Nifty not likely to break past all time highs

Argument – Commodities prices are falling, inflation rate diving down, RBI to cut rates, Indian growth story still not dead, Nifty to break all time highs and venture into unseen territories.

Expectation – Stocks that are based on Indian growth story to move into uncharted territories.

Reality – Leaving apart the defensive's and most of which (leaving apart FMCG stocks) do not rely on Indian growth story venturing into uncharted territories

Further observation – If the Pharma, IT, FMCG companies are trading at all time highs they might be because they are not expensive when related to the growth potential. But that doesn’t stand to be the case, they have given whopping returns in the past and have been running atop on future expectations already built in. The stocks trade at PE of above 40’s and even 70's (Trailing 12 months) and the growth potential seems to be weakening. What the reason could be? Obvious reason seems, institutional investors want returns for their investors, being trading others money they can be greedy but not fearful of loosing the hard earned money. In search of returns they venture out buying stocks which are holding the cash in their balance sheets. The Pharma, IT, FMCG fit the bill.

Conclusion – Nifty likely to be rangebound in short to middle term unless and until growth stocks start moving up. Till then it’s a market wherein institutional investors and the Govt wont let the market fall, while the market itself lags the energy to move up.

What drives the Inflation?

Well the answer is quite simple it’s printing of money which drives the Inflation, many already know this, but let’s illustrate

Suppose there are four People A, B, C, D in a very small town. There are four types of skilled workers in the Economy, suppose A is a Farmer in the Economy who produces agricultural products like Wheat, Rice, fruits etc. B in our hypothetical example is an Transporter who transports goods. C is an Artist who entertains people by enacting small stories, scripts, etc. D is a Mechanic who repairs vehicles, machines etc. Now suppose there is a Government in place which has issued Currencies which the people have to use while buying or selling goods, they cant reject the Government Notes, now suppose that D has found a machine which can print notes, now he becomes lazy and stops working as the printing machine suffices all his needs, he starts buying food from the farmer and pays him though the notes he has printed, when he needs entertainment he gets it from the artist and pays through the printed notes, but whenever the Transporter needs to repair his vehicles ‘D’ does not oblige and refuses to work, now lets see how the situation turns out, Farmer has a limit of producing agricultural goods, and also whenever any machines at his workplace stop functioning there is nobody round to repair them as the Mechanic refuses to work and repair the machines, so whenever any problem arises he has to use the services of Transporter to carry the machines to city for repairing, If he needs to entertain himself, needs relief from stress after rigorous work in the weekdays, he cant get it has the Mechanic with all of the printed cash he has already booked the artist for his service, Also since the Transporter cant get his vehicles repaired from the Mechanic he has to use the services of the Mechanics from the city and render them extra money as travelling allowances, to get all his vehicles repaired, increasing his cost which he passes on to the farmer whenever he needs to transport machines, All this leads to the farmer in believing that the current prevailing prices for his goods are not sufficient for him, as he has to render more money to the transporter, also he is not able to get refreshment after the rigorous work of the week, he hikes the prices of his goods, but to no avail as this is not sufficient due to the printing press of the Mechanic which renders money as and when required to get the services of his choice, but there is saying you cant fool all the people for all the time, slowly and steadily people start sensing something fishy is happening, after coming to know about the printing press they start pricing in such a manner that they might be able to beat the printing machine and all this leads to hyperinflation.

Well I have used a small example of a small town with just four Individuals, but this is what might happen when more people are involved but the price discovery would be albeit at a smaller pace. Printing Money not supported with sufficient goods money can buy lead to Inflation. User comments welcome.

Zimbabwe Not an Exception that 'Inflation drives Stock Markets'

In the previous post http://niftywhatcanhappen.blogspot.com/2009/11/what-drives-stock-market-up-growth-or.html I had mentioned that I will elaborate further on how Zimbabwe is not an exception to the contrarian theory that its inflations that drives the Markets, so here I am to put in some more facts that will prove the theory.

The Chinese Index, the Shanghai Composite was trading at close to 1500 in 1992, and the same index was languishing at 1000 in 2006, a loss of 50% after 14 yrs inspite of unbeatable GDP Growth rate of close to 10% in the same time frame, so friends has the GDP Growth pulled the Market, the answer is no. The Brazilian Index, Bovespa zoomed more than 200 times in the period between Jan 1993 to December 1994, But the Brazilian Economy was not growing at ultra super pace, infact the growth rate dropped a little from 1994 to 1995, but still the Markets gave this handsome return (one of the reason for this zooming was inflation, the other I will post later). The Mexico Economy could not surpass the GDP Growth rate that it saw in 2000 uptil now but the Mexico Stock Index IPC is trading 4 times its 2000 High, so what is driving the Mexico Index, is it the Inflation.

