Indian inflation is collapsing, and is at a 5 year low:
The strong rupee is responsible for a lot of the decline.
Declining inflation and declining interest rates is the bull case for
the Indian markets.
I actually think the Indian markets are going through a blow off. I
think it's going to try hitting 20000 a few times, fail, and then roll
back to the midway point. (~17000).
Wow. The whole article by Stephen Roach is very thought-provoking. The only caveat is that consumer slowdown in the US has been predicted unsuccessfully for the past few years. Never bet against the American consumer. But the consumer only has to slow down once to disprove this notion. The absence of a black swan does not preclude it's existence.
Will it happen? I think so. $100 crude might just do the trick.
From John Mauldin:
As always, the cycle of risk and greed went to excess. Just as dot-com was the canary in the coalmine seven years ago, subprime was the warning shot this time. Denial in both cases has eerie similarities - as do the spillovers that inevitably occur when major asset bubbles pop. When the dot-com bubble burst in early 2000, the optimists said not to worry - after all, Internet stocks accounted for only about 6% of total US equity market capitalization at the end of 1999. Unfortunately, the broad S&P 500 index tumbled some 49% over the ensuing two and a half years and an over-extended Corporate America led the US and global economy into recession. Similarly, today's optimists are preaching the same gospel: Why worry, they say, if subprime is only about 14% of total US securitized mortgage debt? Yet the unwinding of the far broader credit cycle, to say nothing of the extraordinary freezing up of key short-term financing markets, gives good reason to worry - especially for over-extended American consumers and a still US-centric global economy.
How all this plays out in the global economy in the years immediately ahead is anyone's guess. I have long framed the tensions shaping the outlook in the context of "global rebalancing" - the need of a lopsided world economy to wean itself from a US-centric growth dynamic. A partial rebalancing now appears to be at hand - likely to be led by the coming consolidation of the American consumer. That is painful but good news for those of us who have long worried about the destabilizing risks of a massive US current account deficit. But a more complete global rebalancing is a shared responsibility - one that must also be accompanied by an increase in domestic demand from surplus-saving economies elsewhere in the world. To the extent that doesn't happen - and, as underscored above, that remains my view - then a asymmetrical rebalancing dominated by slowdown in US consumer demand should take a meaningful toll on global growth.
It is high time for monetary authorities to adopt new procedures - namely, taking the state of asset markets into explicit consideration when framing policy options. Like it or not, we now live in an asset-dependent world. As the increasing prevalence of bubbles indicates, a failure to recognize the interplay between the state of asset markets and the real economy is an egregious policy error.
I never thought about collateral damage from subprime. Subprime related losses are estimated to be upwards of $240 billion, excluding any collateral.
Inflation targetting by the Fed, is probably worth another post.
Valuations in emerging markets have reached an interesting crossroads. Economist came out with an article which suggested that 2008 for emerging markets might be like 1999 for tech stocks. You can make a fortune off a bubble. I would like to believe that markets like Taiwan, Singapore and India will one day resemble a bubble valuation (with PEs in excess of 50s). At a PE of around 25 with operating earnings growth of 30%, we have some ways to get there.
Enjoy the party while the music is loud.
From investmentpostcards :
Richard Russell: “There are times when all you have in this business is your instinct. I’m going to use my instinct now. I think it’s time to be rather cautious toward this market. We’re in a very tricky area. I’ve said repeatedly that this is not an institutional market. It’s more of a trader’s market. And traders can reverse their opinion and actions at the drop of a hat.
“I’m getting a bit nervous about this market. It’s not one thing that I can put my finger on, but I’m watching those Lowry’s figures. I’m watching the rising number of new lows, and I keep waiting for volume to expand on the days when the market is higher. So let me put it gingerly. My instinct tells me that this is not a great time to be loaded with a broad spectrum of stocks. I think the best thing that could happen now would be the majority of stocks fluctuating within a trading range, while the Dow and maybe the ‘big’ stock averages tend to head higher. This has become a true two-tier market.”
This was scary
...Bankruptcy experts believe that what lies ahead for their industry is the greatest market since the epic failures of Enron and WorldCom led a parade of corporate defaults that ultimately totaled $290 billion. With the credit markets in turmoil and the financial wreckage from the subprime mortgage meltdown spreading, the number of companies in financial distress rose the fastest in four years last month. Standard & Poor’s says defaults could soar nearly tenfold next year.
Over the next three years, $470 billion in loans to financially shaky companies will mature, according to Jefferies, as will an additional $120 billion in junk bonds. Many of those companies will find new loans hard to get, or at the very least far more expensive in a market now wary of risk.
“The opportunity [for firms like ours] has the potential to be larger than the last [down leg of the] cycle,” said Thane Carlston, co-head of Jefferies’ financial services advisory group.
Restructuring experts believe that the bumper crop of bankruptcies will include some of the richest pickings ever. They note that bankruptcy work in recent years has become more complex—and lucrative—because of a host of financial innovations. High up on that list is the explosion of derivatives that enable investors to bet on defaults.
These instruments, in their infancy when Enron and WorldCom collapsed, represent a $35 trillion market today. With investor exposure to default so vast and diffuse, it would take time to figure out who exactly is on the hook for precisely what in a big bankruptcy case.
“These are uncharted waters for everybody,” said Mr. Carlston.
My fundamental assertion here is that a breakout of the yen to fresh 52 week highs would have bearish implications for the equity markets. Yen has been making a higher high and a higher low.. The fly in the ointment: Kiwi currency is rallying again after correcting sharply.
