Saturday, October 29, 2011

Global Markets Update - 29th October 2011

The series of white lies and cold wars [Between Europe and US] via economics continues leaving a lot of people baffled as to what really happened. Before we go to the indices, let us see what has transpired so far with the Euro-Dollar exchange rate impact as all Banks pre-dominantly rely on this and of course the KBW Banking Index for global markets.

The first major fall was from 1.51 to 1.39 and then a 61.8% retracement of the same; next leg of fall from 1.44 levels to 1.31 levels and now a 61.8% retracement [and a similar pattern seen on GBP-USD as well] However, we should remember that it has been a steady climb for the dollar index and the old highs have been long left out. The next stop for Euro will be around 1.2-1.25 levels within the end of this year [it is following a 3 month cycle to the downside from April 2011]

On the surface, the moment the Greek deal announcement came in, all indices and non-Euro currencies started roaring to the upside; Dow had a pending target of 12k anyways and the announcement of the Greek deal accelerated the pending target [which is still well below the high of 12873] made earlier. DAX, FTSE also rallied to 6400 and 5700 levels respectively but still well short of their 2011 highs made earlier this year. Fantastic news for the stock market one would be tempted to think - one really needs to think with a different perspective. A strong index performance would imply that the top notch stocks should be close to the levels they had during the high of this year. The market breadth has been very lack lustre with the bear market rallies of the indices and most of the stocks are no-where close to the 90% of peak value [the indices are at almost 90% of the peak value!], the midcap and smallcap stocks are reeling under a lot of pressure and this holds true for most indices with fiat currencies.

The real problem surrounding the European debt crisis is excessive leverage by the banking system with Credit Default Swaps [that by the way have shown no signs of cooling off despite the 'fantastic European bailout' solution. This means hot money does not believe that the debt will be repaid; [the haircut of 50% is also a compelling evidence why hot money thinks so] 3 months earlier, the majority of the hot money was under the impression that the Fed will introduce the QE3 program whilst Europe won't do so. Most bets in the complex fixed income derivatives market were in line with this line of thought IMHO. In reality, things turned out the other way around; so the USD denominated bets in US triggered a massive sell-off as fund houses got margin calls and they had to dump all assets to fulfil their dollar denominated liabilities. With Europe proposing a 50% haircut and leverage of the EFSF fund, this time it was the turnh of the Euro denominated margin obligations and hence people had to dump the dollar backed currencies and fulfil the Euro denominated obligations.

[and all of this is being fit in right now as the charts had forecast most of these values in advance but yes - must acknowledge that some rise has been a bit bewildering; for instance FTSE posting a close above 5550 was not expected and likewise for DAX posting a close above 5950 - these are throw-overs and are hinting that within the next 3 months the falls are going to be far more severe; 4900 support for FTSE will be decicively broken down and the next stop is 4750 on FTSE now but please look at the timeline - we are looking at 3 months]

First and foremost, the European bailout has no details of the mechanism as to how the falls will be arrested; this move has brought forward a lot of negative consequences and it is going to be politically extremnely difficult to manage; The 50% haircut on Greek debt has actually encouraged other countries like Italy, Spain to simply take a laid back attitude of not paying debt as the haircut precedent is here to stay. The proposed haircut is valid for the interest payable for the previous instalments of bailouts i.e. the entire principal is still pending and Greece needs more aid for running the show. Ireland, another PIIGS country is now having domestic pressure - the honest tax-payers are asking a very logical and straightforward question - we got whipped due to bankers' mistakes; still for the pride of the nation and the genuine issue of having taken bailout money, we the people agreed to take paycuts, and pay higher taxes so that the irish government can fulfil the debt obligations. Inflation if anything is only taking a northward trajectory and why this step-motherly treatment for us; [From the perspective of Irish, they are on the losing side for playing the game as per rules whilst Greek are getting away with all the mess!]

The other major challenge is that there is a lot of debate on-going as to how the write-downs and losses on bad debt be handled and capital raised for the next round of re-capitalization be tackled. The farce of the stress tests is evident with the progress in the European financial turmoil; with each passing day/week/month more and more banks are falling from 'risk-free' / 'adequately capitalized' status to 'risky' / 'inadequately capitalized' status and this is seriously hurting the credibility of the stress tests and the European bond market has lost credibility completely. What is the guarantee that at some point of time they will come back and say 'Consider the amount paid as paid' - game over? This is going to hurt the banking businesses tremendously. Most banks are now coming forth and talking about balance sheet adjustments to ensure that the adequate capitalization comes through. All that this means in simple terms is whether you are a small business or a person, by and large your access to bank credit is gone; banks won't lend money for economic progress! They are making a mockery of the entire system saying 'Bailouts - welcome; it gives us cheap finance for speculation' This is evident in the rising price of commodities.

