Friday, March 27, 2009

Is it the end of the Bear market?

The last 3 weeks, the markets have rallied about 23 %. This is the most in the last 15 years.

The experts have started proclaiming its the end of the bear market, a new bull market arises.

I would be very circumspect now.

Lets see what has taken the markets up:

1. Slew of announcements from the US government. Toxic Assets clean up plan has been touted as the fix-it all. Its allowing the private companies beneift from the mess they created in the first place.
2. Massive short covering. All the bears were caught on the back foot. I am sure the Option Writers must have been butchered completely.

Have the fundamentals changed so much in the past 3 weeks that we have rallied 23 pc up?

Whenever there is a sharp up move or downmove, there is a reaction. Bear markets simply dont take u-turns almost overnight.

Now everyone is turning bullish. The aim of the market movers is to catch everyone on the back foot.

Once everyone including the most sceptic has turned bullish, there would a fall.

The bears have been slaughtered. The Bulls will be the next.

Even during the Great Depression, Dow had rallied almost 50 pc from its base, before collapsing again.

So what would I do:

1. I would simply wait and watch. Buying after a 23 pc rally makes no sense. The risk reward would be skewed in favor of the risk now.

It is quite likely that we would continue the rally for 1 or 2 weeks more.

The elections hang like a albatross round the markets neck.

Hung Parliament with a run-up would be a recipe for disaster.

The toxic asset plan looks good on paper, I would wait for its implementation. Obama's style is good, talk up the markets. I would like to see the results. Its a dangerous game. Talking up the markets if you dont deliver than the fall would be steeper.

I would prefer to stick to Gold for the next 2 years.

I am done with my FD investment in December when the rates were attractive. I have locked in my investments for 5 years.

My next Gold allocation, I would start to look building now. My logic is if the dollar collapses, it would be sometime in the next 12-24 months. The time to build is now.

I would look at my equity allocation last sometime in May-July horizon.

Post that, sit back and watch the fun. The stocks I am looking are almost at 25 pc of their peak value. Even if they rally 50 pc from their bottom, they would still be at 37.5 pc of their peak value.

I would rather buy on the leg up, than the leg down.

I am not convinced of this rally sustaining for a very long time.

The Full year results are the key.

This rally would definitely be good for year end bonuses. Nifty at 3100 certainly looks better than Nifty at 2500 for your NAV. ;-)

Happy Gudi Padwa.


Sunday, March 22, 2009

The Political Games begin


It was a positive week for the second time in a row for the markets.

The year nav pumping is on full swing. Coupled with the Put writing at 2700 strike price for March expiry, 2700 looks to be holding for this expiry.

The PCR is 1.59. With such amounts of Puts being written, someone may just have other plans in mind.

A sharp fall from this level will have the Put writers running for cover.

For the past few months, the option writers have much huge chunks of money by the range bound movement of the Nifty.

Remember, 1 fall will take away all their earnings. The same thing had happened in Jan 2008. The Put writers made hay for several months, then 1 month took away all their profits.

Always 1 should stay have from naked option writing.

The Political scene is becoming more and more complex. Hung Parliament seems to be the inevitable result.

1. The Congress will be weakened by the split in the UPA in Bihar. I see Nitesh Kumar a clear winner from the division of UPA Votes. The split in Uttar Pradesh between the Samajwadi and the Congress will strengthen the hands of Mayawati.

2. The BJP is not doing much better either. The Arun Jaitley - Rajnath spat will weaken its chances. Orissa also will be a problem.

3. Chiranjeevi may pull a few rabbits out of his hat in AP. He will definitely not join the UPA because of anti-Congress stance. He may well become part of the NDA.

The scenario looks very plausible, that a non-Congress, non-BJP Third Front coming to power with no agenda except further looting the country.

We all know how the stock markets will react to it.

My strategy will remain simple. Stay on Cash and buy at 7500-8000 levels. And keep at least half the funds in hand till the elections are over.

We are just now entering the era of deflation. The pain on the street starts now. In the past 1 month, the real estate prices have started cracking finally in mumbai and suburbs like Kharghar.

Real Estate starts cracking when the stock market is near its bottom because of lag effect.

We may have the bottom for the markets soon in place. Remember markets are at least 6 months ahead of the real economy. If the economy is to show recovery post the harvest season (Kharif crop), the markets will bottom out in a month or two.

Caution remains the buzzword. Bear Markets are rallies are sharp, furious and short. I dont see the markets going up much higher from here in the short term.

2 things can happen from here:

1. A straight drop to 2400-2500 levels.
2. A small dip, some more rally and then a drop.

Either ways we seem to be in for lower levels.

The markets tanking after this rally, will remove the last optimist from the market. That is when the bottom is formed.

Even in this rally in our group, I see the number of people buying stocks dropping sharply from previous rallies. Another indicator that the bottom is near but not yet formed.

The last bit of hope is still there. It needs to be crushed to form the bottom.


Saturday, March 14, 2009

Political Uncertainty Ahead

The focus is slowly shifting from the economic slowdown to political stability.

Next 2 months, there will be no economic pronouncements. Whatever has to be done will be done by the next government.

The next government can be a weak government.

The reasons are:

1. The NDA has been weakened. BJP-BJD split means that last time they won 18 out of 21 seats in Orissa, this time that tally will come down and BJD may not support BJP after the elections. Of course, if they dont get majority on their own in the assembly elections, they can be friends again.
Arun Jaitley and Rajnath Singh have fallen out. This internal factionalism is going to cost them dear especially in Bihar. The chances of LK Advani becoming Prime Minister are becoming dimmer.

2.. The UPA has got a boost with Trinamool alliance in WB and infighting within the left in Kerala. Congress will gain at the expense of the left in both these states. The major problem has been the lack of seat sharing with Samajwadi Party. Together, they could have won at least half (40 seats) in UP. Maywati now stands a fair chance of winning 30-40 seats. This lack of alliance will hurt the Congress in far off seats also. For example in Mumbai South where Milind Deora should have been in a straight fight with Shiv Sena, a SP nominee will eat away his votes.
The delimitation of constituencies is going to be major factor.

3. The Third front has the problem that everyone wants to be a PM. They have some good allies like TDP which should do well in Andhra, Jaya in TN, Left (around 30 seats), Mayawati, potentially BJD. But they will again end up with 120-140 seats at the max.

Without BJP or Congress support, Third Front will not be able to form a government. The government formed would be unstable and unlikely to last. Either NDA or UPA has to cross 180-190 seats in able to rope in Third front allies. In the current scenario any of the 3 formations look unlikely to cross 180 seats.

The keys to 7, racecourse road, may well be held by Mayawati and Jaya. You know the havoc they created in 1998-1999.

FIIs should most likely stay away from the Indian markets.

Another unnoticed event that has happened is that the bond yields have shot up almost to 7.3 % before falling down again. This means the rate cuts have not worked at all. If government is going to borrow at 7+ then the corporates will borrow at 9 pc plus. This is because heavy borrowing by the government to finance the stimulus packages.

To sum it, I would stay away from the markets. too much uncertainty about. Every rally should be sold into. The mid-caps are being butchered. Take Mahindra Lifespace for example, almost debt free, strong management, sustainable business model now at Rs 80.

Now, you can have 2 more reasons for markets to move up or down. To move up, year nav dressing, if they move down, people booking short term capital loss.