This is why the rally may be unsustainable - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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This is why the rally may be unsustainable 

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In this issue:
» No V-shaped recovery in sight
» India Inc brace up for bonuses to promising employees
» Look who's keen to start a bank in India
» Valuable advice for a small investor from a value investing guru
» ...and more!!


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00:00
 
Do you think there is a correlation between the stock markets and the economy? There can be no doubt that over a sufficiently long period, stock markets do closely follow economy. But what about the near term? Does a similar co relation exist even from a short term perspective? We certainly do not think so.

We can think of several instances where stock markets have really moved out of whack from the near term economic realities. Infact, the current rally in US equities can be a good case in point. Since March 2009, stock markets in developed world have rebounded in hope of a sharp V-shaped economic recovery. But such a recovery seems nowhere near the horizon. Employment growth is still in shambles and US consumers have hunkered down and cut down dramatically on their spending.

The growth that has happened is a result of the stimulus. But stimulus cannot continue indefinitely. At some point the private sector will have to take over from government spending. But there are hardly any signs of such a takeover. Most economic rebounds in the past have happened because of housing and consumer spending. However, both these sectors continue to remain in the doldrums right now.

Thus, there's very little hope that the V-shaped recovery that the market is betting on will materialize in the near term. And when this reality will come to the markets, there is likely to be a strong pullback. Infact, the more the markets move higher, the steeper is going to be the fall. In other words, the current rally could well be unsustainable.

00:54
 
What about the Indian markets? Is the huge run up on the Sensex in recent months also not consistent with India's economic growth? Certainly not. We believe that the rebound in Indian markets is indeed quite consistent with the country's economic strength. But too huge a run up in a short span of time from the current levels could also make India vulnerable to a sharp pullback. Hence, investors may have to watch out for any such strength. However, if the indices were to fall dramatically in response to a sharp correction in the US markets, it could well present long-term investors with a very good opportunity to participate in the long term India growth story. India's economic outlook looking far more certain than the US, India does appear to be a safer bet than its US counterpart.

01:23  Chart of the day
There has been a lot of talk in recent months about how the world is running out of oil. Today's chart of the day perhaps does its bit in justifying the statement. It shows how mankind has begun to dig deeper and deeper into the earth's surface in order to extract crude oil, one of the most popular storehouse of energy. In 1999, the maximum that an offshore oil field had to be drilled was up to a depth of 1 km. However, after a decade, thanks to technological advancement and scarcity of cheap, easily accessible oil, the maximum depth has gone up to as much as three kilometers or 3,000 meters. While this has certainly led to more discoveries, it also means higher than historical prices of crude oil. As to how deep one can really drill further? Well, it all depends on the energy consumed towards drilling. As long as there is more energy to be recovered than being spent towards drilling, man will continue to explore greater depths.

Source: The Economist

02:18
 
Whitney Tilson is a well-known figure in the world of value investing. Tilson is a disciple of the Graham-Dodd-Buffett-Munger school of value investing. He was one of the authors of Poor Charlie's Almanack, considered by many to be the definitive book on Charlie Munger. In a recent interview with a leading international publication, Tilson spent a lot of time in spreading his wisdom about his investing techniques and the biggest lessons he has learnt in his career.

He gives two key reasons people do not practice and benefit from value investing. The first is that value investing requires patience and few people have this. It is get rich slowly investment philosophy that is popular and most people want to get rich quickly. The second reason is that one has to be very clear about the intrinsic value of a business to be a value investor. And it is really hard to value businesses. One has to make predictions about the future and industry dynamics and that is very hard to do. As he says, "I can tell you after getting a Harvard MBA and spending 11 years in the business it is still really hard to do."

His final advice to investors is - "It is clearly better to be fishing in the pond of smaller stocks especially if you are a small investor, as well as statistically cheap stocks (low P/B, low P/E, low enterprise value etc.). Those are the ponds you want to be fishing in."

03:07
 
It appears that hefty bonuses and lucrative perks are back in vogue for India Inc. As the companies across all industries eye recovery from the downturn, the need to retain valuable human resource is felt like never before. As a result, the employers appear ready to pay huge bonuses to woo their best performers. After all it is always easier and cost effective to retain an employee as compared to replacing him. No doubt why companies like Infosys, Maruti Suzuki, ICICI Bank and Dabur are gearing up to pay bonuses as high as 150% in many cases. While the bigger IT firms are generally expected to top the charts by paying highest bonuses, private banks might emerge as best paymasters by dishing out huge bonuses.

