First Phase of the Downtrend is Over?

Till some times back, every thing looked all right. Stock markets were scaling new highs. Real Estate prices were hitting the sky. Employees were enjoying hefty bonuses and huge pay hikes. India was talking about double-digit growth.

Whatever happened then looks like a dream now because of the Subprime crisis and the consequent global recession.

Since then, stock indices have crashed out. Metals have plunged down. Real Estate prices have been brought down to earth. Multinational (Investment) Banks went bankrupt. Jobs are being lost. Governments are supporting the Banks by providing capital. Central Banks are cutting interest rates drastically and pumping in billions of dollars into the system to ease out liquidity crisis.

As of now, panic level has come down in the financial markets, which appear to be finding a bottom for the time being. Dollars are more freely available in the international markets and LIBOR level has come down significantly.

Experts feel that the first phase of the downtrend is over for the time being. The second phase will be impacting more on the economies rather than the financial markets.

Second phase of the downtrend may witness the bankruptcy (i.e. not able to service the Debt and support the imports) of countries like Argentina, Hungary and Pakistan. IMF has already stepped in to save these countries. Global economy will be slowing down in the immediate future.

Now let us review our markets.

Week that was

As we expected, there was a sharp rally in the in the equity market for the first two days supported by cutting of interest rates by the central banks across the globe and FII inflows. However with the global markets turnig negative after the US elections were over and our weekly Inflation (10.72%) being much higher than the market expectations, Sensex was not able to cross the resistance level of 10750 points decisively. Huge sell off was then witnessed taking the index back to 9600 levels. Still, Friday’s small rally of 230 points helped the Sensex to close positive for the second week in a row. The positive news for the week was the return of FII flows into our markets. Bad news is that the series of economic data released in USA confirmed that USA is grip of recession.

Rupee rallied against US Dollar after hitting a historic low of 50.15 levels in the previous week. However the bad news is that the Forex Reserves of the country dipped by another $5.5 billion for the week ended 30.10.2008.

Week Ahead

As we mentioned earlier, the panic level has come down and there is some sort of stability returning to the markets across the globe.

Arrest of FII outflows and rather some inflows into our markets too have improved the underlying sentiments

Technically, Sensex can again rise to the levels of 10800 points breaking which it may move towards 11800 points. Only precondition is that it should hold above 9600 points and in case of any fall below that level it may retest 8900 levels once again.

Traders are suggested to take position according to the global movements however with strict stop losses.

Investors are suggested to buy some blue chip stocks and public sector banks with a 3-5 years time horizon at fall, as there is limited down side from here onwards.

Rupee may consolidate around these levels as (already mentioned) there is easing of dollar demand in the international markets.

Have a nice week ahead.

Interest Rate Cuts are in the Interest of the Nation?

Nowadays, RBI’s moves have become more predictable which appear to be just following the signals from the finance ministry. There has been a cut of 3.50% in CRR (the money, banks have to keep with RBI in cash), 1.50% in Repo Rate (the rate at which Banks borrow from the Central Bank) and 1.00% cut in SLR (the money, banks have to keep in statutory liquid assets) in the last few weeks alone.

Let us discuss hereunder whether these monetary measures can actually help the country in coming out of its economic slow down blues or these measures are simple paracetemol doses given to cure (tranquil) the cancerous diseases.

First of all, let us understand the economic problems that we are going to face in the near future because of the (current) global recession.

Ø There will be a fall in demand across the globe and our exports may be hit. BPO and BFSI segments of our IT sector may also be hit.
Ø Rising of new capital funds by our corporate will become more difficult in the absence of vibrant stock markets and FII inflows (Capital formation is key to sustain growth of any developing country).
Ø Business confidence will come down because of fall in demand and difficulties in rising funds. New businesses as well as expansion of existing business may not take off in large scale. In fact, there are possibilities of downsizing/closure of many existing business units leading to job losses.
Ø Real Estate Sector will be affected because of lack of demand and Lifestyle Sector will also be affected, as the consumers may prefer to cut down their expenditures in uncertain times.

Coming back to the monetary measures as discussed in the first paragraph, pumping money into the system may not help by itself to improve the economic conditions like similar measures (not addressing to the core problem) failed in US. Throwing money into the problem is like adding fuel to the fire.

No corporate will come forward to put additional money (by borrowing) in to their businesses if they find investment is not going to be profitable because of the expected fall in demand. Also, commercial banks may not lend if they find that projects are not viable even if their margins are good. As the Money growth (M3) is already at very high levels, cutting interest rates may make it more difficult to contain inflation in the immediate future.

To sum up, the real problem of today is not the scarcity of money but the risk appetite among the investors because of the lack of confidence in the growth of the country.

