Global Cues & Indian Markets

it appears 6th august would be another "Black Monday".

i think we have to find out a new terminology for the carnage... a heavy carnage of atleat 800-1000 points sinking in sensex expected on monday......Another Black Monday in the offing....

If asia is down then only expect this heavy carnage but with Bear sterns refusing to buy back their stock the situation is very very bad in the US market.

Don't freak out about the Dow

Why stocks can shake off mortgage meltdown
Turmoil in the credit markets is sparking a global sell off, but are investors overreacting?
By Grace Wong, CNNMoney.com staff writer
August 1 2007: 10:13 AM EDT

LONDON (CNNMoney.com) -- The threat of a broad credit crunch has jittery investors rushing for the exits, but those concerns may be overdone.

Problems in the risky debt and subprime mortgage sector have sparked wild swings in the market recently - these days few bat an eye at 100 point-plus drops and gains on the Dow Jones industrial average.

Investors have been rattled by a wave of credit woes that has hit leveraged buyouts and the mortgage sector. The worry is that a tightening of credit will have a broader impact on consumers and the economy.

There are reasons for concern. American Home Mortgage said Tuesday lenders had cut off its access to credit and that it may have to sell off its assets. The collapse of companies like American Home and other mortgage lenders could make home loans more expensive for borrowers.

And after two years of rapid-fire deal making, the buyout boom is facing a lull. As a debt crunch starts to squeeze private equity firms, the boost take-private deals have provided for stocks could start to crumble.

Uncertainty about how wide credit problems will spread is likely to persist, which means investors are in for more sharp swings in the market. But there are a number of reasons why stocks aren't likely to fall off a cliff, analysts say.

Stock valuations are reasonable For one, stocks aren't too pricey and sell offs are likely to bring in buyers looking for a bargain.

"A lot of stocks are looking reasonably cheap," said Peter Dixon, strategist at Commerzbank in London. "On the basis of valuations, you've got to continue to favor equities," he said.

In the U.S., the S&P 500 index is valued at about 15 times 2008 earnings, which makes stocks attractive investments, according to Stephen Leeb, president of New York-based Leeb Capital Management.

Deals not doomed Private equity buyouts have helped support the stock rally in the U.S. and Europe as investors have bet that nearly any public company could be taken over.

The outlook for these deals is looking murky as buyout firms face hurdles securing financing, but a slowdown in leveraged buyouts isn't going to have a substantial impact on stocks.

"The exit of private equity is not going to be what caps this market. There are lots of corporate buyers out there willing to step up to the plate and fill the gaps left by private equity," Leeb said.

Economy still fundamentally strong Turmoil in the credit markets is being caused by a repricing of risk(healthy in the longer term), and not from problems stemming from the broader economy, many say.

"In our opinion this is a financial market event rather than a real economy event," said John Ip, senior economist for Morley Fund Management in London.

As a result, highly leveraged companies (very few unsound ones; most US companies have good cash reserves & low gearing) and financial firms are likely to feel the pain. But so far, it doesn't look like the upheaval is affecting the ability of companies on sound footing to get credit, he said.

Treasury Secretary Hank Paulson said Wednesday that the fallout from subprime problems was contained and that the global economy remains strong, Reuters reported.

In a sign of the strength of the worldwide economy, the International Monetary Fund last week revised its global growth forecast for 2007 and 2008 to 5.2 percent, up from a previous forecast of 4.9 percent. (US growth this quarter is 4.2% and earnings growth nearly 15.5%)

Plenty of cash out there Despite problems roiling the debt markets, liquidity - or the amount of money available for investing - remains plentiful worldwide.

China and Russia, for example, have accumulated massive reserves. The global economic boom has also helped drive corporate profits, and many companies are sitting on loads of cash. (China in fact is investing part of its forex reserves in private equity & India is mulling the same)

"Liquidity is quite abundant and it will cushion the world's economy and the financial markets against the current turmoil," Tony Crescenzi, chief bond market strategist at Miller Tabak and Co. in New York, wrote in a note this week

The tumult in the credit market may persist for some time, but it's likely that "credit formation will return to levels sufficient to power a continuation of the global economic expansion," he wrote.

