NORTH BOUND JOURNEY CONTINUES...?

FROM AN EXPERIENCE

“I always focus on the strongest stocks and buy them without hesitation-Stocks that are behaving properly are the only ones I focus my attention on”

“Overbought is a relative term used to keep the masses out of the trade”

“I’ll stay in the trade long enough to allow it to work or fail”“Volatility is a necessity to shake out the weak hands”

1. People usually expect the future to be like the past and underestimate the potential for change.

2. When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing, since all optimism has been driven out of its price.

3. In investing, as in life, there are very few sure things. Values can evaporate, estimates can be wrong, circumstances can change and “sure things” can fail. However, there are two concepts we can hold to with confidence: • Rule number one: most things will prove to be cyclical. • Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.

4. Very early in my career, a veteran investor told me about the three stages of a bull market. Now I’ll share them with you. • The first, when a few forward-looking people begin to believe things will get better • The second, when most investors realize improvement is actually taking place • The third, when everyone concludes things will get better forever

5. Investors hold to their convictions as long as they can, but when the economic and psychological pressures become irresistible, they surrender and jump on the bandwagon.

6. Even when an excess does develop, it’s important to remember that “overpriced” is incredibly different from “going down tomorrow.” • Markets can be over- or underpriced and stay that way—or become more so—for years.

7. If everyone likes it, it’s probably because it has been doing well. Most people seem to think outstanding performance to date presages outstanding future performance. Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages subpar performance from here on out.

8. Our goal isn’t to find good assets, but good buys. Thus, it’s not what you buy; it’s what you pay for it.

9. There are two kinds of people who lose money: those who know nothing and those who know everything.

10. One way to get to be right sometimes is to always be bullish or always be bearish; if you hold a fixed view long enough, you may be right sooner or later. And if you’re always an outlier, you’re likely to eventually be applauded for an extremely unconventional forecast that correctly foresaw what no one else did. But that doesn’t mean your forecasts are regularly of any value

11. Surprisingly good returns are often just the flip side of surprisingly bad returns. One year with a great return can overstate the manager’s skill and obscure the risk he or she took. Yet people are surprised when that great year is followed by a terrible year.

12. Psychological and technical factors can swamp fundamentals. In the long run, value creation and destruction are driven by fundamentals such as economic trends, companies’ earnings, demand for products and the skillfulness of managements. But in the short run, markets are highly responsive to investor psychology and the technical factors that influence the supply and demand for assets. In fact, I think confidence matters more than anything else in the short run. Anything can happen in this regard, with results that are both unpredictable and irrational.

                                                        (Excerpts from "THE MOST IMPORTANT THING" by HOWARD MARKS)

                     

                  

                                                                          

FUNDAMENTAL

Last Week’s Market Round Up: "Investor’s rate action conviction buoys markets"

Sensex closed out the week at 16,949.83, up 1.38%, while the Nifty ended at 5,068.35 up 1.39%

Markets were torrid for the initial part of the week as there was speculation that India may become the first BRIC nation with junk status on the back of a possible S&P downgrade.

IIP growth for April came in at 0.1%, lower than street expectations of 1.8%.

Headline inflation failed to slacken with WPI coming in at 7.55% in May as against 7.23% in April.

Rupee ended weak against the US dollar in the week, ending at 55.64/dollar versus 55.5/dollar last week.

MARKET OUTLOOK

"Multiple events over next week to determine direction"

At the current level of 16,949.83, the Sensex trades at a PE of 15.3x FY12 earnings and 13.4x FY13E earnings estimate.

At 13.4x, we trade below average valuations of 15.4x one-year forward earnings.

Central banks in emerging markets are expected to support slowing growth through monetary easing, leading to a further fillip for growth and risk assets.

The next week has multiple events lined up: Greek election results on the 17th, RBI meet on the 18th and FOMC meet on the 20th.

The fate of these events, the most important of the lot being the Greek election results, will drive near-term market direction.

Sectoral Outlook: "Stay with companies robust business models"

RBI in its latest policy cut interest rates by 50 bps to provide a fillip to deteriorating growth environment

We expect pick-up in corporate capex and credit growth buoyed by further monetary easing.

We would advice clients to play interest rate sensitives like Banks and Capital Goods (Yes Bank, City Union Bank and Larsen and Toubro) to capitalize on falling rates theme.

