We fear this future!

Nov 8, 2010

In this issue:
» Gold, Sensex led the performance charts in Samvat 2066
» Refrain from trading in Samvat 2067, suggests Rakesh Jhunjhunwala
» "Buy commodities, and buy them big," advises Mark Mobius
» Bernanke's stimulus plan is an illusion - Paul Volcker
» ...and more!!

------------------------------ More sense than CNBC ------------------------------
"Bill makes more sense in one e-mail than a month of CNBC", says a reader of Bill Bonner's The Daily Reckoning, a financial column. Bill is a three-time New York Times best-selling author. To receive his FREE newsletter on the global economy, click here.

The US Federal Reserve has found a way to make things work, at least when it comes to supporting stock prices and safeguarding Wall Street banks. Release cheap money into the system. And when things are not getting in order, just double up! This is exactly what it did last Wednesday when it pledged another US$ 600 bn of easy-to-print dollars to stimulate the US economy (read, stock markets). All in the name of quantitative easing 2, or QE2.

The question that now arises is - What if QE works? We mean what if the Fed continues to believe that it can release a QE dose anytime it wants to stimulate stock prices and Wall Street banks? Then we'll have a QE3, a QE4, etc. etc.

What such a 'we'll-fire-QE-whenever-you-need-it' policy will do is erase the impact of economic and corporate fundamentals on stock prices. Investors and speculators will become wealthier by just picking up any stocks and waiting the Fed to release a fresh bout of cheap money to take their prices up.

That will be dangerous! We remember what the father of value investing Ben Graham once said - "In the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion. However, in the long-term, the market is a 'weighing' machine on which the value of each issue is recorded by an exact and impersonal mechanism."

If QE were to work, Graham's weighing machine will always be out of order! Identifying quality stocks won't matter at all. Speculation will rule the roost and sensible investing will be thrown out of the window.

We fear that future! What about you?

Anyways, the former Federal Reserve chief, Paul Volcker, has called Bernanke's stimulus plan an illusion. He also believes that releasing such large doses of cheap money will not boost the US economy. Volcker told a business audience in Seoul, "The thought that you can create a prosperous economy by inflating is an illusion, in my judgment. And we should never forget that. I thought we'd learned that lesson and I hope we continue to learn that lesson."

 Chart of the day
Samvat 2066, or the Hindu calendar year from Diwali 2009 till Diwali 2010, was a brilliant year for Indian investors. Not only did their stocks gain, they also made a lot of money on their gold investments. This can be seen from today's chart. As the chart shows, gold prices and the Indian stock markets were the best performers among key comparable stock markets during Samvat 2066. Of course, the stocks prices here benefited from surge in inflows of cheap global money, there were fundamentals to support them as well. So while the Indian economy showed signs of recovery, corporate India reported good performance quarter after quarter.

* Since 17th October 2009; Note - Country names represent their benchmark stock market indices;
Data Source: Yahoo Finance, CNNfn

What do you do when one of the best practitioners of an art tells you not to follow that particular art? You are left dumb founded, aren't you? A lot of investors would have had a similar emotion during a recent interview of ace investor Rakesh Jhunjhunwala with CNBC. Besides his ability to pick up promising stocks early in their lifecycle, Jhunjhunwala is also known to be somewhat of an astute trader. Thus, he left everyone shell shocked when he advised people to not trade and instead invest via systematic investment plans (SIPs) in mutual funds.

"I think 98% of retail people lose money in trade. Whether correction - no correction, bull phase - bear phase. Everyone has a sad story. The proof is in the statistics," he said. Indeed! Mr. Jhunjhunwala has hit the nail right in the head we believe. Besides being a loss making activity for most, frequent trading also eats into your investment returns through huge broker commissions and makes your broker rich at your expense. Thus, with odds stacked so heavily against trading, it is always better to invest for the long term and trade as less as possible.

"Buy commodities, and buy them big!" This is what Mark Mobius is advising global investors these days. Mobius is a leading global fund manager and an expert voice on commodities and other emerging market assets. And his latest advice stems from his bigger view that the US Fed's latest round of QE will further drive the rally for global stocks and push commodity prices 'higher and higher'. But Mobius has also warned of an asset price bubble, if the rally were to continue for long. In short he says, "...there could be an emerging markets bubble, but feel free to ride it for now."