On the other hand, there are certain positive factors for India rising out of the current global recessionary environment.

Ø India is basically an import-oriented country. Our growth is more of consumption oriented rather than export oriented like China. When there is a recession across the globe the price of basic goods such as oil, cement, steel and other metals will come down helping the country to reduce its import bill and indulge in more infrastructure building measures at lower cost.
Ø In case of cost cutting measures of businesses across the world, there is a possibility of more BPO business flowing to India. Indian industry can conquer new frontiers if they are able to come out with innovative products (like Nano Car) with high cost efficiency.

Further, there has been a huge economic imbalance created in the last eight years of our economic growth. Few sections of the society have been benefited much more than the masses of the country. Now we have a (forced) breathing time to think about taking the growth to the masses also.

It is the right time for the Indian government to come forward and increase its investment expenditure particularly in the infrastructure, public health, public utilities and primary education sectors, which will benefit both the masses and the industry. Further right mix of prudent monetary and fiscal measures can help us to come out of the difficult times.

Subprime Crisis - An Indian Perspective- Part II

Last week, our stock market suffered one of its worst ever weekly losses.

Investors/traders’ confidence is in shambles now.

Is it a Beginning of an End or End of a Beginning?

Main reasons for such a drastic fall are as under.

Ø Collapse of American Investment Banks.
Ø Delay in passing the “Rescue Bill” by the American Congress.
Ø Sell-off by US Investment Banks in Indian markets.
Ø Nuked Banks coming in the way of approval of Nuclear Deal by the American Congress.

Now, we are in a “Make or Break” situation.

Sensex is very close to its crucial lifeline of 12500 points and it is quite likely that the levels may be tested once again.

Now, the important question is, whether the support line will hold for the third time (in the recent past). Any fall below this line may take the Sensex even to four digit numbers.

Immediate outlook for our market is grim and there are unanswered questions how many more US banks are going to fail in the immediate future and how much more money is going to move out of India. Effectiveness of the rescue measures is also doubtful.

Traders are requested to monitor the market closely and initiate action only, in case, the said support line is firmly held or a positive trigger from US (Both on rescue bill and nuclear deal)

Cements, Infrastructure, Capital Goods and Power stocks will be in demand, in case of approval of Nuclear Bill.

Dalal Street is now looking at Wall Street (which is already in shambles) for further direction.

At the same time, we should remember one thing.

We should not confuse between the impact of collapse of US Investment Banks on our markets and the same on our economy.

Indian economy is not much dependent on USA like our stock market.

Our economic growth is more consumption oriented than being an export (particularly to US) oriented. In fact, fall in US demands will help us in containing our import bill as the prices of crude and other basic goods will come down.

Indian growth is more visible now than ever.

Friends are hereby requested to look at our countryside for the visibility of growth rather than looking only at cities like Mumbai and Bangalore.

Indians are now importing Audi like cars whereas western countries are getting ready to import Maruti (Alto New version) cars from India. This fact should give a lot of confidence upon ourselves.

Changing demography in India has resulted in more Indians thinking how to grow or how to make money. Traditional way of content-life style is not there now.


India will continue to grow, even though, the growth rate may slow down by some extent.

Still, India will be the one among very few countries to have growth in times of a global slow down.

At the same, major threats for our economy will be

Rising Inflation
High Interest Rates
Terrorism
Infrastructure Bottlenecks
Energy Shortage

Solving of these problems should be a priority for us rather than looking at American problems.


I am of the personal view that Investors may now look for picking some stocks of high quality companies , which can withstand the (likely to be) turbulent times in the (for at least) next two years.

There is a saying. “When tide recedes, one can see who is nude and who is not.”

I would also like to suggest investors to pick such high quality stocks, over a period of time and not at one time, to minimize the price risk.

Even though, gold prices may go up in the short run because of the uncertainty/negative trends in equity markets, gold is not considered as a very long-term investment call. Once US economy, rebounds gold may loss its shine.

However, a portion of investment portfolio can be allocated to Gold investments to moderate the portfolio risk.


Rupee faces strong resistance at 47 levels and there have been RBI interventions in the market in support of Rupee. As I already mentioned, Government may not be comfortable above 47 levels and there may be relaxation of ECB/FCCB/FCNR Deposits rules to bring in more dollars. Or, there may be relaxation in exports norms or tighening of import norms.

I would like to conclude that while investing in India, one has to concentrate on its own economic issues rather than looking at others. Let us concentrate on our Indian Companies where our hard earned money is going to be invested.

Let us stop worrying for others as we have our own tasks.



Wish you happy investment times.

Laymen Brothers versus Lehman Brothers

The entire world is now talking about the Lehman Brothers Inc., which is the latest American Bank to fail. Experts are now discussing how the bank, which boasts itself the cream employees from world best universities, could have failed.

