Monday, January 25, 2010

US Markets Plummet On Good Results And Flimsy Grounds

Last three trading sessions were literally devastating for bulls in US markets. Consider this fact. Dow Jones took most of November, full December of last year and half of January 2010 to rise from 10100 level to 10700 level, a gain of roughly 600 points. And it took just three trading sessions for the bears to erase these gains in Dow Jones. What alacrity on part of the bears in going about their business!

One must keep in mind that this has happened in the midst of result season. Companies have done fairly well. In fact some companies like Intel and Google have done exceptionally well. Intel had posted the best quarterly result of its lifetime. And how is that news greeted by Wall Street? The scrip is sold off, driving the stock price to nosedive into negative territory.

Mind you, here we are not discussing a high beta stock market, nor are we referring to any banana republic. We are analyzing market behaviour of the most developed stock market on this planet, a market that boasts of an army of highly evolved, rational and informed investors. Then what spooked the US markets so much that we had to become spectators to such sharp reactions? Comparable exhibition of panic selling was last witnessed in Oct 2008. But at that time there were enough global reasons to justify such investor-behaviour. What has happened this time around? To ferret out an answer let us dig deep into the state of affairs existing in the present global financial ecosystem.

The first bit of news that unnerved US investors emanated across the Pacific, from the dragon nation. Chinese central bank advised banks in China to go slow on lending. This was taken as a cue that China was feeling the negative effects of stimulus and hence was taking steps to slowly withdraw it. In limiting credit off-take, China was ready to sacrifice its growth curve. This action by the Chinese Government was not appreciated by Wall Street, and so in a gesture of utter disappointment US markets sold off.

In this episode I seem to have lost the thread of US investors' reasoning. Everyone has been accusing that China is fast entering bubble territory because of its loose credit policy. Such liquidity needs to be reined in so as to avert bubble situations developing in different asset classes. And Chinese bubble bursting will be 1000 times more catastrophic than Dubai default scenario. So far so good - I am with the thought process of US investors. If all that is true then China is taking measured steps to attenuate the effects of an anomaly existing in its financial system. It is simply taking corrective action gradually so that the world is not put into a crisis situation. We wanted China to promptly address its liquidity imbalance, didn't we? And if it has started acting judiciously in that direction, shouldn't we be happy? Do we have to express our happiness by selling off stocks indiscriminately? I am pained to admit but selling off Intel and Google shares at this point of time cannot be categorized as actions of any evolved investor.

The second tranche of bad news for Wall Street emanated from Washington. Well good or bad, its just a matter of perception. I don't think its so terrible, but Wall Street feels otherwise. Hence I leave it to you to decide. President Obama wants to tax Big Banks which had to be bailed out. He wants tax payers to be suitably compensated by these banks for having saved their skins during the height of financial crisis. He plans to extract $ 90 bn over a period of ten years as tax from these banks. Big deal!! How is it conceived as such a bad news for investors? These banks are today paying more than that to their employees as bonuses. And here the total tax of $ 90 bn is planned to be collected over a spread of ten years, which is hardly any negative. I wouldn't be surprised if Obama feels exasperated with such reaction from US investors on this tax issue. Who wouldn't?

President Obama also wants to limit the size of these banks and pass legislation to prevent them from proprietary investments. They will not be allowed to use their own money to invest in risky financial instruments. And they may not be allowed to grow so big by acquiring other smaller banks that their failure becomes unacceptable to any US government in terms of collateral damage that such failure will cause. President Obama points out that he is doing all this so that when these big banks take dumb decisions in future, the tax payers will not have to foot the bill for their mistakes. Very noble thought! Firstly the President is ensuring that big banks in future cannot gamble with the money of depositors, thereby making them safe destinations to park your money. Secondly, he is preparing the grounds to bury any bank that fails, without ever having to think of injecting tax payers' money into such a doomed bank. That will be possible since the bank will no longer be so big that on its way down it can devastate the entire financial system.

