Well, never underestimate the ability of Government Functionaries to do the most stupid thing possible. Especially in 3rd World Countries. Especially in India.
The Reserve Bank Of India has just ordered all foreign exchange earners to convert 1/2 of any foreign exchange they are holding into Rupees.
Why? To prop up the Rupee. Does it matter what the individual company needs? Nope. Does it matter that a lot of the drop in the Rupee comes from things the government did to spook investors in the first place? Nope. Some many months ago (a year?) they decided to say you could not haul your money out under some circumstances. Many folks (me among them) simply immediately dumped any Indian stocks or ETFs. I’ve not been back to Indian financial products since. Since then, the Indian Rupee has “had issues”. Now they are sure that demanding any company in India that is still making money must, inside a ‘fortnight’, convert half into Rupees.
OK, all over the place, there will be companies finding ways to immediately turn a load of those earnings that are in non-Rupee currencies into non-Rupee assets. Gold, US Treasuries, pay bills in advance, buy back stock, Bottles of Fine Wine. It doesn’t really matter. If I were the Chief Investment Officer of a company with $1 Billion, I’d promptly take about 3/4 of it and stuff it into Yen bonds, Swiss bonds, UK Guilts, and some US TIPs. The other 1/4 I’d use to pre-pay any bills I could find, including fully funding any executive bonus plans and retirement accounts. I’d also contact the folks who owed me money and ask if they would mind slowing down payments in exchange for manybe pre-booking some future orders. Whatever was left, I’d convert to 1/2 Rupees.
Why? Well, first off you have currency exchange losses. It isn’t free. Second, the Rupee is not exactly a great place to ‘store value’. Might as well ‘store value’ in prepaid obligations. Heck, even just order ahead about 6 months of input materials, with an option to reschedule, and payment made to an ‘escrow account’ in the name of a foreign bank. Anything that keeps the exchange rate risk out of the picture. Finally, the Rupee is not highly liquid. Once IN the rupee, if you need to get a $Billion back out (say to buy oil and shipping services) it can be slow and wasteful. Especially if the RBI is making rules to force you to be in the Rupee.
This is a stellar example of a petty clerk with a big title who thinks he has power and control demanding that people do what he wants. Not realizing that people will do what is best for them, and that rarely will be what is best for him. So he makes rules, and they dodge them. Then the ‘ripple effects’ set in as investors flee, new deals don’t get done, and given a choice of a subsidiary Plastics Factory in India with a Crazy Clark or China with a low level of intervention (and much of that waved for a modest bribe…, oh, pardon, “consideration”…) Well, the investment just goes to those places that don’t have Sovereign Risk listed on the Project Plan Analysis Documents.
So what does the chart look like for India? Pretty grim. That’s why you have not heard much from me about it. Remember that India was part of the BRICS just a couple of years back. The rising ‘best and brightest’ of the Emerging World.
Here’s a 4 year weekly tick mark chart of a Rupee ETF and a couple of Indian stock ETFs. INF if a broad market while EPI is focused on those with dividends (and thus earnings).
IIRC that stock peak is about the point where The Ministry Of Stupidity first talked about putting exchange controls on due to the high demand for Indian assets. Stock markets react fast, then currencies can catch up as longer term projects and business cycles catch up to changed levels of activity.
Notice how on the right side the price bars have gotten very wide? In a thin market with folks just wanting out, that happens. At any rate, the Rupee fund is down about 40% from the peak, and it is on a strong down trend.
So my opinion on India? No need to be there are long as The Ministry Of Stupid is open and conducting pogroms.
As soon as a Minister starts to think they can control or manage a market, run to the exit. Just walk away as fast as possible and don’t look back for a year or two.
Bloomberg is also reporting that “Indian Factory Orders unexpected fell 3.5%” in the latest numbers. Ya think? Guess what, it’s about to fall even more. If an Indian company is buying a load of resources priced in non-Rupee currencies, but has to hold his cash in Rupees, he’s got an imbalanced unhedged position. High risk. No less than the the best banker out there ( JPM ) just announced a $Billion loss from a poorly done hedge trade. It’s even worse if you have NO hedge. It’s even worse than that if you are forced into owning a dropping currency when your debts for inputs are in rising currencies. An “exactly wrong” bet.
