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

Read More

Elections - The Trend Decider

PFA the presentation for this month.

I still believe:

1. This is a bear market rally.

2. We will go higher 12500 before elections is quite possible.

4.By the end of 2009, we will see new lows, re-test of the old lows.

5. The eye-wash which is happening in America will get exposed and the falls will be much severe after that.

6. Buy only only at 10K or below, and stay out during elections.

Presentation Link:

http://nav-files.googlegroups.com/web/Elections+%E2%80%93+The+Trend+Decider+v1.pdf?gda=7Z142mAAAAAI7LF3ZJLiY8OkAnMfVvRfC8TAN-FJ0P1kfzJWvstkF9bHlnILGItBpRIkU-p5p_FRxoKduXbRotMXCDhJvoLB9iSYxdJafsQbV1kNnkaJyqEfD8gizBqda3A8nb_OSkc

Read More

Infy : Guidance suggests Caution

Infosys came out with its full year results. EPS was around Rs 104, slightly above its guidance. The ineteresting factor was its guidance going forward.

Infy suggests a decline of upto 10 pc in profits in dollar terms (less in rupee terms).

Infy has also given zero increments and sharp cuts in variable pay. Its attrition was hardly 11 pc. All this means a tough year ahead for IT.

Infy results usually show the path ahead in the results. Infosys CEO has gone on record saying that these are worst times in our lifetime.

If Infy gets an eps of Rs 100, current P/E would be 14. This is the P/E for no growth. I would say Infy is more than fairly valued at these levels.

The stock markets have rallied and rallied hard. The disconcerting feature of this rally is that the cats and dogs have rallied. Stocks like Jai Corp and Essar Oil.

If the bear market had ended then it would have slow rise led by the large caps. I would still be very cautious at these elevated levels. the Risk reward ratio is heavily skewed in favor of the risk.

My strategy is simple, buy only levels near 10000, remain in cash when the election results are declared.

If the UPA comes back to power or the NDA, then we may see the rally extending to 12500 or even 14000.

The global news flow has stopped giving bad news but I still feel its only a pause. Obama admin can keep giving good news about the banks, and have the banks change their accounting to marked to fantasy instead of marked to market accounting.

I would be very cautious at levels, where the cats and dogs start hitting upper circuit.

I read 1 statistic today, saying 5 stocks accounted for the sensex gains and Reliance alone was responsible for 25 pc of the sensex rise.

If a Third front govt comes to power, there would be no time to exit and we will be back at 8000 before you can blink.

Mayawati as PM and Sitaram Yechury as FM. Ponder over it.

In a nutshell,

1. Buy around 10000, if we see the levels in next 1 week. Trade till the election results. Remain on cash during election results.

2. watch the result. Even if a stable government comes to power, we can buy stocks 10 pc more expensive.

Today DII sold 1200 crores of stock. I wonder if it had anything to do with the end of first phase of polling.

Read More

The Rally Continues.......

It was a super Thursday, the markets just rose and rose on good volumes.

Is this the new bull run?

The Markets has rallied on lots of dollars being pumped. Now, 1 more trillion is going to be pumped in as per the G-20.

Either Obama is going to spectacularly succeed or spectacularly fail.

The Toxic asset waste if the government wanted to solve it, they could have bought the entire toxic asset. Now its a gamble with the private sector being a party to the deal. So who will do the valuation. Some one will be left holding the baby again. Will it be the Buyer or the Seller?

We just need some derivatives on this bundled toxic assets to start the game again.

The next trigger points are Results season in US and India. In India, Infy will kick it off around April 10-13th and on Monday, Alcoa kicks it off in the US.

The markets in 4 weeks have gone from 2539 to 3228. I dont believe the fundamentals have changed so fast.

The auto sales have been good last 3 months on lower commodity prices. The auto results should be good so as the IT on rupee depreciation. I would like to see Infy guidance though.

My sense is the markets will take a breather come to Nifty 2800-2950 range and then take off again.

If I was an Operator thats the best trap for retail and dump some shares on them. Operators dont make money if they take markets straight to 1800 or straight up to 6350. There have to be twists and turns.

