If we don’t get what we want. It’s OK . . . Our desires change everyday. The most important part of life is this moment. This moment is all what life is because it is only this very moment that would always be. The past is already gone and futures would never come. So when people do not behave in the manner we think is right then it is important to be peaceful and calm. Sometimes it appears to me that the very essence of living is hidden in how strong an urge you have for reaching your goal? A human mind ignited with single pointed goal never focuses on things that distract him from marching towards his goal. The various enjoyments, pastimes and habits appear to him as mundane and without any foundation. A man with a purpose has his mind filled with only one thought. The thought of his goal and his intellect guides him in every aspect to reach to it. This power works within and without.

The key change I have noticed after getting married is that the amount of time spent in mundane activities rises exponentially. However, I also noticed that this very time is the best time for a man to test his convictions. If I can fulfill my duty to best of my ability and still have my goal as the driving force, I come closer to my goal moment to moment. It is a difficult thing to do. The higher the goal the easier it gets. But too high a goal generally vanishes in the clouds. So each activity that appears mundane to me due to my own historical data feed has the power to transform me and take me closer to my goal. There is a always the better way of doing only what takes us closer to our goal but when we live in a society we have to practice compassion. So mould yourself in a manner where everything you do, do it in a manner that helps you to be nearer to your goal.

When fire of desire is burning it consumes everything and still is insatiated. But when a man burns all his desires in the fire of knowledge, the sight of the soul, enlightenment nears.

Hari Om
Sahil Kapoor

It is quite possible up untill now that all that I have learnt is also transitory and unreal. Because if my own convictions change then there is nothing real about them. If our state of mind depends on this statement – “If I had this one thing, I would be happy” – then happiness and equanimity will never come. The story of Greek Orpheus and Eurydice clearly points to this. When Orpheus walks from the lower world to the upper with Eurydice following (on the condition that he would get his wife, Eurydice, back only if he doesn’t look behind whether she is following) he operates on the principle that he would be happy only if he gets his wife back. This thought creates so much agitation that he finally looks back and looses her forever. When we keep gazing from one want to another and then to another, we miss the whole point of life. Life is in living not in craving.

Every new moment is a new beginning. Every grand scheme of day and night, life and death, manure and plant is replicated in every moment. Every new second is the death of the last. That’s why its called second. Living each moments makes life whole.

Out of the grand universe, galaxy, solar system, planets and then to animals. We have the opportunity to be rational. When we rationally analyse and use our faculty of intellect the agitation’s cease and experiences disappear. What is finally and ultimately left is not only Bliss but The Only Reality.

S&P CNX Nifty 2010 and 2011 Trend Similarity

Currently Nifty is trading @ 5488.

Best to your trading!!!
Sahil Kapoor

He says “I don’t know, ask the horse”.

In our lives we often are like this man riding the horse. We don’t know where we are going. The horse is our foolishly or mindlessly driven habit or something thrust upon us which we never question. The first indication of some activity in ones intellect is the rise of doubt. If we want to take control of our lives we need to question ourselves.

But why take control? Why not just go with the flow? Why not enjoy with whatever comes up? Why to crack your head on something if it will happen anyway?

The reason is the flow. It doesn’t come until we participate with our complete attention and sincerity. Nothing comes up until we deploy our faculties to it. Nothing happens of its own accord. We form an important ingredient for anything to happen. Do you like to travel in a bus which is out of control? What do you prefer when you have choices?

Most of our everyday decision are based on the mental recording we have been given by our parents, family, friends and people we do not even know. Our world is the sum total of all the good & bad and what we like / don’t like and what we absolutely LOVE doing or HATE doing. Daily routine is generally made without any plan, thinking or implementation. We go about our everyday affairs in an unbelievably casual manner. We if observe objectively most of us live our lives as if we are not concerned where we want to reach. Our outlook doesn’t have a goal, our actions are random or based on no valuable analysis of our own experience (at least, this sounds logical to do) and we only tend to drive pleasure or pain out of whatever we do.  Just see how many times do we repeat ” I like this”, “I don’t like this”.

It is important to analyse our everyday schedule and look for any pattern that we have developed. If there is a pattern which makes us responsible enough to look at ourselves it is a good start.

How to take hold of your life?

If currently  you don’t have any goal in life which drives you, there are chances that you would feel bored, frustrated or you would constantly look for external stimuli in the form of partying, movies, doing some activity like fitness class, or anything that keeps you busy. You need constant stimuli from outside to keep your senses entertained. Please beware Newton told us that a body in motion remains in motion and a body at rest remains at rest until an external force acts on it. Therefore if you get into the habit of repeating this again and again you will feel miserable if there is no external stimuli or entertainment. Conversely over exposure would again repel you.

