Has the storm passed global markets?

It wouldnt be a surprise to think on these lines, as global financial markets especially Equities have settled in a range.Is this the lull after a storm or a lull before the onset of the next upheaval? I would argue its somewhere between the two. Financial markets seem to have priced in a lot of bad news already, which is a slightly comforting fact for investors. The not so comforting fact is, we could have the next storms beginning to take shape already.

I would equate the present climate in global markets to the US hurricane season of 2005, which was the most active hurricane season on record when 15 hurricanes were recorded. Where i draw a resemblance is, global markets have been hit by bad news at regular intervals. No sooner one crisis eases, another seems to creep up. First it was the subprime crisis, then it was the credit crisis. Even as the world still recuperates from these twin blows, even bigger problems could be in the pipeline.

The news of a $50 bn fraud by a hedge fund run by the former chairman of the Nasdaq Bernard L Madoff is a huge setback for investor confidence in hedge funds. The hedge fund industry has been on course to post the worst year on record, as they have been hit by redemption pressures as investors sought to reduce risk. This news could potentially become a huge problem, how it affects markets remains to be seen.

Another potential problem area is commercial real estate. An article on the Dow Jones Newswires said data from Standard & Poor's shows nine large banks hold about $121.1 bn in commercial real estate loans. These loans have to be marked to market. The three biggest holders are Citigroup, Merrill Lynch and Barclays, which each hold more than $ 20 bn of related investments. A next wave of write off could be around the corner.

Credit cards could be in line as well. Rising unemployment is bound to hamper the repayment capacity of borrowers and in turn create headaches for the lenders. An article in the Wall Street Journal quoting te Nilson report, a newsletter that follows the industry stated JP Morgan Chase, Bank of America and Citigroup had nearly 60% of the $ 724.44 bn in outstanding loans at the 10 biggest card issuers in the US as of June 30. One need not be a rocket scientist to do the arithmetic. Writeoffs on credit cards could be huge....thats not an understatement by any stretch of imagination.

Well, the markets seem hell bent on giving us analysts a tough time even in 2009. For now, i await the onset of a much needed break at the year end. I hope 2009 will not be as bad as 2008, but all i can do is hope, wait and watch.

A fightback from the Samurai?

If there has been a symbol which represents Japan, it is the medieval Samurai. I have cited the exmaple of a Samurai, as i believe the Japanese yen has the potential to stage a fightback against major currencies, most notably the US Dollar.

The Yen is a currency which has always been very attractive from the view of a carry trade i.e. borrowing money in Japan converting it to Dollars and investing it in the US. The trade is settled by reversing the sequence of transactions. The interest rate differentials between the two countries made this a very lucrative trade, as Japan is one of the few countries where real interest rates are negative. Interest rates in the US were much higher, which increased the lure of the "carry trade". Well things are changing now. The interest rate differential between the two countries is much narrower, as the US Federal Reserve has cut interest rates aggressively. Trades which were entered into earlier are no longer as attractive, in fact would'nt be wrong to say are a loss making proposition presently due to the shift in interest rates.

The imminent reversal of carry trades is likely to lead to a stronger Yen, which ironically isnt in Japan's interest as the country is an export oriented economy. Another important fall out is, Japan has been one of the favored destinations to borrow loans taking yen denominated loans will become more difficult. This will reduce the amount of capital flowing from Japan into global financial markets.

I believe we could witness a sharp rally in the Yen. Markets have a tendency to surprise, the rally in the US Dollar through most of 2008 being a prime example. Given the problems the US experiences in terms of its current account deficit and labor market, it is difficult to believe the rally in the US Dollar will sustain over the next 9-12 months. In the present markets getting the direction right is a herculean task by itself, getting the timing right would be impossible.

A rally in the Yen is potentially the surprise trade of 2009, I believe there is a possibility the rally might last longer than expected. My thoughts have already started to drift to 2009, as i await the end of what has been a tumultous, crazy and a very eventful year.

This is WAR

I bet this is the thought in each and every Mumbaikar's mind, even as the dust settles on what has been the most audacious terrorist attack on India. Having been a resident of Mumbai all my life, even i have been used to such attacks as the city has witnessed numerous such attacks in the past. But this time its clearly different, the water seems to have passed over the head. The words spirit and resilience of Mumbai are often brought up after such acts, i believe these words are abused, as it is economic compulsion which compels most people to be back on the job soon after such disasters. And the calamity was something Mumbai has never witnessed in the past, as hotels which were the icons of Mumbai were chosen as targets and the primary aim seemed to be taking foreigners hostage.



The scale of planning involved in the operation illustrate the intention of the terrorists. A huge cache of explosives, automatic assault rifles, detailed knowledge of the topography all helped the terrorists wreak havoc in the city. The Mumbai Police, which was the first to rise against the threat had to face highly trained and motivated adversaries, put up a brave fight losing fourteen men in the process. It seemed the city was brought to its knees, until the Government sent out an SOS to the elite forces. Clearly it was time to switch gears. The Army and Rapid Action Force was deployed. Additionally, units of the National Security Guards (NSG) popularly known as the Black cats, the crack Marine Commandos (MARCOS) were called in and soon took charge of the situation. It was time to fight fire with fire, the heavily armed and well trained commandos responded in earnest to the threat which had India's financial capital in its grip. It was almost 60 hours before the entire operation could be completed, Mumbai could breathe freely again.


We all owe a deep sense of gratitude to the heroic efforts of the elite commando teams, who lost two of their own in the daring operations. The sense of professionalism imbided in the commandos was exhibited as a news reporter spoke to them after the completion of the operation. The reporter repeatedly thanked them for their bravery, to which the commandos replied it was their duty and they wouldnt spare any one who posed a threat to this country. Brave men indeed....saludos, my head bows in respect for these men and their deeds. It is very reassuring to know, we have such capable men to fall back upon in times of adversity. I also feel a deep sense of loss, as so many innocent people have lost their lives in this seemingly mindless act. The efforts of the staff at the Taj and the Oberoi, in what was seemingly a hopeless situation, stand out.



