Saturday, November 5, 2011

Global Markets Update - 5th November 2011

What exactly is happening - total theatre/cinema style being adopted by politicians and central bankers of fiat currencies? Well, they can try whatever they want to; they can delay but not avert the inevitable. Whether BoJ injects dollars, ECB cuts interest rates instead of printing currency [fever is better than typhoid right?] - the economy is contracting, let us make no bones about the fact and yet, the inflation demon isn't getting tamed. I wonder how come so many people, media etc try to make 'breaking news', 'headlines' with Greece and surrounding fragile economies. Let us face some facts - the entire world of fiat currencies are simply monetizing debt to the maximum extent possible and gain political prowess.

All borrowed money to the hilt with the promise of returning the same with decent returns but now have no money to return. This is not the first time a sovereign has defaulted on debt - we have seen similar episodes multiple times from emerging economies; yet, they have gotten back on their feet, harnessed resources, got some discipline in their fiscal and monetary policies only to see the economy vibrate [yes - if anybody thinks I am talking about Brazil / Bovespa, I mean exactly that] It just took 3 months when there was a shift of power and markets abandoned Brazil a few years ago; the worst a political leader coming into the helm could expect in his first 100 days. Yet, a few weeks later, when the economy was opened, things changed and see where Brazil stands today? [I don't want to get into the nitty-gritties of income disparity, bureaucracy etc; all emerging economies including India have a lot of that] All that I am trying to say is that there is no perpetual fall or end of the world; when an economy works towards generating real economic expansion, jobs, slowly but surely things turn around. Yes Brazil defaulted on it's loans but then also repaid it as economic conditions got better [now it is also over-heating especially in real estate and one can expect a decent correction here]

Come on - markets knew very well 2 years ago when the Greek crisis first surfaced that it would not be able to repay its debts. 120% of GDP and 6% yields on sovereign yields are signals enough to know that there is a big problem here. For some time, things will be grim but it is not going to be the end of the world.
Europe has enough talent to get back to work and be productive - after all, it is the very capitalistic approach of Europe [and then US] got the industrial revolution. I personally refuse to believe that a country like Poland can leapfrog as an emerging central European country changing the economic landscape from grim to a very vibrant one whilst the other peripheral countries cannot - it is more to do with lethargy and inertia.

Rather than try complex financial engineering methods [that will only worsen the case for global markets], it is better to once and for all acknowledge the challenges and let the countries default. Here lies the Catch-22 situation - it is not the sovereign debt that is bothering the central bankers or banker fraternity in general; there is such a complex web of fixed income derivatives revolving around this debt the quantum of which nobody knows at this point of time [thanks to off-balance sheet items] and can spring a surprise at any point of time. Spain has ample scope for tourism, automotive industries and of course its rich agricultural prowess with olives. Italy again has good engineers, mathematicians [let us not forget that Fiat has been producing high quality engines consistently]. The entire banking system needs an overhaul once and for all - it is time to bell the cat and say - we care hoots to what happens but all leveraged positions need to be unwound, cleared, settled and regardless of who wins and loses - a certain perceentage of the net gain will be used by sovereign to clear the mess. A fresh banking system to start off - will that happen - I guess not since there is too much at stake and this is simply a utopian dream.

So let us get back to basics and see where we stand vis a vis Europe and US
FTSE had critical support at 4900 and it was due for a corrective rally towards 5550 levels [beyond that was a bit of a surprise but then markets cannot cease to surprise one]. 5600-5680 levels cap the upside of this relief rally for now and it seems like the turn has begun but too early to conclude; now there might be one more relief rally [or maybe not] but T1 for FTSE is 5300 and we should be able to see it in all likelihood next week itself. Similarly for DAX, a close below 5800 will confirm the fall and then it can fall another 150-200 points in a jiffy [rest of Europe will follow automatically but just as with FTSE, one poke by DAX at 6150 levels again is not ruled out]

From a currency perspective, Euro-dollar's fall from 1.44 was very fast and a relief rally towards 1.425 was very logical. With or without news, it was bound to happen, just that with news, both the upside and downside proceded with remarkable acceleration. It was an impulsive fall and hence, it is now chalking out a complex corrective pattern and trying to retrace some of the falls and since GBP retraced 61.8% of the previous fall, fair to assume that Euro will try to do that. News will follow - charts are clearly indicating that the next logical target for Euro-Dollar is a tad below 1.36 and eventual target in the next impulsive leg of fall is 1.28 to 1.32 [let us give this 3 to 5 weeks time] and like wise GBP-USD will fall towards 1.55-1.56 levels in an impulsive format after making one more attempt towards 1.6125 levels [note the remarkable closeness to Fibonacci in terms of retracement of the fall as well as the number!]

To bring in EW terminology, the rise in FTSE, DAX, Dow this year were all inter-mediate B waves [the jury is still open whether the intermediate B is done with qualifiying for a Regular Flat (95% odds IMHO are that the inter-mediate B-waves are done with and the inter-mediate C has commenced) or still B in progress that can surface as an Expanded Flat (5% odds but if this is the case, we should see at least 2 more attempts by western indices before December to get as close to the 2011 highs as possible)]

So assuming that the intermediate C wave down has begun for western indices [the impulsive falls from the highs justify this verdict], we are seeing a corrective minuette C2 giving us these relief rallies and bringing forth a lot of bullish sentiments. The facts of the case are simple and straight-forward as I mentioned last week. Randomly, take the top 15 stocks that have high weightage on any index of western bourses [DJIA, SnP500, FTSE, DAX, SMI, CAC40 - whatever you please] The current index levels are pretty much at 75% to 90% of the 52 week highs; if this rise were indeed genuine, at least 75% of the top stocks of these indices must be quoting about 75% to 90% of the 52 week highs? Is it really happening? I doubt it especially considering the way KBW Bank Indices are falling and the way the Fixed Income Markets are behaving.

Whilst fully cautioning bears not to short blindly, any sane person with a little bit of common sense can see the smoke mirrors all over the place - and sad but true, mass psychology probably tends to look so much into the news and words that are being assertively hurled. The debacle of MF Global in the US is just a tip of the ice-berg; if there is anything to be seen with the 2008 debacle on the bourses and now, there are too many things showing same symptoms; relentless rise in debt yields [just that this time, it has more to do with sovereign debt than corporate debet], jobless claims are not really dropping much [after adjusting for the seasonality factor for farming payrolls], consumer confidence is low, stores are shutting down, downsizing, orders are dwindling. Shipping indices are just showing a seasonal high but the reality is all the large container fleet vessels that were aggressively ordered in 2007-2008 are being deferred for deliveries.

Banks are not willing to lend to private businesses or personal credit; private label consumption is increasing, luxury goods sales are decreasing and every day, some major conglomerate announces a job cut drive to gain control over costs. For those invested in exchange linked mutual funds, ETFs, this couldn't be a better time to withdraw and escape with minimal losses now and just hold on to cash.

SnP 500 once it posts a close below 1190 levels, and Dow below 11425 levels, the fall after that will be worse than the fall from current highs [which represents a deep fall already from the highs] IPO mania seems not to be over yet but all will bite the dust sooner than later as a demand slow-down and lack of proper revenue model won't aid these IPOs.

So putting things in perspective for Nifty / Banknifty, a close of Euro-Dollar below 1.36, GBP-USD below 1.56, FTSE below 5400, Dow below 11425-11500 zone will bring bears back into action. Coming up next, coverage for Nifty

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