Weekly Market Commentary - Oct 14 - Oct 18, 2013

So far, earnings season continues to surprise Indian investors to the upside. As Sensex continues to hover around its all time high, most investors will do well to realize that expectation investing can come as an handy tool a bit before earnings season is about to start. Most investors do not use DCF while analyzing a stock/company. I do though. With so many assumptions and complexities built into it, DCF does not act as a quick tool to help investors/speculators make money. In such a scenario, they can resort to what Michael J. Mauboussin calls Expectation Investing.

Expectation Investing is also knows as Reverse DCF. In this method, instead of trying to value a company (stock) by forecasting free cash flows into the future and then discounting them to current period, you do it the other way round.

You look at the current stock price and then try to find out what assumptions market is building into the price. The analyst can review these assumptions and see whether expectations are excessively high or too low to arrive at the decision of investing in that particular company or not.

The biggest advantage of this method, is as you can see, is it eliminated the need of forecasting. However, this method does not provide a quick way to analyse stocks but when formalized into a framework it can help an investor to make a quick decision.

Finally, as a noted statistician George Box said “All models are wrong; some are useful.”

I urge my readers to share with us their experience with Reverse DCF process, if they have tried it in the past.

Sensex gained 3.1%, Nifty gained 3.2% and CNX Midcap was up by 2.3% this week.

Monday – Sensex up by 0.4%, Nifty up by 0.3%, Midcap up by 0.6%
Market party over good Infosys results (guidance) ended early as inflation played spoilsport. September WPI was 6.46% against 6.1% in August and 46 bps above the street estimate of 6%. Surge in inflation has put RBI in a fix and investors on back foot as RBI now will find it difficult to lower interest rates and even may lead to rate hikes to contain the inflationary pressure.

Tuesday - Sensex down by 0.3%, Nifty down by 0.4%, Midcap down by 1.2%
Yesterday’s high inflation numbers led to selling in banking and other rate sensitive stocks. HDFC lost some ground as bank reported its slowest growth quarter in a decade. HDFC earnings increased 27% y-o-y against its record 30% growth in every quarter in last decade.

Wednesday – Markets closed on Eid.

Thursday – Sensex down by 0.6%, Nifty down by 0.7%, Midcap down by 0.4%
Markets were down as investors resorted to profit booking as Infosys and TCS good results quickly became the story of the past. The market did not move much on the news of deal on US shutdown and debt ceiling. Most talked about event of recent times continued to be ignored by investors in the Indian markets.

Friday – Sensex up by 2.3%, Nifty up by 2.4%, Midcap up by 1.4%
A good close to a rather mute week. Markets went up as corporate earnings continued to surprise. L&T, the capital goods major, reported a 7% rise in quarterly profit beating the analyst estimates. Market sentiment was also boosted by the news that LIC will invest Rs. 40,000 crores ($1.28 billion) into the markets in FY14.

Mohnish Pabrai on his learnings from Warren Buffet

I first came to know about Mohnish Pabrai when a friend recommended his awesome book "The Dhandho Investor" to me in beginning of my investment schooling. The book is, no doubt, one of the best books I have read on Value investing and is a must read for anyone about to venture into the field of analysing business, seeking risk and valuing opportunities.

Today, I am sharing one of his videos where he shares his learning from legendary Warren Buffet. Do watch and learn!

Hat Tip: Alpha Ideas

Weekly Market Commentary - Oct 7 - Oct 11, 2013

Infosys results started the Indian earnings season in style, with markets welcoming the raising of lower limit of FY14 revenue guidance. Meanwhile economic slowdown, falling capex spending and low consumer confidence is leading to muted expectations from 2QFY14 earnings. Sensex companies are expected to grow their earnings by 5-7% led by export-oriented sectors that are going to benefit from rupee depreciation.

Sensex gained 3.1%, Nifty gained 3.2% and CNX Midcap was up by 2.3% this week.

Monday – Sensex down by 0.1%, Nifty down by 0.0%, Midcap up by 0.7%
Concerns over US shutdown led to muted trading in global markets. If fighting political parties did not reach the solution soon, it may considerably dent the ongoing recovery in US economy.

Tuesday - Sensex up by 0.4%, Nifty up by 0.4%, Midcap up by 0.1%
RBI tried to undo its liquidity tightening measures it introduced when US tapering announcement led to crash in rupee value against major currencies. RBI reduced the MSF rates by another 50 bps to 9% in addition to increasing the duration of lending to the banks from current one day to 7 and 14 days.

Wednesday – Sensex up by 1.3%, Nifty up by 1.3%, Midcap up by 1.0%
Indian markets struggled in early sessions as IMF reduced the country’s growth projection to 3.8% in FY14. IMF also sees global growth falling to lowest since financial crisis. Markets recouped all its losses when data showed that trade gap narrowed to the lowest level in 30 months. The trade deficit narrowed to $6.76 billion in September from $10.9 billion in August. Main reason for the fall was govt. moves on tightening gold import which has led to decline in gold and silver imports to just $0.8 billion vs. $4.6 billion a year ago.

Thursday – Sensex up by 0.1%, Nifty up by 0.2%, Midcap up by 0.4%
Investors stayed cautious head of the beginning of earnings season on Friday with IT bellwether Infosys results announcement. Street is not expecting any surprises this earning season and is choosing to be selectively bullish this season.

Friday – Sensex up by 1.3%, Nifty up by 1.2%, Midcap flat
Most of the Asian markets closed in green as US political leaders showed some signs of compromise on US shutdown crisis. Infosys results cheered the market as company increased its FY14 guidance to 9-10% from 6-10% guidance previous quarter. Investors also cheered the new draft regulations allowing the establishment of real estate investment trusts in India.

How the economic machine works

One of the best videos from widely respected hedge fund manager Ray Dalio, on how the economy machine functions; how boom and bust cycle occur; what leads to recessions, deflations and expansions in the modern economy.