Archive for September, 2012

BJP is looking for Gandhi …

September 10, 2012 3 comments

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MARKET NOTES 08-09-2012: Are the breakouts the real thing?

September 8, 2012 3 comments

MARKET NOTES 08-09-2012:  Are the breakouts the real thing?


Gold [$GOLD]:


As noted in the last blog post, every breakout needs to be treated with respect and gold was no exception.  On breaking above $1640, gold moved up to $1660, briefly came back to retest the breakout point and never looked back.  It closed the week at $1735.40.  Where does it go from here?


Gold was due for a rally to the $1700 region.  The surprise is in the price & volume momentum, not the price per se.  Gold could stay at elevated levels ranging from $1600 to $1800 for some weeks before it corrects.  We will know if the present breakout is the beginning of another bull-run only after the correction.  A break above $1800 will signify the correction is over.  Until then, the breakout is best treated as the expected corrective pull-back in a long-term bear trend.

Silver [$SILVER]:


Silver illustrates the tentative nature of the price better than gold in the previous chart though both the weekly charts are premised on assuming a similar pattern of price correction.


Silver could rise to the $38 region as noted in the previous blog-post.  Like gold, the price breakout should be treated with respect but whether the breakout is the resumption of a bull run or just a reactive pull-back in the ongoing correction will only be known by how the correction to the current rally shapes out.  Until proved otherwise, the current correction must be assumed to be in progress.  A price break above $42 will negate this analysis.  It is difficult to see that materializing on the Silver chart.


Gold and silver appear to be making coordinated moves and the ensuing price moves could also be similar though Silver’s momentum is much lower than that of gold.

WTI Crude:


Crude attempted a pull-back of sorts like the other commodities but didn’t make it past its 200 DMA closing the week at $96.42, just below it.  Note crude has been in an orderly correction since 22nd of August and this correction is likely to continue for a few weeks more.


Crude may remain ranged between its 200 DMA on the upper bound and its first floor at $92.50 for the next few weeks.  Any pull-back above its 200 DMA is likely to prove fleeting. Until the price breaks below $92, there is nothing to suggest that the uptrend will not resume albeit along a lower corrected base-line than the one shown in the chart.  Crude price pattern supports the notion of pull-backs in other commodities as opposed to resumption of previous bullish trends.



US Dollar:


The US Dollar tanked Friday to close below its 200 DMA after a long time.  In the process it came close to challenging its floor at 80 on the ICE Index.  As noted in the last blog-post the US $ is in an intermediate correction that started from the level of 84 a few weeks back.


In all likelihood, the Dollar may bounce off the floor of 80 for a pull-back to the 82.50/83 region before resuming its downtrend which is by no means over.  However, the long-term bull-trend in the US $ is not likely under threat unless the Dollar falls further and stays below the 80 level.


The Dollar is the key to commodities.  A bounce in the Dollar’s value from 80 will moderate commodity prices and also give clues to future moves.  Watch the 80 level like a hawk next week.



As indicated in the last blog-post, the Euro was begging for an opportunity to rally past the 1.27 level which came its way last Friday.  It closed the week at an impressive level of 1.28150.


Note the rally was very late in coming.  In terms of wave counts, the Euro$ pair is due for a correction which may set in later this week or early next week.  On the upper side Euro has a overhead resistance at 1.30 followed by even more formidable over head at 1.33/1.34.  On the other hand, the Euro has to return to test the 1.27 level as the new floor which it must do early next week.


We won’t know if the Euro is in the process of setting up a new bullish trend for a weeks till the shape of the ensuing “correction” in the Euro assumes some shape.  Don’t discount the possibility though.  That said, the Euro will have to do considerable base-building at current levels to build momentum for rallies beyond 1.33.




The $-INR pair is consolidating nicely above the 54.50 base line since early June.  That consolidation could continue through September as well.  Only a sustained breach of 56.50 to the topside or a decisive fall below 54.50 will alter this view.


In the long-term, the base building above 54.50 indicates a rally to the topside sometime in October or thereabouts.  This could come in the middle of October.

