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.

Weekly Market Commentary - Sept 30 - Oct 4, 2013

Indian markets gained this week primarily due to US shutdown, which inadvertently threw FIIs dollars in its direction. Nothing much has changed in Indian fundamentals though: CAD is still high; cost of funds has not gone down; consumer and business sentiment as reflected by weak PMI data. Even then, market is trading near its highs; is expensive and is very volatile. Though I continue to seek out the reasons to explain these anomalies, and I focus on most important ones, the economy and markets have too many moving parts. Every now and then, in order to explain the movements, I give in to recency effect and attentional bias.

Recency effect is nothing but one’s inclination to explain the process/event occurred, by whatever fresh news/story/event comes to mind. For e.g. markets went up as new RBI governor sworn in.

Attentional bias, on the other hand, is using your current subject under study: one you are most closely paying attention to, to explain every event occurring. For e.g. US shutdown is leading to global market rally as dollar investors have nowhere to go.

However, both examples used above may explain the market movements or state of the economy to some extent but the point is they are not the only ones.

Sensex gained 1.0%, Nifty gained 1.3% and CNX Midcap was up by 1.5% this week.

Monday – Sensex down by 1.8%, Nifty down by 1.7%, Midcap down by 0.8%
Indian markets were under pressure ahead of current account data release expected later in the day. An ET poll is estimating CAD to average $23 billion for Apr-Jun quarter vs. $18.1 billion a quarter earlier. Investors are worried that bad CAD data may force RBI to intervene in the market again and may escalate the cost of doing business in the near term.

Tuesday - Sensex up by 0.7%, Nifty up by 0.8%, Midcap up by 0.6%
Markets went up as RBI promised to infuse liquidity into the system via Rs. 10,000 crores purchase of government securities. Also, CAD figures released previous day came out to be little lower than what market participants were expecting. Gold and oil imports pushed 1Q14 CAD to $21.8 billion i.e. 4.9% of GDP. Indian govt plans to reduce the current account deficit to 3.7% of the GDP in FY14 to meet its $70 billion target.

Wednesday – Markets closed on occasion of Gandhi Jayanti

Thursday – Sensex up by 2.0%, Nifty up by 2.2%, Midcap up by 1.6%
Indian markets rose, as they became the target of FIIs dollars as current political crisis in United States has led to a shutdown of non-essential govt functionaries. Investors are worried that shutdown may prolong and will jeopardize any recovery of US economy.

Friday – Sensex up by 0.1%, Nifty flat, Midcap up by 0.2%
Markets ended flat as US dollars continued to flow in leading to increase in the value of Indian currency. The gain was capped as investors were disappointed by weak HSBC PMI data, which fell to 46.1 vs. 47.6 in August indicating contraction in private economy. Realty, auto and consumers gained as govt. decided to infuse funds into PSU banks to help them offer cheaper loans to public and industry.

Lies, Damned lies and Statistics

Statistics is the science of producing unreliable facts from reliable figures. - Evan Esar

Admission: I absolutely respect our RBI governor Raghuram Rajan.

Confession: I am not a statistician, but I have attended a course on Econometrics during my MBA. And, from what little I have learned there, I can tell you that you can torture your data to the point it say what you want it to say.

The recent report on composite state development index that was prepared under the chairmanship of Mr. Raghuram Rajan was, for the lack of better word, a half ass job. It is complete noise. It hurts when someone you admire produces a work like this.

I didn’t really understand what possible objective it served, though I am assured it is not a political one, although there was a brief twitter war on the issue of Gujarat being called a less developed state. You can read the full report here.

During my MBA classes, our professor always warned us about the situations when statistical exercise will throw out some outcome that might look nonsensical. You should in that case, take hard look at the variables used. You should check for double counting of data, high correlation fallacy and simply using wrong variables. Well, seems all three errors happened in this report.

Many experts in the field have already reviewed it well, some of them do not agree with it including the sole dissenting voice in the panel, Dr. Shaibal Gupta. You can read some of the  reviews and criticism here, here, here and here. Key criticism of the report are highlighted below:

·       Why to include SC/ST share in population when it is an independent variable and all other variables are dependent variables (outcome variables). Independent variable in this case means it is beyond the realm of any state government to control the number of SC/ST population in their state. So, why to assign points to state based on this variable.

·      Why connectivity index, SC/ST population, female literacy, education all get the same weightage, when we know one is more important than the other.

·       In the real world, can Gujarat be ranked as same as Mizoram and fare worse than Tripura? Maybe I am blind to the development happening in our Northeastern states, but I don’t know anyone wanting to go there to work and live.

·       Why did not use per capita income instead of monthly consumption when per capita income also factors in the employment opportunities available in the state. Migrants sending money to home state could simply drive consumption and may not truly reflect the needs of the residents.

·       How reliable is the source of monthly consumption data when the national surveys used to collect this data have credibility issues.

PS: There is no data available, atleast in the report, wherein you can compare how each state fared on different variables used in index construction.