I thought that the weekend would be a good time to wrap up a bird's eye view of the global market conditions.
Dow: People have written off Dow already and turning more bearish by the day. However, there is a time and price balance. The registered high on Dow spot was 12873 on May 2nd 2011; Whilst it is trading phenomenally lower now, it will not go down so easily so soon. It will make 2 more attempts to come close to 12k and possibly even go to 12400. The turning points for these upsides will continue to be 22nd September and 21st December respectively before the towel is thrown completely.
Situation of US Economy: The talks of deleveraging is still a myth; of course the smaller fund houses have already gone bust and even the big names are slowly putting a freeze on new recruits and establishing plans of severance in the eventual course of an economic slowdown. Housing markets are yet to test the lows and consumer confidence is also pretty low. One early hint of inevitable trouble [even before the SnP downgrades were announced] was the fact that the last 3 months have seen a remarkable increase in payment of utility bills through credit cards and leading card lenders are going through a tough time to recover dues from a lot of credit card holders. [So the convenience myth of using credit card for bill payments is by and large debunked]
If the September announcements from President Obama bring cheer, then one should not be surprised to see a revisit to the May levels on Dow. Essentially, what smart money wants to know is how the budget deficit can be curtailed. Given the changed socio-economic climate of the globe, one of the low hanging fruits for US is to curtail defence expenditure which is slowly but surely happening.
The USD will continue to be the standard global currency for commodities and trades world wide and the dollar index is almost at a bottom. It will start surging back sooner than later.
FTSE: FTSE made an intermediate high of 6100+ levels in the first quarter this year and had thus opened the possibility of going to even 6400 which I was personally very optimistic about. The condition was to ensure that 5550 is not breached during the subsequent corrections. The 5550 level has been convincingly breached and FTSE has also tested the 5k levels. Like the Dow, FTSE will also make some attempts to move towards the 5800/6000 mark before taking the final plunge to almost post-Lehman Brothers levels.
Bird's Eye View of The Economy: The banking industry continues to reel under pressure of toxic assets. Lloyds TSB has not even managed to break even from losses incurred by acquiring HBOS [which one should remember was done sans proper due diligence and even had laws manipulated to accommodate the merger. The projected cost savings have not come through] Other aspect is that while one hears 'Property prices now reflect sanity instead of Vanity in London', the prices are no where near the bottom. Hunger for credit growth is getting banks to continue making mortgage disbursements sans due diligence. The banks are getting credit from the central bank at near zero rates and the wrong incentives are ensuring that the economy goes for a toss in full steam.
On the other hand, a weaker GBP is helping some of the industries of UK [especially in Off The Road transport equipments] but that still does not resolve the major challenges. Moreover, all the internal political challenges does not make the country a place for sound investments.
Both US and UK have one common problem as of now; lack of innovation, lack of manufacturing and a social culture that is largely dependent on Social Security. This does not augur well and the slowdown this time will see a lot of work that is outsourced be pulled back into hinterland areas.
DAX: The DAX has long ago topped out for 2011 and with a constant Euro measurement, it is set to fall about 60% from this year's top [or about 45% on nominal Euro terms]. Engineering and manufacturing continue to be the forte in Germany. The Hannover exhibition is time and again showing very innovative instruments being crafted in Germany's laboratories. Currently, a strong Euro is making a lot of good products unviable compared to counterparts in US, UK, Japan and S. Korea. However, with a fall in Euro, there will be a lot of demand for German goods and services.
Whilst this won't prevent the DAX from collapsing, it won't be as systemic as some of the other European bourses are slated to be. The larger problem affecting Germany is that it is now the sole creditor for other Euro zone countries. With 3 countries already having their bonds rated as junk and 3 more potential countries in the waiting list for Euro aid, the system is heading towards a crash. The Swiss-German border is seeing renewed industrial activity and Austrians too are making silent contributions to this development. Given the gravity of the crisis, one may see some more strong ties emerging among Switzerland, Germany and Austria. The sole bone of contention between the Swiss and German governments, the issue of tax evasion by a lot of Germans stashing away money in Swiss accounts may end up with some mutual win-win agreements. The conditions will be such that rather than focus on the breach of laws, the focus might shift to a better taxation system as Germany will be very much in need of money and punitive steps will certainly not help.
