Monday, March 31, 2008

Bubbles waiting to burst

The preponderance of bad news continues unabated. Reminds me of 1996 / 2002 times. Every few weeks a nasty surprise hit the news.

Are there any more bubbles waiting to burst. Here are some likely one's on the horizon. And the one's that we can't see...well those would be the real surprises.

Decoupling bubble
The decoupling theory is already under a cloud. That the recession in US will have an impact on Indian economy is certain. What is not certain is the extent of impact. I feel that the cascading impact of US recession will be impact India's growth across sectors. The impact on India is going to be more severe than commonly expected

Oil price bubble
Crude oil prices have nearly doubled in a years time to $105 now from around $ 50 a year back. However, a large part of the hike has not yet been passed on to the Indian consumers.
For now the government is subsidizing by paying the difference to oil marketing companies in order to hold the price line. But it cannot do that for long, since the oil marketing companies will run out of cash soon. The price hike has to hit the Indian consumers - one way or the other.

Outsourcing Bubble
India still remains the #1 outsourcing destination. But it seems the cycle is turning. Alternate destinations like Eastern Europe, Mexico, Philippines, China are picking up speed. Rise in billing rates, talent crunch and high attrition rates are acting as a dampener.

Real Estate Bubble
Real estate prices in Tier I and Tier II cities have gone up as much as by two to three times in past three years. That kind of rise is not warranted by the growth in the economy. Corrections have already happened in bits and pieces. As India slips into a slowdown, its very likely that the real estate bubble will also burst.

Growth Bubble
Its very likely that India will also slip into a recession (we are already slowing down). The GDP might not go negative. It might just go down to 1% levels, but the industrial / manufacturing / services sectors will contract. Sales will go down, profit down - consumer spending down - real estate down - pay cuts - no increments job losses. Its a glum scenario to say the least. Will have a better line of sight by June '08.

Bubbles in US
Are there more bubbles remaining to burst in the US still ? Will there be a financial meltdown. The way things are going, it seems that most things should unfold in next 3-6 months.

Unknown bubbles
These are the really nasty surprises. Like the derivative losses of Indian companies. Took everybody by surprises. Will we get hit by a surprise sidewinder.?

Related posts on impact and some ideas on what a long term investor can do :-

Sensex - 10K in one year and 80 K in eight years
India : from a slowdown to a recession - and what it might imply
Indices doing a Last Gasp Rally (LGR)? - A suggested Strategy

Thursday, March 27, 2008

US Economy contracts based on GDI numbers - WSJ Economy Blogs

Great insight from Wall Street Journal folks ..... I quote...

"One tiny nugget of good news in the latest gross domestic product report is that the U.S. economy managed to avoid contracting by eking a 0.6% gain. Or did it?A separate measure of the economy touted by Federal Reserve officials last year - gross domestic income - posted its largest decline, at a 1% annualized [.]"

read more digg story

Tuesday, March 25, 2008

Indices doing a Last Gasp Rally (LGR)? - A suggested Strategy

Check out my post on Money Control some days back - Last Gasp Rally

Extract below :-

" I believe we are at the beginning of a bear phase. Any rallies would be short lived.

There is a small chance that there might be one 'last last gasp' rally which might go upto 18K.

..............And I still hold that:-

- We are following the US with a 6 months lag

- Sensex likely to breach the 10K mark too in the next 18 months period.....and likely to go up to 40K (min 25K) by Sept 2013 and 80K (min 45K) by 2016. "

Could this be the last gasp rally (LGR) or has the LGR already happened..?

Suggested Strategy:-

- This is a time to accumulate for long term. And in my opinion, for super normal returns in equities , long term is 7 years.

- If you are making a 'decent' profit for recent purchases, utilize any relief rallies like these to sell off and book profit. My last set of purchases were at 15.5 K levels. Will sell of at 17K cross over. Else will hold for 7 years...!