The other overwhelming emotion i have is anger,which is directed at politicians. Though it would be harsh to paint everyone with the same brush, it wouldnt be wrong to say we have a bunch of useless corrupt politicians governing us. And this is true across the political spectrum, irrespective of party affiliations. How could one explain political parties attacking each other for votes, even as the anti terror operations were on in Mumbai. Its a pity the NSG, which was raised as a anti hijacking and anti terror force is now primarily responsible for security of politicians. What a waste of the best and bravest of our forces!!!!!


This time, it is upto us people to ensure the politicians are made accountable for the horrible mess we find ourselves in. Even as i am writing this post, the news of several changes in the bureaucracy and the cabinet have started coming in. I hope these are just the beginning of sweeping changes in our system. I am pretty sure, the ordinary citizen is not going to remain a mere statistic and will stand up to be counted. The political establishment has to dish out some real tough answers, the goings on in Mumbai are only likely to reinforce calls for swift and decisive action with a view to protect the ordinary populace.

The party's over....a "real" bubble pops

The party seems to be well and truly over for Real Estate. The ongoing global credit crunch has not spared India, which has caused a tightening of lending by banks. A bigger worry for the real estate sector is an absence of buyers due to a combination of high prices and the almost prohibitive cost of availing a home loan. The writing was on the wall (pun intended) , a fall in rentals in Bandra Kurla Complex in Mumbai now acknowledged as the benchmark for commercial property rates, suggested the wheels of the industry were losing traction.

It wasnt difficult to see this coming, as real estate companies have been reluctant to lower prices. The liquidity squeeze has led to companies disposing properties to raise cash, a notable example being Unitech. News reports have also suggested companies are offering discounts for bulk purchases, subject to the payment of a cash component upfront. Friends wouldnt believe when i had told them about six months or so the next market to witness a correction could be real estate. However, I have to admit i was wrong when i expected the big well established players to survive the oncoming consolidation. Even the well entrenched players like Unitech & Emaar are struggling, it seems the whole industry is struggling to come to terms with the slowdown in demand.

Does it mean housing becomes more affordable for the common man? Well for a start, the process has been initiated as developers have agreed to cut rates by 5-10%. But i would argue for a sustained revival in demand prices would have to be cut more aggressively, lower interest rates for home loans will also make things easier for investors looking to buy new homes. I sincerely do hope the froth in the real estate market is cleansed, an ominous example are the Investment banks an industry which has witnessed a shakeout akin to nothing ever seen before. I continue to wait and watch closely as i hope getting that dream house becomes a little easier.

The brakes have been slammed....big time.

The statement pretty much sums up how the auto industry feels at the moment. The present travails of the auto industry are not surprising considering auto loans are the second largest liability most people have, the biggest being a housing loan. The carnage brought about by the subprime mortgage meltdown in conjunction with the credit crisis has well and truly rewritten the archives of financial markets. Now comes the second leg of pain, as shrinking loan availability from banks has deterred buyers.

The extent of the problem being faced presently can be gauged from the fact that General Motors has said it might run out of cash before the end of the year. The clamour for a investment bank style bailout has been rising in the US, considering the importance of the big three i.e. General Motors, Ford and Chyrsler to the US economy. Sadly, the present state of affairs are likely to culminate in either one of these big three filing for Chapter 11 bankruptcy protection.

Whether the US government bails out the auto industry remains to be seen, one thing is for sure. The pain is being felt from Detroit to Stuttgart and even Tokyo. Some of the biggest names in the industry Nissan, Toyota, BMW, Honda have all issued profit warnings for 2009. Is there bigger trouble in store? My fear is, should the freeze in credit continue, its only a matter of time before credit cards become a problem area. The credit crunch seems to be easing as Libor has cooled off sharply from the highs, however confidence is a key ingredient which seems to be missing in global financial markets these days. From the way things look presently, we could be yet some way off before things start to improve for the better.

Almost a $1000 billion and still counting...

$841 billion, thats the amount of losses the financial services industry has already taken from the global credit crisis, according to a report in the Financial Times on 13th November. The amount is staggering to say the least, its feared there's more to come. The International Monetary Fund now estimates likely total losses in the financial sector could be $1400 bn, about 47% higher from the April estimate of $950 bn.

The present crisis can be classified as one of unprecedented proportions. Another fallout has been a massive reduction in jobs, it is being speculated an additional 70,000 jobs could be trimmed in the US alone as banks tighten their belts further. These losses are in addition to the 150,000 already lost globally. Needless to say several industries have been shaken to the core, a prime example being the hedge fund industry. Hedge Fund Research estimates the average hedge fund is down about 15% this year, the worst performance ever. Things dont look too good for the future either. Billionaire investor George Soros in a testimony to a House Oversight and Government reform committee said hedge funds will be decimated by the current financial crisis and be forced to shrink their portfolios by 50-75%.

The crisis has spread to the real economy and the likely onset of a global recession looms. What else has the global economy got to endure, only father time can tell!

Here we go again...

The next round of pain for global financial markets appears to have begun. A rally in the last week of October seems to have petered out due to the emergence of fresh negative news across regions. Global stock markets, most notably the Dow Jones, clearly look set for a new low. Not that there was any doubt in the first place, as highlighted by the reluctance of markets to respond positively to huge stimulus packages announced by Governments, the latest being China. It would seem rallies are being used to exit holdings rather than initiate fresh longs.