CAC40: CAC40 too topped out quite some time ago. The challenge with France is that the longevity of the people is very high but they work only till the age of 58. The industrial productivity has not improved at all that made France a very prosperous nation in the first place. Moreover, the social security obligations are putting more tax payers under burden and the number of people eligible for government concessions is increasing by the day. The soaring premiums for CDS derivatives on French debt clearly is a leading indicator that smart money is worried about economic problems in France.
For the average person in France in the age group 25-32, the average wages have come to about 2500 Euros a month even in a major city like Paris. Even the leading French banks are having challenges with recovering dues from customers who tend to take 2 months forward credit. [In France for instance, you don't get a separate ATM Card and Credit Card; The card is a dual card and allows for a certain level of overdraft even if the account balance of the account holder is nil. The subsequent deposits are adjusted for the existing debits. People are utilizing full credit for about 2 months on an average which implies that at any given point of time, the odds of having a lot of accounts with debit balances are very high]
That being said, France does not lack talent by and large apart from doctors and nurses. There are good engineers for innovation etc and it is only a matter of time that they recognize this and shift the attitudes from a state dependent work force. The close alliance with Germany will do well to limit losses but the CAC40 is set to go below 50% of the 2011 top next year.
PIIGS: all set to sink back to lower than post Lehman Brothers values and a systemic crash of almost all small banks [or probably major ones as well; in Portugal and Ireland, more and more people are withdrawing money from banks which will sooner or later bring a lot of problems in the banking segment. Santander of Spain which currently boasts of about 1.3 trillion Euros of assets will be a major blow out candidate losing over 50% of asset value within a few days.
Major Lesson For Investors: Don't fear if the market is melting. 2014 will be a megabull run and it is not a party to be missed. Dow Futures [due to be listed on NSE soon], Nifty Bees and BankBees are some very good investments. However, markets take time to bottom out just as they take time to top out. So it is good to invest in about 6 tranches over the next 18 months.
Nifty may sink all the way to 3900 or for that matter the panic bottom of 2525 that we saw in October 2008; no problem at all. Let us say one has an outlay of 1 lakh for investing into Nifty. On the other hand it may just tank upto 4675, the panic bottom of Feb 2010 and turnaround. When Nifty is at 4800, one can put in 10k worth of investment in NiftyBees i.e. 20 units [1 unit = 10% of the index value of the day + some administrative charges]. When the value is at 4600, one can add another 10k. To the extent Nifty is above 4000, one can safely invest 10k for a couple of instances. If in case it sinks further below, when Nifty is in the region 3000-4000, one can use corrections and chip in 15k on each major correction. 2014 is bound to be a fantastic year for Nifty and global equities [If election records are any indication of trends from a practical point of view and cycles of boom and bust] Systematic investment helps because it is not possible to point a finger around and confirm the firm bottom. Only subsequent price action confirms the firm bottom.
Simulated Calculation of Networth investing say in 4 installments; 2 installments of 10k each and 2 of 15k
(Asset Values are calculated adjusting for approximate deductions; ignoring interim losses on units bought at higher values)
Installment1-------------------- Nifty Spot ---------------Amount------------Units-------- Asset Value
August '11----------------------4800----------------------10k---------20------------------9600
December '11------------------ 4300----------------------10k---------22------------------9460
April '12------------------------3800----------------------15k---------38-----------------14,440
July '12------------------------- 4000----------------------15k-------- 36-----------------14,440
----------------------------------------------------------------------------------------------------
Summary-------------------------------------------------- 50k-------116 Units
----------------------------------------------------------------------------------------------------
Worst case scenario even if Nifty just manages to revisit the Nov '10 highs in Nov '14 i.e. 6300 levels
Your gains will be 23k in a 3 year time period [116 x 630 = 73k; less 50k money invested] giving you a return of 46% in a 3 year time frame which is almost a 30% annualized return, far higher than the 10% FD
[That being said, one must have about 30% of investments in FD for personal emergencies]
A similar exercise for Bankbees will result in over 40% annualized growth with a 3 year horizon. It is a very good thing that the exchange itself has come up with index related funds and one is sure of liquidity if one wants to encash these gains.
The sole reason why the average investor is better off investing in the index is because in today's complex business scenarios, traditional valuation models and income/expense streams are going for a toss. It becomes extremely difficult to track performance of too many stocks. The average investor [or for that matter even experts] has no clue about so many companies in which one has invested. In fact if one makes a laundry list of companies that have come and gone bust or stocks that have been launched and lost values, probably one might actually end up with an Encyclopedia of Defunct Stocks!