At the same time consumption and agri stories (GSK Consumer, Bajaj Auto, Coromondal Fertiliser) would continue to do well.

We recommend reducing exposure on global cyclicals like Tata Steel as concerns from China slowdown intensify.

TECHNICAL 

Round-up: "Northbound journey continues"

Nifty opened the week on a positive note and continued its upside journey and made a high of 5146. Finally Nifty closed at 5139 with a gain of 1.31% on w-o-w basis. IT, Cements, Realty, Cap Good and Banking stocks outperformed the broader markets on w-o-w basis.

Nifty Outlook: "Range bound"

As mentioned in our previous report "Nifty is looking strong and further upside can be witness till 5150 which is the 200DEMA and above that 5180 which is the double bottom target." As expected Nifty opened on a positive note and made a high of 5146 which was very near to our first mentioned target of 5150.

On the daily chart Nifty is trading above the short term averages as well as oscillators trading very neutral. Thus going forward we believe that Nifty is going to trade very rangebound. On upside Nifty has resistance in the range of 5150-5180 and downside Nifty has support at 5000 levels, thus in the coming days breach of either side will lead to sharp upside or downside move.

WHAT NEXT...?

LEVELS OF NIFTY FUTURES (JUNE 18)

OVERALL RESISTANCES NOW @ 5121-5195-5231-95-5342

Day’s Resistance @ 5166-85-5203

Day’s Supports   @ 5106-5088-71

GOOD RESISTANCE TODAY @ 5166 ON CARDS

If trades above 5160 for 10 minutes see a hike upto 5184

Suppose if trades below 5145 for 5 minutes see a slide 

upto 5125-5109

Below 5106 for 5 minutes means NF slides more upto 5090-72

PHARMA COS SELL DRUGS 10 TIMES COST:MCA

Leading pharma companies, including GlaxoSmithkline, Pfizer and Ranbaxy, sell commonly used drugs at a rate 10 times the cost of production, a study by the Corporate Affairs Ministry has found.

A study by the Cost Audit branch of the MCA found drugs like Calpol manufactured by Glaxosmithkline, Corex Cough Syrup by Pfizer, Revital by Ranbaxy Global, Omez by Dr Reddy’s Labs, Azithral by Alembic and several others were being sold at a mark up of up to 1,123 per cent over the cost of production.

Worried over the findings of the study, Corporate Affairs Minister M Veerappa Moily has written to the ministers of Chemical and Fertilizers M K Alagiri and Health Ghulam Nabi Azad seeking appropriate action on curbing this practice of pharma companies.

He has forwarded a copy of the study to the two ministers.

Emails sent to Ranbaxy, Pfizer, Zydus Cadila and Cipla remained unanswered while Dr Reddy’s Lab said it cannot comment on the findings of the MCA.

The MCA study covered medicines manufactured/marketed by Ranbaxy, Dr Reddy’s Lab, Wyeth, FDC, Alembic, Glaxomithkline, Pfizer, USV, ELder Pharma, Zydus Cadila, Wochardt and Cipla.

According to the ‘suo moto’ study, the mark up (MAPE) on cost of production range from 203 per cent to 1,123 per cent against 100 per cent allowed by the National Pharmaceutical Pricing Authority (NPPA) in case of scheduled drugs.

It said the profit margins were “exorbitantly high” even in cases of top selling brands like Amlodopine, metformin, ciprofloxacin and Azithromycin.

Also, cost of production differs significantly between manufacturers and there was significant variance in retail price between different brands of same high selling molecules.

“This practice of fixing maximum retail price (MRP) to exorbitant high (even 1,000 per cent of cost of production), gives a chance to the whole chain of distributors/whole sellers and retailers to dupe the unaware consumers. This is highly detrimental to the interest of the consumers forcing them to pay the MRP even 10 times of the cost of medicine they are procuring,” it said.

As per the findings that studied 21 formulations of big drug manufacturers, the mark up of maximum retail price (MRP) over cost of production (CoP) was the highest at 1,123 per

cent in case of GlaxoSmithkline for its Tab Zyloric, followed by Ranbaxy (858.09 per cent) for Cap revital, Zydus (752.85 per cent) for Cap Ocid, USV (746.47 per cent) for Gyclomet.

