Liked this article on the way ahead for the Stock markets:
Akash Prakash: Leads and lags
The first green shoots of recovery will likely be treated with scepticism, rather than embraced
Akash Prakash / New Delhi March 27, 2009, 0:47 IST
The stock market is normally a leading indicator, and has historically always tended to lead the real economy by approximately six months. In fact, in the construct of the series of leading economic indicators in the US, the stock market is one of the critical constituents of the leading indicator index. Even in this crisis, the markets broke down, before the crisis really began to eat into the real economy. The markets signalled early on that this is going to be much worse than a plain vanilla recession.
In the case of a traditional cycle, the economy overheats, inflation spikes, the Fed raises interest rates to cool the economy, growth slows and unemployment rises. Once enough of an output gap has opened up and inflation is tamed, the central bank will cut rates to stimulate growth and the cycle will continue. In this type of a classic recession cycle, brought on by central bank tightening ,markets always bottom about six months before the economy. The typical recession will last about 10 months and investors will always lead the economic recovery. Markets will start rising before the economic data conclusively turns, and some people will be left scratching their heads as to why have markets moved.
Given the unprecedented nature of this crisis, the normal equation stated above is unlikely to work. This crisis is far more globalised and structural in nature. This is the first time we have a simultaneous contraction in both global GDP and trade flows in at least 60 years. The global financial system has imploded, and the multinational banks are just a pale shadow of themselves. Central banks across the world have been forced into overdrive and a race to zero interest rates has begun. Risk appetite globally has been decimated and even the real money capital pools are short of liquidity. The reality is that we have limited visibility as to when we come out of this economic morass, and what will be the unintended economic consequences of all the unconventional fiscal and monetary actions being taken today. There are long-term concerns around the dollar, inflation, fiscal balances and the new regulatory structure governing large financial institutions. China is willing to publicly question the safety of US financial assets.
The destruction of wealth has been totally unprecedented (as a case in point, at the recent bottom of S&P 500 below 700, the combined wealth loss in equity and property in the US alone was over $11 trillion), and the near-collapse of the financial system has given investors a new appreciation of risk.
In the above context a big dilemma for investors is the extent to which they should lead a real economy revival. Can investors take on their normal role of being a leading indicator, and piling into risky assets before an economic revival is apparent in the data? Or should one recognise the unprecedented nature of this economic meltdown and be willing to wait for data to turn, before one gets fully invested? Do investors have enough confidence around the contours and trajectory of an economic revival to pre-empt it? If one believed in the normal lead/lag relationships, and agreed with the consensus view of a second half-2009 economic revival, then the time to buy is now. Valuations seem to be reasonable, though arguably, 15-20 per cent away from true historic long-term bottom levels and investor scepticism high.
Given the wealth destruction and new-found appreciation for risk, my sense is that investors will be less of a leading indicator than the past, and a market revival will be more of a coincident event with the real economy starting to revive than past history would indicate. There is nothing like a market down 50 per cent for everyone to relearn the lessons of capital preservation. Investors will, I think, be more willing to lose some initial upside, than wade in early. Investors’ capacity to bear further capital loss is very limited, naturally curtailing their willingness to be early. The question marks around the long-term impact of all the emergency fiscal and monetary policy action undertaken will also curtail any tendency to jump into markets at the first anecdotal signs of recovery. Investors will, I think, be in more of a “show me” mode, wanting to see clear sign of the economy recovering before they believe. The first green shoots of an economic recovery will most likely be treated with scepticism, rather than embraced as in more normal economic cycles.
The current rally, to the extent that it holds, seems to be more a normalisation of expectations and a pull back from extreme oversold conditions. Investors had gotten too bearish and priced in total collapse and nationalisation of critical financial institutions. Rumours were rampant of even senior debt holders having to take hair cuts on financial institution bonds. The Obama administration had also started losing credibility due to a continuing lack of concrete details around the toxic assets plan, and sentiment indicators were in panic territory. Some of the more extreme bearish outcomes for the banks now no longer seem on the table and we are getting more details around the Geithner plan.
While it is true that a series of economic data coming out of the US has surprised — with at least six or seven data points being better than expected, from the Philly Fed survey to new housing starts and new house sales etc —is this a case of expectations being too negative or a sustainable bottoming of the data? This is still a moot point.