------------------------------
Copy-paste stuff Comments in green are my own.

But what if you faced severe redemption pressure from your investors at home (as is bound to happen in a 'bust' situation with no bail-out in sight)? You'd probably be forced to sell your profitable holdings even if you didn't want to. This is where the pain is likely to come from.

Regards,
Kalyan.

The liquidity squeeze could be anticipated (much like the volatility cycles in the mkt; an expansion phase followed by a contraction phase). My biggest fear was that it would correspond with a growth slowdown (recessionary in the US, slowdown elsewhere). This would lead to a somewhat prolonged bear phase (corrresponding perfectly with the 5th wave completion of the Elliotticians ). But (unexpectedly) this has not happened. Growth is still strong. So while one dependency (liquidity) of the Bull mkt function is down the other (growth) is still up (the sustainability of which will depend to a large extent on the Bernankes & the Reddys while their BOJ counterpart can worsen the liquidity variable).

Regards,
Kalyan.

its good that our markets are closed day

unless something spectacular happens between now and tomorrow, get ready for a big haircut tomorrow

kalyan,
Your follow up article is noteworthy.As i understand ;Risk on a particular asset if resold few times ,all the parties holding those Risk contracts amongst them gets effected ,so multiple effect for a SINGLE non performing asset.
As i understand ,suppose in the portfolio of IFCI the npa's are sold to Merrly Lynch ,(say IFCI leverages that Receipt to acquire few more Loan assets ),now ML, who after a qtr. resells those npa's (acquired from IFCI )to Bank of Sanghai,(say ML leverages that Receipt from Bk of Sanghai,to acquire few more Loan assets ),like this the process goes on.
Hence to access the quantum of Bad Debt in the books of the entire Financial entities world wide ,becomes difficult .Now think of the 'Reinsuerers' ,how the Risk of their books is hedged,with another Larger reinsurers (against premium).
All this was OK ,as Cheap source of Money was available from Japan,until the Boj's $ / Yen
Swap got skewed.
So a vast Interlinked dis-harmony arised amongst the Financial community of the World,becoz of this situation.It will take time to stabilise,another (-)ve effect of Globalization,until then rocking of the Boat will bocome order of the day.

Asish
NB: However as per RBI datas indian financial institution's exposure to this Risk is more limited in nature,pertaining to our Home grown Companies mostly.

Credit contagion Is the worst over? Fortune's Peter Gumbel offers a 10-point guide to understanding two harrowing weeks - and what's likely to happen next.
FORTUNE Magazine
By Peter Gumbel, Fortune
August 14 2007: 10:36 AM EDT

PARIS (Fortune) -- Relax! There's really no need to panic! That's the soothing message being put out this week by key players in financial markets after two harrowing weeks in which credit markets in Europe all but dried up, prompting massive injections of funds into the system by the European Central Bank, the U.S. Federal Reserve and the Bank of Japan.

Overnight borrowing rates have come back down after spiking wildly and stock and bond markets have been bouncing back around the world. The European Central Bank, which continued to inject funds into the market on Tuesday, albeit less than one-tenth the amount at the peak of the crisis last week, says that money-market conditions are "normalizing." And Tuen Draaisma, Morgan Stanley's chief European equity strategist, for one, recommended in a note to clients that they should go "overweight" in equities because "we may already be at the point of maximum bearishness and uncertainty, which by definition is the right moment to buy."

So is the worst over? Even the most die-hard optimists concede that it'll take a lot more than a few days of calm to restore confidence among financial institutions and retail investors. "The market is concerned pretty much across the board," says Gerry Rawcliffe, a managing director in the banking group at Fitch Ratings in London.

Here's a 10-point guide to what we know and don't know about the troubles, and what the repercussions are likely to be:

Why did America's subprime mortgage woes have such a big impact on world financial markets?