What started out as the subprime crisis lead to the credit crisis and is penetrating into the real economy. It is worthwhile to note the overwhelmingly pessimistic picture painted by economic indicators. Consumer sentiment, business sentiment and industrial activity are at record lows in several countries. The automobile industry is the focus of the bad news presently, as a possible bankruptcy hovers over General Motors. CNBC carried a report which, citing private studies estimates said about 2.4 million jobs could be lost if General Motors, Ford or Chrysler were to go belly up, a scary scenario indeed.

In India, the scenario is grim to say the least. A lot of industries have resorted to shutdowns whilst cost saving seems to be a top priority these days. To put things into context, the Tata group has asked its group companies to put all acquisitions on hold unless absolutely necessary and focus on optimizing costs. Needless to say, industrial production figures are likely to nose dive and drag capital goods stocks like Larsen & Toubro, BHEL & Siemens lower.

The pain felt by investors globally is going to be much longer than anticipated. I believe the pain could linger on for another 3-6 months, as equity markets tend to bottom out earlier than the real economy. I believe expectations for an economic recovery in 2010 should help equity markets bounce back from the present downtrend, it wouldn't be a surprise to see a strong showing for equities in 2009 even as the flow of adverse economic news reaches a zenith.

Though in the short term, I personally do not want to try and catch a falling knife, i.e. try bottom fishing. I would rather wait for things to settle and then take a relook at the markets. For all of us its the time to buckle up and sit tight, since the last and possibly, the most painful leg of the bumpy ride has begun.

Tough luck Felipe

This post might look like a misfit amid all the other contributions on financial markets, but this is about one of my favorite sports - Formula 1. Having been a F1 fan for more than 17 years now, i can state this season was one of the most exciting in recent times, if not the most exciting ever.
And at the end of the season, i couldnt help but feel sorry for Felipe Massa, who did everything expected of him at Interlagos, Brazil, his home circuit. A pole position preceded a superb victory, though it wasnt quite enough to clinch the drivers championship for the Brazilian. Lewis Hamilton, who was vying to become the youngest F1 champion managed to capture 5th place, which was required for him to clinch the world title.

Being a Tifosi, i couldnt help but wonder what might have been. The Italian team have suffered from a series of blunders in the pits and mechanical problems, a notable one being Felipe Massa's engine blowing up when he was in the lead at the Hungaroring, Hungary. Clearly the crack team of Michael Schumacher, Technical director Ross Brawn and Team Principal Jean Todt had a huge role to play in the team having a stranglehold on the Drivers and Constructors championships through much of the decade gone by.

I hope the team is able to pull up its socks and go one better in the drivers championship next year. In particular i expect Kimi Raikonnen, who clearly is one of the most naturally gifted drivers in the paddock to lift his game one notch higher. Though the 2008 season has just ended, i believe there is lots to look forward to in 2009 as i wait in eager anticipation for the engines to be revved up again.

Phew....Is the worst behind us??

This was the thought that came to my mind as i got home from work on October 30th, a day when ticks on the Reuters screen were blue, what a welcome change it was from the red ticks we analysts have become used to seeing with such unfailing regularity over the past few weeks.

On deeper thought, i clearly believe this is a relief rally in a bear market. There is no way fundamentals can change overnight. The reaction of financial markets to the interest rate cut from the Fed is reminiscent of a person seeing a mirage in a desert. That’s not an unfair comparison at all; given the fact global markets seem to expect a recovery in economic growth. On the contrary, I am worried such euphoria might create the launchpad for the next round of pain; I pray this scenario doesn’t materialize. Though reading the latest forecasts from economists at UBS Investment Bank and Deutsche Bank i gather, things are likely to be even worse than most people expect.

The present crisis has now engulfed the global economy, and threatens to snowball into something which most of us wont experience in our lifetimes, well atleast i hope so!! After the US it was the Emerging markets which bore the brunt, now the focus shifts to..... Europe. It was surprising to see the markets ignoring the flow of negative economic data from the EU for as long as they did. The moment realization dawned upon the markets of where the EU was actually headed, there was carnage. And it still continues, apparently things dont like changing anytime soon. The European Union faces a recession for the first time since the introduction of the common currency..the Euro.

In my view, that’s where the next problem area lays...Europe and the UK. The scope for aggressive monetary policies in terms of lowering interest rates, at this point in time are the highest in the UK followed by the EU. Expectations of lower interest rates can also explain the sharp falls in the Euro and the British Pound.

Banks in Western Europe have now came under the scanner, wouldn’t be a surprise should the ECB announce some kind of a relief package for other regional banks. The worst for the US financials could be over, though it’s just a bit too early to be breathing easy as other regions witness problems.

So what am i doing presently? Amidst the routine flow of work, i wait and watch market developments with a great deal of interest. I wish the problems we are in presently would vanish, though this is merely a hope...until the next wave of bad news hits the markets.

Commodities - Is it the end of the supercycle?

The commodities market have witnessed a massive tumble over the past few months as the readjustment to expectations of lower global growth shift to overdrive. Though the fall has been sharp across the entire complex, two commodities which are considered as bellwethers due to their performance being tied to economic activity - Crude oil and Copper have witnessed the sharpest falls. From the highs reached earlier during the year, Crude oil prices are down about 56% while Copper prices are down about 57% aS on October 24th. What an irony it has turned out to be - just 6 months ago what seemed like a supercycle has now been labelled a bubble. Has the commodities story ended?


Being a commodities analyst myself, i closely follow research reports from several analysts including John Reade - a noted Precious Metals Analyst and Head of Commodities strategy at UBS Investment Bank. In one of his daily roundups John had mentioned of an upward revision in Copper price targets by Alan Heap, Head of Commodities at Citi and said this forecast comes from a bloke who had coined the term "supercycle". In my view, the commodities supercycle has received a jolt - no question about it, however it is wrong to write off commodities especially if the time horizon of 3-5 years is considered.