The truly sad thing is that the people making these decisions will now get ever more desperate as things get ever worse and make ever more extreme and stupid decisions and rules. All they really have to do is “Leave it alone. Don’t touch. Put your hands in your pockets.” Same thing you teach kindergarten kids. Free trade between nations and fair markets is all it takes. ( For dealing with Mercantilists, like China, you need to add the idea of ‘symmetrical countervailing power’, AKA “tit for tat”. They put on a tariff, you match. They put on a ‘mandatory inspection’, you do two of them. They require a 50% ownership, you require 75%… Pretty soon it sorts out. If it doesn’t, no loss as you were just going to get screwed anyway.) Somehow it is a lesson that most nations can never learn. They want to do “tit for tat” or worse when there is no problem and a free and fair market is doing fine. Or they try to do ‘free markets’ against a Mercantilist and wonder why it doesn’t work. Oh Well…
As stated in the WSW posting earlier: Right now it’s a risk off world. The J.P.Morgan news after hours will make for a sloppy market open, with extra pressure on the banks. “Talking Heads” were also talking about Spain and it needing more banking bailouts (and not enough money to do it). India is trying to go from rapid growth to free fall at the highest rate possible, and Saudi Arabia announced a $109 Billion plan to put in solar power. (It burns oil today and could sell the oil instead). As they are in a high sunlight area, with high A/C demand that matches the solar availability, it might actually make some sense. Payback was stated as 12% IIR (Internal Rate of Return). One can only presume that they have many staff available to wash off the dust from their dust storms…
What do the PIIGS look like on a chart? Well, there isn’t an ETF to graph for Portugal. HULIQ existed at one point, but does not now show results at either BigCharts or a Finance.Yahoo.com so I suspect has gone POOF! I’m putting Brazil (EWZ) on this chart as a ‘proxy’ for Portugal. It is doing better, so you can kind of split the difference between it and Spain (EWP) as a synthetic Portugal. Italy is EWI and Ireland, who cleaned up their act rather promptly and traditionally, is EIRL and looking best of the bunch. A relatively new ETF was launched for Greece (GREK) just in time for the Greek Economy to collapse… so it starts at zero late on this chart. That exuberant egg yolk yellow spike on some good “not dead yet” news, followed by a plunge when the dream faded. And Spain is EWP to complete the PIIGS set.
I’ve also got the Euro on as FXE (the gold line) for a way to allow for the $/Euro movements in reading the other lines.
While I’ve not found ETFs that short these tickers, you can get options on them. The options chain is found via the link “option chain” in small type above the opening price on the BigChars chart. For example the options of EWP are here:
So one could buy a PUT or sell a CALL (or do both to create a ‘synthetic short’, though not my favorite vehicle. Why use options to create unlimited risk?)
On that PIIGS chart, we can see that all of them are falling at the moment. Ireland looks the best of the bunch at this point, but even it is not at an entry right now. EWP claims a 16% dividend, but who knows in what currency in the future, or if South America will be confiscating all the company assets in it…
Looking at the chart, it’s pretty obvious that Italy and Spain are moving from “Upper left to lower right” and on the “Avoid” list. Greece is more challenging as the ticker is new, so already down in value when the zero is set. Thinly traded and volatile. South Africa and Ireland trading more or less together, for who knows what reasons. And Brazil, bravely trying to recover for 2 months then giving up and joining the fall.
Time to do “watchful waiting” until a clear bottom indication / entry signal happens. You can see one last October in EWZ. RSI ‘near 20′ then a ‘higher low’. MACD turning “blue on top” and with a sharp upward angle, headed for a zero crossing. DMI getting ‘blue on top’ too. SMA lines doing a ‘bottom weave’ as price breaks out above them.
Nice trade for a month, then it muddles back down, followed by an SMA stack touch from above in November when price crosses over the merged SMA lines, and starts another run higher. Typical, if a bit more volatile than most.
In Feb / Mar we had the exit. RSI “near 80″ with “lower highs”, MACD with “red on top” and angled down for a zero crossing to negative. DMI “red on top”. Price crossing through the SMA lines.
And now? Well, RSI is ‘near 20′. Now all we need is the other indicia. I’d give it about a month or two to develop. For Spain and Italy, probably longer. Greece? Well…. Maybe next year after a Euro Zone exit ;-)
All in all, not seeing a reason to be in these markets at this time. But worth watching for their high volatility on good news. If we ever get any…