A blip in the uptrend....or the harbinger of the real crash?

Global equity markets have been in a tailspin over the past week, led by the developed markets and the emerging markets following suit. The seemingly complacent view of the world economy having put the recession behind has been shaken, and how!! Question marks have begun to emerge on the sustainability of the economic recovery, especially given the fact some central banks across the globe have now started thinking of measures of withdrawing the stimuli infused in 2008.

And that is precisely where the problem lies. The seemingly strong "recovery" in financial markets from March 2009 to present has been fuelled by a gush of liquidity from central banks. The concerted actions by global central banks helped avert a total collapse in the global economy, but might have laid the foundation for the next shake up. Noted investment stalwarts like George Soros and economists like Nouriel Roubini dubbed " Dr Doom" for his prediction of the global crisis of 2007 have said global financial markets have run up too much too soon. What is remarkable about the rally is almost all asset classes most notably commodities, equities and foreign exchange have all run up at the same time. Seldom is this kind of run sustainable.

News on the economic front though better than earlier, is far from making a person ga-ga. Authorities in the US reportedly seized 9 banks in a single day on October 31st, the most since the crisis began in 2007. The US economic system still seems to be struggling if macro numbers are anything to go by. Unemployment remains high, the housing market still suffers from a huge inventory hangover, foreclosures remain at stratospherically high levels. In fact it is now being said the next wave of foreclosures could be in prime loans, a scenario likely to fan out in 2010.

What next for the stock markets now? Technical analysis already suggests this is just the beginning of a major fall, not the major fall. I would not be surprised if most of the stock markets retrace a major portion of the gains made over the past six months. Stock markets like most other asset classes now look like a sell on rallies rather than a buy on dips. The US Dollar, which has been beaten down massively while most asset classes have rallied gives a feeling of deja vu as in January 2008, a big rally could be underway in the greenback. Though the rally might have just begun, the next leg of the move is likely to come as Dollar bears scramble to cover their shorts.

We are at interesting crossroads, remains to be seen how markets behave from here. For me personally, its the defensive approach. Sell stocks move into cash and wait for better entry levels. Though i guess entry levels are about 6 months away atleast, i continue to watch market movements with a great deal of intrigue.

Are the good times back again?

Its been such a long time that i updated my blog....but the numerous twists taken by financial markets especially stocks have held me in intrigue, like almost all of my brethren analysts. The gloomy and dull period that was 2008 seems like a distant memory now, saying it has faded into oblivion would be an exaggeration.

The performance of global equity markets over the past 6 months since March 6th to be precise, has been all but astonishing, bewildering, astounding (might run out of adjectives here!) No wonder us analysts are in a conundrum whether the recovery in equity markets is a precursor of a recovery in the real economy? This is because stocks trade on expectations while actual grass root developments take place subsequently.

In my view, the present rally can be attributed to massive amounts of liquidity pumped into the global economy by several central banks acting in concert. True, the central banks succeeded in stemming the evident rot in the system during 2008 or did they? Another central theme behind the present rally has been a weakening US Dollar, de facto the world's reserve currency. Is a weaker currency bad for a country?? Not necessarily, a weaker US Dollar helped finance the US trade deficit and also helped lower the deficit by making imports cheaper.

The real economy remains far from a recovery, which can be highlighted by economic data. Unquestionably one of the most significant indicators is the employment number. It seems staggering that the US stock markets have risen about 60% since March '09 even as unemployment has risen to 9.8% the highest since 1983 while employers shed 263000 jobs in September.

Reports of banks increasing mortgage durations to dissuade delinquencies are distorting the real picture. Mortgages still remain a ticking time bomb, commercial real estate and credit cards could be two potential problem areas going ahead. It also remains to be seen whether a withdrawal of fiscal stimuli by central banks impacts market sentiment. A statement by Fed Chairman Ben Bernanke of tightening when the economy recovers, spooked markets particularly commodities.

And what about the Dollar? The sheer unanimity in expecting a weaker US Dollar does not augur well at all. The last time such a thing had happened was in Q4 2007, after which the Dollar rallied sharply through most of 2008. Are we in for an encore...time will tell. In the meanwhile, like most investors i am taking advantage of the opportunity markets have given all of us to smile. Whether the smile remains or turns back into a frown is uncertain... i rather hope not!

