Japan's lost decades=China's gained momentum

I was browsing through last week's mint articles and I found the below graph.

Nifty levels...

5200: Intermediate bottom

5400: Possible support as of now

5700: Next Possible resistance

5200-5700: Possible range of consolidation

Pullback in Nifty is sustainable above 5520/5560

A pullback rally of more than 250 points in Nifty in 2 days is sustainable only if Nifty crosses over over 5520/5560 level and trades above that level. Otherwise it can be considered as dead cat bounce back.

When I checked Nifty daily chart for last one year I could make out the certain interesting findings like Nifty moved in a trading range for almost 8-9 months. As marked in the chart, from June, 2010 Nifty moved in a trading range like...

June to Aug -- Nifty range from 5200 to 5600 -- 400 Points consolidated rally

September -- Nifty range from 5600 to 6100 -- 500 Points sharp rally

Oct to Nov -- Nifty range from 6000 to 6350 -- 350 points consolidation

November -- Nifty range from 6000 to 5700 -- 300 points correction

Dec to Jan -- Nifty range from 5700 to 6200 -- 500 points consolidation

Jan to Feb -- Nifty range from 5700 to 5200 -- 500 points sharp correction

From above table of information we can decipher a simple conclusion that, a rally (400 points) is followed sharper-one (500 points) and then consolidation (350points) and a correction (300 points), small consolidation and then sharper-one (500 points correction).

So from above daily chart and weekly charts, I think we can expect one round of consolidation may happen before next leg of rally (above 5520/5560) or correction (below 5100 may take Nifty to 4800 as indicated in charts). That range of consolidation may be from trading of 5200 to 5600/5700 which is also of 400-500 points consolidation.

Nifty may bottom out around 5100/5200

As Nifty breached a major psychological level of 5400, (which most of the analysts, including me thought market would hold on), it made market participants to lower their respective new targets for it.

So I checked for Nifty daily, weekly and monthly charts to find out the trend lines and possible (!!!) support for the market in this relentless selling from big boys...

On daily charts, it can be seen that Nifty traded between 4900-5200 levels for almost an year from September 2009 to August 2010 till it broke out of the range due to biggest inflow of FIIs ever in the history of Indian markets (of $5 billion in a September month). So whenever Nifty corrected in that range it found support at 5200 and 5100 levels on intermediate basis. Another factor is, oversold zone in the RSI, i.e. below 30 levels is trading and it happened only 3 times in last 15-18 months.

On Weekly charts, two main things can be noticed... First is 100 EMA is at 5160 and second is trend line connecting the bottoms (whenever market corrected) is supporting the 100 EMA on Nifty. RSI on Weekly charts is about to touch the lowest level, the level at which RSI traded when Nifty was trading at 2500 levels.

On monthly charts, Nifty clearly formed double top formation around 6300 levels which is a trend reversal signal in technical theory. Around 5100/5200 this double top formation may form a neckline as it supported by 21 EMA, trend line and consolidation range are pointing to 5200 levels.

Bottom line:

And if you see the option data in NSE website, 5100 put option and 5400 call option have witnessed maximum change in the open interest for February series, indicating heavy selling/writing off of these options at these strike levels giving hint for a range for the market.

Mint Article:The decade in banking

Last week I read an article in mint, so thought of sharing some interesting facts... Click here for full article...