“In case of Zyolric Tab produced by GlaxoSmithkline, MAPE on COP is highest at 1123 per cent and in this the share in company’s profit margin is 640 per cent. As percentage of net sales realisation, it is 68 per cent,” said the study on

formulations (medicines) manufactured/marketed in India,” the study said.

It added, “Loading of selling and distribution expenses range from 34 per cent to a high of 209 per cent, highest loading of selling and distribution expenses is 209 per cent in case of Revital Caps produced by Ranbaxy Global.”

The report reavealed that in the 21 high MAT value brands there is very high company profit margin, very high mark up on cost of production, heavy loading of selling and distribution expenses and very high mark-up towards trade margins.

“Company’s profit margins as percentage of net sales realisation range from 29 per cent to a high of 68 per cent.

In 11 cases, the margin is more than 50 per cent,” it said. The study, which was carried out suo moto by the MCA, holds significance as the Government is working on a National Pharmaceutical Pricing Policy that aims at controlling the price of drugs, particularly the essential ones.

The price of 60 per cent of the medicines can be brought under control if a ministerial panel on pharmaceutical policy, headed by Agriculture Minister Sharad Pawar accepts the Pharmaceuticals department’s proposal.

INDIAN ECONOMY IS IN STAGFLATION:Moody's

Global financial services firm Moody’s today said Indian economy is facing stagflation, where growth is slow and inflation high, and cautioned that the Reserve Bank cannot be too aggressive in cutting interest rates.

“India’s economy is in stagflation, with notably weaker growth but inflation still stubbornly high,” said Glenn Levine, Senior Economist, Moody’s Analytics.

Amid wholesale price-based inflation ticking up to 7.5 per cent year-on-year in May due to supply-side factors, the agency said it will cause further “headaches” at the RBI.

“Yet with the inflation numbers now being driven by supply-side factors, and with the currency being pushed downwards…and India’s weaker growth prospects, we think that the RBI could cut rates without it putting too much upward pressure on inflation,” said Moody’s Analytics.

However, it said the Reserve Bank of India (RBI) cannot be “too aggressive” while inflation remains a problem.

The RBI is scheduled to review mid-quarter monetary policy on June 18.

Moody’s said the recent plunge in the rupee is pushing up the price, especially imported of goods and commodities priced in US dollar.

It further said with the rupee now sitting 15 per cent below its peak of late-February, this will ensure that WPI inflation remains in the 7 per cent to 8 per cent range for another six months.

“Indeed, with the growth side of the economy slowing, the risks have shifted sharply towards growth and they (the RBI and other policy makers) should just grin and bear the higher inflation numbers,” it added.

Stagflation is a situation when economic growth of a country stagnates while inflation is rising.

Moody’s Analytics is a part of Moody’s Corp that provides expertise in economic and consumer credit analysis, credit research and risk measurement, among others.

TRADING IN THE ZONE

These Beliefs are the Seven Principles of Consistency from Mark Douglas’s “Trading in the Zone”

I highly recommend picking this book up to add to your collection, because it has benefited me tremendously in understand how beliefs and values play a vital role in one’s trading and ultimate success.

I remember the first time I picked this book up I didn’t “get” it and put it away. About a year later I read it again and it just clicked. I now reference it on a weekly schedule just so the principles in the book stay fresh in my mind and to reinforce what I had learned.

I am a Consistent Winner Because:

1.  I objectively identify my edges.

2.  I predefine the risk in every trade.

3.  I completely accept the risk or I am willing to let go of the trade.

4.  I act on my edges without reservation or hesitation.

5.  I pay myself as the market makes money available to me.

6.  I continually monitor my susceptibility for making errors.

7.  I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.

Five Fundamental Truths:

1. Anything can happen.

2. You don’t need to know what is going to happen next.

3. There is a random distribution between wins and losses for any given set of variables that define an edge.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

5. Every moment in the market is unique.

 “Consistency is the result of a carefree, objective state of mind, where we are making ourselves available to perceive — and act upon- when the market is offering us in any given moment.”

~Mark Douglas

If anybody out there is having difficulty perceiving opportunity in today’s markets then they need to read this book. I know this environment is unprecedented and extremely challenging, but in every market there is opportunity. I just read a great quote very relevant to today’s market, but I’m not sure where it came from.

“Fear blinds us to opportunity: greed blinds us to danger.”

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