One might guess that the sentiments in the corporate boardrooms as well as the Indian job markets hints towards a substantial turnaround as compared to last year. We believe that the amount of bonuses actually doled out will be proportional to the companies' confidence in brewing recovery. The performance in last quarter of FY10 will be quite decisive in designing the pay-packages for next fiscal.

03:45
 
The Finance Minister's proposal to issue new banking licenses has found enthusiastic seekers in the most unexpected quarters. While NBFCs and infrastructure lending companies are well expected to seek diversification into banking, there are other contenders who seem to be willing to cash in on the opportunity. The country's biggest insurer LIC is the latest applicant for a bank license. Already holding over 10% stake in the country's largest PSU and private sector banks like SBI, Corporation Bank, ICICI Bank, Axis Bank and HDFC Bank, the insurer is looking for more. It wants to get into banking to ease the collection of premiums and payment of claims through its branches. Not to mention the lure of garnering low cost funds and using the premium funds for lending. While the proposition is certainly worth considering given LIC's extensive penetration, we are wary of the banking sector being crowded out by too many conglomerates.

04:05
 
So Greece is on the verge of defaulting. And so are some more nations in the EU. However, did you know that the US had also defaulted before? According to Ken Rogoff, a Harvard professor and former IMF chief economist, the US has been in default previously when it went off the gold standard way back during the Great Depression. What is more, he is of the opinion that the US could do it again. The limelight at present may be on Europe, but US also has all the ingredients necessary which is pushing it to concoct a recipe for disaster.

The deficit has ballooned and increased government spending and unfunded retirement commitments have continued unabated. This would then discourage private sector investment which is necessary to spur growth. It goes without saying that governments across the world will have to seriously enforce reforms in the way they spend as the crisis in Europe has highlighted. But how long that would take is anybody's guess.

04:38
 
Meanwhile, the Indian indices have made a strong opening to the week with the BSE-Sensex trading higher by around 120 points at the time of writing. Similar strength was being witnessed across most Asian indices whereas most European indices have also happened the day on a positive note. In India, auto and banking heavyweights were the key drivers of the rally.

04:51  Today's investing mantra
"In the end, what counts in investing is what you pay for a business - through the purchase of a small piece of it in the stock market - and what the business earns in the succeeding decade or two." - Warren Buffett
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Equitymaster requests your view! Post a comment on "This is why the rally may be unsustainable". Click here!

5 Responses to "This is why the rally may be unsustainable"

Sunil

Mar 8, 2010

The subscription is waste of time and money; 4 out of 5 recommended stocks in 2008 went horribly wrong...I remember they were recommending BUY at the historic peak of valuation So you can guess what they are after... they are full of contradictions, so it boils down to doing to your own research and putting bet on stocks...most of the time it is common sense i.e. select from top 5 stocks from each sector, consistent EPS growth and sales growth in last 5 years, currently at half of its high PE, zero debt holding, sound management, good dividend paying, higher promoter holding etc. etc.....whydo you need equitymaster research to tell these simple things.

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Daniel Menezes

Mar 8, 2010

Of course, not V-shaped recovery expected but filtering out all mentioned adversities U-shaped recovery is bound to happen...

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v.v.rao

Mar 8, 2010

It is one of the best oppourtunities now to go for long term investment in the indian capital market. With the inherently poor economic situation of US and Europe, FII's will soon come in a bigway and invest into indian market which may explode the indian stock market. FII will be compelled to invest in India to protect their currency and then later may pull back in terms of profit booking. Eventually, Indians only be the loosers.
Before that happens, government should allow all Maha and Navaratna companies to invest into indian equity markets so that Indians will be benefited. It seems, the steam is gathering momentum, sooner FIIs will jump into action.

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K.D.Viswanaathan

Mar 8, 2010

As mentioned in today's wrapup (March 8),the prevailing rebound in the Indian Markets certainly appears to be in complete consonance with the country's economic strength.'Patience pays' is a good old saying. If, in conformity with the possible sharp downward corrections elsewhere, there is going to be a similar correction in India too, it would be the ideal time for the investors here to invest in some good scrips on long term basis. Whitney Tilson's advice to the small investors that it would be better for them to be fishing in the pond of smaller stocks is worth remembering for ever.

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sridhar

Mar 8, 2010

Please give me sample stock for trading with free of cost under trial basis - 60 days
like midcap, small cap, penny stock with technical
then only u can get subscription. don't tell past and more than one year isssues or performance

sridhar

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