Hope The Rallies Lives On…But…They Still Are Bear Market Rallies


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Hope The Rallies Lives On…But…They Still Are Bear Market Rallies

  1. 1. [THE RALLY LIVES ON] March 13, 2009 HOPE: The rallies lives on…BUT…they still are Bear Market Rallies I reiterate my statements made in my earlier article that In my view, the Indian equity market, in wake of less news flows, with anticipation of more of bad news flows rather than good ones on domestic front will move largely on the back of 1) moves seen by global equity markets, and 2) global news flow or as events unfold globally especially US. These events as and when unfolds will be the guiding factors for Indian markets as I do not see any news flow to come either from govt. (due to elections) or RBI (due to its own problems). For details refer my previous article titled “Optimism Play – Bulls are back at-least for now with markets trying to find a bottom on the back of hope”. And this is precisely the reason, why I continue to focus more on global markets especially US markets, because I believe, the direction to our market would be provided by the events which unfolds globally especially US markets. I continue my believe that some news flows, on which our markets could react on, would be IIP numbers, Inflation data, GDP data etc but only on that particular day and in my view is less expected to provide any guidance to the markets for the medium or long term. And my views further gets strengths from the reaction seen by our market by Today’s IIP and Inflation data, which might have provided some comfort when Inflation data came (markets rallied Vinit Tulsyan | http://vinittulsyan.blogpress.com 1
  2. 2. [THE RALLY LIVES ON] March 13, 2009 within that frame), market went down (when the IIP numbers came), and closed with a modest gain as European markets and US markets futures were looking bad. Global markets (especially US) continue their rally As I write this article, all major US market indices such as DJIA, NASDAQ, S&P 500 were up over 3% each (close to 4%). With Dow Jones getting above 7,100 (a crucial technical level), closing at 7,168 (up 3.4%) and S&P above 741 (a crucial level watched by technical chartists) closing at 751 . Here are some examples of who is rallying: Today’s gain now translates into a double digit gain for all the three major indices in US within last three days of trading with S&P & NASDAQ rallying by 12%. Surprisingly the S&P banking index surged 45% in last three days of trading, GE rallying a whopping 65%. CITI, which traded at 98 cents three days back, is now trading at 1.63, a gain of over 60% over three days. Bank of America has gained 86% this week. And this brings an element of doubt in people’s mind that markets are out of woods, but I strongly doubt it. After a long time safe haven such as Treasuries and commodities rallied along with equities: a sign HOPE is backed by FEAR My previous article talked about why this optimism at-least for the time being is giving way to HOPE, Hope that market might have seen the worst of bad events or environment, but surprisingly on the back of FEAR. As today when markets rallied in US (with each major indices up 3%), one interesting observation to look for was, along with rally in equity markets after a long time treasuries and commodities including Oil and Gold rallied as well. And the reason was clearly the fear about losing money in equity markets. This generally will not happen, when things starts looking good and these would rather move on opposite direction. But the fact is that the FEAR is still deeply embedded in investors mind, they still are looking at investing in so called safe haven such as Treasuries and Gold. This clearly makes a point that this rally is short lived, and Vinit Tulsyan | http://vinittulsyan.blogpress.com 2
  3. 3. [THE RALLY LIVES ON] March 13, 2009 investors are still looking for safe avenues to put their money into; as reflected in decreasing bond yields or rising bond prices or rising Bear Market Rallies are brilliant in changing one’s perception How brilliant BEAR MARKET RALLIES are into changing one’s perception, BUT one has to realize that at the end of the day they are Bear Market Rallies. The question is that this economic turmoil, which has shock economies and banking system around the globe starting with west and spreading into European countries and then to emerging markets, had its foundation going in years, HOW three days or couple of more days of rally could change the already destroyed confidence or could change the worst macro data with respect to credit flow, mortgages, consumer spending, unemployment rate, jobless claims, retail sales and so on and so forth… I have my strongest of doubt over it. BUT… I believe that problem in financial sector is just a part of the larger economic problem or what threatens economy, which gets further complicated with problem from Credit crisis, consumer spending, housing, retail sales, unemployment rate, jobless claims and so on and so forth… The global macro data suggests things are worsening and there is absolutely no sign of stabilization as of now forget about improvement, and today’s data about Japanese economy further getting into deep recession and Chinese exports falling even further confirms these. If things would have started looking good, there would not be a world of expectation from the upcoming G-20 summit in London in April with respect to a global coordinated action and more oversight by regulators around the globe within their respective territory or increasing and strengthening the role played by global institutions such as IMF or World Bank. For more on BUT’s (the bad things) please refer my earlier article dated 11th Mar’09. In the last three days or since Friday, markets around the globe have started looking good, though our market unfortunately was deprived of this “Goody-Goody” look, due to two continuous holidays. And I am sure market participants in India would have been wondering, why these two holidays had to come in this period. Vinit Tulsyan | http://vinittulsyan.blogpress.com 3