Let, the experts discuss about the Lehman Brothers and the laymen like us may discuss the story of the “Layman” Brothers who have also failed recently in our Indian markets. Layman is nothing but the person who lives in the heart and soul of every retail investor of India. The “Layman” comes out as a new “Avatar” just before the market is going to peak out. His brother is “Expert” who lives in the brains of Analysts (both Indian and Foreign), Panelists, Investment Bankers and News Papers/ News Channels. This is the story of the latest “Avatar” of “Layman”

Original Lehman Brothers

Our own Layman Brothers



The story of Layman Brothers

Once upon a time, a ‘Layman’ lived in India. He was following the stock market for quite some time without having invested in it. He wanted to earn from the stock market boom but always having fears of losing.

One fine day (early 2007) he decided to seek the help of his brother who is an ‘Expert’ and a living encyclopedia.



That point of time, entire world was discussing about “Yen Carry Trade” and so the Expert too. He explained Layman in detail about the vicious cycle of funds flow from one part of the world to another part and winding up of such fund flow is dangerous to Indian markets. He further asked the Layman to closely track the JPY-USD trade. Simple funda: If JPY appreciates our market will fall and vice versa. Layman was just wondering why he should not track INR-USD. But he didn’t ask because the person who told him to track was an “Expert”



Also came in, Subprime crisis. Mr. Alan Greenspan warned the world about the Subprime Crisis. Expert started analyzing the Balance Sheets of NYSE (New York Stock Exchange) listed Companies forgetting our own NSE listed Companies. Expert explained the Layman in detail about Securitization CDO, MBS, ARM, Credit Squeeze, Monoline Insurance, etc and etc. He also told that entire world would have problems because of housing crisis in US. Layman did not understand much about the terminology given by the Expert and whatever he knew was just that the tiny piece of land he had bought near his “Halli” was having good appreciation on paper within a short period of time from his purchase.He was wondering whether Subprime crisis would impact the paper appreciation of his tiny landholding. Layman started reading high-end financial magazines and tried to learn how to escape from such crisis. He could find no answer. Still, he was happy that he was too becoming a market player.

Till that point of time, Layman had not started to invest in equity markets. Expert was always telling bad things about the Indian market. He had given multiple reasons. EPS, P/E, Historical P/E, Comparison between BRIC countries (India was the costliest market then), infrastructure bottlenecks, political weaknesses etc and etc. Layman started wondering whether he could ever make any investment in the Stock Market, which never stayed at lower levels for longer period of time that was enough to make any investment decision.



Suddenly one fine morning (August 2007), Layman got a tip from a “taxiwala” about a fundamentally strong penny stock, which could give many folds returns. This time Layman ignored Expert's advice and invested a small amount himself on an experimental basis. From the next day onwards, the stock was always on upper circuits, Our Layman got excited and started looking for tips from every corner. He was also passing the tips to other laymen as well as to our own Expert. This point of time (December 2007) our market was firing on all cylinders whereas western markets were crumbling down because of Subprime crisis.



Now, Expert had to give up his own inertia and he had to concur with our Layman. He told Layman. “No need to worry. Subprime Crisis means cutting of interest rates in US, which will increase fund flows to India and take the markets further up”. Layman continued to invest on tips.

Expert had also devised a new “Decoupling Theory”. India is long-term story. Indian market is a structural bull market. India will become a developed country by 2050 (Layman started wondering what would be his age by then if at all he be alive then). Expert applied various technical and fundamental studies to discover that Sensex would reach 54321.09 points by 12.March.2045.

Every day, Expert discovered new hidden gems from small and midcap sector and termed them as multi-baggers. (For a brief period, Layman also became an Expert himself and started discovering hidden gems on his own).
There is a different story, which tells Layman became a multi-beggar after having invested in such multi-baggers. Expert analyzed the saving pattern of Layman and found that the equities form lesser part. Expert told Layman to invest 80 minus Layman’s age percentage of his savings in equities. Layman was now die hard to increase his equity holdings to maximum possible level. Never mind to borrow and invest.

Decoupling gone. Coupling came. Our markets started tumbling down (late January 2008). Initial Reaction from Expert was that the correction was due to some technical problems (margin issues and liquidity crunch due to Reliance Power IPO) and strong Indian fundamentals remain the same. Layman was complaining that he was not allowed to buy any stock, which he liked, and also available at damn cheap price because of technical snag happened at the broker terminals and stock exchanges. After the technical snag is over, Layman started to pick the stocks at damn cheap prices (10-20% lower than the peak levels). He was happy that he was entering the market at the right time and right levels. He started dreaming what he would do with the returns going to be generated in the next few years. For some time, he was in heaven.