Has the sun finally risen on the global economy?

Its obvious this question must have arisen in a lot of investors minds, especially considering the way most asset class prices have rallied over the past 3-6 months. Is the sub prime crisis and its spillover effects well and truly behind us? I do not believe that's the case, atleast not yet.

To put things in perspective, its the fact that things are getting "terrible" from a "disastrous" state 9-12 months ago. Which means there still exists scope for pain ahead in global financial markets. It also needs to be remembered, the huge gush of liquidity brought in by several central banks might already be setting the stage for the next bubble. However, we could be a few years away yet from the formation of a new bubble.

The problem areas still remain strewn over different geographies and asset classes. In terms of geographies, the UK and Eastern Europe come to mind. Debt and mortgage levels remain high across both regions, Eastern Europe had been in particular focus due to problems with the Latvian economy. The US housing market still faces high inventory levels notwithstanding the recent positive numbers. Currencies also seem to indicate low confidence in the present rally, which is illustrated by the lack of upside momentum against the US Dollar.

Another important charachteristic of this rally has been this has been driven by "expectations". What happens should these expectations be disappointed? It is notable to state almost all asset classes i.e stocks, bonds, currencies, commodities have all rallied at the same time. Such rallies do tend to shake the belief of the most seasoned investors who have a defensive approach, let alone a guy like me who is still on the learning curve.

Adopting contrarian positions in such times is likely to be extremely rewarding, albeit there could be some amount of pain in the short term. Examples could be taking profit in equities and buying the US Dollar. Its almost a consensus view that the US Dollar is likely to weaken, even a slight strengthening of the US Dollar in the event of any new crisis is likely to send the cat amongst the pigeons. Though its difficult to pinpoint what the new crisis might be, a crisis of confidence in government debt (of Eastern European countries for e.g.) or even a currency crisis does not seem far fetched. Noted investor Jim Rogers believes the world is likely to see a currency crisis sometime in the near future.

So what would i be doing? Well, all a small investor like me can do is take profits on equities, wait and watch. The dawn might be here, but we are some way away from the sunrise as yet!

Watta damp squib!!!

That was the reaction i had after listening to the Finance Minister's budget speech.Even as the speech was only halfway through, i had the feeling markets would sell off. And even at this moment, the benchmark indices have shown a big thumbs down to the budget the Nifty down 209 points and the BSE Sensex down 700 points.

The budget was a reality check for investors who thought big bang reforms were almost a certainty, given the thumping majority for the UPA in the general elections. What caused the sell off?? The primary reason in my view is a lack of action on two major areas 1) Infrastructure spending 2) Disinvestment. It was expected infrastructure spending would be upped significantly, though there was an announcement of increased spending it did not have the tone markets were expecting. Disinvestment was by far the biggest disappointment. The fiscal deficit is also expected to be higher than was anticipated by the markets. Foreign direct investment and the lack of clarity on the fuel pricing mechanism were also significant negatives.

I am not surprised if we see the Indian market cracking further under the weight of selling pressure, especially from FII's. What was touted as a dream budget, turned out to be a nightmare on account of inaction, well almost!! Needless to say investors who were shouting from roof tops on the renewed potential in India are likely to have a relook at their stance. Clearly the market had run ahead of itself in amassing expectations, there was a risk even a small deviation from expectations would result in a sharp knee jerk reaction. And this seems to have materialized. It needs to be remembered the Indian story is still intact, the short term weakness is a readjustment to reality.

What next from here? I expect the Indian market to possibly undergo a re-rating, even slight de-rating in the short term as brokerages review their "outrageously" bullish outlooks in the post budget scenario. Banks and infrastructure are two sectors which look vulnerable to me in the short term, especially after having witnessed sharp run ups over the past few months.

Global markets pose another significant risk to the market performance going ahead. True, the global risk always persisted somehow the domestic market performance was somewhat oblivious to international markets given a strong emphasis on India being a "domestic demand" driven economy. This hypothesis will surely be tested over the next 9-12 months. Meanwhile, the best thing to do for now is to wait and watch how the market behaves after the initial reaction which might last about 4-5 days.

Are the Developing markets the saviours for the global economy?

