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Where are financial markets heading?
Where are financial markets heading?
Where are financial markets heading?
Where are financial markets heading?
Where are financial markets heading?
Where are financial markets heading?
Where are financial markets heading?
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Where are financial markets heading?

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In this article I look at: …

In this article I look at:
• What is currently happening, what has happened in last few days and where are financial markets heading?
• A little closer look at a flop show by FEDERAL RESERVE (FOMC Statement) and its stance and direction on economy and Interest rates
• India & Indian central bank (RBI) making headlines all over the world over its GOLD(EN) purchase; my views on what does it mean?
• Where are currencies of emerging economies (especially India) headed?
• Nouriel Rubini & Jim Roger Fight: I thought to have my take on their fight with the former predicting that the "mother of all carry trades" is growing and threatening to cause a global implosion, with investors using cheap US dollars to embrace risk will quickly reverse course once the greenback strengthens and the latter saying Mr. Roubini hasn’t done his homework, yet again.
• The reason given in this article lead me to believe that what Mr. Rubini is saying is wrong? Well, I am too small to even counter Mr. Rubini’s argument, who was one of the few first to predict the economic collapse. But I believe that US$ might reverse its course against developed world currencies, e.g., EUROZONE, JAPAN etc., in the medium to longer term, but not as much against emerging economies including India. So the question or skeptism about Asset bust all around the globe including emerging economies, I believe seems doubtful.
• The reasons given in the article does not let me believe Mr. Rubini’s prediction of everyone closing their shorts on the dollar, selling these risky assets across the world leading this huge asset bubble going into an asset bust”,

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  • 1. 1 Where are financial markets heading? I expect the trends depicted below for different asset classes to continue in near to medium term. I continue to believe my stance that November will continue to be the toughest period to be in equities, volatility along with sideways movement will continue to rule the markets with positive biases into it, Gold will continue its Golden Saga, INR to strengthen during November against USD, Yields will continues its downward trend with Bond prices making newer highs. Good economic data (ISM Manufacturing data), Robust auto sales despite no Cash for clunkers elements during October, encouraging positive ADP job data, earnings continue to be better than expected just cannot lift the market higher., but WHY? Better than expected earnings and macro data points were primarily the reasons, why markets made newer highs during Sep and Oct. FOMC statement and its direction of interest rates was a flop show as widely expected will further deepen the debate going on in the markets of Cheap Dollars chasing all asset classes all around the world especially emerging economies. Two greats, Mr. Nouriel Rubini and Mr. Jim Roger fight I believe is healthy for the market and I thought it’s a good time of have my own perspective on the fear expressed by Mr. Rubini (expressed in red box). India and its central bank (RBI) due to its Gold (en) buy of 200 MT made and continues to make headlines all round the globe and I felt so happy about it. . 5th November, 2009 My conviction over my stance of Indian Markets not having their own legs (barring few occasions such as Budget, RBI Policy action, national election etc.) gets stronger day by day due to the moves witnessed by our markets since my last article. I firmly believe that Indian Markets even going forward (1-2-3 years), will not have its own legs, where in it will be able to move or react due to its India centric news or India centric macro data. The “DECOUPLING” theory just does not hold true in the current context. One day move of 500 points either way on SENSEX turns one either bullish or bearish in no time. Vinit Tulsyan http://vinittulsyan.wordpress.com
  • 2. 2 Where are financial markets heading? None of the market participants all round the globe have got a reason which could be attributed to sharp pullback in Global equity markets. The pullback has been more vicious for Indian Markets with markets falling more than 12% in comparison to global equity markets (including emerging markets) average of 5-7%. Those days are gone, where in a little “better than expected” data points either on earnings front or macro data could move the market but at the same time data points in line with expectation or below expectation are not moving to the downside as well US markets barring today had seen sharp cuts to the extent of 5-6% since I last wrote my article, though the news on the data front has been mixed to positive, definitely not negative. The biggest of all was the ISM manufacturing data, which showed expansionary manufacturing activities. The auto sales were great for the month of October despite not having any cash for clunkers part attached to it. The earnings continued to be on surprising side having positive biases attached to them. Even these earnings could not lift the market despite of the fact that earnings were the most important reason for the markets to inch higher during Sep-Oct 2009. Even the biggest purchase of the biggest rail road company in US by Mr. Buffett could not lift the market, who endorsed his confidence on US economy by issuing a statement that this acquisition is actually is a play on his confidence of US economy being much better going forward. Today, the ISM-non manufacturing data (showing performance of service sector in US) was a bit disappointing, the ADP payroll data was better than expectation, mortgage applications rose higher