Market timing: Once the end of September window-dressing is over, it'll be interesting. Another factor to keep in mind: October is mostly when mutual funds sell their stocks/rebalance for tax purposes, and seasonally amongst the worst times to be in the market.
Revision ratios have started trending towards bearish territory as well.
I do not like the fact that the yen is still up against the dollar. Even though the markets have largely made up their losses, the yen hasn't retreated from the panic highs it set when everything was in a swoon. Either it will play catch up, or the deleveraging has already happened.
Are we setting up for another fall? Or is this a normal course of de leveraging, and a general reprising of risk? Only time will tell.
It'€™ll be good to keep an eye on First Data. I know they were able to close the deal. An interesting tell would be if the investment banks are able to sell the loans from their books. If yes, risk appetites are on their way up.
Read the rest of this entry >>It’s not hard to figure out why China might be a sector to avoid.
Jim Rogers, the perennial China bull, at the beginning of the year, had said that if China doubles this year, he would sell his holdings. That’s exactly what China has done so far
A PE ratio in the 50’s is certainly a recipe for disaster. Won’t surprise me if Rogers has already sold out. When would the Chinese bubble prick? No one knows. One would think that the market will keep going up as long as the Chinese investors feel optimistic. Have faith, is their new mantra.
Faith. A new paradigm. A permanently higher plateau, we’ve seen this all before.
A collapse of this market will surely have repercussions in stock markets around the world. But how exactly do you time this?
Are Chinese investors safe till the Beijing Olympics? Can the market double from here? Hitting a PE of 100 maybe? Bubbles tend to last longer than you can remain solvent. Opening up Hong Kong to the mainland investors is a good move, but only delaying the inevitable in my opinion.
Emerging markets: one doesn't see the point of investing in emerging markets, with their higher PEs. We need risk premium dammit!
Today, you can invest in the US and Europe with their reasonable PE ratios. There needs to be a risk adjustment in their valuations, regardless of their ‘growth fundamentals’. Let’s not forget, the Communist Party of India is still in the alliance at the center. The possibility of them screwing things up is just very very high. These are exactly the same guys who banned multinationals from India in the 1970s, relegating India to the ‘Hindu rate of growth’. Their recent posturing on the nuclear deal is a good example of their potential nuisance. India needs nuclear power if they have to maintain their growth rates. If CPI succeed, the growth prospects of an infrastructure constrained, energy constrained, and corruption constrained India would surely need to be revised down.
The risks in India are under appreciated. A reprising of risk in the Indian subcontinent is due.
John Mauldin's Outside the Box edition this week is really interesting. It's titled Do Not Forget About Changes in Velocity.
It argues that because the velocity of money supply is negative, the credit contraction could be ahead of us.
At least in Asia, reserve ratios in India and China have gone up, though that obviously hasn't done much to the animal spirits prevalent there. I agree with the fact that we may be reaching the tipping point with respect to RMB appreciation. It's easier to keep a currency undervalued than overvalued (you can always print more), but the inflation would kill Chinese growth if they don't act soon.
Also, looks like it might be a good idea to short oil sector..
Fascinating!
From the charts, it seems like Hong Kong, and maybe Singapore, have just started on a long bull. As the Chinese govt. opens up foreign investments to mainland investors, I think this is fundamentally bullish for the neighboring exchanges.
China is now exporting money supply too!
Bullish:
1. 2008 election period timeframe. The administration and the PPT will do what it takes so that George W Bush junior doesn't suffer the fate GB senior did. A slowdown coupled with a lousy market would basically wipe out any chance Republicans might otherwise have had.
2.
3. Fed rate cuts. Historically, stocks have outperformed by a big margin over a 6-12 month period after the fed starts cutting rates.
4. Massive 9:1+ up day the day Fed cut rates.5. Over the short term, analysts have cut estimates sharply, which should be bullish when companies start reporting next month.
Bearish:
1. Rising 10 year yields. Rising yields often presage declining markets.
2. Margin pressure on companies because of commodity inflation. This might manifest itself towards the latter part of 2008.
3. Short term overbought. The markets should experience some profit taking the next week or two.
4. Pre-earnings funk before we hit October. Seasonally a weak time to be invested.
5. Long-term. Wouldn't surprise me if the earnings estimates of the Financials are revised downwards. With the financials contributing 31% of the S&P, how is that bullish for the market?
6. Real-estate induced consumer weakness.
IMHO, Any weakness over the next 2 months would be a great buying opportunity for the next 6-12 months.
Check out the massive 1000 point breakout in the BSE index in India. Indian sensex had been under performing most of 2007. As it breaks out, prepare for BSE 20,000. That's a good indicator of the return of risk appetites. Is this the final hurrah for the Indian markets? Stay tuned for my analysis on market returns in India given current interest rates, rupee valuations, and BPO forecasts.
An interesting take by Richard Bernstein.
Bernstein then lists six capital-intensive danger areas: 1)
Multi-year leadership change is underway, according to Richard Bernstein.
I will elaborate on some of these points in a later post. Read the rest of this entry >>Email me at fundamentalinsights AT gmail
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Sajal has a BS in Electrical Engineering with a minor in Finance from the Indian Institute of Technology Madras, and an MS in Electrical and Computer Engineering from the University of Wisconsin-Madison. Sajal is a CFA Level III candidate. He takes inspiration from famous leaders and gurus, and in learning from history’s lessons.