The developing markets were considered the poor cousins of the developed economies. However with the passage of time it was realized these countries had the potential to provide a fresh impetus to economic growth in world markets. The allure of these countries was further enhanced when economists from Goldman Sachs coined the term BRICS (Brazil, Russia, India and China).These countries had all the right ingredients-huge populations, rising income levels and low penetration of necessary services like banking which made them attractive investment avenues.

The potential of these markets was further magnified when noted fund managers like Jim Rogers and Mark Mobius, the "Indiana Jones" of the financial markets stressed the return potential offered by these markets to foreign investors. The emerging markets have well and truly picked up the baton of economic growth from the developed world and gone on from strength to strength. The pace of growth in these economies has been stunning, using an adjective like "bewildering" to also describe the pace of economic growth is not entirely misplaced.

A recent report released by the World Bank confirmed what most people in the investment fraternity have believed for long. World Bank estimates show a big dichotomy in growth expectations, which can be seen by the following table:








Its no wonder the top performing equity markets globally are the emerging markets. This can be attributed to expectations of these countries filling in for slumping demand from the developed world and helping the global economy extricate itself from possibly the sharpest slump in economic activity since World War II. The following table shows year to date performance of equity markets across different regions:














Source: Bloomberg, as of June 25 2009


However it is very easy to get carried away and extrapolate the growth prospects for these economies. One needs to be a bit more circumspect when evaluating returns potential. The BRIC countries have had their share of problems for example India grapples with a high fiscal deficit and is vulnerable to any spike in commodity prices, most notably crude oil. Uncertainty over the monsoon could slightly dampen expectations, it remains to be seen how the situation evolves over the next month or so. The latest move to bailout Air India could further widen the fiscal deficit. India can ill afford largesse like these.

The emerging markets hold tremendous growth potential and should continue to provide traction to the wheels of the global economy in the future.

Is it a new dawn for the global economy?

Well this question has been one which has the analysts community split right down the middle. I belong to the camp which believes there are still lower lows waiting to be hit across the spectrum of asset classes, be it stocks or commodities. The recent rally has made the sceptics camp look dumb, as a gush of liquidity led to a rocketting of prices across asset classes.

Are we really on the cusp of a rekindling of the growth story in the global economy? I think its too early to tow that line of thought. Albeit its emergin market economies have witnessed stellar runs, supported by enhanced liquidity and expectations of economies like India and China being the growth engines for the global economy. The fact that developed world economies like the US and the Euro zone are still plauged with problems tends to get overlooked. The US still faces the problems of a huge deficit, while the Euro zone is likely to encounter stress from problems emanating from its banking system.

Clearly, the basis for the present rally across asset classes has been injections of massive liquidity. Several global economies have witnessed stimuli from governments in one form or the other, which has helped arrest the decay in economic activity. The sustainability of the present rally remains questionable.

True the emerging markets have been at the forefront of this rally, but they still have their own vulnerabilities. Lets take the case of China and India. Though the dragon has well and truly stirred, China remains an export oriented economy. A significant share of its export trade is with the US, a cooling off in demand could lead to a slowdown in the chinese financial system. The Indian case is interesting, as the allure of the country has increased manifold after the thumping win for the Congress led alliance in the recent general elections. Its very easy to extrapolate expectations and re-rate asset classes. The Indian story looks to have seen a sustainably positive turn, however the rating of markets has been devoid of sanity as too much has been discounted too soon.

In my view, we could be on the verge of shocks. Markets have a tendency to surprise on the opposite side, much to the chagrin of investors. An example here can be the US Dollar. The whole world had a unanimously bearish view at the beginning of 2008, and what did the greenback do? It rose sharply through the year. Are we in for a dejavu? A couple of other indicators point to this too. Risk aversion which is represented by the VIX index looks to be in the process of forming a bottom. A sustained rise in the VIX is dangerous for stocks and commodities due to an inverse correlation. The Japanese Yen, another safe haven instrument in turbulent times could appreciate further and retest the low set at 86-87. The Dow Jones Index has been unable to convincingly breach key resistance levels, which suggests investors are cautious.

Where do we go from here? I believe stocks and commodities could retest their lows and even go lower from there. To cite an example of Crude Oil, i believe crude oil should test between USD 76-78 and then start falling. Purely on a technical basis, a new low could be in the offing. Or would it? Only time will tell....

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.