Presently global markets have been in a tailspin, as the largest economies of the world, the US and Europe, are in a synchronized slowdown. I would attribute expectations of falling demand as the pivotal factor for lower commodities prices, even as the supply side has remained static. But then if demand is likely to be lower, who cares what the supply side is doing? An example which typifies the massive sentimental swing in the commodities market is Crude oil, which rallied even as OPEC increased production in September 2007 as it was thought the increase in production would be insufficient to meet demand. In September 2008, OPEC actually asked members to reduce overproduction from their quotas and guess what....the markets fell!!


Clearly it is economic activity which is the main driver for commodity prices. The weakness in commodity prices could continue until some semblance of sanity or normality returns to the markets - i know these words are the exact antithesis of what has been transpiring in the markets off late. Another significant factor contributing towards weakness in commodities has been a stronger Dollar. In my view, clearly the US Dollar has emerged as a safe haven in these tumultous times, notwithstanding the traditional belief of Gold being a safe haven asset. The sharp falls witnessed in Gold prices from time to time has led me to believe safe haven buying interest is not always a reliable price driver. Its difficult to pinpoint the length of time for which the rally in the US Dollar will continue, however the greenback clearly stands to benefit further as other central banks - most notably the European Central Bank and the Bank of England have a significant distance to go in terms of easing interest rates.


Thus, taking a view from where things stand presently the road to a recovery of economic activity is bound to be a long and painful one. But as economic activity revives and liquidity in global markets is restored we should see commodities bouncing back strongly, a significant factor being strong demand from the Emerging markets. A factor which could increase in importance as recessionary concerns recede, is supply side adjusments. Producers of several commodities are likely to reduce production as an adjustment for falling prices, examples being Zinc and Nickel, this should be supportive for prices especially in a scenario when demand stages a comeback. When is this likely to happen - well it looks like it could be a while coming, may be sometime in 2010. The wheels of the supercycle seem to lack traction presently, though i believe a sustainable recovery is likely to occur sometime over the next 12-18 months.

Its absolute mayhem!!!!

That's my expression as i sit in office this Friday October 24th, a day which has been remarkable even going by the recent volatility witnessed in financial markets. Fear has now come knocking on every door, the gloom is manifesting itself across asset classes. The Yen and the Aussie collapsing, Commodities selling off across the board, Equities across Asia down between 9-12%.

The Indian market was down over 11% as heavyweights like Reliance and ONGC collapsed, each falling over 10% in a single trading session. However my worries are much much bigger. Is the structural story of India still intact? My hunch is we have started to witness the first real crack in the Indian economy, REAL ESTATE. I had mentioned about this possibility in posts on July 9th and 17th. Clearly the cracks are getting deeper. High interest rates, falling demand for housing and tight credit markets have resulted in an unprecedented liquidity squeeze for the Real Estate sector. The seriousness of the problem can be gauged by the fact that biggies like Unitech, Parsvanath and Omaxe have defaulted on repayments of loan instalments.

I believe there is now a distinct possibility of the real estate market witnessing a sharp correction - something which we Indians have been thought is inconceivable. The recent volatility has shaken up a lot of equations and beliefs, the next one could be a fall in real estate prices. Should such a thing happen, the pain for the common populace already licking their wounds from the recent market crash is going to sustain a lot longer. On the flip side, for genuine buyers 2009 is likely to be a good opportunity but then we dont like to buy things which are cheap dont we?

India is in for some testing times ahead, proactive policies from the RBI have been effective in damage control. Though they have not been able to prevent things taking their normal course, the Rupee being a case in point. I now wait and watch eagerly, because as an Analyst i have stuck my neck out and tried to vision what might happen in the near future. Whether i am right or not....only time will tell.

The heat is on

The title i have chosen for this blog, helps me put into perspective the latest developments in global markets as the turbulence witnessed in global financial markets over the past 6 months or so has moved onto hitherto uncharted territory. The indicators say it all, needless to say things look frightening. LIBOR, the rate at which banks transact in the interbank market at an all time high. The CBOE Volatility VIX Index at an all time high, Emerging markets smashed.A country tottering on the brink on bankruptcy.... its easy to shake one's head in disbelief. Things dont look good at all.


The freeze in the credit markets has evoked an unprecedented response from central banks and led the big three i.e the Federal Reserve, the Bank of England and the European Central banks to co-ordinated rate cuts. Other central banks followed suit in an attempt to shore up global liquidity. Another noteworthy development was governments pumping money into banks with a view to shore up battered institutions. The infusion of $ 125 bn into 9 banks by the US, an injection of 250 bn pounds into banks by the UK government and an injection of 6 bn CHF into UBS by the Swiss government stand out.


Nowhere is the pain more apparent than in the Emerging markets...Brazil, Russia, China and India. Instances of trading being frozen on stock markets which were the exception earlier have now become the norm. Its not unusual if investors start wondering.....when and how will this end?


A key factor which would begin the recovery is a thawing of the credit markets....banks begin to lend to each other without hoarding cash. Clearly its very easy to get overtly pessimistic and paint a doomsday scenario....well some might say doomsday has been witnessed many times over!!!


The massive turmoil playing out in the markets is bound to create a lot of uncertainty and anxiety in the minds of investors. So, is it the time to buy yet? In this case, views of two noted investors stand out. The Oracle of Omaha, Warren Buffett's investment philosophy is " Be fearful when others are greedy, be greedy when others are fearful. Presently, it isnt an understatement to say fear is all pervasise. Jim Rogers believes the best time to buy is when nobody wants to buy. These two thoughts are pearls of wisdom from Investors who have enviable track records over the past few decades.


So is it a good time to buy? For people with the investment horizons of Buffett and Rogers,presently markets are at mouth watering valuations. For the common investor its a different ball game altogether, though i clearly believe the markets are now in a territory where investments can be made on a staggered basis. Though i am doubtful if investors have sufficient cash for deployment as an opportune time comes knocking. Research and valuations have been chucked out of the window, as even the biggest of investors are keen to hit the sell button on everything they own. The possibility of a really sharp rally in equities sometime in 2009 cant be ruled out, especially in a scenario where gloom and pessimism dominates. I wait for the sunshine and hope the clouds of despair dissipate soon!

