Stress Test For European Banks : Not So Stressful Though

On 23rd July 2010 results of  Stress Test for 91 banks of the European Union were declared. Of these 91 banks only seven banks failed the stress test. And Spanish banks topped the list with maximum number of failures. Five banks from Spain, one bank from Germany and one from Greece comprised the list of seven failed banks.

One year back similar Stress Test was conducted in US for 19 of its banks. Out of 19 US banks, ten banks failed the stress test conducted in May 2009. It was estimated that these banks would require an infusion of $75 billion to be credit worthy in case of another depression. That was stressful. But here when there is concerns of Sovereign Debt Default in European continent there are only seven banks out of 91 tested which failed. Estimated requirement of capital is just $ 4.5 billion to cater for any rude surprises by way of economic downturn. Isn't it wee bit surprising? It only points to a fact that the tests were not conducted rigourously. The rules applied to test the banks have been lenient. That's the only explanation one can offer.

Stress Test is like an X-ray. It tells us where all the banks and banking system have to be repaired in order to be strong enough to withstand an economic tsunami. In times of trouble if the banks fail, then what is left to bank upon for common citizens of a nation? But the European Union passed off this opportunity to find precautionary measures to safeguard itself against another economic downturn. If the doctor doesn't diagnose the patient correctly then how on earth can you prescribe the right medicine? Critics are  already saying that the stress tests on European banks were so easy that even Lindsay Lohan would have passed it.

So what could be the reason that European Union opted for losing credibility for its banks in the eyes of global investors? The tests were intended to reassure investors and help ease pressure in bank funding. This was urgently required since Sovereign debt crisis in many European nations undermined confidence in the banking system. Has the European Union achieved that goal with a Stress Test bereft of stress? I wonder not!! US investors have already lost faith in the European Banks as is evident from investment data available from various Mutual Funds. For the last two years exposure in European Banks has been drastically reducing in portfolios of US Fund Managers. Some have reduced it by as low as 60 to 80%. On top of that, this Stress Test has evoked some very caustic remarks from US Fund Managers.

Charles de Vaulx, a portfolio manager at International Value Advisers LLC said the stress tests would not change the firm's outlook on European Banks. "We find the European banks still under capitalized," de Vaulx said. "The lack of a test for sovereign risk means the test was too soft and not credible." After announcement of stress test results US markets shrugged off the results as a non event, and marched northwards on  expectations of better corporate earnings.

Gravitating Towards Trade War Scenario : Fallout of Depression

US President Barack Obama has fired the first shot to initiating Trade War. Last week he goes on record saying "Simply put, export growth leads to job growth and economic growth," This President Barack Obama opined while setting up an industry panel to achieve his ambitious target of doubling American exports in next five years. "This isn't just about where American jobs are today. This is where American jobs will be tomorrow", thundered the US President.

After having failed to create new jobs for US citizens through the usual route of driving domestic growth via fundamental economic activities, President Obama has now set his sights on achieving US economic revival by focusing on enhanced exports. To achieve the same he has already started advising competing exporting nations to go slow on their exports. Sample this reaction from a German official to President Barack Obama's advice "With his arguments that we should become a bit less reliant on exports and allow the others to catch up, he's just trying to weaken us. Well, we're not going to take his advice."

But if we know the style and functioning of  US President, he is not going to go back in his new agenda of doubling exports to rekindle US economic recovery, just because Germans do not like it. On the other hand European nations are not going to accept whatever US President has set as his national goal. It is no longer the period just after World War II that European Union will kowtow to US diktat. US will find it very tough to arm twist European Union on reducing its exports, whatever be the Union's present state of economic crisis. And that may set off some kind of trade war, which can be the next level of global concern.

The spectre of the European Central Bank raising interest rates to damp inflationary pressures in Germany is receding away. European Central Bank will find it very difficult at this time to raise rates when many European nations are still struggling with their respective debt-ridden economies. Credit crisis in Europe has at least ensured that the stimulus package will not be withdrawn for several months, which means that present low interest rates are here to stay for quite sometime. This is excellent news for Germany's export-orientated industry since continuation of low interest rates means high inflation, which in turn means that exports will fetch more money to German exporters.

In a scenario where exports are so lucrative, do you feel Germans are going to pay any heed to the wishes of President Obama? And therein lies the danger of a global trade war, in case US decides to pull out all the stops to attain its national agenda of doubling exports at the cost of its exporting competitors.

