Saturday, June 29, 2013
Friday, June 21, 2013
Crutches for the economy
Between yesterday and today, not only our markets but also global markets collapsed. So what has happened that caused such a crash? What caused the panic is nothing short of being silly. Following Bernanke's speech last night it suddenly looked like the collective wisdom of the market- which is what determines stock prices- metamorphed into one of a 5 yr old. How so? Oh ! the stimulus will end Its going to be very very bad indeed , worse than ever before. And so sell whatever you have and run .
Question is did we expect that the stimulus is going to be a perpetual affair. Did we expect that money will be flowing into stock markets perpetually and as a corollary we will have good times till eternity. And yet US markets saw a dream run to reach newer and newer highs recently.
But more probable is that markets had run up too high and had to correct. Last night's announcement was just the excuse. Bernake's message was clear. it was that , if the economy improves the stimulus goes, albeit gradually. Following the withdrawal of the stimulus and with a gap in between, raise interest rates. Further, depending upon the situation the stimulus will be increased or reduced. So all one has to do is to keep watching the economy instead of trying to conjecture on when will the stimulus be withdrawn etc and make all sorts of assumptions.
But what could lie underneath is that most marketmen are in utter desperation. The desperate need to scalp returns. We now hear of high frequency trades with all that algorithms in it. Asset clases are rotated . So are allocations to different geographies. And why so? For, deep inside is that lurking fear that "all is not well". It is not difficult to see that.. Take for instance one single parameter. Unemployment. Fed assumes a figure of around 7-7.5% by the the stimulus is withdrawn say sometime around Q3/Q4 14. Now, it has to be seen to what extent jobs are brought back. Ground reality appears to be not so very hopeful. Poverty is on the rise. Rising poverty doesn't indicate a falling unemployment scenario. Inflation just doesn't seem to budge. It has to rise to indicate any rise in demand.So things could get worse. Upwards of 8% unemployment will start ringing alarm bells Imagine with all that stimulus so far, inflation is where it is. It is entirely possible for it to go sub zero, not to say that it will, but it is possible.. And that is negative inflation. And in such a scenario it is difficult to see how Fed will be able to do away with with the stimulus.
And in case growth picks up with the economic cycle picking up, that should be cause for cheer and is a vastly desirable situation After all, anyone who has broken a leg would want his leg to heal so that he can throw away his crutches. Thats what the stimulus is - crutches for the broaken legs of the economy. It is only necessary till the economy is on its own.
Mean while good quality stocks are approaching mouthwatering levels. Investors can start accumulating these stocks. Stocks mentioned in this blog are all at more attractive levels with no significant deterioration in their fundamentals. And with uptick in the environment, are expected to give good returns.
Until my next then,
Happy investing
Basudev
P.S. There has been a lapse of a day between commencing and publishing this post. So there is inaccuracy in respect of the date of the Fed's announcement. This has been retained deliberately to maintain the spirit of writing.
Question is did we expect that the stimulus is going to be a perpetual affair. Did we expect that money will be flowing into stock markets perpetually and as a corollary we will have good times till eternity. And yet US markets saw a dream run to reach newer and newer highs recently.
But more probable is that markets had run up too high and had to correct. Last night's announcement was just the excuse. Bernake's message was clear. it was that , if the economy improves the stimulus goes, albeit gradually. Following the withdrawal of the stimulus and with a gap in between, raise interest rates. Further, depending upon the situation the stimulus will be increased or reduced. So all one has to do is to keep watching the economy instead of trying to conjecture on when will the stimulus be withdrawn etc and make all sorts of assumptions.
But what could lie underneath is that most marketmen are in utter desperation. The desperate need to scalp returns. We now hear of high frequency trades with all that algorithms in it. Asset clases are rotated . So are allocations to different geographies. And why so? For, deep inside is that lurking fear that "all is not well". It is not difficult to see that.. Take for instance one single parameter. Unemployment. Fed assumes a figure of around 7-7.5% by the the stimulus is withdrawn say sometime around Q3/Q4 14. Now, it has to be seen to what extent jobs are brought back. Ground reality appears to be not so very hopeful. Poverty is on the rise. Rising poverty doesn't indicate a falling unemployment scenario. Inflation just doesn't seem to budge. It has to rise to indicate any rise in demand.So things could get worse. Upwards of 8% unemployment will start ringing alarm bells Imagine with all that stimulus so far, inflation is where it is. It is entirely possible for it to go sub zero, not to say that it will, but it is possible.. And that is negative inflation. And in such a scenario it is difficult to see how Fed will be able to do away with with the stimulus.
And in case growth picks up with the economic cycle picking up, that should be cause for cheer and is a vastly desirable situation After all, anyone who has broken a leg would want his leg to heal so that he can throw away his crutches. Thats what the stimulus is - crutches for the broaken legs of the economy. It is only necessary till the economy is on its own.
Mean while good quality stocks are approaching mouthwatering levels. Investors can start accumulating these stocks. Stocks mentioned in this blog are all at more attractive levels with no significant deterioration in their fundamentals. And with uptick in the environment, are expected to give good returns.
Until my next then,
Happy investing
Basudev
P.S. There has been a lapse of a day between commencing and publishing this post. So there is inaccuracy in respect of the date of the Fed's announcement. This has been retained deliberately to maintain the spirit of writing.
Friday, June 14, 2013
No respite from rupee trouble
For those who were expecting some steps by Govt to stem the fall of the rupee, Mr Chidambaram's press conference on Thursday came as a thorough disappointment. Mr Chidambaram in his usual suave manner explained away the rupees's fall as due the current account deficit and that many countries with CAD have suffered currency depriciation. And that as and when the deficit is controlled rupee will recover. Further he also expressed his confidence in controlling the CAD.so as to keep it within target. So any hope of an immediate govt action to recover the rupee is dashed. and we may have to continue with a week rupee for some time. Both the sensex and the nifty, as a result, lost over a percent each.