I will be researching further on this topic (and hope that my readers give their opinion maybe seconding me or contradicting me), also we will take a look at how the Government is creating inflation and how it might become necessary to invest in the Stock Markets if the DOW JONES index trades above 10.3K, Also I would be posting my opinion on how the US Dollar is not going to sink, while the other Currencies might sink.

GOLD might touch 1400$ as long as it stays above 1040$

What drives the Stock Market up GROWTH or INFLATION?

Most of the Fundamental Analysts say that growth drives the prices of the Stocks up, is it right? Most of those Analysts said that a drop in the prices of Crude would help the market rally but when Crude prices were tanking most of the World Markets too were tanking, when the Crude fell to 33$ the Dow Jones Industrial Average was not at its life time high, neither the Asian Market Indices like Sensex (India), HangSeng, Shanghai Composite (China) were trading close to lifetime highs but were languishing close to more than 50% down from there lifetime highs and now that the prices of World Markets have improved, the Crude too has more than doubled in price.

A small query for all my readers, do you know the Stock Markets in the World that gave most returns?

Was it Bovespa which traded at 19K in 2000, 8K in 2003 and traded at 74K in 2008 a whopping return of 900% over 5 years, or was it the Sensex which traded at 6K in 2000, 2.3K in 2003 and went on to trade at 21K in 2008 again a handsome return of 800% in 5 years, And I have not forgot the Shanghai composite which was trading at 1.2K in 2006 and went on to trade above 6K in 2008 a return of 500% in just 2 years. But dear readers it seems you have forgot Zimbabwe where the unemployment rate is close to 80%, yes dear readers you have forgot Zimbabwe

According to

http://www.zimbabwemetro.com/finance/stock-exchange/zimbabwe-stock-exchange-market-capitalisation-reaches-us203-billion/

Zimbabwean Stock Market gained 300000%,

http://www.thezimbabwetimes.com/?p=12045

Says that Most shares gained 50,000% in one day

http://www.dailyreckoning.com.au/zimbabwe-stock-market-booms/2007/06/04/

Attributes a smaller return of 12,000% over a year to the Zimbabwean Stock Markets

So friends how come a Country whose employment rate is just 20% gives such handsome returns on investments in Stock Markets, It just due to the fact that the inflation there is running hot as you all know and that the biggest note there is 1 Billion (approx) and it can purchase a loaf of bread for you.

In my next post I will elaborate how Zimbabwe is not an exception but an example of the Contrarian Theory that the Inflation drives the Stock Markets and in a post after that why the US $ would not be sinking but gaining, Till then Take Care and try to beat the INFLATION.

Inflating the Inflation, Deflating the Deflation

The Dow Jones Index which was close to 1000 in 1982, topped in 2007 at above 14000 i.e. it inflated 14 times in 28 years and in the current Depression (not yet official), has corrected about 50% and is currently trading close to 50% down from life time highs, Now the Brazilian Index Bovespa which was trading close to 5000 in 1994 topped out at 74000 in 2008 i.e. it inflated much faster than Dow Jones, but now it is currently trading near to 40000 after hitting 29000 in October i.e. it has not deflated as fast as Dow Jones, and still recently one Citigroup Analyst maintained a target of above 50,000 for Bovespa for year end and said that he would be buyer at 35000, All in all the analysts are fooling the world to believe that the inflated, ponzi scheme index called Bovespa is a buy, just like the S&P fooled the world by upgrading Bovespa as investment grade when it was trading at close to 72000, so that speculators could distribute there holdings.

Now let’s have a look at the Composition of Dow Jones and the Inflation, Deflation therein

Walmart which a penny stock and trading at 0.06 in 1972, had a lifetime high of close to 70 and almost giving returns like a ponzi scheme, was inflated more than 1000 times in just 36 years, the stock is currently trading close to 50 and is outperforming the Dow Jones Index.

Microsoft trading at 0.1 in 1986 hit a lifetime high of 60, It was a multibagger stock inflating more than 500 times in just 14 years

Similarly Mcdonald inflated from 0.3 in 1970’s to all time high of 60, inflating 200 times in just 36 years, HP inflated more than 500 times from 0.14 to above 77, Intel inflated more than 200 times from 0.35 to above 75 in just 14 years.

On the other hand Bank of America which inflated not more than 10 times from about 6.5 to 55 in 10 years is trading close to 4 after hitting 2.6 recently. Similar story could be said about Citigroup, JP Morgan, GM, GE, all this stocks are the ones who have beaten down hardly inspite of not inflating.

Now coming to my Indian Sensex, Leaving out the ponzi scheme Satyam which had inflated more than 500 times from 1994 to 2000, obviously on inflated earnings, and whose fraud came into light, The other Inflated Stocks Infosys, Reliance, Bharti Airtel, BHEL are still outperforming the Sensex.