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Obviously the answer is that at some point of time stimulus packages will have to be withdrawn.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.

Friday, December 18, 2009

Sovereign Debt Default Scare - Is Dubai Too Big To Fail?

Just a year back big banks and financial institutions had defaulted big time in many developed nations, specially in US. Declaring themselves bankrupt overnight, these big financial institutions reported losses in billions of dollars on what we now know as sub prime crisis. So huge were the losses that US Govt alone injected more than $700 bn to resuscitate these dying financial institutions. Honest tax payers' money has been squandered to revive failed private US banks in one of the most aggressively capitalist nations of the world. Reason - these banks were too big to be allowed to fail. On the other hand, in 2009 alone 106 US banks had to close down, but they were not bailed out by US Fed. Reason - they were not big enough to be saved.

So what is the lesson to be learnt from here? Lesson is that as a business institution you have to bungle big time, show billions of dollars as debt in your books, borrow or leverage indiscriminately and then sit back and relax after blowing the whistle. You will face no problem because your government will bail you out since your bungling is too big. And once bailed out, you can then go about using the bailout money to enrich yourself with astronomically high bonuses. You can justify large bonuses by showing existence of big money in your books. So what if now the money in your books is honest taxpayers' money loaned to you by your government?You can be squatting smug on your haunches with the knowledge that, do what you may - you just cannot fail. You are too big to be allowed to fail!!

That is how investment bankers are using the bailout money in many countries. In fact in UK the public outrage has been such that Govt has now slapped 50% tax on bonuses that banks pay to their employees. As a result, Barclays recently announced a pay hike of 150% for 22000 of its investment bankers with retrospective effect from June 2009!! Take that - if you tax our bonuses then we have other means of looting tax payers' money.

Well so far so good. Big business institutions have been bailed out of thick financial soups by their respective governments. But in doing so these governments have become susceptible to credit crisis themselves. Governments, I agree, are again too big to be allowed to fail. And that is how we found Dubai getting bailed out by its neighbour, Abu Dhabi. For more details on Dubai bailout click this link here -

Abu Dhabi has given temporary reprieve to Dubai so as to maintain investor confidence in the region. But such actions of saving nations from becoming bankrupt will be possible only when there are only few and far between instances of sovereign default. What happens when most nations fall into a debt trap from which they cannot extricate themselves? Many developed European nations are on the brink of sovereign default. Greece, Spain, Ireland are some such names. Then there are a host of East European nations which are tottering under the burden of massive debt. Who will ultimately bail out whom?

The way even rich European nations are falling into debt trap, I wouldn't be surprised if lenders, as a species, totally vanish from the face of this earth. Germany is the richest nation in European Union and it also has spiraling debt in excess of 70% of its GDP. But wait a second! The biggest debt defaulter can be US in times to come. It is estimated that for the next 30 years US national debt will keep on increasing every year. Presently US Treasury has calculated the National Debt at $ 12.135 trillion. White House estimates a record $ 1.5 trillion deficit this year alone, and next 5-year deficit total of $ 4.97 trillion.

Now imagine a scenario in future when US defaults on its public debt. What will then happen to this global economy, which shook like an aspen leaf with the prospect of tiny Dubai defaulting? The total debt of Dubai, including all its state sponsored entities, is not more than $ 100 billion. Compare it with the present day US debt of $ 12135 billion. It is agreed that US is really too big to be allowed to fail. But tell me, who on this planet will be capable of bailing out US, in case it defaults??

Thursday, December 17, 2009

Did Fed Go Wrong In Last FOMC Meet 2009?

US Central Bank concluded its two day meet on 16 Dec 2009, that being the last FOMC meet of year 2009. The Federal Reserve, specially its Chairman Ben Bernanke, was very careful in not ruffling any feathers, so to say. It took utmost care that the statements it issued should not unnerve market participants. It not only left the rates unchanged , but also retained its key phrase "exceptionally low rate for an extended period of time".