As one can see, the proposals are genuine and for the betterment of the financial system. By putting such reforms in place one is only going to ensure that US financial system remains protected from hurricanes caused by greed in the investment world. Global economy will remain stable only when US economy doesn't get jolted by crises caused by unscrupulous financial wizards, who have invented things like Credit Default Swap (CDS) and Collateralized Debt Obligations (CDO) . Then why has Wall Street reacted in such furious manner? Whose side are the investors taking - the side which is fighting to keep the investment world a safer place or the side which is constantly conjuring up some dirty tricks to dupe the investors?

Its time to see right from wrong. I hope US investors will come around and realize the long term benefits in President Obama's proposal of bank reforms. One should dismiss the politics in all this and assess it dispassionately for the merits. Of course timing of the announcement from President Obama could have been better, but that's no reason to dump all investment ideas like Intel!

Sunday, January 17, 2010

Stimulus Induced Growth - Is It Global Recovery On Steroids?

In the first half of 2009 stimulus packages were injected into economy of each country, which managed to perk up the respective ailing economies from the brink of recession. This shot in the arm has been eloquently described by many economists as equivalent to keeping the world economy on steroids. I won't mind going along with such succinct description of the present state of global economy. The economic recovery from Mar 2009 low is definitely because of the steroids pumped into each nation's economy. And as it always happens with pumping steroids, recovery has been really spectacular. So spectacular has been the global economic recovery that one cannot be faulted for being believing that global economy has made a V-shaped recovery. But this is where one should draw the line. Stop and think - rationalize! Someday sooner than later, effect of steroids is bound to wear off. What happens then???

Simple! We all know the answer. If you revive a critically ill patient with steroids, then the patient develops steroid dependence. This means that you have to perforce keep the patient on steroids forever, otherwise the patient will collapse. Which implies that Governments across the globe will have to keep their respective economies on stimulus package forever, if they don't want a collapse of their economy. That is again not feasible. How much money can the governments print? Ultimately what will the value of such money? Hyperinflation as we see in Zimbabwe - is that what we are aspiring for?

Obviously the answer is that at some point of time stimulus packages will have to be withdrawn. However, what is to be seen is whether the magical carpet of stimulus package, on which most economies are presently floating, is yanked off at one go or their governments judiciously take the patient off steroids in small baby steps. Former scenario will definitely cause immediate death to any economy, while the latter prescription will only cripple an economy. So even if we take the best case scenario of gradual and judicious withdrawal of stimulus package, we still cannot sit smug with a misplaced notion of V-shaped recovery continuing, as in a structural bull run. If anything, do tighten your belts because we are about to witness a roller coaster down-ride of global economy, which will remind one of bungee jumping or free falling from super-high-rise structure.

As far as the fundamentals are concerned, US economy will have to witness a double dip recession. Apart from creating more asset bubbles in global markets, US stimulus package has achieved precious little fundamentally for its economy. On the other hand, emboldened by stimulus money US financial institutions have already started distributing hefty bonuses and compensations amongst its employees. For them its business as usual again, even though President Obama reprimanded them sternly. On Wall Street financial institutions devise newer and more complex financial instruments to stun the world with, like the case of short selling of mortgages, while the man on the main street is still reeling under massive unemployment. With double digit unemployment, consumption obviously cannot pick up and hence the main driver of US economy is dragging it backwards.

If US consumerism does not look up soon, then China is going to have it real rough. Fashioned on export-driven model, Chinese economy will soon be sitting on massive inventories with no place to sell. For about two decades plus Chinese economy has been witnessing runaway success owing to massive exports to US. China has a huge trade surplus with US, so much so that outside of US, China holds maximum US dollars. China is the biggest creditor of US. If US cannot revive its jobs' market, then the consumption data will not pick up. That means that US will be importing incrementally less goods from China. Now you can imagine what China will do with the huge piled up inventories. It cannot even spur up its internal consumption since the wages are very low - as low as one tenth of Japan. And with easy credit there is inflationary pressure of bubble proportions already building up there in many asset classes, like real estate. Time is running out for China. Ailing US economy has become akin to a millstone around China's neck.