Emerging markets seem to have clearly begun a new cycle of at least relative outperformance vis-à-vis the OECD markets, and this will hopefully extend to India as well, after our elections.
Even if this current rally is sustainable, it is unlikely that the markets just gallop away. We may at best have tested how low markets will go in this cycle. Given the type and extent of economic, financial and psychological damage sustained, the markets will give you numerous opportunities to enter. One of the lessons of structural bear markets is that they tend to tire you out, lasting for years. It would seem foolhardy to chase markets at this stage, given too much is uncertain even now.
Found this article on some blog:
2009..Is this sustainable ?
Thursday, March 26th, 2009
In thirteen trading days from an intraday low of 8047 on March 6,2009,the Sensex is once again kissing 10000….moving up near 25%
Getting a lot of calls…basically to make some sense of this rally
Is this the beginning of the recovery and have we seen the Bottom of 8000 for the Sensex and the October 27,2008 low of 7697 will not be tested ?
Is this just a Pullback rally and we shall see the Sensex breach 8000 again in 2009 ?
I hold the view that the macro pains have yet to unfold in their entirety…This rally is a strong counter- trend and a powerful one at that…. we shall see such bounces on oversold markets…Maybe the Bottoms may not be tested for a while…but they will
In fact even on October 27,2008 when the Sensex touched a intraday low of 7697,it swung back sharply within just three days to close at 9788 on October 31,2008 !…and it had begun October at levels of 13000 !
If you think the WORST MUST BE OVER ,then think again !…Sensex at 11 and 12 multiples may appear cheap against the 25 + Multiples we had in January 2008….With Earnings slowing down,we’ll probably see single digit P/E,trailing and forward, on the Sensex in 2009 and that would sustain for some time
The Dow took 25 years to regain it’s 1929 High…It did so in 1954 !…Our wait for the Sensex to regain 21000 should not be so long !…Right Now I see Stressed Prices but not Distressed Prices on our Bourses…..These will come in 2009 itself and give you some great buying opportunities.
Ask an Investor who got into Unitech at Rs 500 in January 2008,whether he’s excited with this rally !…he may be too shell shocked anyway to respond !
The poor Bloke saw a 95% erosion to Rs 25 in just over a year….he now needs to get a 1900 % surge to recover his loss of Rs 475…so if Unitech has gone up 40% from Rs 25 to Rs 35 how does this matter to him !….so don’t live under delusions and the phony excitement being generated by experts and TV Anchors on the Stock Channels of this “big” 40% gain in Unitech
These swings require you to have a Traders Mentality to capture opportunities…and that’s a tough ask….I thought Investment was about Investment !…not Trading or Speculating !
So what do you do to recover from being Hit last Year in Equity ? Some Thoughts….
• Just Holding on to your Equity Portfolio may not work as some scrips may have seen permanent erosion…so review and reposition…believe me taking a real loss than sleeping everyday with a notional one is a big relief !
• Save/Hold/Generate Cash to capture greater opportunities ahead
• Hedge your Portfolios against declines…the volatility is just too unnerving
• If you must Trade then do so with strict stoploss
• Use upswings to exit some holdings to create cash to later capture scrips at distress prices to reposition your Equity Portfolio
• Be prepared to adopt a tactical,rather than strategic, approach to capture great opportunities
• Get some significant Gold exposure in your Portfolio…Physical or through ETFs
• Ensure proper Asset Allocation to suit your Risk Profile and be disciplined in the rebalancing exercise when predetermined allocation ranges are breached
You’ll be deafened and confused by the divergent views and the cacophany being generated on the channels and the print media by a host of Experts and TV anchors
Try some Independent Thinking….after all it’s your monies at stake… .If you’re going to stick your nose at ‘Monalisa’s nose you’re not going to see her smiling at you from whichever angle you look at this Leonardo Da Vinci Masterpiece….. Stand back to look at the whole landscape and get a feel of the macros…only then you’ll get a feel of how they intensely impact the micros currently
There are Plenty Opportunities coming up…It’s better to be prepared and not get them rather than you’re faced with them and you don’t know what to do or don’t have the cash to do so !
Value and Price are two very different Issues…Milk in Mumbai is sold at @ Rs 25/litre….would you buy it at Rs 60/litre ,even if it’s a Swiss Cow giving it !?….But when it’s at a distress Rs 5/litre don’t question the buying opportunity by being skeptical and saying ” Doodh meh kuch kaala hai !”
