Falling stocks and markets are the favourite hunting ground for long-term advisors like me who look for stocks trading below their fair value. The Indian market rose spectacularly during 2003 - 2007. It also suffered an equally spectacular fall in 2008. Many likeminded friends of mine are beginning to think this market is moving below fair value.
It’s all about sentiments. Infact every facet of our life is ruled by sentiments and nothing can be more indicative of this than the stock market. The same market experts who were rollicking in a party mood a few days ago are now procrastinating doom
Suddenly today, all looks bad! The same issues of last 9 months – credit crisis, dollar crisis, tight liquidity, corporate earnings, global slowdown and inflation seem to have come back to the forefront in spite of best efforts to lock it in a closet and throw away the key (by Bernanke and gang, our own operators and P- Note subscribers and embedded value propagators).
The net result is that not only has this self-serving, world-wide spider's web of "investment professional" cretins tied up everyone's money for up to 3-5 years or more, at index levels that were at record highs, so that for the rest of your life you are derisively known around the office as "The man who wore the fools cap last", but they are also now running for cover – not lifting up your phones – if they do pick up your phones either it is OH MY God OR they are guaranteeing that you will make returns of 30% annualised in the next 3 yrs (first at least recover the 35% loss suffered in the last 6 months) as the TRISHUL raises its head or should I call it the rise of the TRIMURTI – the RISE of OIL, INTEREST RATES & Real Commodity Inflation ! The Long Pole is the demise of the dollar (read my August 2007 note wherein I had clearly stated that a cut in Interest rates will lead to consequences far beyond what one can imagine).
And you think that oil, interest rates, real commodities are NOT going to climb dramatically, handing huge, huge, HUGE freaking losses to any individual owning equity / debt that is so grossly, grossly, grossly over-priced? Do you actually, really, truly believe that interest rates will always stay below the rate of inflation? WAKE UP. On a lighter note now we know where the $ 100 billion given to the American Public as tax rebates was spent on - OIL.On a serious note Dr. Reddy is likely to hike the Repo Rate by atleast 25 basis points and the CRR by 50 basis points in the next 30 days.
The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase. There are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn – time for dollar to start its demise and gold to start climbing
The steep rise in swap spreads in the last 14 days is ominous; the deterioration is in stark contrast to what investors have come to hope since March. Banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. We believe we're entering Phase IV. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come.
The biggest threat to global stock markets lies in a combination of the continued unwinding of big bets that banks, hedge funds and others made on mortgage-backed securities with borrowed funds and a likely U.S. recession. A decline in growth will result in increased bankruptcies and defaults, higher unemployment and reduced consumer spending.
What's more, the process of weaning the global financial system and economy off the massive liquidity binge of the past decade will take one to three years and eventually cost $2 to $ 5 trillion,.
The looming recession in the U.S., the accompanying slowdown in global growth and the expectation of additional bank losses on assets other than mortgages suggest that stock markets have further to fall. Earnings forecasts also are probably too optimistic, given declining consumer sentiment. What's more, monetary and fiscal authorities seem unable to come up with a solution to the credit crisis short of injecting a huge dollop of inflation into the world economy.
The next wave will be in the form of a derivatives crisis: the oft-mentioned collateral debt obligations and credit default swaps. It is apparent that few people really understand what they are and how deep they go.
Do you all know how I know this – clearly evident from some of my friends who have got tired of me singing this song and are itching to get into the market but LACK the one good quality “PATIENCE”.
That is bad news. Because it means when the crisis hits, people are more likely to panic. Panics tend to be disproportionate to the problem, particularly when trust in institutions has disappeared, as is the case with banks today.
To put it another way, the war between inflation and deflation is still going on. Inflation is in the news so much that you might think it has won. Just look in the papers; you can practically see the victory parades and hear the music playing. Now that inflation has moved from asset prices into energy and food, then there is a real problem for those who were unprepared….e.g. INDIA
But deflation isn't giving up and isn't going away. Americans are deep in debt. And debts cause a man to pull back…to retrench…to downsize. We see that in the headlines too. Downsizing means spending less money. And spending less money means fewer sales…and lower incomes…and fewer profits. It means an economic slump - and, typically, falling prices.
In today's globalized world, that slump would have to reach worldwide proportions in order to have a major effect on key commodity prices, such as oil and grains. But that is probably coming.
The cure for high prices is high prices. You've probably heard that before. It describes the way markets work. Prices go up. The higher prices encourage consumers to use less…and encourage producers to produce more. It's not long before the supply increases…and demand falls. Then, prices adjust downward.
The Fed seems to be trying to create a situation whereby they are seen to be fighting inflation, simply by not lowering rates any further, This is because, while the Fed may have no interest in fighting inflation, they have a big interest in fighting what they call 'inflationary expectations'. In other words, they are more interested in fighting people's perception of the problem, rather than the problem itself.
Ben Bernanke may make a feint in the direction of fighting inflation - maybe raising rates slightly (in August perhaps). Oil will drop back below $120 temporarily. Bonds will rise. But consumer price inflation may still not go down; it may actually continue to worsen, as the global economy sinks further into a slump. Then, the next phase of the War between Inflation and Deflation can begin.
My advice - IGNORE the sensex levels is what I am saying since the index minus 5 stocks is trading at 13000 - 13500 levels YES you read correctly and by the time this is posted the latter sensex level should be at 12000.
Is it time to “SUPPORT” the market that I have ignored so far - Markets always look for support. This develops when prices fall to levels irresistible to buyers -- something quite aptly called vulture buying -- where investors wait for the market to reach its lows before they become buyers.
The Vultures are circling above – it may be time for the first course of a six course meal ... for the balance five one can keep waiting for – don’t be greedy yet to fill up your stomach.