Now you only decide - if two most powerful economies of the world are in dire straits, can we expect a structural global bull market? Isn't it more prudent to assume that global markets will witness another bout of bear hug? Its time to be cautious if you are a trader. If you are an investor then wait for mouth-watering levels to enter trade. Year 2010 will be a difficult year to negotiate both for investors and traders. But if you are playing the Indian stock markets then be rest assured that Indian markets are firmly in structural bull run. Which means that even as an investor at current level, you are assured of decent profits in fundamentally sound companies in one year's time. Indian markets will correct but they will recover quickly to surpass their all time highs in a year's time. That cannot be said for most of the other global markets, barring those emerging markets not heavily dependent on US exports. Apart from BRIC nations, MAVIN countries are coming on global investors' radars. Happy investing!!

Sunday, January 3, 2010

Last Trading Day of Decade : Yuletide Spirit Prevails

Investors can finally look back at 2009 with awe and admiration. From a situation of gloom and doom, indices world over were sitting pretty at 18/20 months' highs on the last day of the decade gone by. There is a sense of higher expectations and a bullish tenor prevailing in all markets. As we bid goodbye to 2009 and to the decade, we acknowledge navigating two major humbling hurricanes in the financial markets - dotcom bubble and housing market bubble. We have been bruised and scathed, but we still have our spirits intact which can be judged by universal display of cautious bullish sentiments even after all that investors had suffered and endured through year 2000 to 2009.

This force of bullish sentiments will propel the markets higher for some more time. In short we have entered 2010 with a positive bias as far as stock markets are concerned. Given below are some of the reasons for bullish sentiments continuing in global markets in 2010 :-
  • Dollar index which has shown strength for better part of December 2009, is likely to cool down. Continued rise of Dollar index throughout last December had shackled the equity and commodity markets, including Gold, in the last month of the last decade.
  • In December 2009 Dollar Index had risen from level of 74 to 78. Going forward you can expect the index to cool down to at least 76, which is a reasonable expectation of 50% correction. Around that level of 76 the index will also find support from 50 day simple moving average. Even RSI in Dollar Index chart is indicating a fall for the index. If that happens then the existing inverse correlation will propel equity and commodity markets to climb higher in the initial trading sessions of 2010. Across all markets expect to see higher levels from closing prices of last trading day of 2009 in the near term.
  • Trading volumes are set to increase with greater daily participation from players of substance. The big bosses of Fund Houses will be back from their Christmas and New Year holidays. They are expected to start the process of investing with renewed vigour. In their absence their stop-gaps were holding the fort which is why there was such thin daily volumes of trade.
  • Once the big fund houses exhibit bullish sentiments then the individual investors sitting on cash will join the bandwagon.
  • And finally, as the scene unfolds in this fashion, the shorts in the system will be trapped. There will be a rush of short covering which will act as a booster engine for the rocketing markets.
The long and short of this denouement is that bulls can rejoice in the initial trading days of year 2010. Global markets will be in green for the near term in 2010. Indian markets will be no exception. In fact we may witness greater traction in Indian markets as it bounces to higher grounds in the beginning of 2010. This will have added propulsion from short covering. The situation of Bear Trap arising was earlier discussed in my post titled "Nifty - Crystal Gazing For Coming Week" dated 4th Oct 2009. Check the link here for quick reference

After having gone through this 4th October post, you would have realized that by reaching 10500 Dow Jones has behaved exactly as was predicted, but Nifty and Sensex have still some catching up to do. In that post I had indicated that with Dow reaching 10500, Nifty will reach 5500, as the supply zone of 5137 to 5300 will be used by bulls to trap the bears. Similar sentiments were echoed in my 08 Nov 2009 post titled "Sensex and Nifty - Expected Movement Ahead". Here's the link for your reading convenience

Now the million dollar question is whether in the beginning of 2010 Indian markets will play out as per my calculations of Nifty and Sensex or not. Only time will tell! However in days ahead if things pan out in Indian markets as I had outlined in October 2009 post, do let me know through your comments which I shall truly value.

A very Happy New Year to all my readers and followers. God Bless and happy trading for all of you in this crucial year of 2010.