Just to illustrate some well known 'branded' firms; Moser Baer in 2 years the stock has lost over 80% of its value; Cantabil, Koutons both clothing brands that had successful IPOs with an average listing of 350 rupees; again over 70% of values eroded.
Now think again - what is one doing as a shareholder; buying a business that generates revenues and then gets a part of the profit [I am not talking about speculative trading here - pure fundamental investment point of view] If you are a partial owner of Koutons or Cantabil, would you like the way the business is run
Doling out 5 garments for free when 3 garments are purchased. Even with the lowest Cost of Goods, the minimum expense of cost of goods alone is 1800 rupees. Even with a high mark up, the revenue earned on the transaction will be about 4500 rupees. That leaves a gross margin of 2700; the rental for the shop, the overheads, the branding costs will require at least another 2000 rupees. So the next amount the business is actually left with is 700 rupees which is the net profit and incidentally, the banks have a lien on all these revenues and the end result is that there is negative earnings on each share.
The IPO certainly was made successful courtesy partner banks who are doing the whole IPO for a transaction commission. Ellaborate hoardings are put up all over the place to attract the average investor's attention who is commuting with stress and coping up with inflation and more work burden and wants to ensure that there is some additional security and provisioning made for his/her family. If you are a mechanical or project engineer yourself and understand the capital goods segment, you can chose between a large cap like LnT, BHEL or a small cap like NRB Bearings or whatever
So the index itself Nifty, Banknifty, Sensex etc will ensure that regardless of individual stocks performance, you get the minimum average gains of the index itself. In a 3 year horizon, be it a boom or gloom period, things do turnaround. Stocks are a way to wealth provided they are invested in the right stocks or ideally the index itself if you don't want to spend time investigating and segregating the wheat from chaff.
The long term growth story of India is still intact and stocks will generate wealth and provide adequate protection from inflation. Caveat: Keep booking some profits from time to time as well so that the paper gains are realized into real gains and used for good purposes.
Sources for global market outlook
Financial Times[www.ft.com]
The Market Oracle [blog link on homepage of this blog]
Global Market Perspective [Elliot Wave Publications]
WSJ: Wall Street Journal
Dow: People have written off Dow already and turning more bearish by the day. However, there is a time and price balance. The registered high on Dow spot was 12873 on May 2nd 2011; Whilst it is trading phenomenally lower now, it will not go down so easily so soon. It will make 2 more attempts to come close to 12k and possibly even go to 12400. The turning points for these upsides will continue to be 22nd September and 21st December respectively before the towel is thrown completely.
Situation of US Economy: The talks of deleveraging is still a myth; of course the smaller fund houses have already gone bust and even the big names are slowly putting a freeze on new recruits and establishing plans of severance in the eventual course of an economic slowdown. Housing markets are yet to test the lows and consumer confidence is also pretty low. One early hint of inevitable trouble [even before the SnP downgrades were announced] was the fact that the last 3 months have seen a remarkable increase in payment of utility bills through credit cards and leading card lenders are going through a tough time to recover dues from a lot of credit card holders. [So the convenience myth of using credit card for bill payments is by and large debunked]
If the September announcements from President Obama bring cheer, then one should not be surprised to see a revisit to the May levels on Dow. Essentially, what smart money wants to know is how the budget deficit can be curtailed. Given the changed socio-economic climate of the globe, one of the low hanging fruits for US is to curtail defence expenditure which is slowly but surely happening.
The USD will continue to be the standard global currency for commodities and trades world wide and the dollar index is almost at a bottom. It will start surging back sooner than later.
FTSE: FTSE made an intermediate high of 6100+ levels in the first quarter this year and had thus opened the possibility of going to even 6400 which I was personally very optimistic about. The condition was to ensure that 5550 is not breached during the subsequent corrections. The 5550 level has been convincingly breached and FTSE has also tested the 5k levels. Like the Dow, FTSE will also make some attempts to move towards the 5800/6000 mark before taking the final plunge to almost post-Lehman Brothers levels.