  4. 4. [THE RALLY LIVES ON] March 13, 2009 Markets especially in the west have started looking good, all of a sudden. Environment starts looking better when everyone starts seeing a green tick on the indices, but this time the green tick is not light green, but looks like, it has got a darker green shade within it. Why are markets rallying and has it got some steam left? I believe YES, BUT…, as I wrote in my previous article dated 11th Mar’09 Financials have led this rally with S&P Financial Index up 45% over last three trading days. It all started with Mr. Pandit comments about his bank performance during January and February of 2009. What had to be followed was more words of encouragement by another banking giant CEO, Mr. Dimon of JP Morgan Change & Co. He also pointed that his bank has been profitable during first two months of this calendar year. Refer my earlier articles dated 11th Mar’09 on why are the banks stocks looking good? The retail sales in US fell by lower than expected number. General Motors, which desperately needed money in the month of January, without which the larger speculation in the market was that GM would go bankrupt, now saying that they would not need the 2 billion US$. General Electric which was up 65% over last three trading sessions, rating was downgraded but just one notch lower to AA+ against the expectation of AA-. Dollar losing strength against major currencies over the last couple of days is further supporting this rally as well. The Mark to Market Accounting Factor o The debate over MTM continues with odds in favor of not entirely suspending this rule but at-least modifying it in the current scenario and find a method which will enable banks or financial institution to value their illiquid assets more efficiently. For more details refer my previous article titled “Optimism Play – Bulls are back at-least for now with markets trying to find a bottom on the back of hope” Vinit Tulsyan | http://vinittulsyan.blogpress.com 4
  5. 5. [THE RALLY LIVES ON] March 13, 2009 The expectation that Up-Tick rule would be restored o The regulatory authorities in US taking a second look at the uptick rule; the uptick rule limits short-selling in stocks. The uptick rule allows short sales only when the last sale price was higher than the previous price. Under this rule one cannot sell a stock, if the last tick is negative, it has to be positive. It will prevent short sellers from piling on. The expectation is that it will discourage short sellers in taking position; as most of them had been held responsible for hammering down the stock prices. (for more details refer my earlier article date 11th Mar’09) The Obama Factor o Mr. Obama’s word of assurance that people deposits are safe and he is a firm believer of free market economy. o His reiteration that he even does not like the idea of spending govt. money on the back of already one Trillion US$ of deficit that he inherited, but these extraordinary times requires extraordinary measures. And that is why he has chosen to investment in infrastructure spending, which will get the economic cycle moving starting with jobs creation. o He emphasized that to get out of this BUST and BUBBLE cycle; his administration has chosen to invest in areas through his budget, which are areas of future growth such as education, healthcare, research, science & technology and energy etc. o One apprehension, which everyone is having on Mr. Obama is his spending spree and subsequently larger deficits and apprehension over his plans to reduce the deficits by half during his first term, again a word of assurance that he has clearly identified areas through which this deficit could really be halved and he is not using budget gimmicks to make deficits look smaller. o Mr. Obama words on Tax Plans will further surely encourage markets, as he again reiterated that with respect to taxes:  Till 2010 no taxes for individuals and corporate houses would be raised. Their taxes would remain the same.  After 2010 97% of tax payers will still not be paying any increased taxes. Vinit Tulsyan | http://vinittulsyan.blogpress.com 5
  6. 6. [THE RALLY LIVES ON] March 13, 2009 95% of working families will receive tax credits even till 2010.  The Geithner Factor o Till now markets had little expectations from Mr. Treasury Secretary Plan, but with increased news flow, now the expectation is having some positive bias. The positivity has come because of market expectation of his details on dealing with getting rid of TOXIC ASSETS from banks balance sheet, which he will be outlining in next couple of days. This time market believes that his plan to involve private sector in dealing with toxic assets will bring in transparency and will put in a floor for these toxic assets pricing. The markets are largely awaiting his plans to get unveiled and HOPING that these toxic assets in form of SUB-PRIME MORTGAGES, MBS, ABS, CDS, CDOs, CLOs etc , most of them which are illiquid; bringing in private investors or private parties will bring in some sort of liquidity and stability in this market, which is the need of the time. Financials, in my view will further benefit from this move as the large write-downs they had to provide on their books (thanks to an accounting phenomena called Mark- to-Market or MTM) without any support of liquidity will slow down as private investors enter this market and they try and find the true value of these assets; helping in providing at-least a floor in terms of pricing these complicated toxic assets. Expectation from G-20 to align a different interest, which looks increasingly possible at this point in time. o Time for every govt. to provide support to stimulate demand o Financial regulation for a stable global financial system o Looking for ways to solve problem towards emerging markets as emerging markets have gained in importance in this world economic scenario o Not dropping back to the bad word called “PROTECTIONISM” Thanking You, Warm Personal Regards, Vinit Tulsyan http://vinittulsyan.wordpress.com Vinit Tulsyan | http://vinittulsyan.blogpress.com 6