Hip, Hip...huh? - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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20 MARCH 2008

There was a courageous "Hip" when the US markets opened on Monday, March 17th. The Federal Reserve, you see, had just agreed to pump in another USD 100 billion into the system over the weekend. And JP Morgan had agreed to buy out rival Bear Stearns for USD 2 per share. To put that in perspective, the Bear Stearns stock had closed at USD 30 on Friday, March 14. How a stock can be valued at USD 30 on the last day of trading on Friday, and then be sold - the entire company, lock, stock, and barrel - for USD 2 suggests someone found out something pretty bad hiding in the books of Bear Stearns.
At its peak, in 2007, the stock was trading at USD 170.

On Wednesday, there was a louder "Hip", as the Dow surged 420 points - a solid gain of 3.5%. This time the market was celebrating the sharp cut in the federal funds rate from 3.00% to 2.25%. The rescue operations by the Fed are in full swing. The stock market cheered and share prices of stocks like Lehman Brothers (who many expect to be the next Bear Stearns) surged 45%.

So, now we have a "Hip", a second "Hip" and should we be ready for a "Hooray!"?

Huh? Why would there be a "Hooray"?

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The US economy is in a recession. Statistics to prove this may be out sometime over the next few months. But the actions of consumers have already indicated the slow-down. People in USA are shopping less, their homes are worth less, and credit card defaults are at record highs. What is at debate is the extent of the slowdown. Data compiled by and commented on by CNN indicates that the US economy is in pretty bad shape. Of the 7 indicators that track the US economy, Inflation shows up as "under control - for now" and Industrial Production gets a "growth outlook steady".

Everything else looks dismal. With no sign of a turnaround anytime soon.

Ben fights the 7 dwarfs
The 7 economic indicators
How bad is it?
The indicator The reading Next update
Inflation (CPI) Under control - for now. April 16
Retail Sales Below expectations - weak growth. April 14
Job Growth Worst in five years. April 4
Manufacturing (ISM) Weak growth. April 1
Consumer Confidence Lowest in five years. March 25
Leading Indicators Further weakness ahead. March 20
Industrial Production Growth outlook steady. March 19
Source: CNN.com

The US stock market is likely to deflate into a "Huh?" and not a "Hooray". Any rally will be a dead-cat bounce.

Knowing the underlying problem - of a US economy in trouble - is, unfortunately, critical to the understanding of our very "made in India" Sensex.

Our superb command over the English language and our ability to dazzle the world with our slogans like "India Shining" and "India Incredible" put us right there in the spotlight, on centre-stage, with the short term investors.

Our well educated lawyers and our sharp-knifed brokers were ready with the financial structures of P-Notes to offer any piece of India to anyone willing to buy.

The policy makers, hungry to show that India was a success, looked the other way as P-Notes were issued with freedom, and proudly rolled out statistics to show how foreigners loved Indian stocks.

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The Reserve Bank of India remained - and still remains - the only institution to really worry about the long term implications of all these financial engineered products.

Well, those foreigners in a foreign land are now in deep trouble.
Their share prices can sink from USD 170 to USD 30 to USD 2.
They can go bankrupt.
And when people go bankrupt, they sell anything and everything at any price.
They need their money back home as soon as possible.
So the P-Notes are unwinding.
India is being sold. In panic mode.

Maybe we can coin a new slogan now, "India on Sale".

So, Dalal Street and the Sensex will do a bit of "Hip, Hip...Huh" for some time. Maybe 3 months. Maybe 6 months. Maybe 9 months. I can only guess.

I don’t know how low the Index can go.
I don’t have any idea how long before it starts to recover.

But I do know there is a lot of value in the Indian stock market and that the patient, disciplined investor will be rewarded.

And then you can chant, "Hip, Hip, Hooray".

Table 1: Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold ETF Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.


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