Trading Stock Futures : Performance Update Mid July 2010

Last performance update of trading stock futures was published on 6th July 2010 in a post titled "Stock Futures: Performance Update For June 2010". In that post it was seen that we had achieved 100% result in June 2010 trading Stock Futures. That means all the four Buy trades which were closed in June gave profit. In June we had traded lightly because market conditions were not conducive for aggressive trading on any side, long or short. However we still managed to generate a profit of Rs 23317/- from these four successful trades.

July though is different. There were enough indications for markets to move northwards and so I had given  full throttle to initiating buy recommendations. Now mid way through July 2010, its time to generate a performance report to assess where we stand against all stock futures recommendations which have been executed so far. By the way, let me preempt the findings by disclosing that so far in July we have maintained the track record of June by delivering 100% success. Take a look at the details of trades executed in July 2010 in Stock Futures  recommended by me at http://www.stockezy.com/ :-

Aban July Futures(Long) :
Bought at 670 and covered at 890. Lot size = 250. Investment = Rs 33500/-.
Profit = 220x250= Rs 55000/-. Return on Investment = 164%

KS Oils July Futures(Short) :
Sold at 58 and covered at 57.25. Lot size = 4000. Investment = Rs 46000/-.
Profit = 0.75x4000= Rs 3000/-. Return on Investment = 6.5%

Aban July Futures(Long) Rolled Over From June Series :
Four lots bought at average of 864 and covered at 890. Lot size = 250. Investment = Rs 1,48,000/-.
Profit = 26x1000= Rs 26000/-. Return on Investment = 17.5%

Bajaj Hind July Futures(Long) Rolled Over From June Series :
Bought at 116 and covered at 118. Lot size = 2000. Investment = Rs 46,000/-.
Profit = 2x2000= Rs 4000/-. Return on Investment = 8.6%

GMR Infra July Futures(Long) :
Bought at 59.2 and covered at 60.2. Lot size = 4000. Investment = Rs 47000/-.
Profit = 1x4000= Rs 4000/-. Return on Investment = 8.5%

Bajaj Hind July Futures(Long) :
Buying at dips, investment of Rs 46000/- in this scrip was rotated by buying and selling four times between 1st July to 14th July.
Each time profit of 5500/-, 3400/-, 2000/- and 4400/- respectively could be realized.
Total Profit = 5500+3400+2000+4400 = Rs 15300/-. Return on Investment = 33.26%

Balrampur Chini July Futures(Long) :
Buying at dips, investment of Rs 67000/- in this scrip was rotated by buying and selling three times between 2nd July to 13th July.
Each time profit of 5400/-, 3000/- and 8000/- respectively could be generated.
Total Profit = 5400+3000+8000 = Rs 16400/-. Return on Investment = 24.4%

Cummins India July Futures(Long) :
Bought at 596 and covered at 602. Lot size = 500. Investment = Rs 59000/-
Profit = 6x500= Rs 3000/-. Return on Investment = 5.08%

McDowell July Futures(Long) :
Bought at 1296 and covered at 1310. Lot size = 250. Investment = Rs 64000/-.
Profit = 14x250= Rs 3500/-. Return on Investment = 5.4%

Patel Engg July Futures(Long) :
Bought at 417 and covered at 425. Lot size = 500. Investment = Rs 41000/-.
Profit = 8x500= Rs 4000/-. Return on Investment = 9.75%

Tech Mahindra July Futures(Long) :
Bought at 736 and covered at 760. Lot size = 250. Investment = Rs 37000/-.
Profit = 24x250= Rs 6000/-. Return on Investment = 16.2%

Bharti Airtel July Futures(Long) :
Bought at 273.5 and covered at 278.5. Lot size = 1000. Investment = Rs 54000/-.
Profit = 5x1000= Rs 5000/-. Return on Investment = 9.2%

JSW Steel July Futures(Long) :
Bought at 1075 and covered at 1084. Lot size = 250. Investment = Rs 53000/-.
Profit = 9x250= Rs 2250/-. Return on Investment = 4.2%

Renuka Sugar July Futures(Long) :
Bought at 70.1 and covered at 71.5. Lot size = 2000. Investment = Rs 28000/-.
Profit = 1.4x2000= Rs 2800/-. Return on Investment = 10%


Total profit from 01 July2010 to 14 July 2010 = Rs 1,50,250/-

Sugar To Become Sweet For Indian Companies

Indian Agriculture Minister has finally given a hint that Indian Government is considering to decontrol the sugar prices. This is sweet music to sugar sector, and upon hearing this news sugar stocks gave a thumbs up  in the last session of trading on Indian bourses. Now there is hope that the most controlled sector of the Indian Industry will be able to come out of its shackles.

