Market Story

From time immemorial, men have been taught about life, its various lessons and the way to live a good and righteous life in the form of stories. While simple edicts or rules should have been sufficient for rational people, it was understood even then that anything taught in the form of a story serves the two purposes. It entertains and at the same time the lessons and the morals intended be taught, stood a greater chance of being accepted by men in general when presented in that form.

We have therefore developed into species that prefers stories which are emotional and entertaining to rational but cold and unemotional facts. To put in other words we are the Anti-Spock, the rational Vulcan in the iconic Star Trek.

So to come to the point of this note. I have had a few people coming up to me and asking whether this is the time to buy some more in the market. While I could give a simple statement that my system even in the long term monthly charts has triggered a SELL and therefore it is not the best time to buy, people are generally not satisfied because everybody wants a story not a system.

So this is my best attempt at a story. The problem I have with taking a BIG long position in equities on a fundamental level is that even this fall is not sufficient to take our Earnings Yield to 10yr Debt yield ratio beyond parity. Currently it is around 0.85. If you see the attached chart, the market bottoms in 2003, 2004 and even 2008 were all seen with this ratio at a much higher 1.5-1.6 levels. So if and when this ratio reaches that level it would be a good thing to bet your house on the market. As of now it is almost exactly in between the 0.4-0.5 levels when the market tops out and the 1.5 levels when it bottoms out. So a great level to be trading the market than investing big time.

One of the ways this ratio can reach 1.5 levels is if the P/E drops to around 8 (Earnings yield reaches 12.5) while the 10yr Gsec yields remain at 8.4%. The other way of course is if the P/E continues to remain at 13.4 and the bond yields fall to around 5 or any of the combinations in between.

To make a complicated process short, the way we can see a ratio of 1.5 or more is if a combination of a fall in the Nifty prices and a fall in 10yr bond yields happen. Unfortunately, it will require more than just a drop in RBI benchmark interest rates for the bond yields to drop. It will require a significant step from the Govt in terms of fiscal discipline and subsidy reduction for the bond yields to drop and that looks unlikely in the short term. So the more likely event is that the Nifty prices will fall (so that Earnings Yield will rise)  before the market actually bottoms  out for the long term.

I know that even the above is not really good story telling, but this was the best I could do. So heres to hoping that the Govt introduces some fiscal discipline and subsidy reduction so that we can bottom out without having to see a fall in the markets!  Currently though, I am short and will remain short until 4955 is taken out