.

If I was an Operator thats the best trap for retail and dump some shares on them. Operators dont make money if they take markets straight to 1800 or straight up to 6350. There have to be twists and turns.

I would now focus on buying Gold in this period. If rupee strengthens a bit and world price correct a bit to below 900 dollars, I will get Gold at around Rs 14 K.

I would wait for the Elections results before diving into equity. Also, the Geithner plan results will show up in next 2-3 months.

Mid-May to end June will be interesting period. We have the election results as well as US plan results.

Next G-20 might as well have Mayawati addressing the world. Something to think over.

That time, we would see. When hope is destroyed the markets can collapse.

Too many people said in March (including myself) that the markets will hit new lows and they didn't.

Too many people are getting convinced we have hit the bottom (Not myself), the markets may surprise again. This time on the downside.

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