Are we on the cusp of a major bull run? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are we on the cusp of a major bull run? 

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In this issue:
» India has amongst the highest central bank staffers
» NRIs are pouring money into real estate
» Japan is still reeling from the slump
» FM wants to do away with oil bonds
» ...and more!!

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If everything goes well, in a few weeks from now, we may have sown the seeds of a major bull run. We say so because a new wave of stimulus money is most likely to be unleashed in the biggest economy of the world, the US. Sensing that the current efforts are not keeping more people employed at their work, President Obama has called for a major new burst of federal spending. "We avoided the depression many feared. Our work is far from done," Obama thundered in a recent speech. He further added that he wants to spend new money for highways and bridge construction and for ensuring adequate social security net for the US citizens, especially to the unemployed. And the figure that is being talked about is in the region of US$ 170 bn.

Of course, given the kind of fiscal mess that the US is in, spending more would have meant going further down the path of suicide. But what has given some government authorities hope is the unexpected windfall that the government is likely to make from early repayment of bank bailout funds. With the same likely to fall in the vicinity of US$ 200 bn, much of the fresh stimulus money could be spent from it without further endangering the fiscal health of the US economy. Thus, it looks like the US economy will get another shot at trying to bring its GDP to respectable levels and reduce the current record unemployment. And since the US is still the growth engine of the world, this could also mean a great opportunity for the global economy as a whole to finally put the crisis behind it. If it does indeed lead to desired results, this could be one more reason why we could be on the cusp of a major bull run.

01:03  Chart of the day
The fact that government organizations in India are to some extent overstaffed is a well documented fact. As today's chart of the day shows, when it comes to the number of central bankers, India (read RBI) emerges amongst the highest. This highlights that India needs to make its government organizations including its central bank leaner by doing away with bloated staff costs. Having said that, despite having more staff than necessary, in the current global financial crisis, India's central bank certainly deserves plaudits for the way it has handled the build up to the crisis as well as its aftermath.

Data Source: The Economist

This is one of the biggest ironies we have come across so far. The economic downturn in the US, Europe and the Dubai debacle - all had only one factor to blame. A bubble in real estate prices and mortgage loans! But it seems the trend is that of greed feeds greed. With NRIs from the West and the Gulf wanting to relocate to their home-country, the real estate market in India is seeing a never-before rally. The dollar-earning NRIs are willing to pay higher than market prices. Banks and mortgage lenders are all too willing to help their high ticket purchases with attractive interest rates. These funds are therefore feeding an asset bubble in Indian real estate, which was relatively less impacted by the global meltdown. A business daily reports that an estimated 25 m NRIs living in 130 countries have remitted US$ 52 bn to India so far this year. Most of it has directly come to real estate. Further, the current tight liquidity situation across US has enticed NRIs to mortgage loans in India. We do not see this as a very healthy sign as Indian real estate players and bankers have to be very careful about whether the high prices and risky loans are sustainable.

It has been called the country with the 'lost decade' and the recent GDP figures released for the third quarter of 2009 do not paint a rosy picture either. As reported on Bloomberg, Japan's GDP rose at an annual rate of 1.3% lower than what had been estimated by experts and economists alike. Japan is yet to shake off the crippling effects of the global financial crisis and the data shows that Japanese companies are cutting down on capex for building plant and machinery as they want to protect earnings. As a result, there are concerns that the economy is already under the threat of deflation. To make matters worse, the country which is dependent on exports, is already reeling under the impact of a rising yen. The Japanese government, on its part, has come up with a new stimulus package and has pumped in US$ 81 bn into its beleaguered economy.

Since the Japanese economy is dependent on how its developed peers of the US and Europe are doing, it seems unlikely that there will be much headway in terms of growth unless the US and Europe come out from the slump. It is expected that the scenario is likely to be much better in 2010. But whether that actually turns out to be the case is anybody's guess.

Two wrongs do not make a right. From the Oil Ministry's point of view, price controls on petroleum products is wrong. After all, the finances of state owned oil marketing companies are completely messed up because of the subsidized prices. These companies receive oil bonds from the Finance Ministry. From the Finance Ministry's point of view, oil bonds are wrong. They worsen the fiscal deficit situation. In fact, the Finance Ministry has not given any oil bonds to the Oil Ministry so far for the current fiscal. It might wait up to the next budget. The problem is how does a government increase prices of petroleum products without affecting the economy and its popularity? Especially, if it gets elected on the aam admi plank. In our view, no amount of accounting and procedural jugglery can solve the fundamental problem.

All is not hunky dory for the Indian economy. Yes, that the Indian GDP has grown by 7.9% in the September quarter is certainly something to cheer about. But the looming threat of inflation persists. What is worrying really is the rising food prices. This was reflected in the wholesale food-price index that climbed to an 11-month high in November.

As a result, the government yesterday sought an approval to spend an extra US$ 6.6 bn. This will partly be used to subsidize food and fertilizers so as to douse rising inflation. The interesting thing to note is that the government's fiscal deficit had soared to 6.2% in FY09. Further, it is expected to remain high at around 6.8% in FY10. With the added borrowings that the government is going in for, it appears that the deficit is set to exceed the estimate for this year. And so, bond yields are also expected to soar to 8% putting added pressure on government finances.

It is obvious that the only other way for the government to contain the deficit is by increasing revenues. Its proposed plan to auction third-generation telecommunications network is expected to bring in Rs 250 bn. But so often in the past, the problem for the government has always been effective execution of plans. Therefore, it remains to be seen whether this will witness a sea of change this time around.