When we talk of shackles we need to realize the gravity and complexity of chains that Indian Government has put on this very important industry of Indian economy. To fathom the depth of the situation let us face some hard and harsh ground realities:-

1. India is the biggest producer of sugar in the world along with Brazil. It is also the top consumer of sugar in the world.
2. Indian sugar mills are totally controlled through various Acts and notifications by Central Government. Take a peek at some of the chains that Indian Government has tied  this vital industry with:-
   
   (a)   Price to be paid for cane controlled through state advisory price (SAP).
   (b)  Procurement of cane by sugar mills allowed within a stipulated radius only.
   (c)  Price controlled for sale of sugar in free market.
   (d)  Quantity and duration of sale in free market controlled.
   (e)  Limit on quantity to be lifted by bulk consumers like soft drink manufacturers.
   (f)  Price and quantity of levy sugar to be distributed through Public Distribution System.

Levy sugar is sugar that mills have to sell to Government at a price fixed by the government. This price is generally less than half the free market price. The quantity is at present 20% of the total production of the sugar mills. Levy sugar is distributed by the government through its Public Distribution System(PDS).

Sugar mills have to pay a fixed price to cane growers through system of state advisory price (SAP). Earlier Supreme Court had ruled that SAP should be taken into consideration while fixing the price of levy sugar with effect from1983-84. The honourable court had further directed that Central Government should refund the legitimate dues to sugar mills accruing out of this order. Now Bajaj Hindustan has filed a petition with Supreme Court that Government has violated the honourable court's order by not taking SAP into consideration while fixing the levy price, leave alone legitimate dues to be paid to sugar mills. Now Supreme Court has issued notice on 8th July 2010 to central government to submit a reply to this petition.

In this issue of levy sugar, one fails to understand as to why only sugar industry has to bear the burden of subsidy. On top of that you are not ready to pay legitimate prices to sugar mills for levy sugar!! No wonder this industry is making losses day in day out. The following vicious cycle is happening in this vital industry of Indian economy:-

1. Sugar mills are forced to reduce production below their capacity in order to cut their losses.
2. Lower production means lower procurement of cane.
3. Lower cane procurement induces the farmers to grow less cane and switch to other cash crops.
4. This generates scarcity of sugar, sending sugar prices to skyrocket. This compels the central government to import sugar to meet domestic demand, and in the bargain lose precious foreign exchange.
5. In this scenario it is a lose-lose situation for all. Cane growers lose, sugar mills lose, the exchequer loses and ultimately the Indian economy loses along with the public in general.

May be now the Indian Government will wake up to the realities of economics in sugar industry. By decontrolling the sugar prices it will allow this industry to flourish and make India the Sugar King of the world, which is its rightful place given the god-gifted fertile land that it possesses.

Reliance Industries is the biggest industrial empire of India and this group has still not stepped into sugar sector. With freeing of sugar industry of its shackles, Indian Government may create the right conditions for Reliance Industries to join the bandwagon of sugar sector in times to come!!! Keep a strict lookout for sugar sector for long term investment even if the sector is partially decontrolled by the government.

IMF Forecast For 2010: India GDP Upgraded

International Monetary Fund (IMF) has now corroborated what I have been maintaining for quite some time. IMF has upgraded India's GDP forecast of year 2010 from 8.8% to 9.4%. And on the other hand, IMF has indicated that US poses the greatest threat to global recovery. In fact as per IMF it is India and China and some other Asian economies which are supposed to lift the growth prospects in the world and therefore it has raised the world GDP prospects for 2010 from 4.2% to 4.5%. However it has lowered its growth estimates for Euro zone, Canada, US, Japan, and emerging economies.

If we consider expected growth rate of different economies of the world, India ranks second behind China. According to IMF, while India's GDP is expected to grow at the rate of 9.4%, China's GDP is fore estimated to grow at 10.5% for year 2010. This is wonderful news for Indian economy, and should lift the global investors' confidence and investment sentiments towards India.

I had already fore casted in my post dated 17 Jan 2010 titled " Stimulus Induced Growth - Is It global Recovery On Steroids" that US will witness a double dip depression while Indian markets will correct but rebound aggressively to surpass their all time highs in a year's time. Now IMF forecast mirrors my sentiments. With India you can also see other emerging economies to do well, provided they are not heavily dependent on exports to US.

Moving away from growth rates, do keep a look out for textile counters for long trades in Indian markets today ie 9th July 2010. This is because the textile sector will benefit from the announcement from China that yuan will be allowed to appreciate more aggressively.