Bear Stern came then (March 2008). Market crashed and the stocks crumbled. But Layman was unperturbed. Layman was wondering he should have more money to pick the stocks, which became further cheap. It was Expert’s turn to advise Layman to closely follow global market trends. Layman started gluing to News Channels throughout the day and night. Layman used to get up from bed with Nikkei in the early morning, have coffee with Kospi and read newspapers with Hong Seng. Layman had lunch with European markets and dinner with US markets.

Then came again decoupling but again on the wrong side. Global markets became stable whereas we continued to tumble down. Now it is the Expert’s turn to discover that FIIs are going out of India and entering into producer countries such as Brazil, Russia etc.

Along with earlier woes came, Inflation worries. For some time Expert was maintaining that inflation is going up because of “Base Effect”. Suddenly Inflation numbers jumped into double figures.


Expert visited vegetable shops, groceries and other stores and discovered that prices had already gone up.

American experts went one step ahead and said that the commodity prices went up (internationally) because Indians were eating more.

Expert declared that this was only a supply side problem and nothing to do with the demand side. Government has to remove the infrastructure bottlenecks and there was no need for increase in the interest rates. Layman too believed Expert’s thesis.

Federal Reserve Cut rates whereas RBI increased rates. Layman was clueless.

Expert maintained that Indian inflation is a supply side problem and asked the Layman to follow monsoon data that too for the “Agriculturally important states like Maharashtra, Andhra Pradesh and Karnataka”. Laymen started following weather reports.
As a result Layman went with Rain Coat and Umbrella on sunny days and without any protection on rainy days. Layman caught “cold and cough” and got a name “idiot” from his wife and other friends.

In the mean time, Layman was confused by the various government authorities giving different dates (right from October 2008 to March 2009) on which the double-digit inflation would become a single digit inflation. Interest rates hardened. He was wondering for the first time about the cost of funds involved in holding the investments, which have already depreciated by over 70-80%. Expert did not lose his heart. He maintained that Equities were best asset class in the times of inflation.



Expert later discovered that Indian inflation is”Imported Inflation” as International Oil prices are the main culprits for Indian inflation. Layman started wondering how it is so, as the Indian Government is not passing much of the international price rise to Indian customers. Even at this point of time, Layman dare not question Expert’s wisdom.

Many things happened in between, 1-2-3 agreement, survival of the trust vote of the central government, derivative woes of Indian Corporate, NSG approval of Indo-US Nuclear Deal, US Banks getting closed, IIP data, CPI , WPI, P-Notes etc and etc. Layman became a master of all and jack of none.

For every rise of 200 points (Sensex), Expert gave new targets 18,000, 20,000 and 25,000. For every fall of 200 points, Expert gave targets 13,000, 12,000 and even 9,000. Layman had not worked this much mathematics even in his school days. Layman started to sleep with a calculator.

On the global side too, Expert had earlier told Dollar was weakening against Euro and other major currencies because of slowing down of US economy. Now the same Expert has started telling Europe slow down is worse than USA and hence US Dollar strengthens against other currencies.

IT companies derive major part of their income from US and other western countries in terms of Dollars. Expert advised Layman to buy IT stocks as Rupee is weakening against Dollar. Later Layman found where is the question of more rupees when there is no Dollar to come in as there is an overall global weakness. Now it is Expert turn to discover the same and tell to sell IT stocks. Layman is wondering now whether to Buy Low Sell High or to Buy High and Sell Low.

Expert told commodities have a life cycle of 15 years, which has started only 3 years back. Still a lot more remains. Gold mines had been closed. No fresh oil discovery since forty years. No major mine discovery for coal, steel and non ferrous metals. Layman invested gold when it was at $1000 per ounce, which reversed to sub $800 levels in no time. Oil came back to sub $100 per barrel. Expert then declared that commodity price fall was good for India as it is a consumer/importer country. Hence, Stock Market should go up only.

Nothing has worked so far in favor of Layman’s adventure into stock markets. For every inch rise, there is a foot fall. To add his woes Subprime Crisis resurfaced and Lehman Brothers failed. Expert immediately revisited the Subprime crisis as the Lehman Brothers’ fall became an issue.Our market started crashing down once again. Expert's latest discovery is that our market is falling as Lehman Brothers are selling in the market.

But, Layman is not having any clue. He has started wondering whether there will be any take over bid for his own investments, from US Treasury Department as it did for Freddie and Fannie. . Now Layman is in a big dilemma whether he could ever sell his stocks in the market with a profit.

However, Expert continues to live happily as ever giving new definitions and discoveries for every rise and fall.

Happy Ending

Now it is left to the Reader to decide what's right and what's wrong with Layman Brothers and Lehman Brothers.