Testing, testing, testing..... - Straight from the Hip by J Mulraj

Testing, testing, testing.....

12 AUGUST 2011

This is a testing time for all. The US got downgraded by S & P, losing its AAA rating, which is now AA+. Global stockmarkets reacted on opening, on Monday, with the BSE sensex losing over 500 points intra day and ending down 315. --------------------------- Where are the stock markets headed? --------------------------

Sensex: 15,000 or 30,000?

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It's a testing time for investors. Is this dip a buying opportunity? Or is worse ahead?

It's a testing time for other countries too. Rumoured to be next in line for losing its AAA status is France, making its President, Nicolas Sarkozy, cut short a holiday to rush back to the capital (oo la la, things must really be worrisome).

The founders of S&P were quite prescient in giving it the name. At the rate things are going, country ratings would be either standard or poor!

So, what lies ahead? Investors can expect several bounces from the sensex level of 16,000 or so, and several falls back to test that level, whenever another crisis erupts. As it will.

The bounces will occur because there is, in fact, global liquidity waiting to feel comfortable enough to invest. According to a study titled 'Updating Global Capital Markets and Flows: 2011' in McKinsey Quarterly the stock of global financial assets was $ 210 tr. at the end of 2010.

This capital earns a return when global GDP grows. Global GDP is about $ 65 trillion, growing at some 4%. Thus the stock of financial capital earns inadequate returns. When there is a crisis, as after the downgrade, it flees global stockmarkets, causing the sharp falls. When it feels comforted, such as after the announcement by the Fed that it will continue its easy monetary stance (that's like a doctor telling an alcoholic that the bar will be kept open all night), or when US job loss data is better than 'expectations' (heck - job losses were still at 395,000, some 20,000 fewer than expected - is that supposed to be good news?) markets rally.

The problems of bad economic management manifest themselves in various ways. In London, minorities rioted, in protest of unequal job opportunities, causing a lot of damage and mayhem. UK politicians are not reviewing the economic policies and seeking to address the root of the problem; they are, instead, picking on social network sites such as Facebook and Twitter, for their role in providing ease of communication which allowed the organised riots.

Increasingly one will see 'security concerns' overriding 'personal freedoms' leading to intrusions into personal privacy. The Indian Government has already leaned on services like Blackberry messenger to provide it access. Knowing how the Indian polity works, the chances of such intrusions being misused for silencing political opposition, are high. Witness, e.g., the ban on the release of a movie in 3 states which, though cleared by the censor board, did not meet with political approval.

Investors can thus expect the 16,000 sensex level to be tested several times in the coming few months. They could enter as close to that level as their greed permits them to. If the level is breached, on some particularly bad news which one cannot foresee at the moment, then 14,000 would be an excellent buying opportunity.

The problems of the US are well known. Its economic growth depends on continued consumer spending, which accounts for 70% of GDP. Government spending accounts for over 35% of GDP and the deal to raise the debt ceiling requires it to be cut by $ 2.1 trillion. The US consumer would need, anyways, to cut consumption and increase saving, which he has started doing. So one can expect that US would follow Japan and have a long stretch of nominal 1-2% GDP growth.

Andy Lees of UBS says that there is too little innovation because of the misallocation of capital due to low interest rates.

Interest rates must rise and if they do, stockmarkets would tumble. This is a self made trap which the US will take a long time to get out of.

Technology can provide an answer. It's generally the scientists that clean up messes politicians make. American urban planning was based on the back of a personal transportation system that relied on cheap oil, with the US exercising its financial and political muscle to keep oil low, until the Middle Eastern producers banded together to create OPEC. We may have hit peak oil and so oil prices are climbing. There is a lot of oil trapped inside Canada's tar sands, for example.

Perhaps more than in Saudi Arabia. The problem was that it was difficult, expensive, environmentally damaging and hazardous to health, to extract. A new, chemical, process, has now been discovered to get oil out of tar sands in an environmentally friendly and cheaper way If this is commercialised, the US dependence on Middle Eastern oil will diminish, which will have geopolitical repercussions. The US, in turn, is developing its massive reserves of shale oil. According to the website www.dailyreckoning.com, "Estimated U.S. oil shale reserves total an astonishing 1.5 trillion barrels of oil - or more than five times the stated reserves of Saudi Arabia."