NYSE Composite:


I haven’t been able to find a good chart that can display the wave counts clearly for the NYSE Composite index.  For the nonce, note that the high of 8,500 in May 2011 marked the beginning of the current correction in the index and that it has completed a full A-B-C leg 7,200 in early June this year.  The question then is this:  Is the rally from 7,200 a reactive pull-back to 8250 or even 8,600 for another leg to the correction or a resumption of the previous bull-run that began in March 2009?


Clearly, labeling the “break-out” on NYA or SPX as confirming resumption of the previous bullish run is premature.  For that NYA would first have to clear 8250 and then 8,400.  So I advise investors to be very cautious with proclamations of so-called break-outs.  On the other hand, NYA is clearly indicating that the ongoing correction will probably be a shallow sideways movement.  That has tremendous implications which I will explore in a separate blog-post.  Don’t rush out to buy anything right now!




As with the NYA, so with the Sensex; none of the headline grabbing news has really translated into trend changing price action on the charts.  Sensex too continues in its current orderly long-term correction that started in November 2010.


Note that the Sensex is currently in pull-back mode for the final phase of the correction that could begin pretty soon – the so called PE compression or waterfall phase.  In the current pull back a rally even to 18,500 would not be out of place.  There is room for such a rally both in terms of price and time.  Given enough cues from the US that could well happen.


Nevertheless, it will not be a rally to buy into.  I maintain my view that the current pull-back is mere compensation to measure against the fall from 18,500 to 15,800 and the moment the pull-back exhausts itself, the fall in values will resume with a vengeance.  Not bullish on Indian markets barring the said pull-back.


NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.

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#Coalgate: Where is Rahul Gandhi?

September 5, 2012 1 comment

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September 3, 2012 Leave a comment

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MARKET NOTES: 02-09-2012 Has Gold really broken out?

September 2, 2012 Leave a comment

MARKET NOTES:  02-09-2012 Has Gold really broken out?



Gold [$GOLD]:



By any technical standard, the breakout in gold price last week was impressive.  Gold had corrected down from $1670 to $1640, just above its 200 DMA and then shot up to $1692.30 well past its overhead resistance at $1670.  The breakout was accompanied by a high traded volume in overbought conditions which makes the breakout all the more noteworthy.


It would be churlish to disregard such impressive price action.  However the breakout comes at point where one would expect it in terms of wave counts.  We will not know if the breakout is just a reactive pullback or the real thing for another two weeks or so.  I would not rush to buy the breakout unless the price sustains well over $1640 for some time to come.  Respect the breakout but treat it with more than ordinary caution.


Silver [$SILVER]:



As discussed last week, Silver has followed completely different trajectory from the one followed by gold in this correction.  In the case of Silver, a rally to the topside [$30 to $35 region] could have been expected if Silver were in a long term bear market.  Silver’s break above its 200 DMA is impressive and the price could rally further.  The price may sustain over $30 for quite some time albeit with corrections. However, in the case of Silver, the breakout is not likely to signal a new bull run.  I am far more skeptical of the Silver breakout than the one in Gold.


WTI Crude [$WTIC]:



As expected Crude continued to correct, testing its 200 DMA and the current rally’s baseline.  Crude closed the week at $96.47 a shade below its 200 DMA.  The correction could continue in the ensuing weeks.  Note the rally in crude on weekly charts hasn’t been supported by increasing volumes.  Unless traded volumes pick up, an early resumption of the rally in crude shouldn’t be expected.  I am not bearish in crude though I expect it to spend some time in the $90-$95 region before resuming the uptrend again.




US Dollar [$USD]:



As expected the mighty Dollar continued to correct closing the week at 81.22.  The Dollar is likely to test its 200 DMA area between 80 and 81 in the next two weeks.  I expect the 200 DMA to be respected and a bounce from that region back to 82/83.  But that’s a few weeks away.


Long-term, while the Dollar is correcting, the uptrend from 73 is still intact and will resume once the correction is over.  So I am not bearish on the Dollar.  This scenario will be invalidated if the Dollar seriously breaks below its 200 DMA.



Euro$ [FXE]:



As expected, the Euro continued to rally against the $ closing the week at 1.2575 with better than average volumes to the upside.  The rally in the Euro may not be over.  In the ensuing week or two, the probability of the Euro breaking above 1.27 and testing its 200 DMA just above that region cannot be ruled out.


Long-term, the case for a continuing rally in the Euro$ is uncertain.  We would know the long-term trend only on a correction following the current rally.  Look for opportunities to sell rally peeks over the next two weeks.






