“Please God, one more bubble…one last time!!!!”

It is said that after the dot com bust, there were bumper stickers in Silicon Valley praying for one more bubble (presumably to enable people to exit their technology stocks). Their prayers were answered but not in the way they wanted. Instead of getting one more dot com boom, there was a real estate boom and a commodities boom in the US and in other places. We are in times where I am sure a lot of prayers are being made for another bubble.

Strangely the prayers again seem to be in a position to get answered. Central banks all over the world are back to doing the things that they know best. Cutting rates and pumping liquidity. We will now have an additional currency for carry trade. Besides the Japanese Yen, we will have the US Dollar and possibly the Pound and Euro as well.

A lot of people are doubting the ability of lending institutions and other financial intermediaries to move the money around. Most banks seem to be wanting to hoard the cash injected by central banks rather than lend it. However keep things like this long enough and we have another bubble in the making. How long will corporations and households tolerate zero returns on their money?

Pumping cash into the banking system and driving interest rates close to zero is a sure fire recipe to create bubbles. The question is where will the next bubble be created. It is easier to rule out places and mention where the bubble will not be created.

Recent public memory will eliminate creation of bubbles in dot coms, commodities, real estate, sub-prime mortgages and derivatives. Emerging market equities have given significant losses to investors this year. Further countries like Brazil and Russia are vulnerable to fall in commodity prices. A lot of countries depend upon exports to the US and other developed markets and hence may fall out of favour. Thus there may not be an overall emerging markets bubble.

For logic and reasoning please stop here. 

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For flights of fancy and a dose of wishful thinking please carry on…… after all bubbles do not need logic.

Will corporations and households move to China and India in search of higher interest rates and growth in corporate sales and earnings? It may be difficult to sell a China / India story to ‘Joe the plumber’ in the US in the beginning. However “sophisticated” investors could start with carry trade and try to earn interest carry.    

Will not NRIs for example be tempted to move money to India in SBI, HDFC Bank or even ICICI Bank to earn say 5% – 10% (depending on the tenure, currency etc.) rather than getting zero interest from their accounts with Citi or Bank of America? Will not all MNCs try to delist their shares from India given the state of the valuations here. Companies like Mphasis, Monsanto, Novartis, Oracle etc. will surely find the valuations of these companies mouth watering. Having delisted their companies at a premium to the prevailing market price, they could turn to acquiring other companies in India. Entrenched company promoters and management could start increasing their stakes to ward off potential acquirers thus giving a positive overall ‘momentum’ to the market. This would be supported by earnings growth of companies relying on domestic consumption which would not be affected by the woes of US and Europe. Is it here that ‘Joe the plumber’ would join in to participate in the next bubble………..?

Enough dreaming, WAKE UP TO THE REALITY, markets are down 57% from the peak. Try and do something useful. Bye for now.

What is the rush to invest?

It is a tough time for anyone associated with the stock markets. One has to keep track of different businesses and sectors and the earnings of different companies. This however is not enough, one also has to know about the financial health of various banks and financial companies all over the globe and whether these will survive or go bust and if so when. The amount of discussion this generates would have beaten that of the Indian Premier League (IPL) cricket matches. I wonder whether the TRPs of CNBC and CNN have surpassed those of Star Plus and its Saas Bahu fare.

My grandmother has asked me whether the bank where she has her fixed deposits is ‘safe’ and others are asking whether the money market schemes and fixed maturity plans are safe. We live in an environment where if things were to continue the way they are going, each country will have only one bank. This bank would be owned by the government of the country. All the deposits would be guaranteed by the government. There would be no cross border investments or lending. Even within each country, businesses would be essentially self funded. Only secured loans would be available with a huge mark down on the security value. 