We are also of the belief that the cheap money sloshing around the world has the capability to take stock prices even higher. But how high, is the question. Buying stocks just because they are rising is a dangerous reason for investing into this rally. We have the example of 2008 fresh in our minds. And if history is anything to go by, we know that it repeats itself.

Anyways, Indian markets had a weak outing today. The BSE-Sensex was trading with losses of around 145 points (0.7%) at the time of writing this. Today's weakness was largely led by stocks from the IT and engineering sectors. Among other key Asian markets, while China and Japan closed strong, weakness was seen in the Hong Kong markets.

The Indian IT industry may not have a high opinion of US President Obama. After all, the latter has had no qualms in displaying prejudice towards US firms creating jobs back home and not outsourcing. Especially since the US economy is in tatters with the unemployment rate hovering around 10%. But in his recent visit to India, Obama appears to have taken a different stand. Obama believes that India is the next jobs-creating giant for Americans. And that it is not a cheap-labour rival that outsources opportunity from the US.

With this in mind, Obama has promoted US$ 10 bn in trade deals. This, the White House says, will create about 54,000 jobs in the US. That may not really amount to much simply because the US would require creating around 300,000 new jobs a month to put a real dent in its persistently high unemployment rate. But Obama seems to be looking at the long term picture and believes that the US stands to gain a lot from trade deals with India. In the recent past, the US received a lot of flak especially from Indian IT companies, when the former decided to hike visa fees. This move was perceived to discourage non-Americans from bagging jobs in the US. Thus, one hopes that Obama is serious about the deals signed with India. And that this is not some gesture made to evade Republican victory back home.

 Today's investing mantra
"I think it is undeniably true that the human brain must work in models. The trick is to have your brain work better than the other person's brain because it understands the most fundamental models- ones that will do most work per unit." - Charlie Munger

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5 Responses to "We fear this future!"


Nov 8, 2010

my doubt is for stock market everybody need patience and cool.but in some times we will invest in ggod stock that it will give good profit but it will not give good profit when will sell then it will increase we feel depress at that time



Nov 8, 2010

when dollar becomes weak due to printing commodotities goes up including crude oil.so naturally our OMC's shares like hpcl comes down.buy those shares until dollar weakens.the moment dollars becomes strong which ultimately will happen these omc shares will go up due to the tumbling in the commodoties.this is like hedging our portfolio.



Nov 8, 2010

It has become fashionable to object to money being inducted into the economic system. If there is no capital how could any business run? All over the world money is borrowed to tide over difficult periods in business. Indian economy is shining mainly due to massive infusion of capital by Govt of India in form of 6th PC arrears and new scales. Also, the state govt and PSUs were forced to follow suit. Private sector too had to raise wages. Business tanked in 2008-09 but recovered after the liberal infusion of liquidity post 6th PC. Everyone knows that Indian economy has not suddenly become efficient. Widespread corruption and substandard infrastructure has not changed overnight.
You give money in the hands of a large number of people and they go and buy - economy appears to boom. Our high interest rate attracts foreign capital only as long as the interest rates are 0-2 %. The day interest rates rise in USA and other countries this capital could fly back overnight. Bernanke knows this - being a world renowned Economist who has written one of the best books on Economics. He is merely keeping his country's economy going by this infusion.

Real danger to India is not from the possible flight of foreign capital but from loss of control over its natural resources - Coal India shares have been cornered by FII. Similarly all major PSUs, Blue chip companies are being cornered by FIIs, who now control major chunk of floating stocks.

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Nov 8, 2010

For a beginner the logic is correct.Printing money wont correct the malaise.u can fool all the people some-times.some of the people all the times but not all the people all the times.One hopes the root cause is identified & corrected.cash flows must match,with inflows being a bit higher.Here reverse is the case.Making up the difference by cheap money is a short term solution.However that's not our problem .We have to find a way to benefit from their error.Any smart suggestions?

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Nov 8, 2010

pumping money into the system to creat more employment and increasing the production thereby creating a solid manufacturing base is a welcome thing, having said that, when should one stop printing money is a moot question on every economists` (read ben bernanke) mind. But contrary to this printing money just for boosting consumption and creating unsustainable asset and commodity prices ahead of fundamentals is a dangerous situation which is feared by

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