Sunday, June 04, 2006

May 2006: Butcher's Paradise

May 2006 was an awful month, with the Sensex falling 22% in 12 days, from 12658 to 9826, and the Nifty, the NSE index, slipping 23%, from 3772 to 2894. They subsequently recovered, but the fall marked an important change in the unbridled run of the Indian stock markets.

Characteristically of secular bull runs, the corrective fall was rapid and, for the agape bulls, without respite. Millions watched as their capital eroded, and disappeared especially those leveraged long in the stock futures and options segments. For the first time, in the last 2 years, was an intra-day circuit brought in to play, since the indices fell 10%–the maximum limit they are allowed to–and trading was suspended for 1 hour. The last time this happened was May 17, 2004, when the Congress-led UPA government came in to power.

Just a few days ago, everything about India was glowing, and within a week it appeared as if nothing was right. Every bit of positive news was ignored. Theories abound that the fall was anticipated because the index had run ahead of fundamentals or were linked to FIIs moving out of emerging markets.

When it was all over and done with, some important ideas came to fore:

1. No matter how good the fundamentals, markets will always fall
2. Indian markets are purely liquidity driven
3. Indian markets are now inextricably linked to the owners of this liquidity–FIIs–and since most of them originate in the US, the developments in the US economy will have a strong bearing on their behavior in India.
4. How the government of India taxes these FIIs would drive the Indian markets
5. FIIs are now not just investors but also traders (hedge funds)

Quite emphatically, the Indian markets are directly linked to the larger fate of the US markets.
Fundamentals are good up to a point, but beyond this, it is all about hot money chasing hot stocks, and hot money originates in the US.

FIIs have about $35 billion invested in India, and point to note is the current fall was a result of a mere $1.8 billion moving out. Now imagine if $5 billion did!

With this in mind, it has thus become important for Indian investors to watch inflation and short-term interest rates in the US. A buzzing US economy is good, but too much of the buzz would drive up inflation due to rising real estate, commodity and energy prices. Real estate is already slowing down, but oil and energy continues to be high.

In so far, the Fed has increased interest rates 16 times in a row, taking it to 5% in May, 2006, however recent numbers indicate that the US economy could be halting. The possibility of rates being hiked once again in June to 5.25%, has raised its ugly head sending investors scampering.

The reason such small indicators are lapped up eagerly is because the Fed has said that it is unsure of what to do in the current scenario, and its policy makers are watching the economic numbers just like everyone else. So, cues in the Consumer Price Index (CPI), the Department of Labor’s Job Report and the Weekly Unemployment Insurance Claims are watched closely, and interpreted to show where the US economy stands.

May’s 5% freefall in the Dow and Nasdaq was a result of the CPI report showing an increase of 0.6% in April 2006. What halted the further slide was the DoL’s Jobs report which said 75,000 new jobs were created–a figure that was lower than expectations–indicating that the US economy was slowing down. However it has now brought in a new demon: Fears that an economic downturn is in the offing!

With this in mind, June 2006 would be an extremely important month for investors in India.

0 Comments:

KM

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IN PASSING

Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book


“When
everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

“Last
year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

"Most
people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

The
most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Prachi
Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror

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