• The Indian banking system could remain insulated from the global credit crunch and its impact in the wake of the fall of US investment bank Lehman Brothers Holdings Inc. on the strength of its high capital-to-assets ratio and low bad assets.
• The collective net profit of the industry was Rs7,100 crore in 2001. By 2010, it had risen eight times to Rs57,109 crore.
• Bad assets, as a percentage of loans, were 6.83% in 2001. This has come down to 1%.
• The net worth of the industry—capital plus reserves—during this period has risen from Rs57,146 crore to Rs3.56 trillion.
• The ratio of operating cost to total assets has come down from 2.68% to 1.87% and return on assets rose from 0.57% to 1.05% between 2001 and 2010, highlighting the industry’s efficiency.
• In 1991, the year India moved ahead with a process that it had begun in the mid-1980s and embraced economic liberalization, the loan outstanding in the industry was Rs1.24 trillion, about 24% of the nation’s gross domestic product (GDP). By 2000, it rose to Rs4.6 trillion, but as a percentage of GDP still remained about 25.75%. In the last decade, the loan book grew to Rs32.4 trillion, a little over 55% of India’s GDP.
• The overall number of branches has gone up from 61,724 in 1991 to 67,061 in 2000 and 81,802 in 2009 (the latest data available), but the average population serviced by one bank branch has dropped only marginally, from 15,000 in 1991 to 14,000 currently.
• In 1991, there were 35,134 rural branches, accounting for close to 57% of the total national branch network. In 2000, this number dropped to 32,673 and 48.7% of the branch network. By 2009, it dropped further to 31,549 and 38.6%. During this time, branches in metros rose from 6,191 to 8,957, and finally, to 14,761 (from 10% to 13.4% to 18%).
• In 1991, there were a little over 100 million deposit accounts in rural India— 31% of the total. By 2000, their number rose to about 126 million, but the market share slipped marginally to 30%. In 2009, the number rose to about 199 million, but as a percentage of total number of accounts, it remained the same—30%—as the overall number of deposit accounts rose from 355 million in 1991 to 662 million in 2009. The share of metros (in terms of accounts), however, rose from 19% in 1991 to 20% in 2000 and 23% in 2009.
• In 1991, there were about 32 million loan accounts in rural India—52% of total accounts. By 2000, this dropped to 25 million and 46%. In 2009, the number rose to 34 million, but as a percentage of total number of accounts it slipped further to 31%. In these two decades, the share of metros rose from 6% to 33%. In terms of money raised through these accounts, rural India’s share slipped from 21% in 1991 to 13% in 2000 and 11% in 2009, while share of metros rose from 40% to 56% and 60%, respectively.

Is Euro following fate of Bretton Wood’s Gold standard!

Before going to Euro, I would like to touch upon the Bretton Wood’s Gold Standard for the benefit of my readers. Bretton Wood’s gold standard came to existence from a war (2^nd world war) and ironically dissolved with a war (Vietnam War). After 2^nd world war, to build the International economic stabilization, certain countries came together to form a monetary system for trading, exchanging mutually tradable currency and etc. The main designers of this system were Briton’s Sir John Maynard Keynes and America’s Harry White. Even though Keynes had an Idea of new reserve currency called “Bancor” but that idea has been rejected by White and others, indicating people moving towards US rather than UK! So countries which came together, agreed to peg their currency to US dollar and US dollar in turn will be pegged to Gold, $35/Ounce and formed the organization called IMF (International Monetary Fund). The entire system was based on some condition for member countries like subscription quota for membership, trade deficit maintenance like balance payment issues and etc. But after some time due to macro economical cycles, certain changes in the world economy like, recovery of Europe, Cold War between US & USSR, globalization of banking/currency system, fast emergence of Japan, Vietnam War and balance of payment issue with US made the cracks in the gold system, making it to fall out in 1971, by then US president Nixon unilaterally withdrawing the pegging the Dollar to Gold. Which is popularly know as Nixon Shock!

Now coming to Euro, it came to existence in 1992 for most of the European Union countries as the member. The Euro formation was on some conditions like such as a 1. Annual government deficit: The ratio government deficit to GDP must not exceed 3%
and Government debt: The ratio of gross government debt to GDP must not exceed 60%.
2. Inflation rate: Not more than 1.5% higher than the average of the three best performing (lowest inflation) member states of the EU.
3. The interest rate must not be more than 2% higher than in the 3 lowest inflation member states.
4. Exchange rate: countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for 2 consecutive years and should not have devalued its currency during the period

But at present some of the European countries don’t look to fit any of the above conditions except currency condition for example…

Country	Government Deficit to GDP forecast	Government Debt to GDP	Inflation and Interest Rate
Ireland	10%	120%	0.6% & 1%
Greece	7%	140%	5% & 1%
Italy	4.5%	120%	1.8% & 1%
Belgium	5%	100%	3% & 1%
Spain	7%	65%	2.5% & 1%
Portugal	5%	85%	2.5% & 1%

From the above table we can say all troubled European countries like Ireland, Greece, Spain, Portugal, Italy and Belgium are

àFacing government deficit to GDP is more than 3%, which is the minimum requirement condition for EURO/EU.
à Government debt to GDP required condition is less than 60%, but each country’s debt to GDP easily exceeding the prerequisite condition. And also from country perspective Debt to GDP ratios of 120% (Ireland) and 140% (Greece) are not good. We have present example of Japan’s Balance Sheet problem due to which it lost two decades of growth and witnessed lost decade.
àNow coming to Inflation and Interest rate, see the real interest rate of each country. As ECB decides the Interest rate of the region, countries with different inflation (particularly too high and too low) will be under tremendous pressure. This might push them currency devaluation/revaluation which is again restraint condition

--- will be continued...