I was expecting a breakout of the contracting triangle shown above during the week.  That did not happen but then it could happen in the ensuing week.  As is obvious from the chart, the $ has to breakout from the triangle one way or the other and the wave counts favor a breakout to the topside.


A breakout to the topside should invite a retest of the previous top.  Not bearish on the Dollar against the Rupee.







NYSE Composite:



Note the indecisive Doji on Friday after the great speech by Bernanke promising of QE3.  Is that all the bulls could do?  Amen!


In my opinion the downtrend underway in the broad market is likely continue never mind the trumped up gyrations in the SPX.  The downtrend could take us to 7860 region over the next 2 to 3 weeks.  The crucial level to watch out for is 7900.  Support for the index at that level could offer clues to where it is headed.


Increasingly, it is clear that asset prices are being propped up by central banks.  The last time this was done led to a full-fledged disaster in the form of an asset bubble leaving the system itself crippled.  There is insufficient evidence if any lessons have been learned.





The Sensex is in a well established downtrend.  Having crossed below the 17,600 mark, it rose on Thursday to observe the level as overhead resistance and fell away from there on Friday to close the week at 17.430.


The downtrend will continue to test the 17,200 level which is the first region of support.  I would be surprised if that floor held for a long.  The Indian equity markets need to correct for a lot of macro-level factors.





The chart shows the Dow Jones-AIG Cotton Total Return sub-index and is a good proxy for cotton.  In my last blog post on agricultural commodities I had pointed out that Cotton was the lone commodity readying itself for a bull-run.  The above chart is supportive of that notion.


The index is positioned at 51 just under its 200 DMA at 53.  Prices are well above the 50 DMA.  On break above 53, Cotton will have confirmed a new bullish uptrend.  Previous experience shows this could last a few years and go a long distance.  That should enable our farmers to take advantage of it.


NB: These notes are just personal musings on the world market trends as a sort of reminder to me on what I thought of them at a particular point in time. They are not predictions and none should rely on them for any investment decisions.


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Laloo’s Center of Plate Pricing Strategy for Railways

September 2, 2012 1 comment

Laloo’s Center of Plate Pricing Strategy for Railways


Indian train fares are among the cheapest in the world.  A journey by first class air conditioned coach costs a small fraction of what it would cost in the US or Europe.  Second class fares are even cheaper.  Indians will be quick to point at their low disposable incomes as justification for low fares.  They will never ponder the fact that their disposable incomes are low because their infrastructure is mispriced.  With the average savings rate of 30%, it is stupid to argue that Indians can’t “afford” higher fares.  But that is besides my point.  The fact is that it costs a certain amount of money in diesel, power, labor and rolling stock wear & tear to transport a person from point A to point B whether the person or the train be in the US, Europe or India.  About 40% of the train fare is just energy which in India is plagued by shortages.  So how can Indian Railways recover their full economic costs if train fares on an average are just 20 to 30% for comparable journeys abroad?  The fact is Railways being government, they do not even attempt to record the full cost of a journey in their books.  Depreciation on rolling stock is 3% per annum while that would be 20% in the private sector.  Interest cost again is purely notional.  Only Indian labor is cheaper.  All told Railways attempt to recover only their variable costs and totally ignore capital costs.  That generates a meager cash surplus leaving little for track expansion, modernization and safety equipment.  The net result is poor quality of services.  What can be done to improve things?


If one looks at the sub-urban train service in Mumbai one sees the true dimensions and nature of the problems the railways face.  First is the tyranny of sheer numbers.  The Mumbai sub-urban service caters to a city of 10 million passengers.  It carries roughly 8 times the number of passengers carried by the New York metro service daily.  Its train density on tracks is about 5 times that of the UK underground.  It runs the world’s highest number of trains per day.  On all the parameters of technical efficiency, barring quality of service, it is perhaps the world’s most efficiently run rail systems.  The only problem is that it transports people as cattle packed like sardines.  Its “technical efficiency” does not translate into commercial success, quality of service and safety because the train fares are set by unimaginative and lazy politicians looking for an easy way out for themselves.  The train fares are so low that the railways system doesn’t even recover the variable costs of the sub-urban services.


