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.