Saturday, September 24, 2011

Global Market Updates / Special Coverage For Indian Bourses - 24th September 2011

So the Fall Equinox on 22nd September did play out the role that it had to play and got the bourses to melt down more than 4% in a week's time. Gold and Silver also saw a massive sell-off due to unwinding of Long positions and redemption pressures on ETFs. Even crude oil saw a massive sell-off with a rising dollar index. So is it going to be a slippery slope all the way with no relief at all? Probably not. Let us look at each geographical section, the challenges and the potential way forward

US / Dow: Dow made 2 valiant attempts to take out the 11450 zone and even posted a counter-trend high of 11500 once but the crucial requirement of 2 consecutive closes above 11450 was not fulfilled. The global market concerns put in a lot of selling pressure and Dow is now hovering around precariously at the 10500 levels. The 10250-10500 zone represents a very crucial support level and it may continue to take some support in this area before taking the next leg down. [This is in line with the Critical Support level of 1100-1125 for SnP 500 where one may expect a bounce back towards 1150-1175 before heading down to the next stop]

The current rise in dollar index is absolutely on expected lines and some of our readers may remember that we called for a massive rally in the Dollar Index all the way upto 81 levels. A lot of people were confused as to how does this become even a remote possibility when the SnP Ratings were downgraded for US Debt. Partly the answer lies in the fact that the US Dollar is still the reserve currency and partly because of the fact that a lot of leveraged fund houses have their positions in dollar terms and when margin calls are triggered, the dollar obligations on the bourses help the dollar rise significantly. The eventual target for Dow is 6k to 8k levels but it cannot be a free fall unless the orderly defaults on Europe are triggered just as the Lehman Brothers and the sub-prime crisis poked its head up out of no where.

The other reason why even fund houses within the US had to end up with a sell-off was due to the fact that they were sitting with hardly 3.5% odd levels of Cash vis a vis Assets Under Management. The utter disrepect for cash took a severe toll [and will continue to do so as it is human nature not to learn from past mistakes! more so the US bankers who still continue to live in the illusion of the past that at any point of time, the Fed will come and print a lot of dollar bills to bail out the banking system. The way the US bankers operate is nothing short of what North Korea does for the aid. A communist government sitting on a pile of nukes keeps pressing for aid in a begging bowl most of which does not go for the real purpose of malnutrition and poverty alleviation. Yet, the world has no choice but to keep doling out the aid due to the plight of the people suffering there.

This is the modus operandi of elite bankers wearing blazers and talking a lot of fancy mumbo jumbo. The hollow threat each time is that credit growth and the savings of a majority of hard working savers' money [which these suckers have already blown out] will be in jeopardy. By and large with an election due every 4 years, the governments and leaders with the vision of winning or continuing the streak at Washington DC's White House / Capital Hill area do as it is easy to do it at the cost of mango people's money and also win elections!]

This will go on forever until the majority of people in US actually study in proper universities and focus on wealth creation by producing real goods and tangible services. Unless this happens, the Dow will keep oscillating between 6k and 14k in a 3 to 5 year cycle. All cries for a big rally in Dow to 15k and 20k will be hollow ones and the other aspect of Dow sinking to 3k is also rubbish. Even if we take Dow's negative streak in 1970s and 1980s, the 1k mark then, adjusted for inflation works out to 5816 (Taking a CAGR Inflation Rate of 4.5% for US for 40 Years) - so we should be able to see more or less the post-Lehman Brothers levels or maybe slightly lower.

