As often happens, after a bear market, when a rally ensues, there is an extremely divided opinion about whether it is a dead cat bounce (and the bear market will continue once the rally is over) or whether the worst is over, and we are at the doorway of a new bull run. Rules for investors are fairly simple; buy on dips in a bull market and sell on rallies in a bear market. The problem is in identifying which of the two it is! There are extremely well known investors who opine that a new bull market has started, including the likes of Warren Buffet, Anthony Boulton of Fidelity and Ken Fisher. There are others, like Nouriel Roubini, Joseph Stiglitz and Paul Krugman who believe that the TARP and other financial rescue plans will fail and that worse is yet to come. I tend to side with the latter view, perhaps erring on the side of caution in doing so.
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The optimists are enthused by the apparent recovery of the financial institutions; some large banks have declared good quarterly profits in Q1 ended March. Goldman Sachs, with $ 1.8b, JP Morgan with $ 2.1b and Citi with $1.6b (versus a loss in Q108 of $ 5.1b). Part of this is thanks to the greater flexibility given them by the Financial Service Advisory Board (FASB) in marking to market losses on their toxic assets. In India, too, accounting rules for marking foreign exchange losses to market have been tweaked, so that large borrowers in foreign currencies (Tata Steel, Tata Motors, Suzlon etc) would be able to show a better performance.
The rules have been tweaked in the hope that the public private partnership (PPP) of $ 1.1 trillion, announced recently, will help create a market for toxic assets where none exists, thus resulting in their erosion which is reflected in the accounts through the mark-to-market rules. The PPP, however, is tilted in favour of investors, at the cost of taxpayers, and the amount would probably not suffice. The outstanding exposure in just one derivative market, CDS, for example, has been estimated at $ 56 trillion.
Investors inherently have a bullish bias. This is a human trait. One must be optimistic to go through life. So it is quite human to expect that the worst is behind us.
But is it? The TARP programme is expected by eminent persons like Roubini and Krugman to be doomed to fail, and the PPP not to be able to solve the problem of pricing of fancy derivative assets now toxic. Getting such folly out of the global economic system is bound to inflict a level of pain not yet felt. Governments have thrown more money at problems (asset bubbles) which were caused, in fact, by too much money.
In India the problem would be worse, since we are going in for general elections. (However, the spending on such elections is expected to boost GDP by 0.5%). The elections would, in all likelihood, throw up a hung parliament, resulting in an amalgam of strange bedfellows who would be too busy making money than making sensible economic policy. The declining tax revenue, thanks to the slowdown, combined with the increasing spend to boost the economy in the slowdown, will widen the fiscal deficit. This is estimated at an unsustainably high 10% or more, for Centre and States combined. This would ensure that the budget presented by the next coalition Government would be full of obnoxious taxes.
The bearish case, then, is that the worst is by far not over and this rally is a dead cat bounce. The optimists feel that the worst is behind us and that after fall in global stockmarkets (60% in India), valuations are attractive for the long term investor.
What do you, reader, feel? Do you think the worst is behind us? Or is it yet to come?
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Last week the BSE-Sensex ended with a gain of 219, at 11023, and the NSE-Nifty with a gain of 42, at 3384. I believe that the market would correct some more, but then make another rally and head towards 12,000, in an effort to convince investors that the worst is over. I believe that, then, would be the time to sell.
In corporate news of interest, Satyam has been acquired by Tech Mahindra, who bid Rs 58 per share for a 31% stake which, combined with the 20% open offer mandated by law, would take their stake to majority, at a cost of Rs 2889 crores. In my last column I had mentioned that the chargesheet filed against Ramalinga Raju, who promoted Satyam and confessed to the accounting fraud, ran into some 65,000 pages. It now transpires that the chargesheet filed by Mumbai police against Kasab is 7,000 pages. Interesting comparison. Does it indicate that Satyam fraud requires greater investigative backup than the biggest terrorist attack in India? Or that there is an attempt at information overflow?
It seems that the Satyam confession was triggered thanks to a whistleblower, who communicated the fact of non existent bank balances to an independent director! SEBI should immediately institute a whistleblower policy, to protect them and encourage them to come forward. Else other corporate frauds would remain undetected, since so many people, including auditors, are complicit in it. The CLB has declared that independent directors were not involved in the fraud.
However, another independent director, Nimesh Kampani, is apparently being hounded, and has to remain abroad, for fear of arrest, as director of a company that defaulted on depositorsí money. Strangely, he had resigned by then! This suggests that the reasons for his likely arrest lie elsewhere.
Would such arrests, for acts committed by a company after an independent director has resigned from it, not lead to an exodus of truly independent directors? Is independent directorship a Mephistophelian bargain? A site to promote independent directorships, www.iodonline.com, seems to think so, for an article on it urges viewers to become an independent director and earn millions! This can become a really serious threat to good corporate governance if such directors are hounded in this manner.
In other corporate news of interest, RIL has given up its EOU status for its 33 m tpa Jamnagar refinery, and will sell petro products domestically. Global demand for, and pricing of, petrol and diesel having fallen, this seems to be a logical step for the company.
So, investors need to decide whether we are still in a bear market, as I believe we are, and that this rally is a dead cat bounce, or whether we are in a bull market. Should they feel that we are in a bear market, and a rally takes the sensex over 12,000, it would be advisable to sell.
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