I made strong contrarion calls in 1992,1997,2001 and 2003….missed the speed,scale and intensity of the USA Financial Fiasco that has burned the world markets….I’m gearing to make a contrarion call again in 2009….so these bounce back rallies are only delaying distress prices on the bourses and therefore my call….I’m patient….even if this bounce may take the Sensex up to 12k
Get the Point !
Business Daily from THE HINDU group of publications
Thursday, Apr 09, 2009
Bank chiefs see tough year ahead; bad debts may go up
‘Credit growth likely to slip to 18% this year’.
Large number of accounts are being restructured to cope with recession
Net Interest Margins are likely to fall steeply in the fourth quarter
Mumbai, April 8 The year ahead is going to be tougher than expected for the banking sector as banks grapple with slowing credit growth, rising delinquencies and declining margins.
This was the message conveyed by bank chiefs in their consultative pre-credit policy meeting with the Reserve Bank of India Governor, Dr D. Subbarao, here on Wednesday.
Talking to reporters immediately after the meeting, Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India, and Chairman, Indian Banks’ Association, said that credit growth will get moderated this financial year.
The credit growth in 2009-10 could at best be 18 per cent as against 27-28 per cent in last fiscal, said Mr M.V. Nair, Chairman, Union Bank of India.
Analysts have also been predicting a lower credit growth in the current fiscal. Broking firm, Angel Broking in a recent report said, “We expect credit growth to go down in FY2010 to 15-17 per cent as fresh investment demand becomes less forthcoming.”
The meeting was called to gauge the outlook for the year and to seek bankers’ feedback.
Bankers said a large number of accounts are being restructured following the RBI advice to help borrowers to cope with the recession. Although this could provide a temporary relief, rising delinquency continues to remain a serious concern.
The NPAs will go up this year as asset quality will be a problem. If there is a further downturn in the economy, it will affect the bank’s asset quality further, Mr Narayanasami said.
Bankers also apprised the RBI that Net Interest Margins (NIM) are likely to fall steeply in the fourth quarter of the just ended fiscal because of the high funding costs. Although deposit rates started coming down in mid-February, they are still high and will continue to ease slowly. However, as the impact of the cut in benchmark prime lending rates is immediate, this has put pressure on NIM. Therefore, further BPLR reduction may not happen for some time, said bankers.
The interest rates and subsidised interest rates cannot come down further, Dr K.C. Chakraborty, Chairman and Managing Director, Punjab National Bank.
Although the RBI has not directly told banks to cut lending rates, there is enough signal from the current repo and reverse repo rates, said Mr Narayanasami.
“It is in the banks’ own interest to bring down lending and deposit rates. They are trying to bring down their cost of funds. More banks will cut their deposit rates in the next fortnight,” he said.
The RBI on its part assured bankers that the Government borrowing programme would be managed smoothly by combining it with Open Market Operations and bond redemptions under the Market Stabilisation Scheme.
Though inflation may turn negative for a brief period, there are no fears of deflation, the Governor assured bankers.
Industrial outlook to stay bleak till exports improve: Moody's
9 Apr 2009, 1722 hrs IST, IANS
NEW DELHI: Industrial outlook will remain bleak until the export sector gains momentum, the research arm of global credit rating agency Moody's
said on Thursday.
"India's industrial outlook will remain dire until there are signs of improvement in export prospects," Sherman Chan, an economist with Moody's Economy.com said in a statement, released hours after government data showed 1.2 per cent fall in India's February industrial output.
"It's almost impossible for local manufacturers to maintain their previous production levels given the slump in external orders. Exports are unlikely to recover any time soon, as major markets such as the US and Europe are still in bad shape," Chan said.
He, however, said the commitment of the G-20 nations to improve trade finance was a welcome sign.
"The domestic sector may provide some support to local manufacturers. For instance, the fiscal stimulus measures will inject much-needed support to the industrial sector. However, such assistance could at most minimise the damages done by the global downturn," Chan said.
Warning that the foreign investment flow to India is decreasing due to the downturn effect, the economist said: "This will weigh on construction and manufacturing activity."
He, however, said the "tech-savvy" India still remained one of the ideal locations for many global corporations.
"Therefore, India's industrial sector perhaps will not be hurt as badly by the global downturn compared with most other emerging economies," Chan added.