than expectation on the back of interest rates falling below 5%, but the markets inched higher. Cisco and Qualcomm, two technology giants were expected to post better than expected earnings and they did but The much wider anticipated FED statement and its direction of Interest Rates a flop The much wider anticipation build around FEDRAL RESERVE and it providing direction on Interest 5th November, 2009 rates through its minutes could not produce anything. I believe the statement was in line with market participant view and exactly provided statements, which people had been expecting it to provide since last couple of days. Though FED’s BORING statement did pull-back the markets from their highs of almost 140 points on Dow Jones. Let’s look at FOMC Statement a little close on what they exactly said? (http://www.federalreserve.gov/newsevents/press/monetary/20091104a.htm) Vinit Tulsyan http://vinittulsyan.wordpress.com
  • 3. 3 Where are financial markets heading? Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt Where are equity markets headed? These past couple of days did worry me that whether I am actually on the wrong side of the trade, but after due introspection, I came to the conclusion that I am actually not. I continue to believe that markets will be volatile, move sideways having positive biases occasionally (due to continued macro data coming out of United States). I continue my stance as I wrote in my article dated October 12, 2009 titled “October to continue lending its support to equities & OIL, a choppier, volatile and sideways November in the store”. My believe further strengthens with the vast moves seen by equity markets all around the globe that November would be the Toughest period to be 5th November, 2009 in equities, USD to slip further, GOLD, Bond prices to rise, Indian Rupee to strengthen further during November. Excerpts from my article dated 12th October 2009 November (at-least first 2-3 weeks) in my opinion will become the toughest/roughest market to be in Vinit Tulsyan http://vinittulsyan.wordpress.com
  • 4. 4 Where are financial markets heading? From an Indian or global market perspective, markets during November (at-least first two weeks) will be the toughest and roughest market to be in. I do not expect the market to witness a significant or drastic drop over October levels but the choppiness, sideways movement along with volatility will make markets absolutely difficult to trade in, specifically, Indian markets, where more than 80-85% of daily turnover comes from Futures & Options. The choppiness, sideways movement and volatility will be a combination of various factors, such as search for safe heavens by investors all around the globe. I expect GOLD to be an outperformer during November on the back of further slippage in USD. The belief stems from the fact that once the euphoria around earning season ends, and the debate on Interest rates (reverse in federal banks policies all around the globe; obviously led by Federal Reserve) and subsequently on Inflation takes center stage. The sideways movement coupled with volatility could have positive bias into it, meaning at the end of the period, I feel markets will be higher than where it stands today. The caveat is that there might not be huge difference than today’s level (not at-least the kind of difference one has witnessed in between March and end of September). India & Indian central bank making headlines all over the world over its GOLD(EN) purchase; though I feel it’s’ immaterial. After a long time I have witnessed, India and Indian Central bank (RBI) being on world radar because of RBI buying 200 MT of gold from IMF at a price of approximately 1,045 per ounce. Though the transaction was only to the tune of ~US$ 7 billion, ~2.5% of India’s foreign reserves, it has fueled speculation that other central banks within emerging markets will start following the suit, with Chinese Central bank as front runner. Earlier the expectation was that IMF wanted to dispose its 400 MT of gold, which could be sold through open market, which would expand supply; putting pressure on gold prices. Does this signal that RBI is trying to diversify its foreign reserves and trying to find some 5th November, 2009 alternate investment avenues, I believe it was only one off transaction but at-least am very happy that this move took place. I am happy because this not only provides some cushion to declining value in India’s foreign reserves due to US$ decline (though it has rebounded over last one week, but I doubt that this rebound could be sustained due to huge imbalances in US economy eco- system) but also due to high inflationary environment expected in India in coming quarters. Happy that India now figures in top 10 countries having largest gold reserves in the world. Vinit Tulsyan http://vinittulsyan.wordpress.com
  • 5. 5 Where are financial markets heading? Excerpts from my article dated 12th October 2009 on GOLD GOLD: Expected to be in limelight in wake of increasing debate over Interest rates, inflation, sliding USD and subsequently in search of safe heavens Even though Gold is up 17% Year-to-date, I continue to believe that Gold will further strengthen and should emerge as one of the safest alternative investment avenues going forward. The confidence stems more from the debate building around investors concerns over Inflationary environment somewhat on the back of rising interest rates going forward and its position as a perfect hedge against currency and being projected as emotional trade. (Refer my article on Gold: Golden Fortune, dated March 8, 2009). A continuing weakening USD will further attract more investors (including treasuries around the globe in order to safe guard deteriorating investment in USD denominated assets), which should keep GOLD firmly in limelight in coming days. Excerpts from my article on Gold: Golden Fortune dated March 8, 2009 “I strongly believe that GOLD will continue its shine in years to come, though the caveat is that it might not see the sharpest of run (in price