It has become hard to find even two economists that fully agree with each other these days. Take this pair of 'experts' for example. One of them is in charge of running the biggest economy in the world. The other is a former chief economist at Morgan Stanley. While both may seem to hold respectable positions, their views could not be more radically different. The first person we're referring to is US Federal Reserve Chairman Ben Bernanke. And the second person is Andy Xie, who is said to have predicted as early as September 2006 that the US economy would fall into a recession in 2008.

Mr. Xie said recently, "There is a Chinese saying that one could quench the thirst by drinking poison. Bernanke seems to be prescribing exactly this to the US economy. The slower Bernanke raises interest rates, the bigger the next crisis." Xie strongly feels that while low interest rates may appear to help in the short term, they will ultimately jack up inflation rates in just a couple of years, setting the stage for the next crisis. But Bernanke obviously differs, maintaining that increasing interest rates is not an option until the US economy shows signs of a sustainable recovery. In our opinion, keeping interest rates low or increasing them, both have their fair share of dangers. It's just a matter of choosing the lesser evil out of the two. Well that then is the million dollar question, the answer to which only time will tell.

Meanwhile, the benchmark indices continued to trade in the red and the BSE-Sensex was trading lower by 104 points at the time of writing. Selling activity was witnessed in stocks from the banking and metals sectors. While most Asian markets were trading mixed at the time of writing, European markets are trading lower.

04:58  Today's investing mantra
"Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised." - Warren Buffett
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6 Responses to "Are we on the cusp of a major bull run?"

Ravindra Nayak

Dec 12, 2009

Excellant Study. Pl.keep it up.


K G Rao

Dec 12, 2009

You seem to hv made a faux pas in yr comments on RBI staff. If the absolute nos. are similar to those of the US, the per capita staff level in India's RBI has to be less, not more! The chart also indicates that India is not too heavily staffed, compared to Russia, EU and US definitely, perhaps comparable to Brazil and Japan, with only China having a truly remarkably small figure of staff with the central banker. Unless, of course, the chart as reproduced is supposed to indicate staff per unit of population, which it doesn't say. Confusing! Please clarify.



Dec 10, 2009

Equitymaster just goes with the flow...when Sensex goes to Moon, EM starts talking about Mars...thats the way it goes. I remember in early 2008 when valuations of stocks were at all time high, EM was throwing out Stock Select reports urging the bulls to go further (into black hole!).
Sometimes wonder if EM is for speculators or for Value investors.



Dec 10, 2009

Like any other business established in India, quality of this news letter was impressive initially. As the viewer ship grew, I see a constant deterioration in quality and contradicting views.

When markets started rallying after March lows, this news letter kept warning investors to stay away from the market as fundamentals are still weak. Now that long awaited correction is not showing any sign of materialising, equity master also changed its tone. The contrarian, independent and neutral voice turned into shouting with crowd and following a herd mentality.

I am a bit disappointed at the way this news letter is being received by investors now a days.




Dec 9, 2009

This is with regard to the "Major Bull Run" that you theorise is in the offing.

Does your publication get paid to put out such wildly misplaced headings to the (mostly) gullible public? The reasons I'm asking you is this ...

There are several reasons why the numbers coming into the press in the US is so colored that they seem to be from another planet.

First of all, to "repay" the stimulus (TARP) money, banks needed to make "real" profits. So far, they have been cashing in on defaulted CDSs and "trading" profits - a euphimism for taking cash from the FED at zero interest, placing it with the treasury for around 3% guaranteed and calling it "profit". So, this is nothing but smoke-n-mirrors where the Wall Street and Govt are working in tandem to rotate money through various locations within the system and turning loans into profits by sleight of hand. Eventually these profits are nothing but robbing paul (the taxpayer) and putting it in peter's (Investment Bank's) pocket as profit. Do you guys at EquityMarkets understand this and overlook it or are you really taken in by this gimmick?

Second, marking the Trillions of $$$ "toxic" mortgage assets at fantasy valuations by suspending FASB rules forever hoping prices will one day come back to normal, is keeping the lid on the real financial atomic bomb. Till this is done, the US and thw world will only slip deeper INTO the depression and not get into another "BULL" market as you think.

Thirdly, there is an even bigger tsunami in the form of commercial RE crash is coming around May 2010 in addition to residential Alt-A loan resets. This is what is really keeping the FED awake at night and forcing this ZERO interest situation. Soon, with the kind of borrowing the US is doing ($100 Billion per WEEK!!!) will one day necessitate raising interest rates, or else lenders will simply stop lending. When intrest rates take off, the RE mortgage default rates will only worsen probably tilting the US into a full-blown depression. This is the effect of too much debt!

Lastly, while in 2007 it took around $2 of debt to create an extra $$$ of GDP, it is now taking $9 to do the same (which is 450% more debt added to get the same output).

And so, there will be very strong pressure to NOT have another stimulus. At the same time, to prevent another collapse of the system, an even bigger stimulus will be forced on the US Govt in 2010. This will have almost NO EFFECT on jobs or demand for goods and service above current levels.

This will most probably pitch the US over the cliff into depression and much of the (developed) world will also follow. Asian countries (especially India) will be less hit, but we too will see a huge amount of pain and weakness.

And to think you are basing this stimulus as the basis for a BULL RUN?! WOW!!!




Ajit Agharkar

Dec 9, 2009

All very nice to hear and hope. But are we not talking of higher inflation, higher fiscal deficit and also a bull run. How does it all fit?

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