You have no goal in life or even any identifiable desire. You are completly driven by what you are told to do or are expected to do. You are neither concerned anything new that you can learn nor excited by what you do presently.

 If this the present situation, then there is a serious problem. But if you can identify that you have any of these then you are on the right track.

Where to start?

There are a few simple steps

1. Smile all the time – it repels boredom and creates a conducive environment for excitement in the work
2. Identify – what are you most interested in, focus and make a short term plan to move towards it ( for example, losing 5 kgs could be a 3 month goal)
3. Be genuinely interested in the work at hand, focus – whatever you are doing should warrant your complete attention, even if you are drinking tea it should be with your complete awareness
4. Eat – at exactly the same time every day, this would make a rough schedule which can be filled in later

In the beginning we need to be aware of a few things –

1. Expect change and discomfort – you are completely comfortable doing something new then there is a problem, check it
2. Do not expect new results from old habits and activities – you would get new results only if you change or improve what you do. This is pretty much straight.
3. Give it some time, be patient – whatever you plan to do in the short term, give it a minimum time frame. Say a few months. Do not check back on results everyday or every week.

We have be taught,

Patience, thinking and Fasting!!!

Sahil Kapoor

US 30 Yr T-Bond looks toppish

Best to your trading!!!
Sahil Kapoor

The repeating turn dates

Best to your trading!!!
Sahil Kapoor

1. MACD has given a sell
2. Momentum has turned negative measured by RSI (14)

More importantly the price action is pointing to formation of a rising wedge which would break below $105.
Please see graph -

This is my first post after 3 months. Bulls please beware of Crude Oil.

Best to your trading!!!
Sahil Kapoor

1. AAII’s membership has rarely been as bullish as the current 56.2% reading. The 10-week moving average of this indicator is at a six year high.

2. According to a survey of newsletters by Investors Intelligence the proportion of publications that are bullish increased to 56.8 percent in the week ended yesterday from 56.2 percent, almost reaching its last closing price before Lehman Brothers Holdings Inc.’s 2008 bankruptcy prompted a six-month, 46 percent plunge.

3. 9-DMA of TRIN (ARMS Index) is close to a 50 year low @ 0.557

4. Number of opening gaps in S&P 500 is now at the highest level since 2007

5. Total tick (net number of stocks up vs. down during the trading day) has reduced on each day the index has risen in the last one month.

6. A general rule of contrarian analysis is to multiply the unemployment number to the sentiment indicator which was roughly 5% at previous high and is now close to 10%. This means the sentiment is double for doubly worse economic data and same index reading.

7. Technically we are too concerned with the reading on international indices especially S&P 500. Currently S&P 500 close as of Friday is 1244, the trend is up as it made a new 52 week high. Therefore there are very little sign of prices showing a negative trend. However, the readings that we watch in sentiment indicators, technical analysis and on Intermarket indications are reaching alarming levels.

8. We expect the US market would fall significantly from here once the current strong seasonality is over i.e. once December approaches its close and the new year arrives. It is difficult to say what would be the exact effect on the Indian equity markets (S&P CNX Nifty) but it would surely not stand in the way of a falling US, EU and already falling Asian markets.

9. Actionable – it is of supreme importance to do one of the following – a. Buy protection in the form of hedges for your long portfolio b. Exit stocks which are underperforming and shift to stocks and sectors as stated in our ‘Flight to quality’ doc.

10. Caution – it is entirely possible that short term movements in the market might take index to 6100 to 5900 levels on either side, but intermediate trend is clearly breaking down. With Bank nifty forming an intermediate top and market being held up by metals, IT and pharma it would be difficult for the market to climb further if USD infuses weakness in metals and its inversely correlated sectors.

Best to your trading!!!