Bird's Eye View of The Economy: The banking industry continues to reel under pressure of toxic assets. Lloyds TSB has not even managed to break even from losses incurred by acquiring HBOS [which one should remember was done sans proper due diligence and even had laws manipulated to accommodate the merger. The projected cost savings have not come through] Other aspect is that while one hears 'Property prices now reflect sanity instead of Vanity in London', the prices are no where near the bottom. Hunger for credit growth is getting banks to continue making mortgage disbursements sans due diligence. The banks are getting credit from the central bank at near zero rates and the wrong incentives are ensuring that the economy goes for a toss in full steam.
On the other hand, a weaker GBP is helping some of the industries of UK [especially in Off The Road transport equipments] but that still does not resolve the major challenges. Moreover, all the internal political challenges does not make the country a place for sound investments.
Both US and UK have one common problem as of now; lack of innovation, lack of manufacturing and a social culture that is largely dependent on Social Security. This does not augur well and the slowdown this time will see a lot of work that is outsourced be pulled back into hinterland areas.
DAX: The DAX has long ago topped out for 2011 and with a constant Euro measurement, it is set to fall about 60% from this year's top [or about 45% on nominal Euro terms]. Engineering and manufacturing continue to be the forte in Germany. The Hannover exhibition is time and again showing very innovative instruments being crafted in Germany's laboratories. Currently, a strong Euro is making a lot of good products unviable compared to counterparts in US, UK, Japan and S. Korea. However, with a fall in Euro, there will be a lot of demand for German goods and services.
Whilst this won't prevent the DAX from collapsing, it won't be as systemic as some of the other European bourses are slated to be. The larger problem affecting Germany is that it is now the sole creditor for other Euro zone countries. With 3 countries already having their bonds rated as junk and 3 more potential countries in the waiting list for Euro aid, the system is heading towards a crash. The Swiss-German border is seeing renewed industrial activity and Austrians too are making silent contributions to this development. Given the gravity of the crisis, one may see some more strong ties emerging among Switzerland, Germany and Austria. The sole bone of contention between the Swiss and German governments, the issue of tax evasion by a lot of Germans stashing away money in Swiss accounts may end up with some mutual win-win agreements. The conditions will be such that rather than focus on the breach of laws, the focus might shift to a better taxation system as Germany will be very much in need of money and punitive steps will certainly not help.
CAC40: CAC40 too topped out quite some time ago. The challenge with France is that the longevity of the people is very high but they work only till the age of 58. The industrial productivity has not improved at all that made France a very prosperous nation in the first place. Moreover, the social security obligations are putting more tax payers under burden and the number of people eligible for government concessions is increasing by the day. The soaring premiums for CDS derivatives on French debt clearly is a leading indicator that smart money is worried about economic problems in France.
For the average person in France in the age group 25-32, the average wages have come to about 2500 Euros a month even in a major city like Paris. Even the leading French banks are having challenges with recovering dues from customers who tend to take 2 months forward credit. [In France for instance, you don't get a separate ATM Card and Credit Card; The card is a dual card and allows for a certain level of overdraft even if the account balance of the account holder is nil. The subsequent deposits are adjusted for the existing debits. People are utilizing full credit for about 2 months on an average which implies that at any given point of time, the odds of having a lot of accounts with debit balances are very high]
That being said, France does not lack talent by and large apart from doctors and nurses. There are good engineers for innovation etc and it is only a matter of time that they recognize this and shift the attitudes from a state dependent work force. The close alliance with Germany will do well to limit losses but the CAC40 is set to go below 50% of the 2011 top next year.
PIIGS: all set to sink back to lower than post Lehman Brothers values and a systemic crash of almost all small banks [or probably major ones as well; in Portugal and Ireland, more and more people are withdrawing money from banks which will sooner or later bring a lot of problems in the banking segment. Santander of Spain which currently boasts of about 1.3 trillion Euros of assets will be a major blow out candidate losing over 50% of asset value within a few days.
Major Lesson For Investors: Don't fear if the market is melting. 2014 will be a megabull run and it is not a party to be missed. Dow Futures [due to be listed on NSE soon], Nifty Bees and BankBees are some very good investments. However, markets take time to bottom out just as they take time to top out. So it is good to invest in about 6 tranches over the next 18 months.