From the frying pan onto the fire.

Global financial markets are in the midst of a credit crisis. A crisis of mammoth proportions, one which has never been witnessed in the past. The global economy has been dealt a double blow, even as the recovery from the sub prime has been underway. The history books of the financial world have been well and truly rewritten over the past 9 months, what has transpired over the past year surely has given us Analysts a lot of fodder to chew upon, probably even for a lifetime. One line which best sums up the mood in financial markets presently in my view is, from the frying pan onto the fire.

The conversion of Goldman Sachs and Morgan Stanley into banks marked the end of pure investment banks on Wall street. Gone are the days when banks used leverage as a weapon to make profits. The destructive power of leveraging has unfolded with deadly conseqeunces for several banks. No wonder, Warren Buffett realised the destructive power of Derivatives labelling them " Weapons of mass destruction. The latest instruments of destruction are Credit Default swaps, instruments which were originally conceived to protect banks.

An offshoot of the subprime crisis has been a reluctance by banks to lend money, even in the inter bank money market. This has resulted in a sharp rise in the Libor and Euribor, rates which are used as benchmarks by banks when transacting in the money market. The cost of insuring companies debts as indicated by the Credit default swaps have now become a lead indicator of sorts with respect to a bank's financial health. To cite an example, the CDS for Goldman Sachs and Morgan Stanley surged to over 800 points before their conversion into banks. The lower the CDS, the lower is the risk of insuring a company's debt which translates into a greater confidence on a company's repayment capacity. The CDS for Lehman, AIG & Washington Mutual all shot through the roof as problems intensified.

The path to recovery from any disaster can be painful and very long at times. The costs of the present crises have been horrendous to say the least, writedowns of more than $ 500 billion, more than 100,000 jobs lost. Even a $ 700 billion bailout package from the US Government has been unable to instill confidence in global markets. Apparently though i would like to believe the worst of the crisis is behind us, the problems are not yet over by any stretch of imagination.

Who's next??

Is the question topmost in minds of investors as the credit crisis has seen two of the largest investment banks in the US going under. What started out as a trickle, is now a flood as the credit markets have virtually seized up. There in lies an explanation to whats going on in the financial markets at the moment, its not a crisis of solvency but rather of liquidity.

The rate at which banks borrow short term funds have gone up massively. More alarming was the fact of the US Federal Reserve selling short term T bills to shore up its balancesheet. I am now beginning to wonder has the Fed bitten more than it could chew? Possibly these are the first signs of the US financial system crumbling under its own weight.

Global central banks seem to have realised the gravity of the situation and are acting swiftly to inject huge amounts of liquidity into the banking system, particularly the short term credit markets. Would other central banks have to sew together a bail out package for the US Fed? Though this thought seems audacious at present, the developments in the present crisis have surpassed crises in the past in terms of speed and magnitude. Times have changed and how...

The Federal Reserve has hinted at upping the ante with a view to rein in the present crisis, doubts still linger about the amount of ammunition the Fed has up its sleeve. The $ 85 billion bailout of AIG being a case in point. Though the move hasnt done much for market sentiment. The situation with AIG has increased systemic risks in a system, which has already been stretched to its limits or even beyond. The flight to safety seems to have begun, a major beneficiary being Gold which had the single largest gain in Dollar terms yesterday.

The credit crisis has now snowballed into an apocalypse which has altered the landscape of Wall Street forever. The present scenario on Wall street is akin to the Law of the Jungle i.e. the survival of the fittest. The survivors of the present holocaust will have an entirely new world unto themselves, the question is how many institutions can really survive the pain further.

Mad Mad West...

The credit for this title goes to my colleague Archana, who suggested the title the moment i said i'm going to update my blog. What a weekend it has been....our entire team was away in Kuala Lumpur, oblivious to the changing landscape on Wall Street. Though the problems with Lehman Brothers were well documented, the announcement regarding Merrill Lynch's acquisition by the Bank of America was a bolt of lightning from the blue.

Lehman's problems were heightened as the Fed refused to bailout the troubled investment bank. Reading a news item on Bloomberg sounded like a virtual obituary on Lehman, only one amongst four purely Investment banks in the US. The fall from grace for Lehman has been swift yet stunning. It typifies problems with the investment banking industry. An article in the Wall Street Journal made an interesting observation. It likened investment banking to a casino, in case a trader made a profit its the bank's profit if its a loss its the shareholder's loss.

In hindsight, it looks like the root cause of the whole subprime and subsequent credit crisis has been complacency and greed. Most of the banks made huge profits from structuring and selling complex derivative instruments related to the housing markets. The fantastic returns saw a complacency setting in, as it was believed the stupendous returns would continue. And what followed, well as the saying goes.... the rest is history. The crisis has shaken the financial sector to its cores.... more than $ 500 billion in write offs, three large US investment banks going under. The investment banks have become favorited whipping boys for the markets, well almost!! Apparently the pain isnt over as yet, there's more trouble in store ahead. A pointer to this fact is a concerted effort from Central Banks globally to boost liquidity. Earlier only the Federal Reserve, the European Central Bank and the Bank of England had boosted liquidity this time the banks of Japan, South Korea and China have joined in as well. Its an alarming sign, as the credit crisis seems to be spreading its tentacles globally.

The recent problems have seen global equity markets getting pounded, it seems like an orchestrated atmosphere of fear has gripped the global markets. Equities are not the only ones taking it on the chin, Commodities and the Foreign exchange markets have well and truly been a part of the massive readjustment in the markets. What next from here..... the picture doesnt look good at all, its almost like the markets have come full circle i.e. back to where it all started from. The turbulence witnessed in the markets recently looks like going on for a while longer. Looking at it on a contrarian basis, i believe this could signal the beginning of the end for the crisis, though its clear its way too early to get gung ho on the markets at this point.

