Saturday, September 3, 2011

Global Market Updates / Special Coverage For Indian Bourses - 2nd September 2011

The global market scenario is getting more and more grim and as of now this is where we stand starting from US

US: The top for now seems to be in place with the May 2nd high of 12,873; however, we can expect 2 more attempts towards the 12k levels via relief rallies, once in September and once towards Christmas/ThanksGiving before the eventual collapse takes place. The target destination is a minimum retest of the lows that surfaced after the Lehman Brothers crisis. For those looking to use the opportunity to short Dow futures, now listed on NSE, it is indeed a good time. As highlighted earlier, the 3 critical levels are 11875, 12000, 12200. Trades on Dow futures should be initiated only by people who follow the international markets and have a fair clue of what constitutes the index and only then take the position. Unlike Dow futures on other exchanges, there are no protective Calls or Puts against a position taken as one can do with Nifty.

Whilst the dollar is sinking temporarily, being the reserve currency of the world, it is bound to stage a comeback and safe to assume that the downside in Dollar Index is limited to 70-72 levels with a target of 81 in the next 6 to 8 months. Consumer confidence is dropping in US and the debt ceiling increase is only delaying the inevitable. The S&P ratings will have no significant impact over smart money's preference for safe haven currencies which for now is restricted to the Swiss Franc. However, institutional investors will flock to the dollar to fulful dollar obligations with the exchanges. Volumes on the US bourses are dropping sharply and one of the banking darlings in terms of stock price resilience Goldman Sachs has also cracked pretty well from previous highs. Eventual target for Goldman is sub-50 levels. Jobs are not being added at all in the economy and as unofficial reports have it, job cuts are being discussed in a lot of service sectors like banking/financial services, consulting or for that matter even some of the law firms.

Unlike the previous instance in the 2007-2008 timeline when Turnaround Management firms were actively scouting for potential companies for buyouts, the optimism is remarkably lower this time. A lot of Turnaround Management professionals would rather wait for at least a 40% correction more in some of the attractive targets and keep a close eye on Chapter 11 candidates before initiating a 'Buy'. [A lot of details into these aspects are available in the Linked In Group called Turnaround Management. Those interested in global economics and finer aspects of Turnaround Management must join this LinkedIn Group]

UK: The top is very much in place with the rally above 6k in Jan. The pullback to 5400 levels this week after sinking to sub-5k levels once is remarkable. However, the picture is still bleak and will eventually fall to sub4k levels next year. One more countertrend rally to 64k was expected but sealed completely when 5550 was taken out on EOD basis. Already there are bear calls floating around calling for sub 2k levels on FTSE but that seems too far fetched for now. The banking system in UK too is on the verge of a collapse yet again and smart money does not want to buy before the post Lehman Brothers levels are not attained. The action is restricted to FnO in most cases.

In terms of day to day business, retailers are getting squeezed on margins as input costs are soaring but there is no way to pass on the price hikes to the end consumers. The commodity bubble will probably end up making some of the smaller retail players go bust and bring about consolidation in the retail space [One can refer to Nadeem Walayat's detailed outlook for UK economy in the Market Oracle site, link to which is given in the homepage of this blog]

PIIGS: Both Sovereign Debt Yield and Credit Default Swap premiums are on the rise. 3 countries are already in junk status. The critical level on sovereign debt yield of Italy and Spain will be 6%. Spain might just end up delaying the inevitable for some more time. With an election underway and an almost near certain victory of the current opposition party, there is reason to believe that Spain will manage to delay the inevitable. Case in point, to ensure that things don't go awry for Spain so soon, the Finance Ministry announced austerity plans well in advance and even the opposition agreed for the same and Spain was lauded for its 'proactive' steps by ECB early this week! The barometer of Spain's crisis will be the yield on the Sovereign bond and stock price of Banco Santander. With 1.3 trillion dollars in Assets [around 50% of which are toxic as per some estimates]  this counter will lead the fall in Ibex. [Investors must take note of the fact that the yields of 6% being discussed here are for the short term paper sold in primary markets. The long term yields are inching towards 20% due to their toxic nature in the grey markets which will only accelerate the fall next year when these become headlines]

It is not going to be the end of the world by any standards. Consumption is still the key and will in all probability make resources and human capital more competitive in the  global job market as far as people are concerned. Only those living in the comfort of supremacy of fiat currencies and an illusion that social security will take care of challenges will suffer. Marking the first precedent in this is Portugal. With minimum wages now at EUR 400 levels for blue collar workers, a lot of factories are reconsidering placing orders into Asian or Latin American suppliers. With proximity sourcing options in Portugal, the total cost structure is beginning to tilt against low cost sweat shops of 'emerging' economies. On the other hand, countries like Turkey and Morocco are also offering good sourcing options and the concept of 'proximity sourcing' will gain a lot of momentum as we move into a prolonged dull phase for the next few months.