Bonds rally strongly on surplus funds
9 Apr 2009, 1835 hrs IST, ET Bureau
MUMBAI: Banks parked close to Rs 1,31,000 crore of their surplus funds with RBI on Thursday, as a part of the central bank’s daily money market
This has once again led to speculation that RBI will announce some measures by which banks will stop parking their idle funds with RBI or invest them in bonds.
The RBI governor has said in various public appearances pointed out that for economy to recover, banks will have to start lending to the real economy again. The rupee however closed just above the 50 against the dollar mark (at 50.04) after trading below it for most part of the day.
Bonds rallied strongly on the last working day of the week with banks and primary dealers using the huge liquidity surpluses to buy long dated bonds. Dealers pointed out that yields on short term debt instruments have fallen dramatically since the beginning of the new quarter. This allows banks to borrow cheaply from this market to invest in higher yielding securities.
The RBI said on Thursday it had set a cut-off price corresponding to a yield of 6.74% for the 6.05% government bonds maturing in 2019. This is the benchmark 10-year paper that closed at 6.70% in the market, after some traders sold the securities that they were alloted in the market.
For the 7.50% government bonds maturing in 2034, the cut off price corresponded to a yield of 7.74%. "Every time yields cross 7%, we have seen a return of appetite among traders," says Ramkumar K, head of fixed income at Sundaram BnP Paribas AMC. "The IIP numbers also being much less than market expectation cheered the market. However RBI may be done with its rate cutting spree as of now, although a cut in repo rates will not be unexpected," he said.
The rupee traded in a small 16 paise range and found support from gains in Asian currencies. The dollar and yen softened against other major currencies on Thursday as global stocks rose, renewing appetite for risky emerging markets assets. The main stock market index BSE Sensex though pared all again to end only 0.6% higher.
India may see 75, 000 IT job cuts this year
10 Apr 2009, 1126 hrs IST, Jessica Mehroin Irani & Deeptha Rajkumar, ET Bureau
MUMBAI: The Indian IT industry, already under pressure since the downturn began in the US financial, banking and insurance markets last year, is likely to see close to 75,000 job losses this year, according to senior executives of leading software companies.
US president Barrack Obama’s policy on outsourcing had prompted some technocrats to estimate the extent of possible job losses in India at about 50,000 jobs in the first half of the new year itself. These job losses would be across sectors such as IT, ITeS and BPO, they added.
“As on March 31, 2008 there were 550,000 direct jobs created by the IT industry in Bangalore,” said Infosys board member TV Mohandas Pai. “I would estimate close to 30,000 IT professionals, earning an average salary of Rs 5 lakh per annum, would have lost their jobs between April 2008 and March 2009 in Bangalore.”
Mr Pai also said that for fiscal year 2009-2010, an additional 25,000-30, 000 jobs may be lost in Bangalore alone. “These job losses are due to the fact that many companies have shed excess capacity as the growth rates of industries have decreased. It is possible that a fair number of these people would have found jobs in other industries too during this time at a lesser salary,” he added.
Mr Ravi Ramu, CFO of realty firm Puravankara and former CFO of Mphasis says about 50,000 jobs could be at risk next year. However, what worries him more is the spin off effect that will see a lot more losses. “Every direct job in the BPO is supported by 6 indirect jobs. In reality, the spin-off will be even more negative.” Even though, IT bigwigs are concerned about the high rate job loss, IT lobbying body Nasscom, doesn’t think so.
According to Nasscom president Som Mittal, earlier the retrenchment was not on such a large scale as attrition was high. “Companies are stressing more on performance issues in these times as they want to increase productivity. The coming times are uncertain and people are not hiring in large numbers as before. There is already a wage moderation that is happening across the industry and this will definitely reflect on the spending,” he told ET.
Economy leveling off, bumps not over
Posted: 2009-04-10 10:11:20+05:30 IST
Updated: Apr 10, 2009 at 1011 hrs IST
Washington : At last, after a nerve-racking six-month descent, the economy appears to be leveling off.
But don't assume the bumps are over.
Stock investors, shoppers and home buyers are less jittery. Once-frozen credit markets are slowly thawing. And economic indicators that had been going from bad to worse are showing signs of stabilizing - though still at distressed levels.