But there were few positive takeaways. He assured that all planned expenditure will be made and urged departments to go ahead and spend. This will result in some economic activity. He assured of more reforms and suggested that investors should focus on long term rather than get weary on short term volatility. Considering his track record in his present tenure, it appears he means business.
But what about growth ? Does it mean that in the long term growth will pick up. May be it will or may be it will not. In today's world, how long is long term.? Growth is the feedstock of stock markets. Stock prices will not go up unless the company grows it's business. At present one big obstacle in the way of companies to grow is the high interest rate environment. Companies after companies are bleeding. The number of companies whose share price has fallen below par value is increasing. It is unfortunate that the few instances in which RBI has reduced rates, the same has not been passed on by the banks. And our banks continue with fat NIMs (net interest margins). Its a serious dichotomy here. If the target of credit is bleeding can the banks add flab? As long as this imbalance continues we will be alternating between hope and despair. That is volatility. And it kills.
Until my next then,
Happy investing
Basudev
.
But there were few positive takeaways. He assured that all planned expenditure will be made and urged departments to go ahead and spend. This will result in some economic activity. He assured of more reforms and suggested that investors should focus on long term rather than get weary on short term volatility. Considering his track record in his present tenure, it appears he means business.
But what about growth ? Does it mean that in the long term growth will pick up. May be it will or may be it will not. In today's world, how long is long term.? Growth is the feedstock of stock markets. Stock prices will not go up unless the company grows it's business. At present one big obstacle in the way of companies to grow is the high interest rate environment. Companies after companies are bleeding. The number of companies whose share price has fallen below par value is increasing. It is unfortunate that the few instances in which RBI has reduced rates, the same has not been passed on by the banks. And our banks continue with fat NIMs (net interest margins). Its a serious dichotomy here. If the target of credit is bleeding can the banks add flab? As long as this imbalance continues we will be alternating between hope and despair. That is volatility. And it kills.
Until my next then,
Happy investing
Basudev
.
Wednesday, June 12, 2013
Fitch returns India's rating back to 'stable' from 'Negative'
The dramatic fall of the rupee in the past few days appears to have taken a respite and closed higher today at around 57.8 to the $ against yesterday's close at 58.4 and an intraday low of 58.98 (an all time low ). This is due to an unexpected upgrade of India's rating by International rating agency Fitch. India's rating is now back to 'Stable' from 'Negative'. Govt should now be able to breathy easy and continue with its efforts to
contain deficit, inflation etc, push for reforms, attract foreign investment, improve infrastructure.and put in place necessary catalyst for.growth. The present upgrade is the result of Govt's actions in the light of Fitch's earlier warning that it would downgrade India unless the country addresses its economic issues. Therefore if the necessary follow through on Govt's action does not take place , we may see a downgrade to junk. And if Standard&Poor's outlook on India is anything to go by, it still maintains a negative rating. Doubts therefore persist. Govt therefore cannot afford any lackadaisical approach and needs to cash in quickly on the improved sentiment. It has nothing to loose but everything to gain with elections due next year.
So far as the rupee is concerned, while currencies of emerging markets have also borne the brunt of depreciating values, India might have underperformed a bit. But this could be because it had appreciated quickly earlier. Looks like we may have formed a bottom for now.
IIP figures for April released today continues to paint a weak picture for the economy. 2% growth compared to last year. Capital goods index a dismal 1%. Not a happy situation.
Not surprisingly FIIs have been selling. They have been selling index futures, obviously to hedge their investments. They have been selling in the debt market.They have been selling stocks also. Markets are therefore at the level where it should be under the circumstances. With a depreciated rupee marketmen are not hopeful of a rate cut soon. And with that hopes of highly leveraged mid sized companies getting a hold are also gone for the time being. This is further aggravated with inflation not being kind either. In any case there isn't much downside left and we may be near a bottom.. .
More in my next and until then
Happy investing
Basudev
contain deficit, inflation etc, push for reforms, attract foreign investment, improve infrastructure.and put in place necessary catalyst for.growth. The present upgrade is the result of Govt's actions in the light of Fitch's earlier warning that it would downgrade India unless the country addresses its economic issues. Therefore if the necessary follow through on Govt's action does not take place , we may see a downgrade to junk. And if Standard&Poor's outlook on India is anything to go by, it still maintains a negative rating. Doubts therefore persist. Govt therefore cannot afford any lackadaisical approach and needs to cash in quickly on the improved sentiment. It has nothing to loose but everything to gain with elections due next year.
So far as the rupee is concerned, while currencies of emerging markets have also borne the brunt of depreciating values, India might have underperformed a bit. But this could be because it had appreciated quickly earlier. Looks like we may have formed a bottom for now.
IIP figures for April released today continues to paint a weak picture for the economy. 2% growth compared to last year. Capital goods index a dismal 1%. Not a happy situation.
Not surprisingly FIIs have been selling. They have been selling index futures, obviously to hedge their investments. They have been selling in the debt market.They have been selling stocks also. Markets are therefore at the level where it should be under the circumstances. With a depreciated rupee marketmen are not hopeful of a rate cut soon. And with that hopes of highly leveraged mid sized companies getting a hold are also gone for the time being. This is further aggravated with inflation not being kind either. In any case there isn't much downside left and we may be near a bottom.. .
More in my next and until then
Happy investing
Basudev
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