Taming of the BULL-Crash of 21 Jan 2008

[uasish]

Devilal (when he was deputy PM) only started this Loan Waiver,Monmohan repeated,hence future PM / FM may continue.

 

[pkjha30]

It was long in coming. Much anticipated correction since October 2007.

The crash during october 2007 actually did not happen. That was a side show to get retail investors lulled into believing that market can bravely take a hit and move up easily. As always last rung of current uptrend is signaled by a flurry of cheap mid cap or upcoming stocks.They rush in to invest and and find most stocks are over priced and try to find some thing that suits their budget no matter what FA/TA says.

The current crash truly signifies a CRASH and market will be in for a long haul to repair the damages resulting from it.

Currently both sensex and nifty is hovering around their 200EMA mark which was pointed out earlier on in my thread of Crash and FII activities (17.5.2008).

That time market was around 17K and EMA was 12500 or so for sensex and proportionately for nifty.

Now EMA200=5068. Nifty has already come to this level. So if it does not bounce back from this level withing a month and break above EMA 100 ( 5567), market will be in for trouble on long term basis.The breakout has to happen on sustained strong volumes. The weakness will persist for months in midcap and small caps.

1.FIIs have been largely net sellers during this month. Since 14th Jan they are huge sellers as usual.
2. Govt has permitted them to short sell so they may be gaining hugely on both ways. Their hold on market will be still stronger and can take it where ever they want to.
3. No of tip giving threads had increased in this forum, of late.

However there is a note of optimism here with a word of caution.
(what is written below is purely speculative and may not have bearings on market in abnormal situations such as bear trend being confirmed.)

FIIs and their bankers have burned heavily in USA sub prime crash. Before closure of FY08 they are milking the cash cow to straighten their Books.
But it may not be killed off. So For the time being there is no option for the market but to go up and it will achieve its stated target of 25000 or above by year end.

Budget is due in February 2008 and it will take note of the situation. Indian companies will have good news so watch finance ministry and Chidambram very carefully.It will help.

Fundamentally strong companies will always bounce back early. So watch out for your favorite stocks.
Long term investors will benefit most from the crash as they might loose some profit(if not booked partially) but gains will be more.

2009 is an election year so we will have to face uncertain times in 2009.

Indian economy will perform better and hence market may go up.

In fact I see the scope of growth in the countries like India China Russia and so called emerging markets by sheer weight of population.

In sum this crash has come at a good time, when there is scope of good news flow in future and hence fast recovery. So it is an opportunity for long term investors to get into action and search for good quality stocks.

After all FOOLS who buy early are relatively wise .

Remember, Jallikattu( Bull Taming Game in Tamilnadu) is held every year. That means there has to be a BULL that needs to be tamed ( and every year)

Pankaj

There are some points which seems more probable and some appear offtrack. Especially about" good news flow" and "Indian economy will perform better"
seems , now more unlikely given the squeeze in money supply and inflation, Thanks largely to galloping crude prices. Elections are another worry. Nuclear deal will takes its own time denting Indian credibility.Stagflation is staring in our face.

I expected better on some of these fronts. But Twin elections may not let that happen.

On other points it seems Market failed to consolidate at and around 15000 and so it has taken nosedive to 12500 as anticipated. I feel it has potential to go upto 10000 to 11000 levels. Uncertainty on political front , crude price, sub prime crisis, credit crunch, slow down in industrial growth, slowdown in demands due to less money supply,mostly M3, fiscal and revenue deficit, balance of payment problem, high import bill due to surging dollar.

and so on....

It would be too optimistic to say Market will achieve 25000 level as we are in a period of doldrums. Yet , though not by March 2009 but by second qrts sensex may yet climb another peak. But every climb is taking longer and harder to achieve. That in itself tell something to us.That is , for investors, go for fundamentally or funnymentally good scrips.

FIIs have not yet turned positive. But rest assured that they are going to turn back once we come to those investing levels.