Sahil Kapoor

a.      Liquidity Situation Remains Benign

b.      Bond Yields differentials drive fund flows

c.       Quantitative easing sequel to have another attempt

d.      QE – will the US repeat the Japanese failure?

e.      Currency  wars

Liquidity Situation Remains Benign

In the emerging economies the pace of economic activity has slowed a bit, but from breakneck speed to merely very fast. Most vital signs, from productivity to government debt, are healthy. The developed world continues to remain in a shadow of uncertainty passing the baton of growth to emerging markets, continuing the trend of the last 10 years. The developed world with all the problems of unemployment, poor growth, expected deflation and lack of consumer/corporate spending has kept the liquidity tap open. This has lead to a benign liquidity regimen in most western economies. The emerging world is trying to tackle hard with this exodus of liquidity from developed world seeking growth and return. The primary impact has been the emergence of market devaluation of western currencies and a rise in the emerging world monies. Many emerging market policymakers are buying boatloads of dollars to stop their currencies rising as foreign capital pours in from Western investors even as their economies continue to create a yawning gap between the growth rates of two worlds.

Liquidity position in emerging markets has helped the cause of the massive surge in equity indices. Policy makers have tried to keep excess liquidity under check in most emerging and specifically exports oriented markets. This is clearly visible through the central bank policy stance of many emerging and export oriented markets like Australia, India, Brazil and China has joined in recently. However liquidity positions in emerging markets have remained favourable majorly due to excessive inflows from developed world. According to the latest data from EPFR Year-to-date flows into emerging market funds exceeded last year’s record setting US$44. The funds took in $3.8 billion in the week ending Oct. 20. Investors added $1.4 billion to emerging- market bond funds and withdrew money from Japan stock funds for the 16th week among the past 17. U.S. equity funds had net outflows of $1.9 billion. This super fund flow into emerging market has seen all time high inflows into India. SEBI data showed that net FII inflows into the stock market in October have crossed the $6 billion mark for the first time in history, with the current figure at $6.11 bn. Of the $6.11 billion that the foreign fund managers have pumped in, $4.4 billion came through the secondary market route while $1.7 billion has come through the primary market and other channels. Net FII inflow for the year also neared the $25-billion mark, with the current figure at $24.5 billion.

The liquidity position is expected to remain benign for the coming few months as investors pour funds into emerging markets chasing superior growth and outperforming index returns.

Bond Yields differentials drive fund flows

A key driver of the fund flows into outperforming emerging markets like India is the unprecedented levels of interest rates in the developed world vis-à-vis the emerging markets.

Presence of ultra low yield, poor macro economic outlook and lack of investor confidence in equity markets has lead funds to pursue other risky asset classes. The asset classes that have found favour with these funds are emerging markets, Industrial metals, commodities running in demand-supply deficits like sugar.

Last week the difference between yields on 2-year and 10-year Treasuries widened to the greatest amount since September. The difference in 10-year and 30-year Treasuries have also widened to record levels. These record spreads have led to a surge in the expectation that the real interest rates in the US economy could get negative. The effect of low interest rate regimen in US and other developed markets have been the resurgence of inflation sensitive sectors or more correctly the expectation of resurgence in growth for inflation sensitive sectors. Some of these sectors have given initial signs of revival like the auto sector, white goods and other consumer discretionary sectors.

Quantitative easing sequel to have another attempt

The key area which remains the pain area is the housing market. The key trigger of the financial crisis of 2008, the housing markets, has shown very little signs of revival. Housing starts in September were 73 percent lower than the three-decade peak of 2.27 million reached in January 2006. The government incentive gave housing a temporary lift in late 2009 and early this year, helping to stem a slide in prices. The initial tax break required contracts be signed by the end of November, pushing sales of existing homes to an almost three-year high 6.49 million annual pace that month, according to figures from the National Association of Realtors. Demand dropped for the next three months, only to be revived by the extension of the deadline to the end of April, which caused purchases to peak at a 5.79 million pace that month. After tumbling to a 3.84 million pace in July, the lowest since comparable records began in 1999; sales have climbed for the past two months, reaching a 4.53 million pace in September.

US Federal Reserve and other central banks in the developed markets introduced quantitative easing. QE I involved purchase of government-sponsored enterprise (GSE) debt [$100 billion] and mortgage backed securities [$500 billion] on November 25, 2008 and increased the size of these purchases on March 18, 2009 to $200 billion and $1.25 trillion, respectively.  Purchase of $300 billion of longer-term Treasury securities was also announced on the same day in March 2009. Quantitative easing (QE I) led to lower Treasury yields for a short period but they moved up soon.  After a brief one-day rally following the March 18, 2009 announcement of an extension of QE1, Treasury note yields continued to advance higher until early-April 2010. Treasury yields have maintained a downward trend since April 2010.  It is expected that the Fed would announce the course of the second round of quantitative easing (QE II) at the close of the November 2-3 FOMC meeting.