- Accumulation strategy
  •  invest 25% at 15 breach
  • 50% when the market breaches 12k
  • Remaining 25% at 10 breach.
  • Buy only blue chips.
  • Any monthly savings to be held off and invested at 12 and 10 breach.

Monday, March 24, 2008

India -Corporate bottomlines likely to be hit in Q4 - 2008

Great story from Haresh Soneji of CNBC-TV18....

India Inc. has been thriving on other income over the previous few quarters. The dependency has moved up so much that core profits have declined extensively. Other income to sales was pegged at some 8% and 40% to profit after tax......

.....With that we arrive at a PAT which could show a decline of around 18% y-o-y. The actual decline could be less or could be more. No one is certain about it. And since market respect PAT growth, suddenly the market could well look expensive again.

....... History repeats itself. But, people have short memories. No wonder then, market guru Warren Buffet comments, "What we learn from history, is that people don’t learn from history". So very true.....

read more | digg story

Sunday, March 23, 2008

50 years of Market Swings - from Fortune Magazine

Fantastic story from  Fortune Magazine. Provides an interactive timeline for past 50 years where all the bear markets as well as recessions have been marked out.

Bear markets in US have lasted from 90 days to 3 years (the 2000-03 one).

I believe that's pretty much how Indian markets have also behaved.

"50 years of Market Swings"

Friday, March 21, 2008

US Recession predicted by Prof Roubini in 2006

Prof Roubini had predicted the US recession way back in 2006. I came across this very recently.

"The Biggest Slump in US Housing in the Last 40 Years"…or 53 Years?

Check it out. It makes for a fascinating read...uncanny resemblance to how the economic scenario is playing out now.

He had  infact laid on in how the recession will play out in a twelve step approach, starting with falling housing prices.  In the next steps he lays down how the recession will spread to other sectors, including failure of financial organizations / hedge funds etc

Also check out The Economists' Forum at  Lots of thought provoking stuff in an easy style from some of world's greatest economists.

I am still absorbing lots of stuff in both these forums...!

Hope to share some of the insights from these and other forums as we go ahead

And I still hold that:-
  • we are following the US with a 6 months lag
  • Sensex likely to breach the 10K mark too in the next 18 months period.....and likely to go up to 40K (min 25K) by Sept 2013 and 80K (min 45K) by 2016.

As one of my readers said - lets wait and watch......

Monday, March 17, 2008

Sensex - 10K in one year and 80 K in eight years !

Sensex likely to go up to 40K (min 25K) by Sept 2013 and 80K (min 45K) by 2016.

However before that , Sensex likely to breach the 10K mark too in the next 18 months period.

Here's how the the Senxex's 10 year historical trend looks like.

Cycles, in stock markets and in the economy go hand in hand and repeat themselves. Check out the table below. The stock markets have corrected by more than 50% in past and have rallied by more than 50% too (in fact much much more than that).

Have also provided Sensex projections - best case and worst case. Projections based on certain assumption on length of cycles and severity and timing of economic slowdown and subsequent recovery.

Go back in time. When during end of 2004, the markets were at around 3000 levels , levels of 20000 in just 4 years hence would have sounded ridiculous.

Just as levels of 10k were sounding absolutely ridiculous 6 months back..!

Markets are harsh and unforgiving. But for those who can think (and hold stocks) for a 7 year range, they are one of the best investment options.

As we go ahead in this fascinating journey of stock markets, I will talk about my thoughts on making super normal returns in stock markets on a long term. And also revise the projections (if necessary) as we get more and more additional information

And believe me , super normal returns in stocks is more psychology than analysis.

