Chickens come Home to Roost

The markets were down about 5 % to close the week at 4906. All the gloom and doom predictions are slowly coming true. In all this bad news lies the seeds of the next bull run. Lets see what the future holds for the Indian economy.

1. Kingfisher huge debts are threatening to derail the airline industry. Kingfisher going bust or requiring a bailout as serious implications not only for the airline sector but the banking Sector. The government is talking about FDI in Aviation. This comes a bit too late. Who will invest in India's ailing airline sector and even if they do it will be at throwaway valuations.

2. The Banks are threatened by NPAs. Not only Kingfisher debts but also from the Power Sector. The biggest one to take the hit is State Bank of India. The defaults have just started and things will get much worse before they improve.

3. The Government auctions of 10 year bonds are devolving on the primary dealers. In layman terminology this means that no one is willing to buy bonds from the government at the Interest Rates being offered. The last bond auction devolved at 8.83 %. The Repo Rate is at 8.5%. This pretty much makes the case for holding rates redundant. If the most secure asset in India gives you an yield of close to 9 %, the banks will demand much more from the home loans.

4. Over the last few weeks, ICICI Bank has stepped up bombarding people's mailboxes with offers of flats at sale at much discounted rates. This is another sign that the NPAs of banks in terms of real estate sector loans are beginning to show up. As the layoffs increase and the distressed sales increase, expect the Balance Sheets of Banks to look much more horrible.

5.The mid caps are being slaughtered in the markets. The ones which have large FCCB holdings and the companies where promoters have pledged shares are the ones being hammered. The Mid-Caps are already at a level of Sensex being 10000. Pipavav Defence is an example of being circuit down at Rs 55.

6. Technically, the markets may have made their low 4838 for this settlement. Every rise can be sold into. The supports come at the 4800-4850 band after which comes 4720 and then 4500. The markets are oversold now on a delay basis and some amount of bounce can come to take the market to 5000-5050 levels.

7. Europe continues to struggle with the debt crisis. A discussion with one of my colleagues from Germany underlined the same. The issue is ow how much should Germany support the rest of Europe. The future of Euro is in question and now it becomes a question of national politics rather than just being pure economics. The next year brings elections in France and the US. Germany goes to the polls in 2013.

8. Channel support comes at around 4830.First resistance now will come at 4950. These are small trading ranges and are suitable only for traders. The direction is now very clear and it is on the way down. Not all stocks bottom at the same time and this is a rare opportunity to build a new portfolio from a clean slate.

Amidst this boom and gloom now is the time to start picking stocks which will survive the downturn and will do well with a 3-5 year perspective.We must look for companies which have less amount of debt on the books, have a market for their products and ones which will represent the new India. For those interested in stock picks we have Lakshmi's Investment Cherry Picks.

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Broad Picture: What the coming months hold for us?

Its been a scenario of doom and gloom all across the world the past week. As the Financial Markets bleed, doomsday predictions are announcing the coming end of the world. Lets see what the future holds for us.

Crystal ball gazing has always been difficult.Some things are apparent now. The US will no longer be the superpower it once was. Its influence is on the wane. It is a gradual process, buy say in about next 20 years it will no longer be as dominant as it once was.

They say every century belongs to a country. Earlier,it was the British who ruled the seven seas on the back of its fleet and industrialization. Before that we had the French and Spanish domination.

Printed paper or currency is losing value. Mindless printing of currency notes has eroded the buying power of the US Dollar. Precious Metals like Gold and Silver are the new safe havens.

Downgrades of US AAA Rating means it would be difficult for US to borrow from the world at the same almost zero interest rates.

Europe is in doldrums of its own. After Greece and Ireland, now Spain and Italy are on the verge of default. The future of Euro is under question.

With the 2 major currencies of the world, the Dollar and Euro having a major question mark against their name, gold emerges as an alternate currency.

Domestically, the car sales are slowing down, the housing sales are down and the economy is slowing down

The tell-tale signs are all there. You have new launches like the Volkswagen Vento being pushed at 6.99 % Interest Rates. We keep getting smses from builders imploring us to buy their flats.

The good part is the sharp drop in oil prices. This means no more fuel hikes in the short term.