So brace for it and stay on sidelines watching action.

pk

ps (Doldrums are the areas in Oceans where there is no Winds and so Sailing Ships found it difficult to sail through them. As you may be knowing in ancient times ships were powered by sails using winds till Riman Galleon and spanish Armada came along. and subsequently Motorised Ships were used)

 

[pkjha30]

Hi

Looks like we are in for a long wait. Let us see what FII s are doing in India.
Here are some data compiled from SEBI

Year 2008 FII Equity Data

Month -- Buy -- Sell -- Net
January -- 103678.20 -- 116713.90 -- (13035.70)
February -- 70121.00 -- 67858.30 -- 2262.60
March -- 67923.50 -- 67939.80 -- (16.10)
April -- 62516.00 -- 61441.00 -- 1074.80
May -- 58813.70 -- 63825.20 -- (5011.50)
June --- 62840.80 -- 72936.70 -- (10095.80)
July -- 63563.30 -- 65400.40 -- (1836.80)
August -- 47560.20 -- 48771.90 --(1211.70)
September -- 66496.20 -- 74774.80 -- (8278.10)
October -- 8958.20 -- 10203.90 -- (1245.70)

Total for 2008 -- 619362.10 --657399.80 -- (38037.70)

Grand Total till October 06, 2008 -- 2763678.60 -- 2518248.00 -- 245430.70


Total for December 2006 -- 42270.30 -- 45937.60 -- (3667.40)

Total for Year 2006 -- 475622.50 -- 439082.80 -- 36539.70

Grand Total till December 29, 2006 -- 1329439.50 -- 1117457.60 -- 211981.90

As you would have noticed that FIIs have been steadily taking money out of India. During 2006 they had turned positive by July. But in 2008 , even by this time they are still in negative on Yearly basis. They have taken out 38037 Crores on Rupees from India in year 2008. On a grand total basis if you see FII are still net positive and their investment has shown growth from year 2006( and even earlier). Why I take 2006 as benchmark is due to fact that it was first big jolt to Indian Market. However , the difference this time is that USA, where most of FIIs are based , is in the grip of severe shock. As many companies are failing or filing for bankruptcy or being rescued, , FIIs are trying to stem their total rout by pulling out monies from emerging markets to meet their requirement. Since USA administration is also facing election any recovery would take place only after January, when New President takes over. Americans have always found an easy way out of financial mess...Start a War. I don't know if Iran would be at receiving end but sabre rattling would be there. Anyway, when USA shows signs of recovery companies would certainly look forward to leverage Emerging Markets for investment. Rebound in India would not come till six state elections and Lok Sabha Elections are over by MAY 2009. New Government and policies or continuance of existing Govt is immaterial. Either way they have to come up with the policy measures to revive the economy. Notwithstanding mayhem in the market, India economy has shown resilience.
The recovery would be fast and furious unlike previous recoveries. The reason being , during previous recoveries , we were still recovering from tight squeeze of inspector -license raj. Govt control on business and industries were vice like. Now situation is different. Hence, new policies would help in quick recoveries.

Another point is that it is a myth to state that we are decoupled from world market. No, sir, we are not. The more we liberalise our economy, the more we will have stake in other market's well being .

Many people criticised Rs 60,000 cr farmer's debt rescue plan. Now with leaders in free market championing cause of failing companies and formulating rescue plans ( both USA and EU ) , rationality of farmers' debt recovery plan would have dawned on all of us. No wonder, if our Industry or banks need support of the Govt, there may not be any hesitation by policy makers as there are no damned Pontiffs from IMF or WB to teach us few lessons in finances and Accounting Practices barring MSA.

For all the above reason, I feel optimistic, and some of you may term me a fool. But Market shall recover just to scale new peaks, which looks unlikely to majority.Our internal development is enough to fuel the growth. Basically dependence on Export and import is still very less.He we need to nurture infrastructure, manufacturing and agriculture.

My idea of something like 10,000 is still standing. But end of 2009 will be a surprise for many.

pk

 

[prakashreddy]

Hush hush rumour is that JP Morgan is having 93 trillion dollars outstanding credit derivatives. Worst part is that no one knows where it is outstanding and how good or bad it is. If that caves in, GOD alone knows what will happen. The recent 700 billion rescue package looks miniscule.

Dare to see the link where this information is posted?

 

[pkjha30]

Hush hush rumour is that JP Morgan is having 93 trillion dollars outstanding credit derivatives. Worst part is that no one knows where it is outstanding and how good or bad it is. If that caves in, GOD alone knows what will happen. The recent 700 billion rescue package looks miniscule.

Dare to see the link where this information is posted?