The problem is not that people can’t afford to pay a higher fare in return for a more comfortable journey.  On a variety of parameters it is possible to show that while passengers are more than happy to pay a higher fare in return for better service, it is the politicians in their anxiety to earn a few brownie points via populism who are to blame for the vicious cycle of low fares, poor quality of service, migration to private transport, under investment in public transport, etc.  Laloo Prasad Yadav in his tenure as the Minister for railways showed superb imagination in breaking out of this vicious cycle.  His innovation lay in blunting the populist argument for cheap fares for the poor by keeping II class unreserved coach fares constant while allowing the railways to charge extra for everything else in line with demand.  The other subterfuge that Laloo adopted was in allowing the railways to add to sleeper capacity in 2 and 3 tier AC coaches in line with demand without insisting on a proportionate increase in the capacity for II class unreserved coaches.  Effectively, on a per train basis, Laloo was thus able to increase fares in line with demand giving the railways the much needed cash flow to improve services.  Unfortunately his successors have discarded Laloo’s shrewd pricing strategy & railways have tamely slipped back into their old shabby ways.


The problem with railways is that a network of sub-continental size and complexity is run by a caboodle of civil servants under a politician from Delhi.  This over centralization means that despite the wide variations in local demand for train services, the central bureaucracy always comes up with one-size-fits-all solutions that are inherently sub-optimal.  Setting of rail fares is no exception.  There is little in common between a train journey from Mumbai to Pune, a run of about 4 hours to an overnight journey between Kochi and Trivandrum.  The passengers are different, the times are different, and the nature of services required by passengers is different.  However, the present system of setting fares ignores these differing characteristics and fixes a fare for both the journeys by a standard cost per KM travelled.  The central bureaucracy tries to reduce its internal complexity but ignores passenger requirements & needs and either fails to meet them or doesn’t charge for them properly.  This lack of differentiation between local needs is the key to using Laloo’s innovative approach to railway service pricing.


Simply put, rail fares need to be split into two parts.  One part is the basic cost of transporting a passenger per KM of distance travelled.  This cost is a function of fuel & energy costs, labor, depreciation and interest.  All these costs are centrally determined for the railways as a whole.  It is this basic fare to cover basic costs that must be set by the railway minister for various classes of travel.  The second part should be train and service specific.  For instance the train to Pune from Mumbai need only have two kinds of coaches; the general unreserved variety and chair cars.  There is no need for any other kind of coach.  The second part of the fare should be set by the Zonal railway HQ that runs the train.


It is the Zonal Railway that owns the train and is responsible for running it on time.  Zonal HQ decides what rake to use, what kind of coaches to put in the rake, what services to offer.  It is the Zonal Railway that sells the tickets, knows its passengers first hand and is best placed to figure out what they need and how much they can pay for the service.  This local information & intimate knowledge of local market is simply not available in Delhi and is completely ignored even if available.  The Zonal Railway can be given discretion to add on up to 50% of the basic fare to the total fare for the journey depending on its judgment of what services to offer and how much the passengers will be willing to pay for them.  This would put the local add-on outside the direct responsibility of the Railway Minister enabling him to rightfully claim that he had no hand nor responsibility for setting fares for local services added on to the basic train journey giving the railways a certain degree of flexibility in fare setting according to market conditions.


There is an urgent need to find a way to raise resources for the railways.  The cost of transporting one person by car from Bandra to Nariman point by car is roughly about 2000 times the cost of doing the same by a rail service.  You may argue that this cost is paid by the car owner.  But regardless of who pays for it, the economy as a whole incurs this cost and suffers a productivity loss.  If we are to move people from private to public transport, not only must the rail service get better but it must also raise the resources to pay for improved services.  The existing rail services are extremely efficient in a technical sense.  It is the sub-optimal under-pricing that has negated the technical efficiency and driven passengers to either private transport or the more expensive air travel.


Laloo showed that passengers will willingly pay more for basic services and that it is possible to raise fares politically provided you arm the politician with a politically sound argument.  Decentralization & delegation of the responsibility for setting part of the fares to Zonal Railways can be the institutional change that insulates the politicians, gives the railways more commercial freedom and the public better services and lower overall cost of travel.  The productivity gains from moving people from private to public transport are humongous and something quite easily done.

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Modi’s Hangout!

September 1, 2012 2 comments

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