The new world order - Will it succeed?

The IMF and the World Bank are what we think of when we think about countries needing money to bridge their deficits or when they are in need of covering their balance of payments gaps. However that is all set to change very soon. In fact, it has already begun.

BRICS - The top 5 emerging economies of the world recently collaborated and created a 100 billion $ fund that would primarily serve two purposes -

1. Be a source of funding for infrastructure and other large scale projects in the developing economies.
2. Be a source of bailout for the economies when they face a balance of payment crisis.

Well, it also has a third - subtle but more important reason - Driven mainly by China and Russia (due to the Kiev issues probably?) this might be the beginning of a new world order - wherein the emerging economies, which make up for a little over half of the global output move away from the US dominated financial system.

Whether this will be successful or not - Only time will tell. But we can always have our opinions (or biases).

It is unclear how this will be better for the 5 nations compared to world bank and IMF as being their primary lenders in the past. Their funding has required stricter and stricter norms to be followed by borrowing nations. The amount of money that the nations borrow from these facilities depends on the severity of crisis, the credibility of the borrower and whether or not the borrower is likely to honor the rules laid down by the lender. This is also one of the primary reason for the BRICS making such a move. Should we call this more of a political move rather than a step towards fiscal freedom?

CHINA Problem - Inequality

Clearly, China has exerted a strong influence in the formulation of the BRICS development bank. The country will be the largest contributor to the bank - almost twice as much as all the others. The sheer size of their economy and their continued rivalry with US might mean that it could have a vested interest in being the harbinger of more problems of US - Not fighting the so called financial dominance of the West but to be a launchpad for its own dominance in the world economy.

These are also some of the issues that led to such a long delay in the formulation of this facility. India has done well in showing some resistance to such moves by China.

All in all, it is a good move by the 5 emerging economies. The reduced funding from Fed will also be hedged by these nations with this move. However, the imbalance due to differing contributions and variations in sizes of the economy will be a key issue. Moreover, more consolidation on the policy front will be needed in future!

The stock market - Budget '14 anamoly

So it was kind of weird that other day when the budget came out. It was better than the last one where subsidies had really strained the fiscal deficit and added to that, no clear strategy of reviving growth made things bleak for the economy. The market reacted accordingly. They declined the day the budget was out. More precisely, they were unhappy that -

1. Govt. had no plans of reviving growth. The manufacturing and Industrial production was low. The sectors were not given investment opportunities through FDI.
2. Increased non-plan expenditure would lead to widening the deficit - which the center by the way promised to bring down to 4.8% of the GDP.
3. Increased non-plan expenditure would cause inflation. This would be both demand pull and supply push.
4. To bridge the fiscal gap the government would increase taxes. Bad news for businesses.

The 2014 budget was much better. Focused and it had some bitter stuff in it. The FM promised to bring down the deficit to 4.1%, implement GST, control inflation through fiscal policy (good news for businesses like RE where the interest rate exposure is high). The stock market still fell! Why?

Being ambitious is Ok. But being over-ambitious is not.

The first thought that comes to our mind is that perhaps the markets were over-expecting from the budget and things somehow fell short. This would be reasonable considering the hype that Modi got with him. However this is not the case. It is completely the opposite of that.

The market thinks that the budget is over-ambitious and based on unreasonable assumptions. Of particular importance are -

1. The tax revenues that the govt. forecasts are higher. The current tax revenues of the govt. are not good. And to be able to get the Fiscal Defficit down to 4.1% will be a challenge. This divergence of views when it comes to fiscal deficit is the major cause of the fall.
2. The markets were positive about the govt. having a clear long term view on reducing subsidy bills.
3. The markets also think that the implementation of GST will take longer then expected. The FM hopes to implement it in the next 8 months. The market thinks it'll take 2-3 years.

Besides this, the fiscal deficit number itself looks audacious. In the coming days as the govt. takes measures to show it's commitment, the market should react positively.

MACD - One of the best indicators - but not used?

The debate between whether one should use technical indicators or resort to fundamental analysis of the company in arriving at the decision of investing or not investing has a long history. However, sometimes these indicators can work very well - IF USED INTELLIGENTLY.

One of the good indicators that I have come across is the MACD - Or the moving average convergence-Divergence. I don't say that it is the go-to indicator for making your decisions - but what I like about it is -

1. The signals it gives are more reliable then others.
2. The signals - beyond the crossovers - are often leading indicators and can enable you to buy the security/sell it at its lowest/highest.

Let us take an example to make my point clear. I am not trying to focus too much opn how the indicator is calculated - rather on what it says and how should one interpret it.

I'll take the example of Suzlon - A stock that has rallied tremendously in the past 1 year, Reaching an all time high of Rs. 35 before starting its descent. The question we need to answer is - for someone who bought the stock at, say 25 bucks, could have predict the down-turn at 35 and sold at that point.

The price history of the stock is shown below -

We can clearly see the surge in prices in a matter of a few months. An investor, looking at the stock in Jan-Feb would have been able to buy the stock at Rs. 10. Now let us look at the MACD overlayed on this. 

What is a cross-over - 

The MACD is a simple difference of a 12 day and 26 day Moving average. A negative value (below the neutral line) means that the selling activity is present and the prices are going down at a faster rate. A sell signal. However, if you were to rely on this, you would have sold the stock at 24.5 Rs. -Almost 10 busks below its peak. Not so good then. 

The signal line cross over does a much better job as it measures the MACD relative to its own 9 day Moving average. MACD line below the 9 day EMA (White line in the graph) is again a sell signal. However, based on that signal, the value would still have been about 5.5 Rs below the peak. Can we do better?

Let us now also consider the histogram. What it tells us is simply the gap between the MACD and its 9 day moving average. What does that signify? Rising bars in the histogram means that the MACD is moving faster than its average (upwards) and is a strong buy signal. 

Once you see a rising MACD and a falling histogram - it means that the 9 Day EMA is catching up and sooner or later there will be a reversal. I have highlighted the this in the next diagram. 

This time if your are vigilant, you could have sold it for around 32-33 Rs. An improvement of almost 3 Rs./Share. Of course one could combine this with another great indicator like RSI. The overheating is clearly seen before it reaches its peak telling us that it is over-brought. It is actually hard to miss this one! Most of the guys would hve realized this down-trend by the time it touched 32-33. But that is not the case! 

The trading volume actually did not pick up until the value fell to Rs. 30. People were waiting with baited breathe - seen in the abysmally low volumes near the peak - meaning that they would have been continuously monitoring the stock. Had they used MACD - They would have done better! :)

Kidding aside - Some people have this notion that technical indicators are never reliable. However, if you base stuff on solid math they can assist you if not govern your decision making. 

Cheers