With the advent of discount brokers Wall St. learned to securitize debt to generate huge income streams. This has led (along with the Feds encouragement) to an explosion of leverage both on Wall St. and around the world. CDOs, SIVs and the credit derivatives which supposidly allow lender and holders of these instruments to offload risk. THe Credit derivatives markets now total over 62 trillion with total derivatives at somewhere between 500 and 1,000 trillion worldwide. THe OTC derivatives market is one huge blackhole that no one knows exactly how big it really is. JP Morgan holds 90 trillion in derivatives (notional amount) and over 9 trillion in credit derivatives. JP Morgan is an arm of the Fed along with Goldman Sachs. Too much financial consolidation in NY and pretty much a fascist or corporatist business model has developed between Ny and DC.

Ludwig von Mises was exactly correct. The root of all financial problems is the abuse of credit, and weve done it on a scale never before seen.

That's internet forum where this information is posted. Others are also talking about it. Essentially, its all CDO/CDS or in plain terms I borrow and don't repay.

The question is how much will we be affected, in what way and what are the sectors which will get banged.

Leave aside market meltdown. Sometimes sensex do not reflect real economy.How much do India owe to the world and how much do they owe to us and on what terms??

This binge of credit driven consumerism is taking its toll on USA and consequently other linked economies.


During World war -II USA delayed entering the war so that British Empire crumbles. It had manufacturing base and war was far away from its border. It had money. Yet it did not lend money to finance this war. It asked Gold in payment. So more than 80% or world's Gold reserves ended up in fort Knox. And on that strength Dollar became de facto standard currency . Arrangement with Petro Producing Countries to do Business in Dollars only helped as it increased demand for dollars. USA merrily printed it and distributed it. Ultimately, it started printing Dollar to finance its lopsided Balance of Payment in World Trade. Today America imports more than it exports. It subsidises its Farm produces to ridiculous levels. (Forget about our subsidies to Agri Sector, that's peanuts).

Sub Prime lending is part of this tradition. Be definition it is lending to those who are not credit worthy. Amazing... And then they sell US Treasury Bonds as Collateral to Foreign Govts who have huge reserves of Dollars.

Why do you think Clinton and Bush visited India? Just to ask for money... That is why China is having such power over US economy and Govt.

But no wonder, US still being only Muscleman on the street, it will go to any extent to safeguard its interest and muzzle others into submission.In fact Govts should ask for Gold to be swapped by US Treasury Bonds to maintain creditworthiness.

But the moot question remains....how much we will be affected and in what way.FM says we are largely isolated...read insulated... from such shocks barring few exceptions. It may be seen as a virtue now. Irony of the situation is yet to sink in.

pk

 

[prakashreddy]

Pankaj,
As usual, another excellent post. As per your own post made earlier today, total net sell by FII this year is about Rs.38000/- Crores. How much it will be in terms of US Dollars? About 9 Billion. Right? Look at the effect of it on our markets. BSE Sensex went down from 22000 to 11000, half is gone. What will happen to India if a catastrophy of the magnitude indicated in my post happens? Shall we remain insulated from these types of shocks? As one of the commentator in a website rightly said today standing aside US is like "sharing a lifeboat with an elephant".

Now the next question. Who has actually sold in Indian bourses so far under the banner FII selling? Is it the institutions themselves out of their own accounts OR is it institutions on behalf of their client accounts say HNI's? If we have not seen real institution selling as yet, can they desist themselves from selling when JP Morgan goes under?

Well, all of this is just hypothesis. But in the current situation, none of us can rule out any such situations. I am shuddering to think the consequences.

 

[pkjha30]

Exactly Prakash. FIIs have made another 110,000 Crores investment in 2006 and 2007. If Financial Institution collapse, most likely these may be withdrawn leaving us with Sensex Target of 5500-4800. Its the same level where Bull run started.

However, in such a scenario I see few things happening..

1. Many leveraged companies would go bust. That means ICICI as well.Keep monies with SBI dear.

2. Fundamentally strong companies would find it difficult to raise resources from Market and Banks may not be in a position to finance them at cheap interest rates.

3. Supply of Goods will be reduced as manufacturing sector falters due to cash crunch. Demand would remain high so inflation would pick up pace.

4 As industrial growth slows down, unemployment would be there and lot of people including techies and traders and financial wizards would find themselves on street. Salaries in private sector would go down as supply of skilled personnel increases and requirement reduces.

