This indicator shows that a 30% fall is coming - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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This indicator shows that a 30% fall is coming 

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In this issue:
» The indicator that shows that Sensex could correct near term
» 10% chance that there will be complete chaos in US, says Biggs
» US Fed divided over stimulus withdrawal
» Indians lap up consumer goods in a big way
» ...and more!!


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00:00  Chart of the day
If historical trends are any indication, then the current stock market rally that started in March 2009, has perhaps run up too much and too fast. Today's chart of the day helps put this in proper light. If one were to consider stock market rallies on the Sensex since 1993, then no other rally has run up so much in such a short time as the current rally. It should be noted that a rally is defined as a move of 20% or more without being interrupted by a correction of 20%.

Thus, if the current rally has to find a place along the trend line in the chart, the stock markets will have to undergo some degree of correction in the short term. It should be noted that a correction of 30% from the current levels should place the current rally nicely along the trend line. Alternatively, if the markets go nowhere for the next 7-8 months, the current rally will again tend to fall in line with the trend line. Either ways, this is not good news for stock market investors wanting to invest at the current juncture.

However, investors take this chart as a gospel truth at their own risk! It is just a technical study after all and has completely ignored fundamentals. Speaking of fundamentals, if the correction does indeed happen in the short term, it will be a good opportunity for long term investors to invest and hence, capitalize on the long term India growth story.

Source: CMIE Prowess

01:00
 
It is believed that if you want to track inflation, you should track copper prices. Historically, copper prices have proved to be a reliable indicator of inflation. The reason may not be hard to find. Copper is an excellent conductor of heat and electricity. Thus, it is perhaps used in the widest variety of consumer goods. It finds applications in goods ranging right from the basic plumbing materials to cars and super computers. Thus, if copper prices are rising, it would mean that an economic recovery is underway and inflation is about to show up on the horizon. Copper prices have been climbing steadily over the past few months. Recently, they broke into new highs of the current rally. Hence, does this signify that a major inflationary environment could be upon us?

It is well known that the argument before we entered 2010 was whether we are staring at a deflation or an inflation caused by money printing by central banks. Barely a few days into 2010 and we are getting some sort of signals from the way copper prices are behaving. However, a short-term movement in copper prices could also be because of some other factors. Thus, we may have to wait for the trend to sustain itself for some more time. However, the buzz around rising inflation is getting hard to dismiss. In India too, investors seem to be warming up to commodity producing companies. Quite a few steelmakers have seen their prices spike in the past few trading sessions. Same is the case with producers of non-ferrous metals. Are we seeing sector leadership changing hands here? Well, only time will tell.

01:55
 
Rising commodity prices is good for commodity companies and their investors. It's bad for companies consuming these inputs. This is because rising prices of key metals like steel and aluminium leads to a rise in the latter's input costs. And if one is in such a competitive industry like automobiles, it gets difficult to manage margins in such times. Ask Mr. Pawan Munjal, the chief of India's largest 2-wheeler maker Hero Honda.

In an interview with Mint, Mr. Munjal has raised concerns over rising prices of key inputs like steel and rubber. But he clarifies that this does not come as a surprise to the company. As he says, "We knew that commodity prices had bottomed out and they had to head up. But I don't believe they will go through the kinds of level they had gone through earlier."

Our view on commodity prices remains positive for the next few years. With more than 2 billion people from China and India aspiring to live life like an average American, demand may not be a problem for years to come. Furthermore, the recent financial crisis has meant that companies have been wary of investing in new capacities, thus constraining supply in the medium term. Thus, when the demand moves up and supply fails to keep pace, there is only one direction the prices can go. And that is - up. Consuming companies like Hero Honda might not want this to happen anyways!

02:43
 
Promise to buy US$ 1.25 trillion of mortgage loans seems to have become a bitter pill for the US Fed. Minutes from the Fed meeting throw light on conflicting views amongst the bank officials. Some Fed officials believe that it is high time the stimuli are wound up. Else a hyper-inflationary situation would not be avoided. Others see the high unemployment numbers posing a grave risk to economic recovery. And hence they oppose a monetary tightening. The sparse improvement in house buying market also seems to be short lived. Once the Fed cuts down on asset purchases and withdraws tax credit, foreclosures and distress sales are expected to be back. It is but a 'choice between the devil and the dark sea' for the US central bank. Having printed and distributed cheap money at the cost of economic viability, the bank is unlikely to absolve itself of this mess anytime soon.

03:13
 
You would think that the current slowdown is hampering consumer consumption trends in India. But it does not appear to be so. As per a survey conducted by Accenture and published in the Mint, Indians have emerged as the biggest spenders on consumer electronic products. The survey shows that 18% of the respondents from India spent over US$ 3,000 on electronics. On the other hand, only 6% of the respondents spent as much in the US, France, Germany and China.

The survey covered 19 different consumer technologies, including smart phones, high-definition television sets and computers. Global consumer electronics companies are seeing the immense growth potential that emerging markets like India hold. Little wonder then that they want to set shop in the country. And the buoyancy means that domestic players also get the opportunity to do brisk business. So agricultural production may have been hampered. Food prices may have risen. But that has not deterred the average Indian from splurging on consumer durables.

