Thin Thursday

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).

Indian Rupee and ETFs  4 year weekly tick marks

Indian Rupee and ETFs 4 year weekly tick marks

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…

So what?

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 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.

P.I.I.G.S. vs Euro

P.I.I.G.S. vs Euro

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…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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8 Responses to Thin Thursday

  1. R. de Haan says:

    Well, EU stupidity has hit the roof today telling us we have a mild crises but growth is coming soon as long as the individual members keep working on that 3%.
    Nobody believes that and I among some others think the financial end of the Eurozone is around the corner.

    As for India, their history comes with track record of stupidity.
    Now they have the missiles to lauch the bomb and they are very proud of it.
    Hopefully their stupidity remains limited to their financial and economic behavior.

  2. omanuel says:

    @ R. de Haan

    We can each see the flaws in others, but society is “going to hell in a hand-basket” while we loudly debate and argue.

    Where is the leadership needed to reverse course and return to sanity?

    Leadership that can avoid the pitfalls inherent in human nature

    And guide society away from fantasies, back to reality

  3. Robin Melville says:

    “… UK Guilts …” — nicely-timed Freudian slip :*)

  4. E.M.Smith says:

    @Robin Melville:

    Oh Dear… one of my “inner words” has snuck out… Yes, I tend to think on two tracks at once. The Formal One with “Gilts” and the “informal one” that has its little jokes and word plays… Sometimes things leak ;-)

    (And, BTW, I loath “sneaked”… “snuck” is a much better word ;-)

    @R. de Haan:

    It’s an interesting time. Watching the “Euro Zone Talking Heads” all trying to convince each other they are “Super Duper Super Men” and can fix it; well, that’s an interesting floor show if you have enough pain killers…

    India is trying to cope with being a Global Power based on a Colony Mindset. Lots of pain to come as they find out they are neither.


    I’m a bit sckitzo on the whole thing. On the one hand, I’d love to “fix the world”. OTOH, it’s pretty clear that “Thus it has always been”. So I just look for ways to make some money out of the stupidity, or avoid losing money on it, and move on. Division of Labor between the “making a living” part of me and the “change the world part”. I’ll work on changing the world on the weekend ;-)

    (Other than my AGW stuff where I work on changing one small corner of the world a bit more often)

  5. p.g.sharrow says:

    @EMSmith; Actually this blog has even an greater effect then your AGW efforts. Clear thinking with GOOD information and not bull crap is in short supply. Please keep up the good work. pg

  6. E.M.Smith says:


    Thanks! Some time very early in life I noticed that many folks had a warped “seeing” of reality. Later I realized that for many of them it was a deliberate act. Only much later did I realize that for another large group, the “broken seeing” was to manipulate others by misleading them (and to gain / retain power).

    It was at that point that a fateful decision was made.

    I decided I could not deceive innocent people for my own gain. Helping them and being truthful about it, despite the personal costs and despite what it would cause folks “with position” to say about me were “more important”.

    This has, as you might guess, caused some degree of trouble for me from time to time. The emperor does not like it when you say “He has no new clothes on AND does not need your money to buy more!”…

    So it’s nice to know that “what I do” is helping someone. It’s all I really ask of life.

    Per the chart above:

    Those “emerging” and Euro markets continue to plunge. As RSI is on the 20 line, we’re looking for a ‘higher low’ in it in about a week and for the Red Line (DMI-) to cross over the black ADX line on the bottom indicator. About then MACD will shift to “blue on top” and it will be time to “buy the dip” for a “counter trend trade” back to the SMA stack. That is a very fast trade, and don’t overstay it…

    Often I’ll just wait for the SMA touch and then buy a ‘short’ on it. Like EEV or FXP (for China).

    Or just sit out in bonds… like TIPs.

    We’re into this drop a couple of weeks now, and about then folks get emotionally tired and news flow shifts, then we get a few days of retracement. A week or so after that folks realize nothing got better and the drop resumes. If this is a typical cycle.

    On CNBC the head of Tyson foods was saying they saw some move from beef to chicken because chicken was cheaper. Yeah, folks only have so much money… I’m sure taxing more of it away will increase their spending… /sarcoff;>

  7. p.g.sharrow says:

    You are so right! The “normal” people that earn a living are out of pocket money. My significant others’ business is a Beauty Spa and we see the effects, on the street level, as beauty treatments are the first to be cut back. Hair cuts and color are the last thing to be cut back on. For the last year the time between hair treatments has been extended longer and longer as people try to get by on less and less pocket money.
    The talking heads say that the consumer must “step up” to get the economy restarted and the politicians want to take a larger cut off the top to expand the funding of their favorite projects. Bureaucrats are positive that they can fix everything with more control and money. The system is paralyzed from too much control and taxation already and these control freaks want to do more to fix things!
    Prophecies call for the GREAT DECEIVER to be replaced by a wise old man to set things right for the future. I think we will need an army of wise old men to fix things. pg

  8. Pingback: WSW, Sunday, 20 May 2012 | Musings from the Chiefio

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