Because these mortgages were lumped together in packages and sold as asset-backed securities all over the world, particularly in Europe. Often the initial securities were themselves put into new packages, leveraged up and resold as so-called collateralized debt obligations (CDOs). They are a sort of derivative play on the underlying mortgages, just as futures and options are a play on stocks and commodities. Big banks have whole securitization departments who create these instruments. They do so to profit from the difference between the long-term returns these investment vehicles produce and their more plain vanilla short-term borrowing, and to earn fees.

Who bought them?

Everyone, and that's the problem. The CDO market has exploded in recent years: More than $100 billion worth of structured cash CDOs were issued in the fourth quarter of last year alone, according to CreditFlux Data+, a London firm that tracks them (and that doesn't include the even more arcane "synthetic" CDOs). Banks, institutional investors and hedge funds have been the main customers, but some retail investors have also bought into them through the asset-backed securities, or ABS, funds that some of the biggest European banks sell to the public. Everyone who bought these securities was given the same pitch, namely that they were a relatively safe bet, since much of the paper had AAA ratings, but offered higher returns than regular corporate bonds.

So what went wrong?

The number of delinquencies in the U.S. subprime mortgage market has been rising and is now substantially larger than anyone expected - about 14 percent of the total, up from about 10 percent in 2004 and 2005. That means there's a strong likelihood that some of the securities holders, especially those where the underlying mortgages were taken out in the past couple of years, are sitting on losses.

Those troubles have been massively compounded by the aggressive use of leverage in CDO packages. When U.S. blue chip financial players like Bear Stearns and then a variety of European banks began reporting problems, panic quickly gripped the markets. That turned into a vicious circle: These debt instruments have now become impossible to price because nobody wants to buy them any longer. And since they can't be priced, the size of the losses aren't clear, which in turn has given rise to more rumors about financial players in trouble. Banks in continental Europe especially simply stopped lending to one another, which is why the liquidity dried up in the credit markets as a whole and the European Central Bank had to jump in.

How big is the problem, really?

Nobody is quite sure. Patrick Artus, an economist at Natixis in Paris, reckons the total damage inflicted by subprime woes is a relatively manageable $45 billion, which is the difference between the expected rate of mortgage delinquencies and the current much higher rate. Another French bank that is an important player in the derivatives market, Sociéte Générale, reckons that even if things really turn sour, the worst will be losses of about $100 billion. That may sound like a lot, but it's the equivalent of about 1 percent of the total market capitalization of the S&P 500.

Such calculations highlight the real issue here, that the panic has been due more to a collapse of confidence than to any financial cataclysm. "We're still primarily looking at a liquidity crisis rather than a credit or a solvency crisis," says Fitch's Rawcliffe.

Is it really over?

No. The market "remains very, very fragile," says a top executive at one of the leading European banks. Some confidence has been restored into the international banking system and its overnight lending patterns by the big injections of central-bank funds, but nobody has yet dared to start buying that subprime paper in any sizeable quantities. And because there's so little transparency about who is sitting on what size losses, the rumors continue to swirl.

Nouriel Roubini, an economics professor at New York University's Stern School of Business, who has long warned about the risk of financial contagion, reckons some other parts of the U.S. housing market including home equity loans and second mortgages are starting to display what he calls the same "toxic characteristics" as the subprime sector. More optimistically, Neil McLeish, the chief European credit strategist at Morgan Stanley, says that, "we have passed the absolute peak of that anxiety and uncertainty." But even he believes that credit market conditions will be more difficult in the coming months and, "there is still some risk of additional volatility" at least for the next month or so.

Who are the biggest casualties?

Banks and financial market players across the world are starting to come clean about their exposure and losses, partly in order to help restore confidence in the market. The losses incurred by Wall Street titans Bear Stearns and Goldman Sachs, which this week announced it is putting $2 billion into one of its hedge funds, have received the most publicity. Outside the United States, firms such as insurer AXA and BNP Paribas in France have frozen or shut problem funds, while a range of banks including NIBC of the Netherlands and Commerzbank in Germany have detailed their exposure and expected losses.