terms) it has seen in recent times. But increased attention by Investors (both domestic, international, sophisticated investors etc), Households, Treasuries around the globe, and further its position as an Inflation Hedge, a perfect hedge against Currency or in Short “A Safe Heaven”, in my view will continue. It will continue due to FEAR embedded in everyone’s mind; the fear of losing investment value in any of the asset class mainly in Equities. With GOLD being termed as one of the safest heaven and is being projected as “TRADE OF EMOTIONS” in the western world; it was evident that money from Equity Markets was getting diluted to GOLD.” Nouriel Rubini & Jim Roger Fight: I believe it’s extremely healthy for the markets 5th November, 2009 In a CNBC interview today the noted economist Mr. Rubini warned that the "mother of all carry trades" is growing and threatening to cause a global implosion, with investors using cheap US dollars to embrace risk will quickly reverse course once the greenback strengthens. He intensified his prediction, saying that the likelihood of the Fed keeping interest rates low and thus weakening the dollar will prolong the carry trade and make it all the more painful when it starts to unwind. According to him "Eventually there's going to be an end to this carry trade". When that snapback of the dollar is going occur it's not going to be 2 percent or 3 percent, it's going to be more like 25 or 20 percent. And then everybody will have to close their shorts on the dollar, they'll have Vinit Tulsyan http://vinittulsyan.wordpress.com
  • 6. 6 Where are financial markets heading? to sell these risky assets across the world and you could have this huge asset bubble going into an asset bust." On the other hand Jim Rogers on Bloomberg said that Nouriel Roubini is wrong about the threat of bubbles in gold and emerging-market stocks. Many commodities are still down from record highs and equity markets aren’t on the brink of collapse. “What bubble?” Rogers said, when asked if he agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.” When asked if gains made this year pointed to a bubble, he said: “It’s not a bubble if something is up 100 percent this year, but down 70 percent from its high. That’s not a bubble, that’s a good year. That’s a great year. Maybe it’s too high for this year, but that’s not a bubble.” I thought why not to have my perspective on these two great, respected views I believe it’s more of a compulsion rather than choice for FED to continue keeping their rates lower for an extended period of time, and on the wake of it, Dollar would be cheap. When dollars would be cheap, why would not investors look to embrace or build positions in all asset classes all around the globe especially emerging markets and what is wrong in it? The confidence stems from the fact that emerging economies are doing great with their respective currencies expected to strengthen against US$ going forward due to favorable economic scenario. Coming specifically to India and its currency, I expect Indian Rupee to continue its appreciative journey against USD in near to medium term. The confidence stems partly from the same reasoning applying to Brazilian economy and others. On the back of strength in Indian economy, consumption returning to normalcy, higher commodity prices, an expected credit rating upgrade from rating agencies (on the back of govt. stability, an expected 6.5% growth, record IIP numbers etc), record foreign reserves, resilience of Indian Economy to not only avert this economic crisis but to emerge stronger, forecasts for faster economic growth (in coming years), all time low interest rates in developed world, money available at cheap rates, money trying to find its way to economies where the risk & return profile is still favorable etc. So does that lead me to believe that what Mr. Rubini is saying is wrong? Well, I am too small to even counter Mr. Rubini’s argument, who was one of the few first to predict the economic 5th November, 2009 collapse. But I believe that US$ might reverse its course against developed world currencies, e.g., EUROZONE, JAPAN etc., in the medium to longer term, but not as much against emerging economies including India. So the question or skeptism about Asset bust all around the globe including emerging economies, I believe seems doubtful. I also support Mr. Jim Roger’s reasoning that It’s not a bubble if something is up 100 percent this year, but down 70 percent from its high. That’s not a bubble, that’s a good year. That’s a great year. Maybe it’s too high for this year, but that’s not a bubble.” Vinit Tulsyan http://vinittulsyan.wordpress.com
  • 7. 7 Where are financial markets heading? The reasons given above does not let me believe Mr. Rubini’s prediction of everyone closing their shorts on the dollar, selling these risky assets across the world leading this huge asset bubble going into an asset bust”, 35 stocks, one cannot avoid to have position in from a long term perspective Soon (in next 7-10 days), I will be publishing an article on my pick of 35 stocks within Indian Equities, which in my opinion provides a proxy on India’s Play. I am a firm believer of Diversification and based on my understanding, I have picked 35 stocks from large and mid- caps across sectors, wherein I will be putting my money to (whatever little I have). I have not done bottom-up picking but I believe more on top-down approach and then selecting a stock. Most of the stock capitalize on this great Indian theme, where in some of them are global plays, turnaround stories etc. The motivation behind this idea of selecting 35 stocks came from my article dated 22nd March 2009, titled INDIA & CHINA: “LOVE US, HATE US BUT CAN’T IGNORE US” (http://vinittulsyan.wordpress.com/2009/03/22/india-china-love-us-hate-us-but- cant-ignore-us-2/). *** Thanking You, Warm Personal Regards, Vinit Tulsyan http://vinittulsyan.wordpress.com *** 5th November, 2009 Vinit Tulsyan http://vinittulsyan.wordpress.com

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