Looking at the big picture, the cycles of boom and recession have shortened. India does not get into recessions, since it is a booming economy we experience what is known as a slowdown.

The focus now would be on government policy making to bail us out. If we see good reforms then Indian Markets would do well.

For now, we are firmly in the downtrend. Expect support around Nifty 4800 and Sensex 16000 levels.

That is the time, when we buy good strong companies that have survived precious slow downs and come out stronger. Till then, we wait and bide our time.

Enjoy the Rains and keep buying Gold, Gilt funds and small quantities of good stocks.

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Elections over: What next?

The public has voted. All the votes have been counted and the winners take away the spoils. It was the best possible verdict (other than clear NDA victory).

The people who held the country to ransom have been shown the door. Manmohan Singh has proved to be a much better politician than most. First the nuclear deal and then this. If we break the results down, the Congress has won mainly because of UP, Kerala, WB, rajasthan and AP.
The real surprise has been AP and they deserve to win, they saved Satyam. Satyam going down would have been real bad news for Indian IT.

The real worry is now that the Congress should not fritter away this mandate like they did in 1984. The next big event lined up domestically is the Budget and the Monsoons. Busget will take at least 2 months to be prepared, and good monsoons should be here in a months time.

Domestically, things seem to well settled now. The Budget would be interesting because all the freebies will have to be balanced out.

The only missing puzzle are global cues. This rally has been fueled by FII money and till they stop pumping in, the markets will keep rallying.

Monday, the markets will gap up 700-800 points. Now, what do you do at this point?

Typically, it is classic sell on news. The smart money had already poured till this stage. At 13000 sensex, nifty 3950, the trailing P/E would be around 19.

Just look at the charts after the Nuclear deal vote of confidence, the markets peaked the next day. We still have not reached nifty 4620 after that.

It would be best to wait for markets to cool in. It would now be retail money jumping in. They are typically the last to get in. There would be definitely corrections on the way.

If the global cues, remain good we are headed to 14500 by July (factoring in good monsoons, which they should be, after all monsoons have failed only only 1-2 times in last 20 years).

If I had bought at lower levels, I would book some profits.If I have not bought, I would sit quietly. The markets always remain here. They do not go anywhere. Markets always give everyone a chance to buy.

There would be a dip after the euphoric rally on Monday.

I would wait for that dip to buy.

Remember the primary goal of investments should be capital preservation. At 13,000, valuations would look stretched. (8K to 13 K in 2 months)

For the moment, time to celebrate.

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GM Results, Stress Test results and Great Expectations

This was an eventful week in the US. This week probably sowed the seeds of a bear market rally in the US for at least till the end of June.There are several factors for this.

The Stress Test results were out. It portrayed a hunky dory picture for the US banks. Obama is doing well to play up the sentiment. The banks need help but not too much. We are on our way to recovery. Throwing money at Banks has helped. There is always a free lunch out there. We just have to print US dollars and the only cost to pay is the cost of printing those notes. That's Obama's message for the world.

The Stress Test results will buy time till the next wave of failures. I don't see that happening very soon. The Banks managed to show good results by accounting jugglery. Wells Fargo for instance, saw NPAs jump by 40 pc but Reserves to accommodate the same were increased only by 5 pc. This especially at a time when the NPAs are increasing.
If the value of the banks debt decreased from 100 cents to 60 cents and banks took a gain of 40 cents on their books.

The Investors are not really bothered by all this. It time to herald a new dawn and keep buying the shares of banks. The only fly in the ointment is that banks make money from their customers. The Customers are the US citizens who have lost their jobs. GM just made a loss of 6 billion dollars last quarter. Even Toyota made an annual loss. These jobs are going to disappear and they are not going to come back. Who will pay the loans of these people. Who will hold the bucket for these losses which will come later on. Remember the US unemployment is now 8.9 pc highest in 25 years. Bankruptcy now looks inevitable for GM. You cannot keep losing billions of dollars every quarter.

The 1 part of the problem of credit availability has been solved but the second part of demand creation remains. Till jobs are created there will be no demand creation.

For now, it is time to party. Recession is ending and get in before the Dow moves to 10000 seems to be the feeling.