Bear Stearns, Fannie, Freddie......Lehman???

The names seem familiar, as were the problems faced by the first three. Are we up for a repeat of the This was the first thought that came to my mind the moment I heard the shares of Lehman brothers plummeted 45% in a single trading session. The reason attributed to the massive slide was the failure of the Investment bank to conclude talks with a South Korean Bank for capital infusion. A possible capital infusion into Lehman had arrested the negative sentiment in the financials sector, particularly the investment banks which seem to have become favorite whipping boys for the stock market. Is Lehman on the verge of collapse?? Its really difficult to have an answer to this question, but going purely by the market movement of its stock something surely seems to be amiss. Things have really turned sour for Lehman, one amongst the four US entities which are pure investment banks, the others being Goldman Sachs, Merrill Lynch and Morgan Stanley.

While in a conversation with my Boss over Lehman a while ago, he pointed it out at times the markets serve as self fulfilling prophecies. Like in the case of Bear Stearns, the liquidity problems surged once other banks started refusing to lend money in the interbank market. Recently, there was news of officials from the Federal Reserve calling up Credit Suisse, a swiss bank to verify whether they had cut off credit to Lehman Bros.

Problems for the US economy seem to be only getting worse. The Treasury placed Fannie and Freddie under a conservatorship with a view to removing the ambiguity of the mortgages owned or guaranteed by the pair. These two entities combined either own or guarantee about $ 5 trillion in mortgages. The fresh set of problems with Lehman leaves me wondering whether the Fed is going to intervene again should there be an escalation of the problems. A precedent has been set in the case of Bear Stearns; however the options available with the Fed seem to be rapidly diminishing. They were able to stem the rut in the US economy by aggressively cutting interest rates; they have seemingly stemmed the systemic risks in the short term by placing Fannie and Freddie under conservatorship. But my worry is, has the Fed got enough ammunition left should another wave of problems hit the financials sector.

In my view, the next wave of problems could be from “prime” loans, or loans given to people with good credit records. Jamie Dimon, the CEO of JP Morgan, which reportedly has huge exposures to these loans had remarked recently the outlook for these loans is “terrible.” Though these problems may or may not materialize, one thing seems certain. The financials sector and the stock markets on a larger scale are not out of the woods yet. Just as things were slightly beginning to look up, we have a fresh wave of bad news hitting the markets. How the markets cope wit the latest developments would be an interesting thing to witness. As far as investors go, the pain experienced over the past 6-9 months is likely to linger on for a while. All we can do is wait and watch.

Have the clouds of gloom dissipated?

That global financial markets have witnessed tremendous turbulence over the past 6 months isnt an understatement by any stretch of imagination. Though the markets seem to be on a path to recovery, the pain for investors isnt likely to evaporate anytime soon. The financials sector continues to hog the limelight, the news of a possible stake sale in Lehman Brothers and the seperation of its investment bank and wealth management by UBS AG, the world's largest wealth manager being two prominent recent developments within the sector.

Like i had written in one of the earlier posts, the Dollar seems to be holding onto its gains against the major currencies. The strength in the greenback has seen another asset class featured regularly in the headlines recently, Commodities. The sector has witnessed a fall across the board, with Crude oil leading the way. Apprehensions over rising inflation in several countries due to higher commodities prices have eased significantly. Is it the end of the Commodities story? I beg to differ, instead see these moves as an adjustment to expectations of a sharper deceleration in global economic growth. It looks more like a correction within a "supercycle" of which we might have seen one leg already, definitely there's more to come. Higher commodity prices are needed to ensure a supply side response and providing an impetus to the discovery of alternative supply sources. Given the present macro economic picture, the weakness in commodity prices looks set to continue in the near term, though it could be a different picture over the next 9-12 months.

An easing of nerves has also been seen in the Indian equity markets as the benchmark BSE Sensex has gyrated in a range between 14000-16000 in the near term. Is the pain a thing of the past for the Indian stock market? Well not quite yet, owing to two major factors namely Inflation and the upcoming general elections in 2009. Inflation continues to be a worry for the Indian government,however the sharp slide in crude oil prices has eased the pinch a little. However that doesnt mean the tightening cycle in India is over, we could be in for another round of interest rate hikes though this time the hikes could be of a lower magnitude. The markets could be in a wait and watch mode till the formation of the new government at the Centre, as it would provide clarity on the future course of economic policy.

Finally some light seems to be emerging at the end of the tunnel, as of now it seems more like a ray of hope which could further brighten with the passage of time. The rocky ride experienced by investors earlier has become a little less bumpy, though we could yet be a far distance away from a smooth ride on.

Well done Abhinav.

That was the first thought that came to my mind after i heard the news that Abhinav Bindra had won India's first ever individual Gold medal at the Olympics. Its difficult to find adjectives to describe the achievement, words like monumental and stupendous wouldnt suffice. Even as the nation of a billion plus people rejoiced, the poise and composure Abhinav showed after clinching the medal showed the mettle he's made of. Having scaled the pinnacle of the sport without the backing of corporate sponsorship, apart from the Mittal group makes the victory even sweeter. Its a real surprise how a country as big as ours has been unable to produce a Gold medal winner earlier.

I'm sure the sight of Abhinav standing on the podium with the Tricolor being unfurled and the National Anthem playing in the background wont be forgotten in a hurry, perhaps never. Kudos Abhinav, you have made each Indian proud. Youngsters aspiring to take up sports now have a new icon to look up to. All this while the United States have Michael Phelps, who holds the record for the most Gold medals in the Olympics, while Australia had the " Thorpedo" Ian Thorpe. Two swimmers who symbolised the future of sport and set many a swimming pool on fire with their ability. Though there's a long way to go in terms of matching the achievements of Phelps and Thorpe, like Abhinav himself said its not the destination but the beginning of a new journey. Here's wishing you all the very best for the future. Saludos!!