03:46
 
It is not 2012, but it sounds like the script of a disaster movie. We are talking about the predictions of Barton Biggs. The former research guru from Morgan Stanley and the author of "Wealth, War and Wisdom". He points out how a major rebellion can set in if economies collapse. For example, Greece is at the verge of sovereign default. As a result, there is chaos everywhere there. Mobs are out on the street. If Dubai caves in, there could be huge problems there too. After all, there are around a million workers from South East Asia there. They have been seriously overworked and grossly underpaid for years.

Mr. Biggs wonders if such a situation can arise in the developed world too. Can the US, Europe or Japan face social unrest stemming from economic collapse? After all, there have been such situations earlier.

However, never has it been so difficult to implement the rule of law in these countries as now. He believes there is still a 1 in 10 chance of a complete chaos in countries like the US. Interestingly, if that were to happen the best option would be to own a farm. Away from the large cities. And stock it with lots of food supplies and even some ammunition. It sounds surprising isn't it? Perhaps it's a reflection of the public mood there. Of course, here is India we seem to viewing a completely different horizon.

04:34
 
Meanwhile, after rising for first three trading days of the year, the Indian markets seemed to be in correction mode today as the BSE-Sensex was trading lower by around 100 points at the time of writing. Auto and IT stocks were seen causing the maximum damage to the benchmark. Things were not cheerful in majority of the Asian markets too as most of them were trading in the red. European markets have also opened on a negative note.

04:50  Today's investing mantra
"The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers." - Warren Buffett
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25 Responses to "This indicator shows that a 30% fall is coming"

chetan modi

Jan 16, 2010

good article & very practicle apporach truth ia always bitter but truth is truth.

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sk

Jan 12, 2010

An excellent write up whose authenticity can be judged after a day or two of reading the same.

Like 

divyakant.

Jan 11, 2010

IT SEEMS THAT....this article is very very fair knoledged and experienced based, and will be very useful to all who wonts.BUT a question in my mind that too many peopeles have invested in ulip, and are investing now, they have no proper guidance how to treat their investment; so we request you to lighting this matter.

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diapk Udeshi

Jan 10, 2010




Market is full of uncertanity. One must invest in stock
systematically at every month, moderate amount






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VINOD

Jan 8, 2010

Dear FRIENDS,

THE CHART OF THE DAY - INDICATES GREED & FEAR. IDEALLY THE BEST THING A SENSIBLE RETAIL INVESTOR SHOULD DO IN MY OPINION SHOULD REEDEM HIS PRINCIPLE INVESTED @ START OF THIS RALLY & INVEST THE SAME AMOUNT OF PRINCIIPLE IN GOLD ETFS.

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Mukul K.Gupta

Jan 8, 2010

I think one may not put undue reliance on technical indicators. But Barton Briggs musings should be kept at the back of mind. A diversified bet within 100 /200 liquid shares may be a good defensive move with gold as insurance and self occupied property the ultimate refuge.

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Mandeep Dang

Jan 8, 2010

This is reference to Joe Biggs Comment regarding Mobs on the Strret.The Ex Dy Governer of Bank of England Commented that on the Day RBS and HBOS Had defaulted the
Govt of England had sounded out calling the Army on the
Street.However Gordon Brown and his FM PERSONALLY along with the Governer of England took immediate action of
stimulus Package of Capiattalising both Banks and Saved
the day.

Mandeep Dang

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ravi ashankar

Jan 8, 2010

i dont agree with rising coper prices always give raise to inflation , we have seen rising in cu prices yealds good business also.

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suresh gujarati`

Jan 8, 2010

Dear sir,
Read your comments. It is caution for those who invest without thinking and follow with impluse. As per US economy is concern it is moving towards recovery side, hence there is any correction it may be just routine, may about 10% or lettle more.
Then shall we stop buying scripts what your website suggesting?
suresh

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CAPTAMITSHARMA

Jan 8, 2010

I LIKE TO REMIND ALL GENTLEMEN'S WHO HAVE GIVEN THERE VIEWS ON TOP IS THAT ABOVE ARTICLE CLEARLY STATES THAT IT TAKES INTO ACCOUNT ONLY TECHNICAL VIEW NOT THE FUNDAMENTAL VIEW AND THEY ARE CLEARLY RIGHT ON THERE TECH VIEWS.REGARDING FALL IN MARKET THEN I BELIVE THERE ARE 1000 DYNAMICS THINGS WHICH MOVES MARKET UP AND DOWN STARTING FROM FORMATION OF GOVERNMENT TO FII'S MONEY,SO ITS JUST NOT POSSIBLE TO SAY HOW MUCH MARKET WILL CORRECT.BUT AS A RULE NOTHING REMAINS IN ONE DIRECTION SO TODAY OR TOMMORROW MARKET IS GOING TO CORRECT ,SO WAIT FOR IT EVEN IF YOU HAVE TO WAIT FOR A YEAR.BUT FOR FIRST TIMERS AS A THUMB RULE BUY BLUE CHIP SHARES LIKE RIL,SBI,NTPC,L&T,BHARTI AND SOME MONEY ON UPCOMING COMPANIES LIKE GEODESIC,VOLT TRANSFORMER ,RIL POWER WHEN MARKET DIPS DEEP BUT SEE LAST 5 YEARS BALANCE SHEET (CHECK THINGS LIKE CASH FLOW,PE,DEBT ETC)LIKE ALWAYS THIS SITE GIVES SOME OF GOOD PICKS

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