Coming to India, exports are up, indirect tax collection in July is up 16.4%, and Brent crude prices have fallen to around $ 100, from a high of 127 in April. The RBI is correctly following a tight monetary policy stance.

But we also continue to do foolish things. One of which is to keep pumping money into Air India. Why should it be necessary for the Government to own an airline that it has no chance of ever being able to rescue and in which it keeps pumping money as in a bottomless pit? If the objective is only so that in times of crisis (such as for evacuating Indians out of Libya or Japan) surely planes can be chartered or military aircraft used? It would be far cheaper. Air India has a debt burden of Rs 46,000 crores, 70% of which is from the collection of banks including SBI, PNB, BOB, BOI, IDBI, CBI and OBC.

The dues just escaped being termed as NPAs due to an infusion of cash last month but for how long can the default be avoided? Moody's has warned India of a rating downgrade because of high NPA's of banks.

In corporate news, Piramal Healthcare, flush with funds after the $19b. sale to Abbott of its pharma business, has struck a sweet deal.

It has bought 5.5% of Vodafone for $640m., which allows the parent to bring down its stake below the mandated 74%. Apparently, Piramal Healthcare will be provided an exit within two years in one of three ways. An IPO. A buyback. Or a buyout by another investor. The deal will give it an assured 17-20% return. Sweet!

The BSE sensex dropped 467 points to close at 16839 and the NSE-Nifty dropped 138 to close at 5072. Another few hundred points drop on the sensex would provide a buying opportunity, bearing in mind that the sensex would, probably, repeatedly test the 16,000 level.

Testing, testing, testing...

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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2 Responses to "Testing, testing, testing....."

sultan fazelbhoy

Aug 13, 2011

PART TWO -- my earlier comments were forwarded too soon due to pressing the wrong key. Sorry. Can you piece them together??? Thanks
I come to Anna-ji and his mission, HE IS BEING VERY HASTY. Undoubtedly corruption needs a revolutionary attack. Yet some actiion is taking place by the courts against large cases and a draft bill which is not ideal, but better than zero. It is an indication that politicians are agreed they need to change. To put it humoursly, politicians and diapers need to be changed regularly for the same reasons . . .
ANNA-ji and his talented and enthusiastic Team must understand the intricasies involved. Passing a bill will not automatically solve the corruption problem. There is an endemic CANCER in our body politic and like a physical cancer only one line of treatment will not bring about a cure; eg chemotherapy needs other medical and mental support for success
We, the peoole, must realise that asking the politician to give up his route of easy income is like asking DRACULA to give up drinking blood. A positive and long lasting change of ATTITUDE is a most difficult task. It has to come from within as any psychologist and any spiriutal guru will confirm. Even spiritual sages sometimes become greedy, lustful, attached to power, surrender not to God but to temptation and lose the basic quality of humility
I am in disagreemtnt with inlcuding the PM in the list. That is punishing an individaul when it is the PARTY that nominates him that needs to be punished
I am scared of Anna-ji's fast ending in disaster. He may prove a point of being self sacrificing but what if there is an eruption of countrywide violence? how will it be controlled without messing up our society further??
Our society is very complex; the tentacles of the cancer have penetrated to the lowest level of Govt staff. Innovative "medical" holistic treatment is needed and there is no statesman in sight like another Nelson Mandela or Abraham Lincoln or our very own wise and spiritual Gandhiji
I advocate an all party NATIONAL GOVT or will it be another illusion ??? Sultan Fazelbhoy




Aug 13, 2011

What is being overlooked is that the country's patience is being tested -- by both UPA and Opposition. Both are wishy washy in their focus: the one t remain in power and wait for Rahul to be PM. Unfortuneately he is NOT a visionary and stateman calibre YET. The Opposition wants resignations without a convincing action strategy. Their past record is not encouraging

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