Sunday, March 16, 2008

Preponderance of Bad News - 8K Sensex? - and what should an investor do

We have what I call 'Preponderance of Bad News' - too many negatives coming in quick succession. Some key ones which will impact :-
  • US recession is nearly 'confirmed – question now is how deep and how long will it last
    India slowdown confirmed. We are very likely headed to a full blown recession. We seem to be following US footsteps with a 6 mths lag. (and US was in a denial mode on slowdown/ recession 6 mths back)
  • Corporate / Bank results likely to be hit due to derivative impact – not sure how widespread it would be.
  • 2009 elections uncertainty

In similar situation in 2002 and before, the market retraction has been more than 50%. We are very likely to see 12K levels in sensex within 3-6 months. If recession, then 10K expected to be breached in 12-18 months.

Suggested strategy (assuming fresh cash available !) – invest 25% right away – 50% when the market breaches 12K – remaining 25% at 10 breach. - buy only blue chips. Any monthly savings to be held off and invested at 12 and 10 breach.

Existing holdings – Hold on to blue chips (ACC, Reliance, L&T, Bharti and likes). Sell the rest and take a hit.

Strategy based on 5 year cycle.

Friday, March 14, 2008

Recession in India - In US footsteps

According to Sharma, China and India are likely to underperform while Thailand is likely to outperform. The US is heading into a very bad recession like the 1920s, Sharma said. "Large write-downs can erode financial wealth in the US. The Fed's move is not enough to stop the credit contagion. and some banks can go under.

read more | digg story

U.S. Has Slid Into Recession, Economist Survey Says

The U.S. has finally slid into recession, according to the majority of economists in the latest Wall Street Journal economic-forecasting survey, a view that was reinforced by new data showing a sharp drop in retail sales last month...

read more | digg story

Deep recession feared in U.S.

Economists are no longer talking about a U.S. recession but a deep recession after figures yesterday showed business sentiment continued to plummet in early February.

read more | digg story

Wednesday, March 12, 2008

India : from a slowdown to a recession - and what it might imply

Key economic factors playing out in the economy over next 6-18 mths.

1. Growth slowdown - GDP growth for 08-09 likely to be in 5% range. IIP might go negative at 12 mths. Not so preposterous. That's how recessions start. Next 3 months will decide if its only going to be slowdown or a full blown recession in India.

2. Oil price hike - India buying at $100 now compared to $ 60 range not too long in past. Will suck big part of disposable incomes with the population

3. Election uncertainty will hamper sentiment

4. US recession (yup its in recession , though its yet to be 'officially declared' whatever that means) - its impact on our economy is yet to sink in. Seems to be a clear lag of 6 months. We are now in a stage where US was 6 mhts back.


1. 12000 levels for Sensex very likely in 6 months. If recession, then 10,000 mark likely to be breached in 12 mths.

2. Next twelve months all resources will get repriced :-

a) Interest rates will come down across board. Housing loan likely to go down to 7%, personal loans to 10%, Auto
at 9%.Those were the levels just a few years back.

b) Increments / bonuses / job change increments will come down. labour market will get more fairly priced.

c) Real estate prices likely to correct more than 30% from current levels.

All this is difficult to digest. But did not the story play out in a similar way 5 years back. Cycles simply repeat and play out as they are supposed to.

And what about 5 years from now. That's a much happier story. but even more difficult to digest. Just like a 20,000 levels sounded ridiculous in 2004.

Hope turns to denial. Denial to despair. Before hope regains.

Amar Harolikar

Saturday, March 1, 2008

What you dont know about the Budget 2008- The Rs 60 K loan waiver will also finance the 6th pay commission

1. The Rs 60 K loan waiver:- is it going to finance the 6th pay commission outgoing...!
here's why I think so correct me if I am missing anything here:-

- No provision made in budget for the 60K amount. common opinion is that it is going to be financed by bonds and will remain

- what it means is that loan balances being waived off in the books of banks would be replaced by these bonds. so no immediate cash impact there.

- here's the interesting part. if the banks write back this amount that will increase their profits and they would need to pay tax on the amount. this tax will conservatively work out to at least Rs 20 K crore. and this is the amount that the FM is likely to use for financing the incremental impact of the 6th pay commission