I would now focus on buying Gold in this period. If rupee strengthens a bit and world price correct a bit to below 900 dollars, I will get Gold at around Rs 14 K.

I would wait for the Elections results before diving into equity. Also, the Geithner plan results will show up in next 2-3 months.

Mid-May to end June will be interesting period. We have the election results as well as US plan results.

Next G-20 might as well have Mayawati addressing the world. Something to think over.

That time, we would see. When hope is destroyed the markets can collapse.

Too many people said in March (including myself) that the markets will hit new lows and they didn't.

Too many people are getting convinced we have hit the bottom (Not myself), the markets may surprise again. This time on the downside.

Read More

Is it the end of the Bear market?

The last 3 weeks, the markets have rallied about 23 %. This is the most in the last 15 years.

The experts have started proclaiming its the end of the bear market, a new bull market arises.

I would be very circumspect now.

Lets see what has taken the markets up:

1. Slew of announcements from the US government. Toxic Assets clean up plan has been touted as the fix-it all. Its allowing the private companies beneift from the mess they created in the first place.
2. Massive short covering. All the bears were caught on the back foot. I am sure the Option Writers must have been butchered completely.

Have the fundamentals changed so much in the past 3 weeks that we have rallied 23 pc up?

Whenever there is a sharp up move or downmove, there is a reaction. Bear markets simply dont take u-turns almost overnight.

Now everyone is turning bullish. The aim of the market movers is to catch everyone on the back foot.

Once everyone including the most sceptic has turned bullish, there would a fall.

The bears have been slaughtered. The Bulls will be the next.

Even during the Great Depression, Dow had rallied almost 50 pc from its base, before collapsing again.

So what would I do:

1. I would simply wait and watch. Buying after a 23 pc rally makes no sense. The risk reward would be skewed in favor of the risk now.

It is quite likely that we would continue the rally for 1 or 2 weeks more.

The elections hang like a albatross round the markets neck.

Hung Parliament with a run-up would be a recipe for disaster.

The toxic asset plan looks good on paper, I would wait for its implementation. Obama's style is good, talk up the markets. I would like to see the results. Its a dangerous game. Talking up the markets if you dont deliver than the fall would be steeper.

I would prefer to stick to Gold for the next 2 years.

I am done with my FD investment in December when the rates were attractive. I have locked in my investments for 5 years.

My next Gold allocation, I would start to look building now. My logic is if the dollar collapses, it would be sometime in the next 12-24 months. The time to build is now.

I would look at my equity allocation last sometime in May-July horizon.

Post that, sit back and watch the fun. The stocks I am looking are almost at 25 pc of their peak value. Even if they rally 50 pc from their bottom, they would still be at 37.5 pc of their peak value.

I would rather buy on the leg up, than the leg down.

I am not convinced of this rally sustaining for a very long time.

The Full year results are the key.

This rally would definitely be good for year end bonuses. Nifty at 3100 certainly looks better than Nifty at 2500 for your NAV. ;-)

Happy Gudi Padwa.

Cheers,
Nishit

Read More

The Political Games begin

Hi,

It was a positive week for the second time in a row for the markets.

The year nav pumping is on full swing. Coupled with the Put writing at 2700 strike price for March expiry, 2700 looks to be holding for this expiry.

The PCR is 1.59. With such amounts of Puts being written, someone may just have other plans in mind.

A sharp fall from this level will have the Put writers running for cover.

For the past few months, the option writers have much huge chunks of money by the range bound movement of the Nifty.

Remember, 1 fall will take away all their earnings. The same thing had happened in Jan 2008. The Put writers made hay for several months, then 1 month took away all their profits.

Always 1 should stay have from naked option writing.

The Political scene is becoming more and more complex. Hung Parliament seems to be the inevitable result.

1. The Congress will be weakened by the split in the UPA in Bihar. I see Nitesh Kumar a clear winner from the division of UPA Votes. The split in Uttar Pradesh between the Samajwadi and the Congress will strengthen the hands of Mayawati.

