The Bull laid Bare - The Honest Truth By Ajit Dayal

The Bull laid Bare

22 JANUARY 2016

At some point in time, every magic show must end.

The lights are switched on.

The audience, captivated by the magicians and accustomed to the darkness of the dimly lit hall, rub their eyes to the new reality of the bright lights.

And so it is with stock markets.
Moved by Magic, levitated by myths, they must eventually face the reality of earnings.

After two years of waving magic wands and spinning promises, the lights are now turned on.
The Bull is stark naked.

The central bankers of the world gave the illusion that they knew exactly what was happening and all their actions were data driven.

The governments of countries ranging from Brazil to China to Russia - the part of the legendary fearsome foursome that comprised BRIC - lost control of their economies long before they announced their surrender.

India - the shining light in BRIC and, supposedly, in the world - has to face month after month of disappointing economic data in an increasingly difficult world. Our one blessing is that the price of oil has collapsed. Beyond that one hard comforting fact, one can clutch to straws of hope and justify why India is a star and can defy gravity like the Indian Rope Trick.

Smoking is dangerous for your health

Cheered on by the Modi Brigade, the research analysts envisaged a new India.

The famous Arnab interview made it obvious that Rahul Gandhi was a non-starter for the post of Prime Minister and that the Modi juggernaut was on its way to victory. Quick to follow up on the social media chatter, the research analysts inputted their fictional data points of the 'Gujarat Model' into their 'Excel models' and came up with a surge in earnings.


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There was no concrete fact to support that action.

Instead, there was a blurring of reality, prayer, hope, cheerleading and desperation.

The crowd loved the magicians and their trick of upping the earnings estimates.
The magicians loved the crowd for cheering them on.

Pretty soon it became unclear who was leading the dandiya twirl: but no one cared.
The music was hypnotizing.
The beat was mesmerizing.
The finance companies were raking it in with real commissions and real revenues.
The investors dreamt of a great future from their paper wealth.

Graph 1: Earnings Estimates were wildly off - but who cares!

But soon the analysts ran out of whatever they were smoking and whatever it was that they were drinking. Given their elevated status, it may not have been legal.

The Modi administration has had to face the reality of dealing with a diverse country with many difficulties and challenges: Gujarat has Gujaratis but India has Indians with different needs and demands.

Magicians cannot solve these problems.
Slogans cannot solve the varied issues that are required to 'Fix India'.
The analysts had to modify their Excel Sheets to face the reality of reported earnings.

The global environment has made life a lot more difficult what with the complication of a weak currency, the need for foreign flows to support stretched asset prices, and companies with debt in foreign currency.

With no surge in earnings to support the surge in share prices, the Indian stock markets were always vulnerable.
A reality check was long overdue.

Graph 2: Getting closer to value: historical PER of India expands as historical
EPS is adjusted downwards on disappointing results

Every bull market must come to an end.

This one never had any earnings power behind it.

It had hope, it had prayers, and it had a lot of research analysts smoking something that may not have been tobacco as they peered into the future.

Now that the haze of the smoke has cleared and the lights have been switched on, it is time to face the reality.

The mid-cap and small-cap indices still have a long way to fall to better reflect their underlying earnings power. When it happens, it will be ugly.

Indian stock markets are a great place to invest in a sensible, deliberate, and calibrated manner - but recklessly inhaling whatever the financial services industry conjures up for you is injurious to your wealth!


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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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4 Responses to "The Bull laid Bare"

Prakash S Mainkar

Jan 26, 2016

Thanks!Worth reading. Please send regularly.

Like (1)

Naveen Prakash

Jan 23, 2016

Great article.
Love the poignancy of the theme.

Like (1)

madhu p v

Jan 22, 2016

dear ajith
still i say , hope and prayer are great aspects for a leader to generate such enthusiasm. but look at the pragmatism of his actions according to reality.hope and vision can make prime minister out of a chaiwallah, but skepticism backed by statistics could not make even a dayal out of ajith dayal

Like (1)

Krishan Chander Anand

Jan 22, 2016

There is a enormous time lag between the inputs and outputs. You are right to the extent that what we are observing is the outcome of the inputs made by the previous government. We will start seeing the impact of the inputs of the present government after a few years. What are these programes? The programmes are as follows:
The saving in the distribution of subsidies to the deserving persons.,
Organic farming and stress on the repair of water bodies,
Skill development based on the needs of industry, Start Ups and made in India programs to reduce import bill.
Completion of held up large infra structure projects impacting the bank NPAs',
Passing the pending legislations.

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