That's right. Fed wants to retain an exceptionally low rate for an extended period of time. And yet the US markets gave a thumbs down to this benign act of Fed. The moment the decision on rate was announced yesterday, the US markets sold off. Dow Jones which had made an intra-day high of 10553 before the announcement, swung into negative territory to make an intra-day low of 10402 after the announcement. By pressing the sell button US markets signaled to Ben Bernanke that he had not done enough.

But what more could Bernanke have done? He went overboard painting a rosy picture and not stepping on any toes, keeping rates at zero for an extended period of time. Time magazine also splashed him across newsstands on the same day as its Person of the Year 2009. Every bit of positioning helps. Time's managing editor showered accolades on Bernanke. Sample this piece from the article - "Bernanke didn't just learn from history; he wrote it himself and was damned if he was going to repeat it,".Such manoeuvres can surely give Bernanke that extra push when Senate Banking Committee votes this Thursday on Bernanke's second four year term.With a little help from my friend - reminds one of an old song by Beatles!

But alas! Markets will be markets!! Ben Bernanke's friendly and conciliatory overtures were given a total cold shoulder. The promptness with which the market sold off after the Fed announcement of keeping rates unchanged suggested that this was a premeditated move of the market. It could well be that irrespective of Fed decision market participants had preplanned to sell off after the announcement. Are they trying to express their displeasure before Bernanke gets the votes for a second term? Time will only tell. I would rather like to pin the sell off down to fears of sovereign default by Greece. More of that later.

Debt Laden Dubai - When Will The Woes End?

Fortnight ago Dubai World's request to its creditors for debt repayment restructuring plan had sent sentiments of global investors into a tizzy. In taking precautionary stance, global investors had exhibited an urgency to take cover at this slight bit of adverse news in global financial ecosystem. That amply indicates that risk taking appetite of global investors is surely on the wane. Otherwise, how do you explain a puny $ 26 bn expected default scaring the wits out of investors in South East Asia, across Indian Ocean to Europe and across Atlantic to the Americas?That's pandemic contagion, if you may!!

But why is the global investor getting spoofed so easily. Could it be that Dubai World episode portends destabilizing happenings in global financial ecosystem in days to come? Does Dubai World indicate that the cup of global financial woes is finally spilling over? Does Dubai epitomize the surreal world of tall dreams with borrowed money, whose nemesis is in offing? To get an answer to all that let us first understand the nuts and bolts of Dubai and Dubai World.

Dubai is one of the seven Emirates under the federal governance of UAE. It started off as a trade based oil-reliant economy but presently has turned itself on its head as a service and tourism oriented economy. This has been necessitated because of the belief that its oil reserve will last only twenty more years.

Dubai World is a state-owned conglomerate which deals in real estate, financial instruments and various other business ventures . Its real estate arm, Nakheel has to its credit the Palm Trilogy, three palm tree shaped man made islands, as also Burj Dubai, the tallest free standing 818m high man made structure being built. 'The World' is another extravagant real estate development project which aims at creating 300 islands off the coast of Dubai resembling the continents of the world. All such projects come at an exorbitant price and are insanely expensive for all parties connected with such projects.

It is estimated that the actual debt burden of Dubai's government-related-entities is 116% of emirate's GDP. That's what has prompted economist to put the tag of 'debt laden' to Dubai. Such a tag is also being put on fancied European countries like Greece and Spain. Many East European countries have also earned this sobriquet. So the global investor was spoofed not by the size of expected Dubai default, but that one sovereign default may trigger an avalanche of other sovereign defaults.

But now for some good news. Last Monday was pay time for Nakheel's bonds which had matured and the creditors could be paid off $4.1 bn. A bond default was avoided at the very last moment when Dubai's oil rich neighbouring emirate Abu Dhabi came to its rescue with $10 bn dole, like a knight in shining armour. This total sum of $10 bn will see off debt servicing requirements of Dubai World till April 2010. What after that! Will Dubai have to periodically stick out the begging bowl for servicing debt of its state owned entities?

To get an answer to that and more, do watch this space in coming days.