As far as Germany is concerned, the Bund will continue to be the European safe haven equivalent of Europe though the DAX is all set to collapse. Every interim rise now is a shorting opportunity. Likewise, the Swiss Franc will gain even more credibility as a safe haven currency but the stock market will portray a different picture [the Swiss index is already over 20% lower than its 2010 high!] Here, one can see a renewed activity of industrial production and engineering and a lot of consolidation in the SME space.

As far as India is concerned, there is no way it can shy away from the impact of global economic scenario in the short to medium term. However, even with a pessimistic 7 to 8% growth in GDP, it is a significant growth especially considering that a lot of other economies are collapsing. With an average per capita GDP of USD 1200, it cannot get worse as a country [that the middle class will receive a double whammy in the form of decreasing net worth, salary freeze and still inflation is a separate issue. The common man of India always has had to grip with this situation and unfortunately, there is no place to hide from this except to make sure some cash is always available and ready to be deployed into suitable opportunities]. Margin calls on both stocks and commodities on other bourses will force FIIs to press the Sell button and gain access to cash

This is one of the best opportunities for Indian investors who missed the party in the 2008-2009 crisis and resurgence. For long term investments, the 2500 - 4500 levels on Nifty [8k to 14k on Sensex] are all excellent buying opportunities. Rather than jumping into the 'Buy' wagon on every dip, one should use panic selling as an opportunity to accumulate for the long term. Whilst the decoupling theory is still a myth, things are changing for sure as far as emerging economies are concerned. The domestic consumption story is still strong and if the crisis does come in as expected on the western bourses, the consumption story will provide a complete fillip. Today only a fraction of the Indian populace buys exotic gadgets, items, services of the western world at a premium. The current crisis will start providing excellent opportunities for a larger proportion of the Indian population to access services at low prices [and the western suppliers would be more than willing to oblige] and hence the long term story is intact.

Whilst I do concede that my call for a potential new high this Diwali went bust big time with all time and price targets getting violated, the longer term story is intact and 2014 will be a year to celebrate. Nifty and Sensex are here to stay and they won't go to ZERO! Maybe this time Sensex will chalk a low lower than 8k which we saw post Lehman Brothers; so what - it represents another fantastic buying opportunity with a clear mandate of more than doubling if not tripling in the subsequent recovery. Prerequisite to such conditions is to ensure there is free cash available to deploy them [rather than taking loans on gold or other securities/assets which was seen as a rampant phenomenon last year when we were heading towards Diwali]

Outlook for Gold and Silver: Silver has long ago topped out and as of now safe to assume that gold also topped out at 1925 levels. A short term flight to safety may be seen and above 1925 per ounce, Gold can rally all the way to 2000 and 2200 levels, it is nearing a top. Just as margin requirements were raised on speculative longs on silver last year, 2 consecutive margin hikes on speculative longs on gold have increased margin calls by over 40% on gold now. Eventual target for gold is a minimum of 1450-1500 and whether it falls from current levels, 1925 levels or 2k levels, the fall is going to be fast and furious. Bolstering my case for gold is the divergence in the price of silver. Whilst gold pulled back remarkably after the 8% collapse within 2 trading sessions, silver has not even managed to take out 43 on EOD basis. Currently silver is taking support at the 41.5 to 42 zone but once silver closes below 38, 32 to 33 will come in a jiffy.

Every rise in silver is a potential shorting candidate [please take a look at the conversion of units from Comex to MCX levels and rollar exchange rates as my analysis of Gold and Silver is always based on Comex rates in USD]

To summarize: DJIA futures and FTSE futures [coming soon on NSE] are excellent shorting candidates from forthcoming countertrend highs. Nifty is still a good trading candidate and investment BUY opportunities will be coming in a jiffy. Do not panic - if you take a 3 year horizon, some excellent wealth creation opportunities are coming your way. On the banking side, don't rush to buy SBI so soon. ICICI has already shown dismal performance post acquisition of BOR and a similar effect will be seen on SBI mergers with SBx divisions. These 2 counters are worth investment only when ICICI falls below 450 on spot price and SBI falls below 1250. These are the levels when I personally will be buying these stocks. As far as other counters are concerned, I will certainly share my ideas if I come across any. My personal allocation will be highest to Nifty Bees and BankBees. I will be increasing my allocations for these counters with each fall.

1 comment:

nalin said...

nagraj ji...
Ur analysis is as usual impeceble...
aap ka phot b bada changa hei!!!!