Tuesday, January 1, 2013

Outlook For January 2013 / Overall 2013

Wishing all readers a very Happy and Prosperous Calendar 2013 New Year
[This being the outlook 2013 post, will be pretty long. So read at leisure]

Hope that the posts in 2012 were helpful in terms of anticipating price and time trends. We were looking for one last leg of correction in Jan '12 before starting the upward march that obviously did not happen.
5740 was the logical target even when Nifty corrected from 5629 in Feb '12 to 4770 levels in mid-2012 and we had a lot of jittery people writing in. We managed to assuage a lot of fears and stuck our necks out for the target of 5740 [the blog archives will also say the same]
Above 5740 was supposed to be a bonus and what a bonus it has been

Nifty EOD 31st December 2012
Nifty EOW 28th December 2012

BankNifty EOD 31st December 2012

BankNifty EOW 28th December 2012

So what is the expected road map now??? Well for starters, more upside hopes are still alive and a close above 5944 is near certain to invite a test of 6080-6180 levels. As mentioned in the Dec '12 post, I am personally bearish for the year 2013 due to reasons mentioned in that post.A Euro-currency break up is inevitable no matter how hard the central bankers and financial engineers and politicians try to work things around. It is only a matter of time; 2013 and 2016 are the 2 most high probable years for the same to take place. All the global mega-banks will continue to hunt for ways to boost 'Tier 1 Capital' in financial jargon which to put things in perspective implies that banks have far less money than what their balance sheets reflect.

My personal outlook is that 2013 will be a repeat of  2010-11 but perhaps not as chaotic

Even if for sometime, one ignores the trillions and quadrillions of dollars worth of speculative securities that are floating around in the system created by the banks, even the basic lending is at a mess; on average, a western bank is leveraged to about 18 times Tier-1 capital [it is 10 to 12 times in emerging markets like India] Personal credit lending is restricted to home loans,car loans, student loans and 'shadow banking' loans like gold loans and pay-day loans. No matter what the 'Non-Farm Payrolls' say, the ground reality is that most personal finances in fiat currencies are in distress. Business credit is only extended to sound conglomerates these days.  Student Loans and Pay-Day loans are by far the most toxic ingredients lying in the banking system today, especially in the UK and in the US. The jobs and wages offered are not enough for most of the people to pay off for living expenses and service debt. In fact the very fact that utility bills are paid with credit cards and an alarmingly high number of people accessing pay-day loans is a sign of bad things to come

What are pay-day loans? These are short-term borrowings that low wage earners access for short durations [2 weeks to 6 weeks] from dignified loan sharks. In credit-worthiness terms, most people accessing this credit are those who belonged to the 'sub-prime' category in the previous housing bubble. Since a lot of them cannot even access credit cards any more, they are resorting to pay-day loans i.e. short term funding that will be set off when the next paycheck is received. One question is who are these loan sharks and who is funding them? This happens in a shadow banking system where banks fund the loan sharks and ask them to fund gullible people who desperately need access to credit [the same person if s/he applied for funding from a bank would get booted out!!!] Whilst an individual's credit risk is much lower compared to that of the housing mortgage, the sum of all parts is enough to trigger a domino effect and trigger a bank run at some point of time.

Now add the trillions of dollars of speculative securities lying on commodities, exchange rates and sovereign debt, matters get worse. US Municipalities will continue to go bankrupt at an alarmingly high rate [there were some good experts who predicted this but just got the timing wrong in 2012] Municipal defaults will continue to soar over the period 2013 to 2016 with some relief rallies in between.

Whilst many are feeling that a single Euro must be preserved, one must also realize that it is not in the best interest of peripheral countries to continue with that option. Whilst it provides some relief in terms of access to funding, the longer the peripheral countries stick with the Euro, the more difficult will it be to come back and resurrect the economy IMHO. The Euro is taking out a lot of potential of boosting economies in peripheral Europe as it makes them far less competitive in global commerce. Whilst a lot of short-term pain will follow with the collapse of the Euro currency, the longer run view favors this outcome. The overnight devaluation of the peripheral currencies will result in short term hyperinflation, countries like Italy, Spain will suddenly become so competitive that a huge demand for jobs will come back and tourism will get a huge boost IMHO

