Have the Bulls come back to pasture?

There have been considerable amount of articles, views and opinions by the experts, economists and others about the onset of the bull market. Let us examine the economic variables and try to reach a conclusion. Mr. Obama and his team of firefighters are working 24/7 to douse the fire that caused the financial meltdown. Other economies of the world seem to have come to terms with the large scale damage and seem to have dusted themselves and got up to traverse their journey to prosperity. The worst seems to be OVER!

In financial market terms: Whenever there is a consensus about a particular trend then the trend reverses and proves them wrong.

Here we are not talking about a trend but about pessimism. Whenever there is pessimism there seems to be a concerted effort to tighten belts, cut costs and generally be frugal. This frugalty will in turn bring down costs but will also bring in a possibility of entering the downward spiral of the economy.

Here we have a different phenomenon happening. India is on a growth path and is on its own trip. This is a country of more than a billion people with high aspirations and a penchant for savings too. As written earlier we have just redefined the hindu rate of growth at a little over 6% from the 3% growth of the past. This growth and the large base created in the last decade will hold it in good stead and will be able to digest the impending political instability.

As far as India is concerned, the bull market will take some more time to really start, the Indian political climate has to stabilise after the formation of the new government. Untill then the market will be range bound between 3000 and 2500 on the NIFTY.

So the conclusion is that, the bull market is round the corner. Let the tide turn in favour of a stable and viable government to confirm the Bull run.

DOLE Time in US and VOTE Time in India

Stimulus packages of the recent times have started to have the "Look and Feel" of socialism. unemployment compensation, food stamps and Subsidized Medical Insurance seem to be from the era of socialistic societies. This further proves the economic management cycle professed earlier. This cycle, as written earlier consists of of "Liberalization, Privatization, Globalization, Nationalization".

The debate of whether to bail out individuals or institutions is another matter which needs attention. Do individuals who speculated in the real estate market on account of greed need a bail out or Institution who nourished this greed and found themselves holding "toxic assets" need a bail out?

Lets once again examine the root of all these problems. Lets start with the housing statistics of USA, for a population of 305 million the country has 130 million houses which makes it, one house for every three people in the country. Its a nobrainer that housing supply is more than demand in this country and people have started buying and selling houses for speculative purposes than for dwelling purposes. When real estate is used for speculation then the "reality" of the investment gets lost and becomes a virtual asset. Now tell me if there is any point is letting banks lend to people who want to speculate in the housing trade? isn't it same as lending money to trade in the stock markets? In stock markets when money is lent, the stocks are subjected to a haircut and the haircut is as big as 50% in India, whereas the haircut here was 5% owing to the fact that this was "Real" asset and not a stock! But it turned out to be an "Unreal" one.

Another side of the problem is the propensity of American consumers to consume. Consumption in itself is no taboo but consumption by discounting your future income is a problem. That too using up your future income projections to pay for speculative buying of real estate is a disaster.

If this is the root of the problem, then should the new administration stop housing construction activity and? Should old houses be demolished and new ones built so that a renewal of assets happens and housing supply remains constant? these are the question that need to be answered by the new administration. I, for one would always suggest asset renewal over new asset augmentation that would generate employment and renew the infrastructure. It would also be wise to start a massive Infrastructure renewal plan to kick start the economy. that would surely percolate to other countries and would be an answer to the bulging cash stashed in the banks due to liquidity infusion and hoarding of Cash that has been witnessed in the country.

Lets get back to India, what ails us here? We are witnessing a slowing growth rate. Our policy makers are trying to bring down inflation by reducing fuel prices. I think we are barking at the wrong tree! India is bound to have inflation around 5-6% and it cannot be stopped because of the substantial portion of the economy is unaccounted for. That's what is called the black economy. Controlling liquidity at the wrong time suffocated the demand and drove interest rates higher in the last six months. With inflation higher than the repo rate we still have a negative real interest rate. With negative interest rate there is no hope for foreign portfolio investment and therefore no hope for the stock markets because the strong hands of FIIs will not buy India!

No amount of bullied interest rate reduction will work as the banks have become risk averse and are taking their own time to sanction loans. Housing and real estate prices are set to spiral downwards as the stratospheric levels of real estate prices are not sustainable in India too, even if the country is deficient of housing that's because of the affordability issues.

Stock Markets in India will witness laid back meandering business for sometime now as the country is gearing up for elections. Now non-issues will take centre stage.

Elections in India will be highly entertaining and will have very high educational value.

Wrong Prescription Again

Injecting liquidity is a very short term measure for the markets and the economy. The patient wants vitamins, proteins and carbohydrates so that he can get up and start walking again. I am talking about the Indian Economy. But, our doctor has given him a pain killer and a bottle of glucose. I met a friend here, who said this liquidity injection is like a ritual we have in our homes during January (Sankranti) : we pour sweets, chocolates, puffed rice, sugar cane pieces and coins on the small kids in the house. We call the neighbouring kids who will sit around the kid and collect all the sweets, etc. and then go away. The same thing is going to happen here, injected liquidity will find its way to the stock markets and other markets to buy puffed up stocks which will be downloaded by the FII's.

Expect the markets to come down after the initial euphoria of the liquidity injection and the US Presidential Election. This bearish phase in the Indian stock markets will last till the middle of next year (of course, I am repeating this line again!). So, if you have bought when I wrote BUY you could offload the stocks now and make a neat 10% gain. the Regulators, Government, Politicians and FIIs will give enough opportunities to re-enter the markets at better prices.

Some prescriptions

A reduction in CRR and lifting of ODIs on participatory notes in by SEBI show the bankruptcy of ideas in the present government and its policy making bodies.

Dear Sirs, please consider these suggestions, may be you need these simple ideas.
1. Anounce an ambitious program of Government Investment at least while leaving office. After haveing squandered nearly 1 lakh 50 thousand crores on farm loan waiver, sixth pay commission, raising individual tax slabs, etc. You owe it to the country to do something constructive too.
2. Speed up the process of approving SEZs and pester promoters to hurry up on setting up these SEZs.
3. Please take interest to allot land for the NANO project. Here interest means applying mind and not extending HAND.
4. Speed up the process of UMPPs and allot them to sincere corporates who want to implement projects.
5. NHAI has been forgotten. Let them do their work of six laning the the golden quadrilateral and let them take a few more projects.
Reduce CRR further and persuade banks give loans to people who want to pay back and not to those who want a waiver.

Do this and I will come upwith some more prescriptions.

INSURER of LAST RESORT

This week saw the first spate of nationalization of the century. Loss making investment banks were "bailed out" by congressional votes. Do we now assume that this paves way for calibrated risk taking or unbridled risk taking? A glance at the history of financial business in particular shows that the cycle of nationalization, liberalization, privatization and globalization continues unabated. As Institutions take high risks and fail! nationalization raises its head. low level of risk taking and ultra conservatism leads to lower profits (but PROFITS) and prepares for liberalization and as the risk taking propensity of Institutions increases, this liberalization leads to privatization and globalization until the institutions fail after taking unbridled risks which paves way for nationalization again!! That in short is the cycle of economics.
This also props up a pertinent question. Does the state need to bail out private business and absorb losses? Does the state need to disinvest while making profits? The answers are obvious: The state cannot take risks but can underwrite all risks and the STATE is the INSURER OF LAST RESORT.