Nifty may sink all the way to 3900 or for that matter the panic bottom of 2525 that we saw in October 2008; no problem at all. Let us say one has an outlay of 1 lakh for investing into Nifty. On the other hand it may just tank upto 4675, the panic bottom of Feb 2010 and turnaround. When Nifty is at 4800, one can put in 10k worth of investment in NiftyBees i.e. 20 units [1 unit = 10% of the index value of the day + some administrative charges]. When the value is at 4600, one can add another 10k. To the extent Nifty is above 4000, one can safely invest 10k for a couple of instances. If in case it sinks further below, when Nifty is in the region 3000-4000, one can use corrections and chip in 15k on each major correction. 2014 is bound to be a fantastic year for Nifty and global equities [If election records are any indication of trends from a practical point of view and cycles of boom and bust] Systematic investment helps because it is not possible to point a finger around and confirm the firm bottom. Only subsequent price action confirms the firm bottom.
Simulated Calculation of Networth investing say in 4 installments; 2 installments of 10k each and 2 of 15k
(Asset Values are calculated adjusting for approximate deductions; ignoring interim losses on units bought at higher values)
Installment1-------------------- Nifty Spot ---------------Amount------------Units-------- Asset Value
August '11----------------------4800----------------------10k---------20------------------9600
December '11------------------ 4300----------------------10k---------22------------------9460
April '12------------------------3800----------------------15k---------38-----------------14,440
July '12------------------------- 4000----------------------15k-------- 36-----------------14,440
----------------------------------------------------------------------------------------------------
Summary-------------------------------------------------- 50k-------116 Units
----------------------------------------------------------------------------------------------------
Worst case scenario even if Nifty just manages to revisit the Nov '10 highs in Nov '14 i.e. 6300 levels
Your gains will be 23k in a 3 year time period [116 x 630 = 73k; less 50k money invested] giving you a return of 46% in a 3 year time frame which is almost a 30% annualized return, far higher than the 10% FD
[That being said, one must have about 30% of investments in FD for personal emergencies]
A similar exercise for Bankbees will result in over 40% annualized growth with a 3 year horizon. It is a very good thing that the exchange itself has come up with index related funds and one is sure of liquidity if one wants to encash these gains.
The sole reason why the average investor is better off investing in the index is because in today's complex business scenarios, traditional valuation models and income/expense streams are going for a toss. It becomes extremely difficult to track performance of too many stocks. The average investor [or for that matter even experts] has no clue about so many companies in which one has invested. In fact if one makes a laundry list of companies that have come and gone bust or stocks that have been launched and lost values, probably one might actually end up with an Encyclopedia of Defunct Stocks!
Just to illustrate some well known 'branded' firms; Moser Baer in 2 years the stock has lost over 80% of its value; Cantabil, Koutons both clothing brands that had successful IPOs with an average listing of 350 rupees; again over 70% of values eroded.
Now think again - what is one doing as a shareholder; buying a business that generates revenues and then gets a part of the profit [I am not talking about speculative trading here - pure fundamental investment point of view] If you are a partial owner of Koutons or Cantabil, would you like the way the business is run
Doling out 5 garments for free when 3 garments are purchased. Even with the lowest Cost of Goods, the minimum expense of cost of goods alone is 1800 rupees. Even with a high mark up, the revenue earned on the transaction will be about 4500 rupees. That leaves a gross margin of 2700; the rental for the shop, the overheads, the branding costs will require at least another 2000 rupees. So the next amount the business is actually left with is 700 rupees which is the net profit and incidentally, the banks have a lien on all these revenues and the end result is that there is negative earnings on each share.
The IPO certainly was made successful courtesy partner banks who are doing the whole IPO for a transaction commission. Ellaborate hoardings are put up all over the place to attract the average investor's attention who is commuting with stress and coping up with inflation and more work burden and wants to ensure that there is some additional security and provisioning made for his/her family. If you are a mechanical or project engineer yourself and understand the capital goods segment, you can chose between a large cap like LnT, BHEL or a small cap like NRB Bearings or whatever
So the index itself Nifty, Banknifty, Sensex etc will ensure that regardless of individual stocks performance, you get the minimum average gains of the index itself. In a 3 year horizon, be it a boom or gloom period, things do turnaround. Stocks are a way to wealth provided they are invested in the right stocks or ideally the index itself if you don't want to spend time investigating and segregating the wheat from chaff.
The long term growth story of India is still intact and stocks will generate wealth and provide adequate protection from inflation. Caveat: Keep booking some profits from time to time as well so that the paper gains are realized into real gains and used for good purposes.
Sources for global market outlook
Financial Times[www.ft.com]
The Market Oracle [blog link on homepage of this blog]
Global Market Perspective [Elliot Wave Publications]
WSJ: Wall Street Journal