Finally, some rain in Hyderabad!!

I am sure the local people in Hyderabad wouldnt have the same feeling when it started pouring during the evening of Friday August 8th. I used the word local, as i'm amongst the droves of people who have moved to Hyderabad in search of greener pastures. The rain reminded me of the showers seen in Mumbai, the city i belong to and a place where such spells of rain are fairly common. Experience with long spells has better equipped the people of Mumbai to deal with torrential downpours. However in Hyderabad the case seems different as the city hardly sees the kind of rain experienced in Mumbai. Atleast this was the first instance when it has rained with such intensity in the city during the last one year.


The rain is accompanied by its share of problems. Huge traffic jams, power cuts and flooding in the low lying areas. Luckily, the apartment that i reside in was spared the power cuts, though the adjacent street adjacent to it did resemble a large flowing rivulet. Also i felt blessed as the rain started pelting after i got home in the evening, i really sympathize with the folks who were stuck at several places due to bad traffic or had to suffer long power cuts. As i settled on the couch looking at the rain pouring outside, my thoughts immediately drifted to hot pakodas with tea as is the norm during the monsoons in Mumbai. I really miss those days, though the spell of weekend rain did provide a sense of deja vu.

Is the Dollar back for good?

I bet this was the question uppermost in people's mind given the way global markets have been reacting lately. The week gone by being a case in point. Strength in the US Dollar saw a tumultous ride across markets, with the Euro plummeting the most in 6 years and weakness across the board in commodities. A special mention needs to made of commodities since it was the rally in this asset class which has stoked inflationary pressures globally and forced central banks to embark on a tightening spree.

Coming back to the question is the greenback going to see a sustained rally? Well, the present news flow seems to suggest Dollar strength in the near term, though its unlikely the rally will sustain over the medium term. The rationale behind this is the US is grappling with an economic slowdown amidst high inflationary pressures. The Federal Reserve which seems to be doing a tight rope walk at the moment, resisting pressures to raise interest rates. A few other signs do look ominous. The US labor market seems to be weakening, the credit crisis is thought to be only half way through, though losses suffered by institutions are likely to diminish here on. The housing market remains an area of concern. A statement from the CEO of one of the banks to emerge relatively unscathed from the credit crisis, JP Morgan Chase mentioned the outlook for prime loans, given to people with a good credit record was "terrible". A spread of the crisis to prime loans could have disastrous consequences for the US economy already reeling from losses at Fannie Mae and Freddie Mac, institutions which own or have guaranteed about $5 trillion in mortgages.

Another crucial factor for the Dollar strength has been expectations for weaker growth in the Euro zone. Economic data from the Euro zone clearly suggested an imminent economic slowdown, the markets seemed to ignore what was always apparent. It needed a statement from the ECB Chairman Jean Claude Trichet to see market participants hitting the eject button, and the Euro getting slammed subsequently. Can a similar thing happen with the US Dollar? The release of economic data will be the best gauge for this.

The present spell of weakness in commodities is being viewed as signs of a top being put in place for several commodities most notably Crude oil. It isnt an exaggeration at all to say, it is Crude oil which is driving international markets. I view the present weakness as a "correction" in a rally which has seen prices rising from $ 50 to $ 148 in less than two years. A move to $ 100 seems likely, though it is better to watch the markets closely than get carried away in the din surrounding falling crude prices.

To sum it up, the foreign exchange markets seem to have factored in most of the negatives for the US economy while the re alignment towards lower growth in the Euro zone has well and truly been set in motion. However the equation could change once again should something unforeseen by the market happen, like a rate cut from the FOMC. Will such a scenario materialise? I prefer to wait for the situation to fan out, as i watch what looks like a sea of red on the Reuters terminal!!

A correction looming on the Mumbai Real Estate horizon??

Well, finally there could be some good news in store for potential investors in Real Estate. Seems the rapidly deteriorating macro economic picture has finally started to take a toll on what has been traditionally preceived as a safe investment avenue. Auctions for plots at the prestigious Bandra Kurla Complex held by the Mumbai Metropolitan Region Development Authority (MMRDA) have seen the reserve price falling. This development is really significant as the Bandra Kurla Complex has been positioned as the hub of commercial activity in Mumbai,having overtaken the traditional business district in South Mumbai, namely Nariman Point in terms of business importance.

This could augur the start of a much anticipated or from the view point of a potential investor a "much needed" correction in the Mumbai real estate market. The only word that can be used to describe existing rates is stratospheric, which has put housing out of the reach of most of the middle class. Buying interest which has been on the wane recently due to rising interest rates, is likely to further take a hit as more supplies hit the market over the next 9 - 12 months. A correction in Mumbai could very well herald a correction across the whole Indian market. One look at the way real estate stocks have performed over the past 3 months or so suggests the stock markets are pointing to a significant slowdown in earnings for these companies. Only time will tell how big the correction will be, the only thing potential investors can do until then is wait and watch, hoping their dream home becomes a little cheaper to acquire.

Real Estate - Whats the real deal?

Real Estate, the word used often used casually in conversations has developed new connotations. After sharp price rises over the past few years, it would seem more appropriate to use words like “unreal” or “surreal” to describe the market. Saying prices have gone through the roof wouldn’t be an understatement; the sky seems to be the limit, quite literally!! The rapid rise in land rates has made spawned a whole new class of multi millionaires. The flip side of the coin is, owning real estate has become a herculean task, especially for the burgeoning middle class in India.

