»5 Minute Wrap Up by Equitymaster

On This Day - 27 MAY 2010
'Stocks could fall by 40%'

In this issue:
» History could repeat itself in US stocks
» An economic indicator that is out of sync with reality
» Silver has turned out to be second best
» We are doomed, says contrarian guru
» ...and more!

--------------------- Don't Miss! FREE Webinar with Ajit Dayal - Register Now! ---------------------
If you are worried about the global crisis reaching India and impacting your investments, then tune in to the Equitymaster FREE Webinar, titled, 'Global Fears, India Cheers?' Listen to Ajit speak on the opportunity he can foresee for India...and for a long-term investor like yourself. Scheduled for Monday, 7th June, 5.30 pm (IST). Hurry! Register now!

The US stock markets are correcting alright. But no one can deny the fact that they have had a fantastic run up until the recent troubles. Truth be told, as per reports, there have been only two other times when the US stock markets have gone up so much in such a short span of time. The 112% gains in 1932 and the 116% gains in 1933 were two such instances. And what happened in the aftermath of such huge gains? Well, the stocks witnessed a 40% correction in the first instance and a 34% correction in the second.

It may be naive to simply extrapolate these events in the future and assume that a similar fate awaits the US stock markets today. But the case for a 35%-40% correction in the current times has been made stronger by one observation. That of the economic reality on the ground. Stock markets have factored in a very quick economic recovery. However, nothing could be further from the truth. Unemployment levels have failed to ease and credit is still hard to come by. Thus, the US stock markets could well start heading downwards once this reality catches up with them. Take into account some sort of overreaction and a 35%-40% correction in US stocks does look well within the realms of possibility.

Needless to say, even Indian stocks could feel the heat. But Indian investors have very little to panic from such an episode. On the contrary, it could turn out to be a fantastic opportunity. An opportunity to buy into the long term India growth story at attractive valuations. Thus, as it turns out, one investor's loss could turn out to be a gain for the other.

 Chart of the day
A lot of experts seem to be favouring silver over gold these days. Today's chart of the day however may just end up punching a big hole in that theory. As the chart indicates whenever BSE-Sensex has had an off year in the past decade or so, gold has turned out to be a much better investment than silver. Given this scenario, it is quite possible that of the two precious metals, gold continues to have an edge over silver in the future as well. Of course, when the economy is doing well, Sensex will have a definite edge over gold and silver. And when it seems to falter, gold has turned out to be a more preferable option than Silver. Unfortunately, silver has turned out to be second best on both the occasions.

Source: Quantum Gold fund ETF

"Debt will get you in trouble," writes Bill Gross of Pimco, the world's biggest bond fund manager. He has warned that the countries with too high debt (like the US and European nations) face a 'tortuous journey in the months and years ahead'! Gross has written this in his latest outlook note.

He has also warned that global investors must not expect more than 4-6% returns from a 'diversified portfolio of stocks and bonds'. "Investors must respect this rather tortuous journey in the months and years ahead," he has said.

Given his years of experience and the quantum of money that he has successfully managed over these years, you can't expect Gross to go wrong in his predictions. Anyways, we see one direct fall-out of the 'low return' years that Gross predicts for western investors. And that is more money will flow to the high-return' emerging markets like India over the next few years. Of course, investors here need to guard themselves against any bubble that such a huge flow of foreign money can cause!

Recently, the Baltic Dry Index (BDI), the index that tracks global shipping rates jumped as much as 9% in one single day. Infact, the index is up a huge 40% since the end of April. Now this is something really strange. Normally, the index should move in perfect lockstep with stock markets. This is because both the stock markets as well as the BDI rise and fall with the level of economic activity. But what has happened in the last few days has turned this logic on its head. The global stock markets have taken a huge beating and investors face an uncertain future. But not the BDI. This index has gone from strength to strength.

What gives? Apparently, the rise in BDI has been attributed majorly to the jump in rates of one particular type of ship. And these ships are nothing but capesize vessels. It should be noted that capesize vessels are amongst the largest in the world. And they are supposed to be the vessels of choice for transporting metal ores and can also be used as oil tankers.

Thus, looks like there is more metal and oil floating in the seas globally. And if this is indeed the case then are either the buyers hungry for products or sellers are getting desperate to unload. Looking at the economic scenario globally, appears more to be a case of the latter than former. However, we cannot be 100% sure. We may have to wait for some time before the real story is out.

Taking into considerations the buoyant market conditions prevailing in the past at least a dozen real estate developers had filed their IPO prospectuses with SEBI. Bulk of them planned to raise money to repay debt. But now as the market conditions continue to remain dampened, the developers are facing the heat. Investors fatigue in the real estate stocks is not helping them either. All of them are waiting for the market conditions to improve before hitting the markets. However, apart from timing - valuations play an important role in the fund raising exercise. If the developers are willing to leave something for the investors on the table we may witness a renewed vigor for the real estate IPOs.

In the current financial year, developers need to pay around Rs 250 bn towards debt repayment. Thus they have two choices right now - wait and watch for the conditions to improve or take a valuation hit. We believe that the latter option is more feasible in the current market conditions as it would be a win-win situation for both of them.

Anyone taking the government's promises to bring inflation to single digits in few months may be in for a rude shock. For those who are well informed on the subject beg to differ on such possibilities. Economists at OECD opine that inflation in India may remain 'stubbornly high'. Reason being the uncertainly prevailing over the deficiency of monsoons this year. Add to that demand for products outstripping supply with economic recovery underway at modest pace. The higher taxes on imports as well as sale of petroleum products would only add to the price rise.

The OECD also believes that the RBI is not taking sufficient action to check liquidity crunch. Particularly ahead of the government's ambitious borrowing programme. We believe that the concerns of inflation level remaining high are justified. However, adopting a calibrated approach to contain price rise is the only way to do so, without hurting growth.

Meanwhile, Indian stock market traded strong yet again today with the BSE Sensex sitting pretty with gains of more than 140 points at the time of writing. Heavyweights like ONGC and ITC were instrumental in driving the gains on the Sensex. Most of the other Asian indices also closed strong today whereas Europe has also opened on a positive note.

'We are doomed'. Who else can say this but the famous contrarian investor and author of the famous gloom, boom and doom reports, Dr Marc Faber. Speaking at the conference in the US, Faber gave his perspective on the financial crisis and his take on the future. While he did raise a lot of pertinent points, the one amongst the few that was important from an investing point of view was his observation the US Fed will keep interest rates at zero in real terms for as long as possible and hence, cash and long term bonds will be a bad place to hold one's money and hence, equities and precious metals would be a sound place for wealth preservation. He also observed that everybody should have 50% of their money in the emerging world as these are not saturated and are growing rapidly.

As usual, he came down heavily on the US administration and commented that the lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything...everywhere. According to him, during the crisis of 2008, the financial system went bust but did not die. However, the next time it happens, the nations will go bust and ultimately, the world will go to war. Honestly, we couldn't have ended on a more bitter note.

 Today's investing mantra
"Questioning GAAP figures may seem impious to some. After all, what are we paying the accountants for if it is not to deliver us the "truth" about our business. But the accountants' job is to record, not to evaluate. The evaluation job falls to investors and managers." - Warren Buffett

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407