The biggest international victim to date is a mid-sized German bank called IKB Deutsche Industriebank that its peers, including a government-owned bank, stepped in to rescue earlier this month, taking over $11 billion of credit lines and putting up a $4.7 billion funding package. IKB had been an aggressive player in the CDO market, through two off-balance sheet firms that it used to pump up its commission income and advisory fees. In the end, its exposure to dodgy securities through these two firms far exceeded the bank's liquidity and equity capital.

Is anyone safe?

Not completely, but barring some huge problem nobody yet knows about, major banks seem in the best position to weather this storm because they have the strongest balance sheets and are able to refinance their operations most easily thanks to the extra liquidity that central banks have put into the market in the past week. "Being a bank and having access to the central bank (credit) windows is key at the moment," says the top European banker.

Hedge funds are another story, as the Goldman Sachs-run one that was bailed out this week shows, although some of these funds foresaw the troubles and have been aggressively shorting the subprime sector and any securities relating to it.

Why didn't central banks cut interest rates in response?

Some critics of the European Central Bank, especially in France, are saying that its interest rate policy, which has consisted of regular rate hikes to counteract inflation, has partly fueled this crisis. "One can ask if the ECB isn't becoming a prisoner of its rate-increase strategy," Thierry Breton, the former French finance minister said this week. But bank economists are generally more supportive and say that the ECB acted smartly with its three consecutive days of huge money-market interventions - the biggest of which was a whopping $130 billion injection last Thursday. "It's a demonstration of the financial system operating as it should," said James Nixon, a London-based economist at France's Société Générale, who says that the troubles primarily affect the financial sector rather than the wider economy.

While the Fed did cut rates in 1998 during the last derivatives meltdown, involving Long Term Capital Management, central banks may not need to this time if markets continue to calm down. Indeed, the big question now is whether the ECB and the Bank of Japan will go ahead and raise rates in the next month, as they had signaled before the crisis. Roubini isn't sure, and thinks that the Fed may well move to reduce U.S. rates quite soon. "The likelihood of a cut in rates is now much higher," he says.

What does this mean for the world economy?

So far, not all that much - but keep your fingers crossed. Growth in Europe and Asia remains buoyant, even if the U.S. outlook is unclear. Some borrowing by companies and individuals is bound to get more expensive as markets adjust and restore a risk premium. But "it's not obvious that the repricing will lead to an economic slowdown," says Société Générale's Nixon, although there's a possibility that Britain's economy, which has thrived because of its heavy dependence on financial services, may be vulnerable. Roubini thinks the United States will bear the brunt of what he sees as an inevitable slowdown of consumer spending related to the housing woes, and reckons that this could ultimately spill over to the global economy if it's sufficiently severe. "The effect on the real economy in the rest of the world depends on whether there's a hard landing in the U.S." he says.

Will there be any regulatory fall out?

This is almost inevitable, especially in Europe where it's now clear that many of the purchasers of these securities didn't fully appreciate the risks they were taking. Look for the first moves to come in Germany, where bank bail-outs are exceedingly rare. The last time a bank got into serious trouble there was in 1974, when the Herstatt Bank collapsed after some disastrous forays into foreign-exchange trading that bear some similarity to IKB's woes. Regulators quickly followed up with an overhaul of the national banking system. It's not clear that IKB's rescue will have the same dramatic repercussions, but it's already prompting tough questions about how a mid-sized bank could end up with such an enormous exposure to risky assets via an off-balance-sheet firm.

"I suspect that at the end of this, regulators will ask themselves if this very rapid expansion (of transactions involving asset-backed securities) has been a good thing for banks, or if the risk comes back to haunt you," says Fitch's Rawcliffe. Watch also for credit agencies to come under pressure to do a better job at assessing the market risk of exotic financial instruments.

----------------------------------------------------------------------

The lines in bold bring out the reason & mechanism for the 'multiplier effect' & 'interlinked dis-harmony' that Asish has very aptly & cogently pointed out in his post.

Regards,
Kalyan.