Never go by what bankers like Goldman Sachs or for that matter any advisory keeps on harping about - there is enough evidence in public domain that GS called for Oil over USD 250 / Barrel in the roaring 2006-2007 period, doctored deals by airlines to hedge their risks by locking in a futures price of USD 135 for aviation fuel and when the crash of 2008 took place, called for a low of 30 dollars a barrel! The losses that airlines incurred were far greater post Lehman Brothers not because of low load factors but due to this suddenly odd position they were in to pay more than the market price [and the treasury managers woke up so late that it was not even worth buying Puts by then to arrest some of the losses caused by the locked in rates!]That is how most advisories work - when Gold started appreciating from 1400 levels, the first call was for 1625 [and that is logical] and then a panic raising prices to 1800 off levels. Around this time, there was sudden increase for gold and we heard cries for 2000, and eventual destination of 5000! 2 days of sell-off and now people are talking about 1000 on gold etc - bottom-line: in a herd mentality, only extreme price targets are given without any justification.

So as far as the US is concerned, safe to assume that any level around 5k and 7k on Dow is a wonderful opportunity to start buying as there will be counter-trend rallies on a cycle degree as well. With presidential elections in 2014, regardless of who comes into power, there will be enough doctoring of statistics and sentiment barometers to bring Dow back again to 12k plus levels.

FTSE saw a sharp sell-off but in all likelihood, will take some support in the 4900 zone and stage a counter-trend bounce in the short term. Eventual target lies at around 2500 levels [I am very skeptical of the calls for 1850 on FTSE at this point of time for reasons same as the ones given for Dow] With elections towards the end of 2013/early 2014, seems very much plausible that FTSE will bounceback smartly from well above the 2k zone.

For UK, one good aspect is that they are producing goods and services that fuel the economy. One leg of hyperinflation that will take out a lot of small and mid-sized retailers but eventually will start bouncing back with consolidation. The falling Sterling will help the exports of engineering goods; real estate prices are correcting and will continue to fall further in line with what is happening in the US. We should be able to see a sharp fall by mid-2012 and then a smart pull-back by early 2013 in the UK real estate market.

Now, the world is beginning to realize the strategic significance of UK supporting the unity of Eurozone but staying out of the Euro. This has come as a blessing in disguise as it allowed the Sterling to collapse well, for a brief period spook up but maintain the downward spiral for competitive exports. It also saved UK the burden of doling out funds for Eurozone bailouts as they are hard pressed to monetize their own debts.

Outlook for CAC40 and DAX remains unchanged; a 50% to 62% correction from this year's highs; CAC is almost there and would probably be one of the first ones to hit the 2k levels from where a bounce may be anticipated. DAX should be able to stage a pullback from the 3500-3800 zone and by 2014, come towards the 6500-7k levels again.

SMI (actually the leading indicator now for European stocks) broke down the crucial support level of 5300 [it had a pending target of 5600 via a counter-trend rally which I am still marking as pending until we get 3 consecutive closes below 5k levels] but I expect SMI and DAX to stage very smart pullbacks in a 2 year time frame with or without the drama of Euro.

PIIGS - Will continue to sink into an abyss regardless of what happens in terms of bailouts. Italy being a major Mediterranean  gateway with a lot of intra-Europe trade as well as foreign trade is in a position to step up relatively quickly. Spain will also have severe problems but may be able to work its way out of trouble at least temporarily which is an uncanny exception amongst the PIIGS countries. Portugal has displayed remarkable solidarity and is showing signs of people realizing the importance of productivity for longer periods of time. Now the shops are open all 7 days a week in most places, the minimum wages are rationalized and one can see Portugal's factories gain a lot of orders. Whilst the Italian people have already starting following suit and Spaniards, taking some more time to join this bus of 'responsible' and 'sensible' part of the workforce, with a brief period of negative extremeness, should be able to see a difference.

Unfortunately, I am not able to say the same about Greece and Ireland with the same confidence with my limited knowledge and exposure of conditions in here. As of now, not able to see any definitive action from both people and governments here to bring the old drive of doing something concrete and creating wealth and opportunities for people. The attitude still seems to be that of living under the 'glory of past' and 'hope' that some other counterpart will bail them out of trouble.

So that is how I see the US / European markets for now. In the next part of the weekend series, we will take the coverage for India.

1 comment:

nalin said...

thanx nagraj ji...4 replying 2 my query.
Luv & regards