QE II is expected to serve as a harbinger of continued low interest rates and infusion of cheap liquidity into stagnated sectors. The primary focus of the Fed appears to reduce the yields across the curve. This will reduce the already paltry rates investors are getting to park their money for safe keeping which would induce money to get into assets where it earns better risk adjusted returns which are commodities, emerging market equities and currencies.

Economic conditions are projected to improve as the Fed supports business activity with QE2.  In light of this expectation, bond yields are likely to move up when the first signs of convincing evidence of robust growth are visible.

With real GDP growth rate tapering down, unemployment not showing any sign of coming down, inflation much below US fed target rate, there is strong case for QE2. The available estimates for QE II are placed anywhere between 1.2trillion to 3.5 trillion. This heterodox economic policy measures are expected to revive sector through availability of cheap credit and by bolstering consumer confidence. We expect the developed economies to engage into a coordinated QE II effort with some time gaps. This would ensure stability of currencies of each economy against the other and is quite apparent from the outcome of recently concluded G-20 meet.

The objective of QE II as stated above is to reduce the yields across the curve and in turn revive stagnated sectors of the economy like housing, banking by providing access to cheap credit. How successful the QE II would be is a question of supreme importance. Though we believe that the introduction of QE2 will provide just short term relief and over long term the impact of excess liquidity created will be visible. The effect on interest rates could be small. Banks are currently holding about $1 trillion in excess reserves rather than making loans and increasing the supply of credit to the non-banking segment of the credit market. It is possible—perhaps even likely—that almost all of any increase in the supply of credit associated with QE2 simply would be held by banks as excess reserves. One reason is that even in normal times, investment spending is not particularly responsive to changes in interest rates. Investment spending depends more on the economic outlook. Consequently, reducing interest rates modestly from their already historically low levels is unlikely to stimulate aggregate demand. Little effect on aggregate demand implies a corresponding small effect on output and, hence, employment. Therefore for QE II to be successful it needs to follow true heterodox economic policy.

QE – will the US repeat the Japanese failure?

Historically QE was used unsuccessfully by Bank of Japan (BOJ) to fight domestic deflation in early 2000. The BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. With quantitative easing, it flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves, and therefore little risk of a liquidity shortage. The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities and equities, and extended the terms of its commercial paper purchasing operation. The key reason for failure of BOJ’s quantitative easing policy was the inability of the local Japanese banks to lend and the absence of consumer borrowing due to prolonged period of recession post the lost decade. While there is little evidence that quantitative easing stimulated overall lending activity, there does appear to be some evidence that quantitative easing disproportionately supported the weakest Japanese banks. Therefore BOJ’s QE failed in reviving the economy effectively but did stem further de-gradation of the economy.

The European Central Bank (ECB) has used 12-month long-term refinancing operations (a form of quantitative easing without referring to it as such) through a process of expanding the assets that banks can use as collateral that can be posted to the ECB in return for Euros.

We expect US QE II to provide short term support to the market in the sense that Federal Reserve and other central banks would employ a coordinated quantitative easy process and buy non-risky assets from the market. This would lead to reduction in yields of these non-risk assets and prod investors to seek risk assets and support, revive economic recovery.

The risk to quantitative easing is an uncoordinated easing process by various central banks leading to further devaluation of USD against major world currencies. A weaker USD is going to be both the natural and the intended consequence of the coming bout of additional but uncoordinated QE by the Fed, and it will have a strong collateral effect on the already weaked and export dependent economies of the Euro Area and Japan. Talk of currency wars and competitive devaluations is rising by the day. Japan recently threatened “resolute action” against China and South Korea, Thailand has placed a 15% tax on bond purchases by non-resident investors and central banks in export dependent countries have talked of curbing excessive appreciation of their currencies. Japan has already intervened in the forex market to curb JPYs incessant rise against the USD.

Currency  wars

Currency wars are expected to be stronger for countries which are export dependent as their export competitiveness reduces with rising domestic currencies. The already fragile export dependent EU nations like Greece and other PIIGS nation would face continued pressure in presence of a further stronger euro and lead to bigger problems. This aspect of QE presents a real risk which can destabilize the world economy and hamper fund flows due to currency distortions.

The already ongoing currency war between China and the US over the appreciation of Chinese Yuan Remnibi has seen the world chorus grow louder. It is expected that a rise in Yuan would reduce its export, increase consumption of domestic goods and give a fair advantage to other exporting nations. The recent stance taken by various countries and especially the developed world that China has kept its currency undervalued for over two decades in which its economy has grown over 4 times in last 14 years and its currency has been artificially maintained at lower rates.