It is extremely unfortunate that whilst in the world of science, new evidence trumps the old and brings out newer models for future, the same is not happening with economics. Keynesian economics with concepts like Money Supply, Velocity of Money etc etc have been repeatedly turned on their heads in the last 3 decades, no changes in those models have come about and all the pedagogy around economics still continues to rule the roost making the real world even more disparate from the world as it should be as per economic pedagogy [and the root cause of the mess lies in the cunning politics played by hand in glove central bankers, private bankers and erudite politicians who are reducing people to slaves in the era of democracy and social media by keeping them under debt for as long as possible!!! ]

The deflation propaganda economists and central bankers and analysts can shout as much as they want but hard evidence points the other way around. Just when the gold standard was abolished, price of gold was supposed to be USD 35 per ounce and 1 British Pound Sterling was supposed to be equivalent of 1 Troy Ounce of Silver!!! [this definition has not changed for over 200 years now]

Even at 2% target inflation rate, the current prices are well above the defined limits!!! The price of essential commodities like Soybeans, Corn, Crude Oil are significantly high and financial engineering will only escalate these prices. Credit contraction yes but the common man regardless of whether s/he is in the emerging world or the developed world is finding it hard to make ends meet. Even the basket of goods that define Consumer Price Index and Wholesale Price Index has not changed for more than 5 decades
[All this with an exponential surge in economists with only one answer - monetize debt and hope that inflation clears it out in the long run as in the long run, people will be dead and that is the only certainty apart from taxes!!!]

Silver is expected to find a bottom in the USD 22-25 per ounce from where a new wave up should commence taking out old highs towards USD 50 per ounce

Gold is expected to find a bottom in the USD 1350-USD 1450 mark and then start a mega bull run towards USD 2000 per ounce [These were downside targets mentioned in this blog in 2012 as well and there is  no change to this view. Give or take 75 dollars on either side adjusting for inflation]

Nymex Crude will find a bottom around the USD 65 / Barrel mark and them commence an upward journey to USD 150+ levels [Give or take 10 dollars on either side]

[Please note that these are larger trends that take a good 2-3 years to materialize in terms of both fall and rise] Silver being higher beta will fall and rise faster than gold. In India in Rupee terms, the bottom for gold should be in the 25k to 28k / 10 gms for gold and 45k - 48k / kilo for Silver. Buying physical units and stashing them away in safe lockers would be a better idea for higher quantities. ETFs should be taken for lower quantities.

Coming back to Nifty, time will tell when the decline will begin but when it does, it is bound to send shivers down most participants' spines as the fall in 2013 will be quite sharp and rapid. Investors would be better off  holding onto cash for now and entering favorite stocks when Nifty comes around the 4800 mark. That is always a good point to enter the market as even if it takes a 15% to 30% hit at that time, the rebound impact in a 3 year horizon will be significant and one can easily clock a 20% to 30% per annum ROI for investments made at 4800 levels.

I personally expect a minimum of 4531 on Nifty and 7500 on BankNifty as downside targets for 2013 [please note that these are longer term targets and attempts to Short Nifty randomly via Futures or Put options can turn futile or even loss making in the short run. One should have a certain level of fundamental and technical analysis finesse to be able to play these moves and have guts of steel to get out of the trade when SL is hit]

Most Sensitive Time Periods for 2013

1st March 2013                        377 Days from 22nd Feb '12 Interim Top of 5629
21st March 2013:                     Spring Equinox
11th June 2013:                        377 Days from 4th June '12 Interim Bottom of 4770
21st June 2013:                        Summer Solstice
22nd September 2013              Fall Equinox
21st December 2013                Winter Solstice

From the major planetary movements point of view as discussed by WD Gann, the period starting 30th May 2013 will be critical to watch out for as the major planet Jupiter moves into the air sign Gemini, causing confusion and turbulence in markets [Also falls in line with the common market parlance, Sell in May and Go Away!]

The periods of retrogade Mercury will also add to the volatility of the financial markets and these will be covered as we progress through 2013. There is nothing to despair about even if markets fall. Markets as usual will have their ups and downs. It is just a matter of cutting one's losses and booking profits from time to time even if it means getting off the bus a little earlier. On the other hand, there is nothing to fear about in terms of short term 10% to 20% losses on portfolios as long as most of the exposure is linked to the indices and leading index participants.

The most potential bad news to hit the headlines in 2013
Unsustainable debt
Loans going bad
Corporate Debt Restructuring
Bank Runs
So on and so forth

Wishing all of you a very Happy and Prosperous Calendar 2013 as the new wave up after the impending correction will bring the most cheer by mid-2014 IMHO