Another joke that comes from the 'elite' analysts about banks and companies posting double digit growth figures in EPS and here, I have to quote cricket legend's Sidhuism 'statistics are like swim-suits - what they reveal are enticing, what they hide are essentials' Earnings per Share is one aspect but then we have Stock Price and Number of Shares Outstanding. A company deserves the comment growth when the shareholder value of the firm has actually grown.

Enterprise Value [Shareholder Value] = Stock Price x Number of Shares Outstanding

First and foremest, most there have been deliberate attempts to keep lower EPS expectations prior to results season this time for all major companies in major firms this year. Second, as one can see with the Enterprise Value metric, a higher EPS does not guarantee wealth creation! None of the top notch banks [the leading barometers of global growth] have managed to grow shareholders wealth; they have continuously eroded shareholder value due to fat bonuses and excessively leveraged speculation. In fact, the US has again proved that how shallow it's concepts of 'procedural justice', 'ethics' are concerned. Most top management positions across all major firms have negotiated such lopsided contracts [especially in banks] that the executives leave with a golden parachute in case something goes wrong and services are terminated.

My simple questions to all bulls yelling with roaring indices is simple and straightforward - if the indices are really roaring and the bull market are

1] If that is the case, why is enterprise value not coming to normalcy?
2] Why so many jobs are being cut in both private and public domains?
3] Why is the housing market not roaring with the same enthusiasm?

If the unemployment numbers are going to increase and inflation is showing no signs of peaking out, how can companies grow? No rational and ethical 'expert' can answer this question because s/he knows that there is no answer to this. There is no right way of doing the right thing. If financial engineering has created this mess, financial engineering is not going to solve this problem as somebody said 'the devil lies in the details'

Next targets for major indices are
Dow - 10250 (full confirmation will come through when it decisively breaks 11425 on closing basis)
FTSE - 4750 (full confirmation will come through when it decisively breaks 5200 on closing basis)
DAX - 5000 (full confirmation will come through when it decisively breaks 5550 on closing basis)
CAC40 - 2500 (full confirmation will come through when it decisively breaks 2800 on closing basis)

So that is how we stand with major global indices; the pullback on Bovespa (Brazil) has been very encouraging but it is all set to retest the 40k mark but will bounce back smartly as we inch closer to the next Football World Cup. Hang Seng has staged a smart pull-back and is almost on the verge of finding the current bottom [looking at 14k - 15k levels for the bottom after which it will march towards the 32k mark in 15 to 18 months] I would encourage the Indian investor to start accumulating some Hang Seng Bees [Scrip Code HNGSNGBES] when Hang Seng is going in the range 14k - 16k [don't worry just in case it pokes down to the 12k mark once] - this is not a trading scrip. This is a healthy investment scrip with a target of doubling the investment in 12 to 18 months time frame.

As far as gold is concerned, there is some divergence - it was in a Contracting Triangle for almost a month and has now broken out of that triangle and has retraced up towards the USD 1750 levels [another indicator of fear plus speculation by banks speculating on commodities]. The top seems to be in place with USD 1925 levels and the next stops for gold are USD 1450 and USD 1200 within 3 to 6 months. If you have gold in the form of coins, bars, this is the time to book some profits on those holdings and sit tight on the cash. We had given a buy call for gold since Diwali last year as we were relatively sure of an upside until USD 1650 on gold but now we don't find much steam left in gold for now. The negative divergence has been confirmed by platinum and silver.

Coming to silver, one can forget about the highs it made earlier this year at almost USD 50 levels; the next destination for silver is USD 25-26 and we expect this to show up within the end of this year. Silver is in a way a measure of risk appetite of hot money and the fact that they are dumping silver is a good measure of how much they sense risk in all asset classes of capital markets.

Coming up next, coverage for India 

1 comment:

nalin said...

Although platinum is diverging in -ve territory, zimbabwe will soon pitch in 2 save the price realisation(imho, they will soon,if nt wrong dyve actually issued a statement on the same.).

I feel if some one hardend with gold shud @least learn the investment in plattinum & palladium. They r one which r industrially relevent.