The world is complex!

Seeing all the financial turmoil which is happenning makes me feel that world is not as simple as we think. Old assumptions and old correlations don’t always work. Take a recent example:

When Fed cut rates for the first time in Aug/Sept, our markets did a wonderful rally. What was the reason given- excess liquidity!And now Fed is on a rate cut spree and still people are talking of “inadequate liquidity”! The same markets are viewing the “fed cuts” as negative because it means more problems are in store.

Clearly the financial markets are driven more by sentiment rather than “logic”. The Fed is trying its best to improve the sentiment but it can’t cure all the problems of bad debt. The US economy which was fueled by debt has to take it on its chin and people have to experience pain in this phase of transition. All these rate cuts shall only delay this pain but won’t eliminate it completely. The US consumer has to finally learn the importance of savings and the meaning of financial literacy. A nation can’t run on a credit card forever.

US recession is a done deal now but we need to see how the current credit market problems and a US recession impacts global economies in the coming months.

Now the problem with India is that we have heard so much of “India growth story” in the last couple of years that we refuse to consider the possibility of big slowdown! Even when IIP numbers come at mere 2%, we call it an aberration rather than trend reversal! Another example of confirmation bias.

Even when inflation is on a rise and RBI can’t cut rates, we remain optimistic about super duper growth. Even our FM tends to put all the blame on the “global sentiment”.

We can’t view the current situation through the lens of the past. Who knows things might have changed? Remember US stock markets started to fall much before all these problems came into limelight. May be the markets have a hint about the coming quarter results and are adjusting to them in advance!

Coming back to equity markets- certainly we are in a bear territory. This doesn’t rule out couple of sharp bounces but till we consolidate and move up again,it still remains very risky.

On the investment side-the world is witnessing a move to “real hard assets” like gold. With rising inflation and falling currencies, I won’t be surprised to see Gold hitting new highs in the coming times. Anybody for $2000/ounce Gold? May be I am too bullish!

Trends,trends everywhere..

Dollar has been in a downtrend, oil is on an uptrend and so is gold. Equities are on a downtrend!All this is displaying the power of trends.

So what all do we need to do- just be on the right side of these trends. Don’t try to be extra smart by fighting these trends .These trends can really accelerate in the coming times.

Did you see how a bank like Bear Stearns got sold for just $2 dollars/share when it was trading at $170 an year back? In 1 week, it went out of business.

This raises a bigger question-Will a Citibank follow in the footsteps of Bear Stearns? Things are moving fast and the risks are way too high! And if you think this is just “America’s problem”, didn’t you believe in the power of globalization?

Stay away and let this market find a bottom. Be ready to miss a few opportunities but don’t be adventurous with your money.

Of course those of you who invested in gold might be having some real good time!Enjoy the ride in gold and commodities like crude.

Should one buy the dips?

The market is trying to stabilize at lower levels but every rise is met with fresh selling. Definitely fear is ruling our markets!

So should one act brave and buy this fear? Ask the brave guys who bought a JP associates while it was falling down!

I’d buy the fear but only in small quantity. There is a very high risk of this market testing lower levels. Even if you don’t buy now, you will only miss “a few opportunities” but you might end up saving a lot of money.

Just as no price is “high enough” for stock prices, similarly no price is “low enough”.

The world is going through turbulent times and the US consumer which formed the central engine of US and global growth is under a lot of stress. Major banks like Citi are still facing possibility of huge writedowns (till date $180 billion+ has been written off in the banking system) and there are big question marks on its survival.

The world doesn’t end in a recession but stock prices do stumble a lot in recessionary times.

You might have to reconsider your “equity exposure” in the short term. I might be wrong but the price trends tell me that we are still headed down.

So this might be a time to change your strategy -like resort more to short term trading and avoiding heavy leverages. Try trading Mini NIFTY futures in small quantity which allows you to take directional bets on both sides.

I feel the best strategy is to play like a boxer who is just staying away from his opponent and placing high frequency jabs from a distance. Getting near is too risky!

Post budget market

The budget has come and gone. Mr. PC has again managed to dent the sentiment in the capital markets by increasing the short term capital gains tax and tinkering with STT exemptions. Both these measures shall further reduce the liquidity in the markets. It is a bad time to have such measures.

A good thing was to give more money back to the income tax payer .This might increase domestic savings as well as consumption in the economy. In a way he is back to where he started-running huge fiscal deficits by giving such “pre-election” sops like loan waivers etc.

Coming back to markets- the equation which was 60/40 in favour of the bulls before the budget is now turning in favour of the bears. Budget was one event which could have taken us past the 5350-5400 levels. As we failed to do so, now lets be prepared for the break down of 5050 levels. All those who are on the sidelines shall jump in with short positions.

So lets see if the weak global cues today take us below 5050 or do we manage to stay afloat above these levels?