Tuesday

India - The Last Man Standing

1 Comment July 20, 2010 – 1:53 pm |   | Permalink |  Print This Post |

We have been championing the bear cause for India for a while now - our timing is never perfect, we don’t expect it to be - and are holding our shorts and sleeping well. We said before that German’s Dax was also on steroids, but at the time of writing the Dax is getting hammered and are “quite far” (still more to go folks) from their peak (now 5920 - peak 6200-6300). We re-opened our put options on the Dax when it re-rallied to 6100s last week. Apologies for the lack of timely updates - we will NOT include that in our public portfolio since it was not published live. We have been pursuing other more “noble” things in life at the moment - (to exaggerate a little) finding a cure to cancer. Yes, that is part of our day job for this year. Without going into details, day trading and watching the screen flash is NOT a luxury we can afford. So we have tailored our trades to “medium” term trades - ie we are prepared to hold our trades over months. This is quite distinct to most traders (at least those who blog about their trades) who take relatively huge positions and have a tight stop! The size of our positions are laughable (I can assure it it’s no laughing matter as even tiny positions can lead to disastrous losses!) - but our priority is not to be wiped out and to have a good nights rest.

We have been harping on India for as long as we can remember (probably about 1-2 months since the Indian election). For us, that is the Last Man Standing. Short it. The analysts are too busy focusing on China. Contrarions like Hugh Hendry are picking on China - expecting a huge crisis and fall. We love Hugh, and put him alongside Jim Rogers on our hall of heroes. For those who have never heard of Hugh Hendry, watch every single one of his interview on YouTube. Not everyones cup of tea, obviously - “too radical”. Back to India. Whilst the attention is on China, do you know that China is the second worst performing Index after Greece this year? So, the fall of China IS happening before our eyes in the short term - and yes there could be more ahead. Flying under the radar is India. Great growth, good fundamentals and the right sort of demographics (unlike Japan’s aging population). It is only 50 points from this years top, and 14-15% from its ALL TIME 2007 high. Are things as good as before? Obviously everyone is expecting it to be. What about confounders like high inflation? India’s inflation has been reported to be about 10-11.5% - and whilst most expect this to be fuel for equities, we beg to differ. We are no economist (most economists get it wrong anyway) - I am sure you can come up with a list of reasons why stocks will do better in an inflationary environment. We think all things equal, if you correct for other factors (ie do a multivariate analysis on Inflation and stockmarket performance), we think inflation presents as headwinds for stocks.

Warren Buffett wrote this back in 1977 : How Inflation Swindles the Equity Investor - its good to have the sage of Omaha on our side, even though the US back in the 70s may be a different species of apple compared to India of today. Sure, if an extreme Zimbabwe-type scenario unfolds in India, then its markets could go through the roof! But in the short to medium term, we are expecting a significant pull back in India. Don’t hold your breath though - we ARE since we have short India’s NIFTY above our heads! If only we can find more favourable put options (other than day options) that goes into late this year.

Even if it doesn’t and we are totally wrong on this, we will fall back on our other Rule of Trading: Nothing goes up (or down) in one straight line!

On a different note, our Agriculture ETFs are doing up! Finally up after months of patience. Wheat backwardation is actually in process. Amazing how the tides turn.

Regarding BP, our target $400 was cleared nicely - we wrote on several occasions when BP was in the pits that $400 was the MINIMUM target. $400 was then SO far away that even we couldn’t believe our analysis. Call it short squeeze or whatever you want - but when the whole world is taking one side of a trade, you know there’s money to be made being on the other! We took that leap of faith and jumped in front of the oncoming train with our eyes closed - and survived with nice profits! (yes we are out!)

This blog is not meant to be a “see how good we are” or “we were right” - bloggers tend to highlight their good trades and ignore their bad. We have had many shocking trades. Take INDIA as an example, the title of this post! We are holding our positions - we smell money on this trade!

See you in the battlefield fellow traders. (just heard Goldman’s profits are less than expecting - of course they will in time, their profits are 90% trading profits that add ZERO value to society - it makes us unsophisticated traders poorer over time so eventually no one will be funding their profits).

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Addition:

We found this article on India’s Stock Markets reaching 29 month high on today’s news. Definitely a good contrarion indicator to short in our view. We rang our broker after reading it - asking if there was any way we could short Indian stocks! Shorting stocks directly would yield greater returns if our call is right than shorting the index.