2. The BJP is not doing much better either. The Arun Jaitley - Rajnath spat will weaken its chances. Orissa also will be a problem.

3. Chiranjeevi may pull a few rabbits out of his hat in AP. He will definitely not join the UPA because of anti-Congress stance. He may well become part of the NDA.

The scenario looks very plausible, that a non-Congress, non-BJP Third Front coming to power with no agenda except further looting the country.

We all know how the stock markets will react to it.

My strategy will remain simple. Stay on Cash and buy at 7500-8000 levels. And keep at least half the funds in hand till the elections are over.

We are just now entering the era of deflation. The pain on the street starts now. In the past 1 month, the real estate prices have started cracking finally in mumbai and suburbs like Kharghar.

Real Estate starts cracking when the stock market is near its bottom because of lag effect.

We may have the bottom for the markets soon in place. Remember markets are at least 6 months ahead of the real economy. If the economy is to show recovery post the harvest season (Kharif crop), the markets will bottom out in a month or two.

Caution remains the buzzword. Bear Markets are rallies are sharp, furious and short. I dont see the markets going up much higher from here in the short term.

2 things can happen from here:

1. A straight drop to 2400-2500 levels.
2. A small dip, some more rally and then a drop.

Either ways we seem to be in for lower levels.

The markets tanking after this rally, will remove the last optimist from the market. That is when the bottom is formed.

Even in this rally in our group, I see the number of people buying stocks dropping sharply from previous rallies. Another indicator that the bottom is near but not yet formed.

The last bit of hope is still there. It needs to be crushed to form the bottom.

Thanks,
Nishit

Read More

Political Uncertainty Ahead

The focus is slowly shifting from the economic slowdown to political stability.

Next 2 months, there will be no economic pronouncements. Whatever has to be done will be done by the next government.

The next government can be a weak government.

The reasons are:

1. The NDA has been weakened. BJP-BJD split means that last time they won 18 out of 21 seats in Orissa, this time that tally will come down and BJD may not support BJP after the elections. Of course, if they dont get majority on their own in the assembly elections, they can be friends again.
Arun Jaitley and Rajnath Singh have fallen out. This internal factionalism is going to cost them dear especially in Bihar. The chances of LK Advani becoming Prime Minister are becoming dimmer.

2.. The UPA has got a boost with Trinamool alliance in WB and infighting within the left in Kerala. Congress will gain at the expense of the left in both these states. The major problem has been the lack of seat sharing with Samajwadi Party. Together, they could have won at least half (40 seats) in UP. Maywati now stands a fair chance of winning 30-40 seats. This lack of alliance will hurt the Congress in far off seats also. For example in Mumbai South where Milind Deora should have been in a straight fight with Shiv Sena, a SP nominee will eat away his votes.
The delimitation of constituencies is going to be major factor.

3. The Third front has the problem that everyone wants to be a PM. They have some good allies like TDP which should do well in Andhra, Jaya in TN, Left (around 30 seats), Mayawati, potentially BJD. But they will again end up with 120-140 seats at the max.

Without BJP or Congress support, Third Front will not be able to form a government. The government formed would be unstable and unlikely to last. Either NDA or UPA has to cross 180-190 seats in able to rope in Third front allies. In the current scenario any of the 3 formations look unlikely to cross 180 seats.

The keys to 7, racecourse road, may well be held by Mayawati and Jaya. You know the havoc they created in 1998-1999.

FIIs should most likely stay away from the Indian markets.

Another unnoticed event that has happened is that the bond yields have shot up almost to 7.3 % before falling down again. This means the rate cuts have not worked at all. If government is going to borrow at 7+ then the corporates will borrow at 9 pc plus. This is because heavy borrowing by the government to finance the stimulus packages.

To sum it, I would stay away from the markets. too much uncertainty about. Every rally should be sold into. The mid-caps are being butchered. Take Mahindra Lifespace for example, almost debt free, strong management, sustainable business model now at Rs 80.

Now, you can have 2 more reasons for markets to move up or down. To move up, year nav dressing, if they move down, people booking short term capital loss.

Cheers,

Read More