5. With less money in hand to spend , demand will slowly fall. NANO will certainly not take off. FMCG and electronics goods, luxury items would face reduced demand. Air Travel..same.

6. With unemployment, crimes would rise.

7.Govt of the day would be butchered at the hustings.

8.Market would remain in 4000-6000 zones for long time to come since people would not have confidence to invest. FIIs would not come as they would be licking their wounds for next few years.

9.As income falls, tax collection ( buoyant as of now) would reduce and Govt spending on welfare and development items would increase. So to fund the gap, few remaining people would be taxed more. That is , tax rate would rise.

10. Economy would be in long haul with stagflation. We may go to organic farming to save fertilizer cost. No export of food items. People in other countries would not be in a position to purchase our items of export. Import would also decline with reduced industrial activity.

11.Public Distribution System would be prominent place to purchase food in India and we might see a lot of techies queuing up there. (Reason being they earn high salary and do not save anything, live USA lifestyle in India)

12.Black Marketing and corruption would be the order of the day. License-inspector Raj would be there. Babus would love it. Again Golden days for them would come. Ever heard of Cement permits. Meet SDO to get one. Sugar, Kerosene ??? When my father was constructing, we had to get it through permit as there was no free sale. It was introduced later in fitful start to liberalization.

13.Riots may be order of the day as Parties would have nothing else to show for achievement. Communal divide would be extreme.

Finally Govt would go in for Massive public spending and Interest Rates would be cut. Lending would be made cheaper. Export Import would again be liberalized.Industry would take few hesitant steps. And we will be well on our way to recovery. What I have not included is possible War with one of our neighbours and Military Takeover of Indian Republic.

Ok Ok add few suicides as well.

Its one's take.

pk

ps: most of the financial figures that I quote are from either SEBI or NSE/BSE or reputed websites.FII figures are from SEBI.It is also available in dollars if you want.

 

[pkjha30]

Here is Nifty chart since its inception.

without any lines, of course.

pk

 

[pkjha30]

This is an interesting writing giving overview on Sub-prime crisis in USA in a two part post

The backdrop

In a land far far away (the United States of America) a long long time ago, there was a great housing boom.

Okay wait. I am getting a bit ahead of myself.

So first a little perspective.

In the US, buying a house is considered to be one of the best investments one can make. This is particularly true because the government, as part of long standing policy, encourages people to own their own homes by allowing tax-deductions on mortgage interest payments. This means if you took a loan to buy a house and are making monthly payments towards the mortgage as well as toward property taxes, the government puts some of that money back into your pocket by allowing you to deduct a per centage of those expenses from your federal taxable income. In other words, a certain portion of your house-ownership cost is written off by the government from your tax bill.

Since the US government does not consider providing any such relief to people who rent (though such people are generally worse off than home owners), the financial incentive to own a home is that much greater.

So yes. Where were we? Yep. The housing boom. For the last few years, prices of houses were going up and up in the US driven by ever-increasing demand. So much so that people, many many of them in fact, started thinking like Mr. Bullah below:

Hey this house is worth $500,000. In a year it will be $600,000. So if I can sell it then, I can get a 20% return on investment.

Of course there is a small problem. Bullahs net worth, in terms of his savings, are $10,000 (2% of the houses cost). And just to make things worse, he has a bad credit history having defaulted on his credit card bills a few times. In order to make the very basic minimum down-payment for the house (usually 20% of the cost), he needs $100,000 i.e. $90,000 more straight away.

For full reading check this

http://greatbong.net/2008/10/01/the-great-wall-street-meltdown-part-1/

pk

 

[pkjha30]

NEW YORK (Reuters) - Stocks fell for a seventh straight session on Thursday, with the Dow sliding below 9,000 for the first time in more than five years, as investors worried recent moves by authorities worldwide to thaw frozen credit markets might not be enough to avert a global recession.

The Nasdaq fell below 1,700 for the first time since August 2003.

The Dow Jones industrial average was down 241.57 points, or 2.61 percent, at 9,016.53. The Standard & Poor's 500 Index was down 17.18 points, or 1.74 percent, at 967.76. The Nasdaq Composite Index was down 34.26 points, or 1.97 percent, at 1,706.07.

So as DOW and NASDAQ sink , what are the odds that we may go to 2003 level???

pk