We expect such currency wars to become omnipresent if efforts are not made for a coordinated effort for another bout of QE v/s deflation.

Economic data shows weakness, sunny times ahead?

The most important expectation of growth has come in from the recently concluded U.S. government offering of $10 billion in Treasury Inflation Protected Securities (known as TIPS). This offering was priced to yield an interest rate of -.55 percent. This means investors are ready to pay for protection against inflation to the government. Inflation expectations are much larger than the present level on interest rates. Presently inflation data is stoking deflation expectations. Core consumer prices were unchanged in September for the second month in a row. That pushed the annual rate of core inflation down to just 0.8%, which is the lowest in 49 years. There is some inflationary pressure in the food and energy sectors. The recent increases in the price of raw foodstuffs will push CPI food inflation up further. And the latest rise in oil prices will further boost gasoline prices. The recent slowing in the manufacturing recovery suggests that spare capacity in the sector will be used up at a slower rate, resulting in more downward pressure on producer prices for longer.

Employment data in the western world has continued to remain weak and has shown little improvement after inching closer to normalcy post severe jobloss of 2008-2009. In US, the Private sector employment increased by 64,000 in September, but state and local employment fell by 83,000. Even if we exclude the 77,000 Census workers that were laid off, employment still fell by 18,000. That was the first drop in non-Census payrolls since December. Barring Canada most of the developed markets are currently witnessing job losses which have kept unemployment rate at elevated levels.

Our view is that employment picture in the western world is the most important indicator to gauge the vitality of the economic recovery. Given below is a graph depicting US CPI and Non-Farm Payrolls percentage change over the previous year. It is quite evident that employment picture leads the realized levels of inflation in the economy.

Most western central banks have kept policy rate at remarkably low levels for the last many quarters. We expect this to continue unless there is a material rebound in the employment situation. Forward cues from this data can be gauged for the health of the economy and the stock indices returns as well.

Economic activity is US recovered sharply last year and softened in the third quarter of 2010. Historically economic activity take time to revive post recessions and this time lag is generally larger for recession which last longer than average business cycle downturn. The current period of muted economic activity and subdued output readings is fairly consistent with historical recoveries. As is visible from above readings the activity in manufacturing and services sector in US has softened but still remains in the positive expansionary mode.

Our readings of economic data give us an outlook of subdued but constant economic recovery. Base case scenario points out to a 1.2% to 2% of economic growth for the US Economic.

Intermarket Analysis pointing to a structural shift

Taking a cue from the economic data flow we note that a subdued growth scenario looks most probable as long as the western world is able to stop further job losses. However Intermarket analysis has started pointing towards a much more powerful theme at play. US Bond markets are giving out indications that the worst for the US economy might be over and a return to normal growth path lies ahead in the future. Below is a graph showing US 30-YR Treasury Bonds and a ratio of copper to CRB Index.

A rising bond price denotes two things. Firstly poor expectation of growth, inflation and economic activity and secondly unavailability of better risk adjusted investment avenues. With US 30-YR T-Bonds hitting their all time highs the Yield on long term bonds have declined to all time lows.

Rising bond prices have occurred at a time when inflation causing commodities like industrial metals and crude oil have continued to trade close to their 52 week highs. Industrial metals like copper and some rare earth metals are marginally away from their all time highs. Therefore in the current scenario it represents an aberration that in a rising commodity price environment the Bonds prices have continued to rule at all time highs keeping yields close to their lows. USD index has fallen close to its decade lows.

A rise in inflation causing commodities generally leads the bond prices lower sending yields higher in the expectation of future inflation. This theme has played out perfectly in Asian markets which have seen bond yields rise along with rising commodity prices.

Currently it is apparent that US 30 Yr Bond is in a process of forming a top and starting a down leg. This would inturn push rates upwards creating inflation expectation and putting an end to deflation expectations. Therefore as stated earlier, we believe employment picture remains the most important economic indicator to watch in sync with the shaping of US 30 Yr T-Bond and the spread between 2 year and 10 year Treasury yields.

A rising yield accompanied by a steep yield curve and emergence of a stronger commodity price dynamics would be the best case scenario for Asian growth theme. However, in the short term a reversal of US Bonds can lead to temporary strength in the USD which can lead to a material correction in the commodity and Asian markets rally. Over the long term, a rising of yields from all time lows would significantly reduce the deflation expectations from the market putting double-dip recession to rest.

Best to your trading!!!

Sahil Kapoor