Stocks - Distribution on?

Looks like a distribution pattern to me as far as the broader indices, Nifty and Sensex are concerned. Of course, there is another possibility that the markets hit new highs, but at the moment i would prefer to believe that we are in for a correction. Economic conditions do not support new highs.

Since markets can surpise the best investment decisions should be taken carefully after due study and not on the basis of recommendations.

Inflation figures negative!

Inflation figures are negative now. A first in the last 30 odd years. Time to do a detailed analysis.

Watch this space for a detailed analysis to follow soon.

Green Shoots Turning Brown

Big banks still not lending. Loan volume at the 21 largest recipients of government funding fell 7% during the month of April, according to a survey by the Treasury Department.

This is a headline from CNN Money. Surprised?

The Federal Reserve Bank of New York’s general economic index fell to minus 9.4 in June from minus 4.6 the previous month, while economists had expected the gauge to stay unchanged. Readings below zero for the index signal manufacturing is shrinking.

This one is from Bloomberg.

A little more time before all "Green Shoots" turn brown. There is no reason yet to believe that the US economy is recovering.

Warren Buffet on Diversification

"Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing"

The above quote is by Warren Buffet.

IIP Growth in April 2009 1.4% over April 2008

The details of the IIP nos (from the press release of the govt) makes an interesting study.

A quick review tells us the following .

1. Eleven out of seventeen industry groups showed a positive growth. Seems good so far.

2. The industry group ‘Wood and Wood Products; Furniture and Fixtures’ have shown the highest growth of 31.4%, followed by 12.6% in ‘Wool, Silk and Man-made Fibre Textiles’ and 10.2% in ‘Non-Metallic Mineral Products ’. Furniture and Fixtures with the highest growth. Should that enthuse us?

3.On the other hand, the industry group ‘Food Products’ have shown a negative growth of 34.4% followed by 12.4% in ‘Leather and Leather & Fur Products‘ and 5.1% in ‘Other Manufacturing Industries’.

4. As per Use-based classification, the Sectoral growth rates in April 2009 over April 2008 are 4.6% in Basic goods, (-)1.3% in Capital goods and 7.1% in Intermediate goods. The Consumer durables and Consumer non-durables have recorded growth of 16.9% and (-)10.4% respectively, with the overall growth in Consumer goods being (-)4.7%.Negative growth in capital goods is a pointer to industry confidence. Growth in intermediate goods does not tell us story till it is clear for which products these intermediate goods are used. Growth in consumer durables may be seen as encouraging.

5. Alongwith the Quick Estimates of IIP for April 2009, the indices for March 2009 have undergone the first revision and those for January 2009 have undergone the second (final) revision in the light of the updated data received from the source agencies. (It may be noted that revised indices (first revision) in respect of February 2009 have already been released in May 2009 and these indices shall undergo final (second) revision in July 2009). This is the best part of it. So the final figures for April 2009, shall not be known till August 2009. How much would it differ from the quick estimates is anybody's guess.

Now for a comparison with the previous months.

1. The general index is at 270.1 for April 2009, down from 302.6 for March 2009. Of course, the figure for March 2009 will only be finalised next month, so its prudent to compare with earlier months.

2. The general index stood at 274.2 in Feb 2009 (higher than April 2009), 284.8 in Jan 2009 (higher than April 2009), 284 in Dec 2008 (higher than April 2009) and 267.6 in Nov 2008 (marginally lower than April 2009). In short, April 2009 figures indicate a contraction with respect to the previous quarter.

3. The index is lower in April 2009 as compared to May 2008 (274.6) too. So we may see negative nos in May 2009, until and unless there is real growth soon.

4. In the latter half of 2008, the index fell to 262.9 in Oct 2008. So in Oct 2009, expect positive growth in nos. even if there is stagnation.

We seem to be far away from economic recovery.

IIP positive - First sign of recovery?

The IIP for April 2009 have come out positive. At 1.4% growth, "experts" have been remarkably quick to say that this is a sign that the slowdown period in the Indian Economy is over. Is it so? Watch this space for a detailed analysis soon.

Can Marginal Propensity to Consume be Zero?

Most mainstream economists tell us that the Marginal Propensity to Consume cannot be zero. That is of course not true! This is one of the reasons why mainstream economists often go wrong. But first what is Marginal Propensity to Consume?

Marginal Propensity to Consume (MPC) is the fraction of the next Rupee earned, that an individual/household shall use in consumption of goods and services. Thus if MPC is equal to 0.8, it means that if the income of an individual goes up by Rs. 1/-, the individual shall spend 80 paisa and save 20 paisa.

Now, mainstream economists believe that MPC cannot be Zero. Thus if there is an additional income, part of it shall surely go into consumption. Notice, how fiscal stimuli plans are often based on this premise. Reduce taxes and part of the disposable income shall go in increased consumption. Hand over money (Bush style) and part of it will come back as consumption expenditure.

Are the mainstream economists correct in their belief? Consider a falling economy with job cuts all around. Lets take the case of a person who still has a job, in fact gets either an increment (or a Bush style $600 paycheck). Let us assume that this person also has a home loan to pay. With falling home prices and with people being fired all around him, would he consider spending part of the extra money in buying something or will he save it for a rainy day. I suspect it shall be the latter. If so, mainstream economists are far away from the truth. No wonder they are unable to understand why people did not go shopping when Bush handed them cheques. They were unable to figure out in advance that savings rate in US will go up under the circumstances.

As a conclusion, in stressed conditions, in the short run, MPC can indeed be zero. Any attempt at fiscal expansion is therefore, unlikely to yield results in such conditions.

Inflation down to 0.13% - Some economic recovery!

From what seems to be the expert opinion in the country, India's economy is gearing up to keep its growth rate high. The stock market movement would also suggest that the worst is over. But is it so?

Inflation is down to 0.13% as per the figures released today and having been sub 1% now for several weeks. One wonders whether this is an indication of an economy on the path to recovery! With food prices largely remaining high or going higher, the low inflation figures indicate a lack of buying interest in commodities and consumer goods. A pointer also to low industrial activity. Surely that does not point to a recovering economy! This despite stimulus packages announced by the previous (?) govt. and expectations of more stimuli in the coming budget.

Seems economic activity remains slow. Now to wait for IIP nos to see whether they support my contention or not. Time also seems ripe for a stock market correction, which could come sooner rather later.

Will US enter into Hyper-inflation?

Inflation happens "when too much money chases too few goods" (in common parlance). Since a lot of money is being printed and thrown into the system, many analysts believe that inflation will start building up in US.

However, this can happen only if demand for goods picks up, demand for credit goes up and banks start extending credit. If none of the above happen, then despite additional money being printed, it will not chase goods. Take the example of Japan, which did not see hyper inflation despite years of money being pumped into the system by the govt.

My own view is that for the next few years, US citizens are not going to go back to old ways of spending on credit. The recent experience has been bad enough for them to make long term changes in habits. Savings will go up as indeed they are going up as off now. In such a scenario, inflation running away seems unlikely.

What will happen a few years down the line, when people forget the experience post 2007? If US citizens go back to their old ways and the Fed is not smart enough to have pulled out the money in the intervening years, well, US could see hyper inflation. But to say the least, this does not seem to be a scenario for the next three-four years, until and unless one believes that the US economy is going to be back on track very quickly.

I for one, would not consider hyper-inflation in US as a matter of concern, at least for the time being.