Technical View Oct 13, 2011

Markets after hitting a bottom of 15745 have risen to 17000 levels where they face multiple resistances.

First is the double top at 17200. Then are the gaps at 17358-664 and 18005-37. It has filled one gap of 16833-17000.

Markets will require tremendous strength to overcome these resistances, possibly gap ups, which looks difficult in the current environment.

On the downside levels of 16400-600 should prove crucial.

Banks and Power Sector Exposure

Bank stock valuations have been hit due to exposure to Power sector and uncertainty related to availability of fuel and PPAs. However if one looks at the groups that are developing these projects, are these worries really justified?

Biggest capacity expansion is by NTPC, followed by RPower, Adanis, Tata Power, Lanco, Jaypee, Jindals etc. Only Lanco maybe considered weaker amongst this and could cause problems to Banks. However it is foremost in terms of capacities actually commercialised and to be commercialised.

Have any of these groups really defaulted to the banks?

Ability of analysts to swing the mood of institutional investors on the basis of some theme (i guess mainly to market their research) is really amazing. Some broking houses actually held roadshows to assess the exposure of banks to power sector and impact that it would have on their earnings and balance sheet.

And for most banks exposure to power sector is less than 5% of their total advances. Power projects typically will have annuity of 25-30 years so a couple of bad years can really be made up.

After more than 25 years, i still cant understand how and why market chooses to react so violently to issues like this and completely decimate the valuations. Maybe because i belong to the school of thought who thinks equity is for the long term and quarterly earnings are less important than the long term prospects.

Europe -- Migration to where the jobs are could be the solution

There should be a simple solution to the problems of Europe. Greece can first stop paying interest on bonds (or ask for a moratorium for 1-2 years), restructure the economy (that is the difficult part, more on it follows), get back in business. Banks which get hit due to restructuring will get support/bail out from their own governments. This way nobody pays for others' sins.

In India we had massive cleaning up of the banking system in the 90s. Restructuring of bank loans happens regularly. So this solution is implementable.

The difficult part is to restructure the economy. That means creating jobs which will pay well and therefore govt support reduces. Europe including Greece are losing competitiveness in mfg. Efforts of the developed world to globalise so that access to markets in developing economy is available seem to have backfired on them as with globalisation, mfg shifted and technology transfer became easy. This problem gets exaceberated by the lifestyle enjoyed by Europeans. I have come across several comments branding Europeans as "Lazy" and "not willing to work". These are comments from Indian companies who acquired businesses in Europe and had tough time getting people to work (meaning work longer hours beyond the official working hours). Greece reportedly has severest problem here with people retiring in 40s and most people working in govt.

Maybe one solution is to export people to where there are jobs and these expats support the local economy (like the gulf employees support Kerala's economy). Given the smallness of population of Europe, the world will have enough jobs for people willing to work. China, India, Canada, Australia, Germany, France, UK, US should allow migration from the affected countries. They can have minimum visa quota.

An unusual solution but one which will work.

And then we are back in business.