An analysis behind the sharp surge in the Real Estate market suggests apart from demand and supply issues it is a fear psychosis about rising rates which has supported prices. True, the availability of land in mega cities like Mumbai has remained more or less static whilst demand has risen exponentially. Enormous wealth creation has seen a jump in the incomes and hence spending capacities of people. Apart from the availability of wealth, it is a fear of rising rates in the minds of people that has lent support to prices. Though there are signs of a slowdown, a “correction” hasn’t been witnessed in the recent past.

Things looked hunky dory for the market about 3-6 months ago, apparently things have soured since then. It would be difficult to ignore the macro economic scenario we are in at present. Rising energy costs, galloping inflation and interest rates heading up north. Rising interest rates seem to have taken sheen off the market, as it has made servicing loans more expensive. Fresh loan issuances have also been adversely impacted.

Assuming things are likely to keep going up is naïve to say the least. All asset classes are vulnerable to corrections, even the so called “safe assets”. An example which can be cited is the US housing market; the collapse of the sub prime mortgage market had ripple effects on the global economy. Investments in this market saw some of the world’s biggest banks writing off US$ 400 billion, apparently the crisis hasn’t ended. A crisis of this magnitude doesn’t look likely in India given the vastly different structure of the Indian market.

It wouldn’t be surprising to see a correction in the Indian real estate market, a long anticipated correction at that. Will the investors waiting on the sidelines enter in case of a correction? Logic seems to suggest “yes”, experience or wisdom suggests quite the contrary. An example which can be illustrated here is the Indian stock market, investors were comfortable buying stocks when the Index was trading at 22–23 times forward earnings, now when valuations are around 12-13 times its apparently doomsday, there’s an all pervasive atmosphere of fear.

Well, to cut a long story short it would be good to see a correction in the real estate market as it would throw up interesting investment opportunities. Is a shakeout imminent? I tried gazing into a crystal ball and coming up wit an answer. Unfortunately all I could see was a hazy and foggy picture. Hardly a surprise, that even crystal balls would seem to be of little help when trying to gauge the sentiment of hordes of people who still nurture dreams of owing small pieces of the pie known as the Real Estate market.

Euro 2008 - The heralding of a new Era??

Euro 2008 is now behind us, a real pity for soccer fans like me cos watta tournament it was. The Spanish armada vanquished the reliable Germans thus getting rid of the tag of perennial underachievers. The quality on display was quite stunning, no team portrayed it better than the Dutch who virtually painted the tournament orange until they ran into the Russians.

The biggest disappointment were the Czechs especially considering the way they played in the qualifiers. France were not far behind, but with their talisman Zinedine Zidane gone the creative talent seemed to be missing in midfield. The seemingly impregnable Italian fortress was conquered, though it needed a penalty shoot out to seal the deal.

Without a doubt Spain were a class apart as they played attacking one touch football. The tournament saw the rise of new stars, Spain's David Villa and Fernando Torres taking the cake while German Bastian Schweinstiger enhanced his reputation a great deal. Inevitably, Spain head FIFA's world ranking which were issued post Euro 2008, the Germans and the Dutch too made signifcant gains in terms of places.

Too bad the tourney ended so quickly, but for us football fans there's always some action on offer. The qualifiers for the World Cup 2010 and the commencement of the national leagues in Europe should provide some real thrilling moments ahead.

How long will it be before the clouds clear?

This is a question upper most in every investor's mind as the global financial markets witness a tumultous ride. The problems which began with the US housing market seemingly have spread to other asset classes and countries. Plunging equity markets, commodities hitting the roof, weakening currencies and high inflation have all impacted investor sentiment adversely.Though risk aversion witnessed in the early part of the year has subsided, the overwhelming emotion which still rules markets is fear. The aggressive approach adopted by the Federal Reserve to prevent the US economy from slowing drastically has seen the Dollar plunging to lifetime lows against other currencies most notably the Euro. Clearly the problem of economic growth wasnt restricted to the US alone, it has become a global phenomenon.


The Emerging markets were hit the hardest as they were the biggest beneficiaries of fund inflows. India and China are two prime examples, the equity markets in both countries have seen sharp corrections after having seen a tremendous rally over the past couple of years. The Latin American economies have withstood the bearish sentiment primarily owing to the rally in commodities. Countries like Brazil, Argentina, Mexico, Peru, Chile are exporters of several commodities. The Brazilian index has hit new lifetime highs, most currencies in the region are strengthening overall the sentiment seems extremely gung ho. However a pause in the commodities rally has the potential of seeing growth in the Latam economies slowing down significantly. The Euro zone also seems to be grappling with galloping inflation at present, recent releases of economic data have pointed to signs of a slowdown in several member countries of the EU.A sustained spell of economic weakness could be around the corner.

Some developments worth a mention include
-The world's biggest banks writing down $ 400 billion-Three of the largest central banks namely the Federal Reserve, the European Central Bank and the Bank of England injecting huge amounts of cash into the banking system
-The Federal Reserve opening its discount window to Investment banks to ensure availability of funds,an unprecedented first.

Given all these signs, the situation does indeed look alarming. Doomsday theorists have been having a field day, but there's light at the end of every tunnel. Its the journey to the end of the tunnel which can be really painful and needs loads of patience. Investors should look at the present picture in the bigger scheme of things and remember several markets are witnessing "corrections" after exponential spells of growth. Investors who thought the markets were an easy place to make money have been taught a very costly lesson. The problems being witnessed in the global markets are likely to continue in the near term, particularly if problems with mononline insurers intensify. A bailout of two of the largest bond insurers by a consortium of banks pointed to problems in the insurance industry. Clearly the problems have not disappeared and could resurface.

Unfortunately the dark clouds over the financial markets are unlikely to dissipate in the near term, if getting the direction right in markets is difficult, timing the markets is almost impossible. Volatility is likely to remain high, staying on the sidelines and waiting for clearer skies would be the best bet in such times. As the old saying goes, a bird in the hand is worth two in the bush!!