There were fresh signs Thursday that the full force of the recession may be petering out: a strong profit forecast from Wells Fargo, a drop in unemployment benefit filings and several retailers predicting solid April sales. On Wall Street, the Dow Jones industrials rose nearly 250 points.
Still, with unemployment rising, it will be at least several months before the country's economic engine pops into a growth gear. Job losses - and the fear of them - act as a headwind against consumer confidence and spending, which account for more than two-thirds of the US economy.
"The sense of a ball falling off a table, which is what the economy has felt like since the middle of last fall, I think we can be reasonably confident that that is going to end within the next few months, and we will no longer have that sense of a free-fall," President Barack Obama's top economic adviser, Lawrence Summers, said Thursday.
But Summers, who spoke at the Economic Club of Washington, said it was too soon to forecast how strong the rebound would be and when it would take hold.
The economy shrank at a 6.3 per cent rate in the final three months of 2008, the worst showing in a quarter-century. Some economists say it fared about as poorly in the first three months of this year, while others expect a 4 to 5 per cent rate of decline. The government releases its initial estimate at the end of April.
And the economy is still shrinking in the April-June quarter - perhaps at a rate of 2 to 2.5 per cent, some analysts say.
When will it grow again? Maybe the final quarter of the year.
For now, said Brian Bethune, economist at IHS Global Insight, "I think we can say we've gone through the most terrible part of the recession."
The scenarios charted by economists are consistent with Federal Reserve Chairman Ben Bernanke's hope that the recession, now in its second year, will end this year.
Bernanke, however, has been quick to caution that this will happen only if the government succeeds in stabilizing financial...
markets and getting banks to lend money more freely again to both consumers and businesses. To that end, the Fed recently plowed $1.2 trillion into the economy in an attempt to reduce interest rates for mortgages and other loans.
Even in the best-case scenario, the unemployment rate - now at a quarter-century high of 8.5 per cent - is anticipated to climb to 10 per cent by the end of this year.
History shows that the jobless rate moves higher well after a recession has ended. That's because companies won't want to ramp up hiring - often their single-biggest expense - until they feel confident any recovery will be lasting.
Consumers, whose sharp cutbacks in spending plunged the country into a steep economic tailspin at the end of last year, seem to be gradually spending more freely.
On Thursday, Wal-Mart Stores Inc., the world's largest retailer, said sales at stores open at least a year increased 1.4 per cent in March. However, discount retailer Target Stores Inc.'s sales fell.
The government reported last month that consumer spending rose in February for the second month in a row - after a half-year of declines.
Shoppers' appetites to spend should get a lift later this year from tax cuts contained in Obama's $787 billion economic stimulus package. Tax credits of $400 per worker and $800 per couple translate into about $13 a week less withheld from paychecks starting around June.
The hope is that the added consumer spending will prompt retailers to replenish inventories, which have been cut nearly to the bone during the recession. That would require factories to boost production, creating a ripple of positive economic activity.
Thursday's $3 billion first-quarter profit forecast from Wells Fargo was in part a reflection of the very low interest rates at which banks can borrow money from the government and then lend it out at higher rates to consumers and businesses.
Another positive flicker came Thursday from the Labor Department, which reported that the number of newly laid off Americans filing for unemployment benefits dropped by 20,000 last week to 654,000.
Although credit and financial conditions have shown some signs of improvement since the worst of the crisis last fall, they are operating far from normally, Fed officials say.
"In view of the state of the credit markets, it seems a fair bet that it will take time for momentum to build," Gary Stern, president of the Federal Reserve Bank of Minneapolis said in...
a speech Thursday. "But with the passage of time - as we get into the middle of 2010 and beyond - I would expect to see a resumption of healthy growth."
To be sure, the economy is not out of the woods yet. Another bailout of a troubled bank or other company could easily shatter already fragile confidence and send the economy reeling again. The collapse of General Motors would send many more to the unemployment lines and could jolt the economy into a major backslide. And, there's the risk that consumers will once again shut down as jobs continue to vanish.
And, even if the recession were to end later this year, most economists believe economic activity won't return to a more normal pace of around 3 per cent to 3.25 per cent until late next year.
"Yes we have probably seen the worst ... but the shape of the recovery will look more like the Nike swoosh," meaning a gradual - not sharp - rise back to normal, said John Silvia, chief economist at Wachovia Corp....