The real problems will start a few months down the line. The next results in July and August September onwards. Things can get nasty if institutions start failing. The whole so called solution till now is print more dollars. This will work only till the dollar remains attractive. The 10 year T bill is already upto 3 pc which is bad news as everything from Mortgages to credit card debt is linked to the T-Bill rates.

As and when Inflation rears its head, the central banks will have to start raising interest rates. The main problem the US faces is the lack of jobs for its citizens. That has to be fixed. Obama's tax plans to curb of shoring will back fire in a big way. If the companies dont move jobs to low cost areas they become unviable and leading to more bankruptcies.

Obama is like a typical idealist. he positions himself like a Robinhood, the defender of the common man. All that has come about now is lofty promises.

In India, the elections hold the key. Looks like UPA + Left support and a Pranab Mukherjee or Shiela Dikshit as a probable PM. I would buy on dips if the market dips post results while a government is being formed.

Last time all Opinion polls were wrong and who knows this time. NDA might just squeak in. Prakash Karat has now started talking of supporting Congress led government.

I would buy because the global problems have taken a pause for now, monsoons look to be on time.

Its a traders market not an investors market. Till we get clarity on the long term, buy low and sell high.

Cheers,
Nishit

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U, V, W or L

Hi,

Its time to take a break from stocks and re-learn the alphabets.

Have you guessed it?

We are looking at the types of recovery possible for the US economy and the World Economy.

1. V Shaped Recovery
In this type of recovery, there is a rapid deterioration in the economy and before you know it there is a sharp recovery as well. V-Shaped recoveries are less painful and are are the mild recessions last for about 1 year. We are way past this stage to say that there would be a V-Shaped Recovery this time.

2. U Shaped Recovery
In this type, things go downhill then flatten for a bit. For maybe 6 months or so there is no further deterioration in the fundamentals of the economy and then a recovery starts taking place. This type of recovery includes a dull phase of maybe 5-6 months where nothing much happens in the economy, but we do start recovering. We may be in a U shaped Recovery mode. The next 3-4 months may make it clear.

3. L shaped Recovery
This type of Recovery is a variation of the U-Shaped recovery, only that things get prolonged. Thing stop deteriorating but do not get better either for a long time to come. This may take up to a year when things are pretty dull. I would say we have more chance of a L shaped recovery.

4. W shaped Recovery
This is the most dreaded form of recovery. As the letter suggests, there is a sharp fall, then a recovery which flatters to deceive. Things fall down again and then we are again on the upward part. This is basically 2 recessions almost back. The second recession may or may not be as bad as the first one but it devastates sentiment.
People lose hope in this type of recession. The second recession may be smaller in magnitude but leaves everyone shattered. (George Bush's middle name is also W, which should give you an idea of the havoc it can wreck ;-) )

So, U, L or W, take your pick. Next 3-4 months will make things clear. I would say 25% changes of U shaped, 35% chances of L-shaped and 40% chances of W shaped recovery.

The implications for the world equity markets:

1. U shaped - the worst is over. We have hit whatever lows we had to hit. (Dow should be at 10000 by Jan 2010)
2.L shaped - the worst is nearly over. Slow consolidation for the next year or so. (Dow should be at 8000 by Jan 2010)
3. W shaped - You aint seen nothing. This was just a trailer. Picture abhi Baki hain. (Dow should be at 5000-6000 by Jan 2010)

The toxic assets are coming out slowly. In the US, 32 banks have failed so far. That's more than what failed in entire 2008.

Chrysler has filed for bankruptcy, GM is next in the queue. Obama has made it clear. GM is almost sure to file in for bankruptcy.

The US economy is showing some signs of stabilizing. The rate of deterioration is not as bad as it was earlier. Next 3-4 months will give us clear indications whether Spring is here or the onset of Autumn for the markets has come.

In the immediate future, the results are out of the way in the US. The next key thing is the Stress Test results. I think they should not be too bad.

The Dow looks to be stabilizing for the months of May and June. The Quarterly results in July will set the tone.

For Global markets, next 2 months should be serene.

Above. I have tried to outline the probable scenarios which could play out and the implications for the global markets.

Thanks,
Nishit

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