Ashu Dutt’s 'THE BOOM & BUST JOURNAL' - July 2009 Edition from www.ashudutt.com

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Ashu Dutt’s 'THE BOOM & BUST JOURNAL' - July 2009 Edition from www.ashudutt.com

July, 2009

VOLUME XXVII

Published this 1st day of July, 2009

Price: US$ 10

CONTENTS

The “Call”

The Big Picture

Technicals

Smoke Signals

The Good, The Bad, The Ugly

Investment Themes

Directional Spotting

Random Moorings

THE CALL

What are the odds for an upside of 20% in 12 months? I’d say about 50%. What are the odds for an upside of 30% in 12 months? I’d say, that’s a tall order. Say about 5%. Now what are the odds, we may see a 20% drop in the next 3 months. High. Very high infact. Perhaps 70%. That does’nt add up, does it? Well it just may. You see, Indian markets lack the diversity of investor thought processes (and I don’t mean they lack investors) that is so critical to correctly price markets. In that sense, the “skew” in the markets is in the extremes. The whole market either tilts to optimism or to pessimism. And at the moment, it has gone into a sense of extreme optimism. Nothing wrong with that. Only issue is do you want to be in stocks where the stocks are running ahead of the businesses they represent or in stocks that are running behind the businesses they represent. From an investment perspective, it absolutely makes sense to be on stocks that may be running behind the prospects of the business they represent. From that angle, we may not have the kind of upside that would excite me. Such markets also expose themselves to severe downsides on relatively flimsy news (and the current situation seems to fit this scenario).

There are also signs of “bubble” like behaviour specially in power. While the prospects for power are undeniably good, the kind of capital being raised draws parallels to investor behaviour at the time of the dot com boom or previous booms in India like the construction of steel plants etc. The end result will be much the same. Easy capital, riff raff issues (for the most part) and large losses on IPO investments. That’s not a good thing at all. In the next 2-3 years, it is not just China but the US which will be competing for capital for infrastructure. If India takes investors for a ride now, capital will be very very difficult to come across. I don’t have much factual data to say otherwise. Most foreign investors who got in through GDRs, FCCBs etc have eventually ended up making nothing (check out the deep discounts on FCCBs etc). Only there is no shortage of the next lot of investors ready to be made suckers out of.

THE BIG PICTURE

India is severely undervalued and Indian stocks are overvalued. You see the India that is emerging will be filled with “innovation” companies in technology and pharmaceuticals. Those who innovate and come up with “destructive technologies”. Yet, India’s stock markets are filled with archaic relics of the past that should be valued like relics. There is no reason why power companies, oil & gas companies should be valued at even half of their current valuation. And that’s precisely where they will head. As we go forward, global companies will crowd to India (as their own markets offer little growth prospects), taking a lot of Indian companies to deliver mediocre returns.

TECHNICALS

The probabilities I am looking at right now are as follows:

- Short Term Trend (7-30 days) – Bullish. The Odds are

o +10% gain: 60%

o +5 % gain: 20%

o -5% loss: 20%

- Intermediate Trend (30-90 days) – Bullish

o +15% gain: 40%

o +10% gain: 40%

o +5% loss: 20%

- Long Term Trend (90 days +) – Bearish

o -20% loss: 30%

o -15%loss: 50%

o -10% loss: 20%

Trying a short in the immediate term may be downright dangerous. As I add up the put and call writing data, it seems highly unlikely the markets will keep below 4000. Closing out the shorts makes sense. I know it is counter intuitive to all the views you hear but then that’s the way I see it.

The likely scenario is a rise to 4400-4500 levels (and that could happen within the next 90 days) and then a 15-20% fall. So a “counter intuitive” strategy may make sense i.e going against the current thinking and staying long now (even perhaps be in a buying mode) and then closing out and perhaps even a short should we see 4500s (ofcourse, we need to look at the momentum as we reach that point but I can’t see any chance of a level beyond 4600).

Past supports and resistances are meaningless. Both were driven by “one time” events. The massive November/December 2008 fall by a global credit squeeze and the highs of June by a Congress victory. None represent where we are settling.

Looking at the momentum (and yes there is momentum because the markets seem to stay down only for short stints and rise at the slightest excuse), I would expect sharp spikes in the markets. Infact very sharp spikes should a significant short build up. This is a very likely scenario given that most chartists and other “influential” voices have dug themselves into a “short” position.

For a more detailed Technical Analysis, please see Ashu Dutt’s “THE CHARTIST’S ALMANAC”- July Edition

THE GOOD, BAD AND THE UGLY

THE GOOD

There is almost no chance of going back to 3100 type of levels. Markets at that point were facing a “credit seizure” situation with almost no clarity of how things were going to pan out. That is not the case anymore.

THE BAD

There are number of important variable we need to keep our eye on. One, I believe we are still in a wobbly economy. That may mean the markets have run ahead very fast in anticipation.

Many results look good because input costs are down and the benefits of a falling rupee (people were hedged thinking the rupee was heading to 40 to a dollar). Those benefits are gone while demand has not picked up that strongly.

THE UGLY

We are almost always making investment/trading decisions on incomplete information. That should not happen in times where we can look at a million opinions before deciding. It is not helpful to “swing” with the mood. Easier said but difficult to follow in an era of 24 hour news flow.

Moreover, business media has to look at volumes, size etc before bringing up stocks. By default that means that stocks will only appear on the radar when they have had their run. Buying stocks in this manner is a sure shot way to “mediocritize” returns.

INVESTMENT THEMES

US Infrastructure spending will be the world’s biggest infrastructure story in the next 3-5 years. Most US Infrastructure is now over 40 years old and in some ways archaic. That would mean a massive pull of capital away from world markets. And could also mean a high interest rate regime as competition for global capital becomes severe (primarily led by the US, India and China).

DIRECTION SPOTTING

In terms of returns, I would say real estate stocks, infrastructure stocks and hotel stocks should give some of the best returns in the next 1-2 years. Most of these stocks have reached levels which reflects little of their underlying asset value

I expect the markets to head back to around 16,000-18,000 levels (Sensex) in the next 2-3 months. Real estate stocks could get revalued double quick as they raise money from local and foreign markets include AIM/Singapore REITs. Real estate and infrastructure companies are cash starved. If markets don’t pickup, they will go back to where they came from. If they pick up, they will rise the fastest.

Hotels seems to be trading way below their net asset value. I find Hotel stocks in India enticing. With just 5 million tourists (compared to 15-17 million in countries like Thailand & Malaysia), Hotels may be India’s next big investment story.

It may make sense to invest in small caps (great value must be here)…because if they don’t have volume, no media will pick them up. Since media will pick up stocks with already strong volumes, chances that great values exist with small stocks is substantial.

RANDOM MOORINGS

The IT Boom as we know it may be over. I find absolutely no long term return value in Infosys, TCS, Wipro. While this may be an early call, these guys are vestiges of an era before the net. A structural downgrade is in order. With Google going in for “server” based OS and “cloud computing” a reality, I don’t see how these guys are going to move forward. As the amount of work on the top/head decreases, they may not be in a position to take on “long tail” work (small odd jobs but many of them). New companies will rise to take their place but these companies don’t deserve the valuations they have. I am not enthused by this sector.