Sunday, November 20, 2011

Chickens come Home to Roost

The markets were down about 5 % to close the week at 4906. All the gloom and doom predictions are slowly coming true. In all this bad news lies the seeds of the next bull run. Lets see what the future holds for the Indian economy.

1. Kingfisher huge debts are threatening to derail the airline industry. Kingfisher going bust or requiring a bailout as serious implications not only for the airline sector but the banking Sector. The government is talking about FDI in Aviation. This comes a bit too late. Who will invest in India's ailing airline sector and even if they do it will be at throwaway valuations.

2. The Banks are threatened by NPAs. Not only Kingfisher debts but also from the Power Sector. The biggest one to take the hit is State Bank of India. The defaults have just started and things will get much worse before they improve.

3. The Government auctions of 10 year bonds are devolving on the primary dealers. In layman terminology this means that no one is willing to buy bonds from the government at the Interest Rates being offered. The last bond auction devolved at 8.83 %. The Repo Rate is at 8.5%. This pretty much makes the case for holding rates redundant. If the most secure asset in India gives you an yield of close to 9 %, the banks will demand much more from the home loans.

4. Over the last few weeks, ICICI Bank has stepped up bombarding people's mailboxes with offers of flats at sale at much discounted rates. This is another sign that the NPAs of banks in terms of real estate sector loans are beginning to show up. As the layoffs increase and the distressed sales increase, expect the Balance Sheets of Banks to look much more horrible.

5.The mid caps are being slaughtered in the markets. The ones which have large FCCB holdings and the companies where promoters have pledged shares are the ones being hammered. The Mid-Caps are already at a level of Sensex being 10000. Pipavav Defence is an example of being circuit down at Rs 55.

6. Technically, the markets may have made their low 4838 for this settlement. Every rise can be sold into. The supports come at the 4800-4850 band after which comes 4720 and then 4500. The markets are oversold now on a delay basis and some amount of bounce can come to take the market to 5000-5050 levels.

7. Europe continues to struggle with the debt crisis. A discussion with one of my colleagues from Germany underlined the same. The issue is ow how much should Germany support the rest of Europe. The future of Euro is in question and now it becomes a question of national politics rather than just being pure economics. The next year brings elections in France and the US. Germany goes to the polls in 2013.

8. Channel support comes at around 4830.First resistance now will come at 4950. These are small trading ranges and are suitable only for traders. The direction is now very clear and it is on the way down. Not all stocks bottom at the same time and this is a rare opportunity to build a new portfolio from a clean slate.

Amidst this boom and gloom now is the time to start picking stocks which will survive the downturn and will do well with a 3-5 year perspective.We must look for companies which have less amount of debt on the books, have a market for their products and ones which will represent the new India. For those interested in stock picks we have Lakshmi's Investment Cherry Picks.

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