It is very easy to be pessimistic these days. There is hardly anything that is positive which is mentioned in the present day media reports. In the midst of all this, I have tried to list out some positive (and some not so positive things) that may happen in the days to come …………

  1. With all speculators tired of speculating in all sorts of things like wheat, corn, rice, sugar etc. there will finally be some of this stuff left to eat.
  2. With crude oil prices coming down, one won’t need to be a billionaire to fill up the petrol tank in one’s car. Plane ticket fare will again start approaching a second class A/c rail ticket fare. We will again use corn to make pop-corn or have bhutta rather than run our cars.
  3. All the land grabbers (construction companies) realise that there are no buyers for their properties at the price at which they are trying to sell. Further the potential buyers have cornered the land grabbers in a David vs. Goliath re-enactment by choking off the funding sources of the land grabbers. Liquidity is scarce and any mutual fund manager who buys debentures or commercial paper of construction companies is risking his job. The cost of one’s monthly EMI on the dream flat in Virar will be finally be lower than 80% of the monthly salary. With the way the US property prices are going, it may however be better to buy an apartment in Manhattan though.
  4. With inflation easing off and the consequent easing off of interest rates, the loan tenure of many ‘floating’ rate loans will come back to 20 years from the 60 years it had reached.
  5. The price of cinema tickets and pop-corn will be low enough that one will not mind wasting some money on a dud movie like Drona or Kidnap.
  6. One will not have to loot a bank to pay the hotel room rent. Hotel staff and taxi drivers will be more respectful of the local tourists as the foreign tourists would have all but disappeared.
  7. Fresh graduates lucky enough to get a job will turn up for work on the appointed day. They will not leave the job within a few weeks of joining. They will not expect a 30% pay hike every quarter to be retained.
  8. The pesky phone calls marketing credit cards / personal loans will come down as the banks will be busy collecting the previous loans that they have made. On the other hand they might start bothering you for deposits.
  9. Your wife (for male married readers of the blog if any) will start pestering you for jewellery. She will remind you that her necklace bought a couple of years back has appreciated while you need no reminding about the status of your stock investments.
  10. People again start discussing the prospects of Kolkatta Knight Riders vs. Rajasthan Royals instead of discussing whether Wachovia will merge with Citigroup or Wells Fargo.

Is there a sense of Deja Vu in all of this? It is there because this was the life we had just a couple of years back. Or in other words we would be seeing something called mean reversion. Mind you this is not something which will take decades to happen. This could happen in a matter of months.

I discuss stock market investing and some bottom up stock picking opportunities (not across the market – please note) with many clients. A lot of these clients tell me “What is the rush?” or “Why try to catch a falling knife?”. So far these people have turned right. Every week of delayed investing gives a discount of some 20%.

However this may not last forever. By the time the discussion moves to IPL, Saas Bahu serials and US Presidential elections or our general elections for that matter, most of the panic selling may be over and done with. One just has to wait for the global and local media to get some even more interesting topic to discuss in the headlines.

Are we out of the woods yet?

The question everyone has is “Is this the bottom?” Trying to catch tops and bottoms in the market is a futile exercise. Nevertheless since the question is asked so often, I will try and add my two bits worth to the subject matter.

Let us look at individual sectors and companies to see if this is the worst that can happen. Any spending which is discretionary in nature (even an option to postpone will help) will suffer. This is a time when interest rates are high, EMIs and loan tenures have shot through the roof, fuel prices are pinching, the job market is uncertain and demand is faltering. In such a scenario, neither are families nor are corporates going to spend significant sums in buying cars / two wheelers / trucks / buses or go on a holiday or dine out or go to the movies or put up a new factory …….. you get the idea. People are just trying to hang in there and not do anything ambitious. So here are sectors where I feel worse times are ahead in terms of earnings. Whether the stock prices have factored in this is a moot question.

Sectors to avoid

Auto (Cars, CVs & two wheelers)

Airlines and Hotels

Multiplexes

Media

Capital goods

Real Estate / Infrastructure companies

Utilities (surprising? there will not be a demand reduction, there could be a P/E reduction in a high interest rate scenario)

Stock brokers / Investment banks

Commodities (oil, copper, zinc, aluminum, steel…a bubble about to be burst, but that is a subject matter for another post)

Any bull case scenarios for these sectors? All the blah blah written above still does not answer the question whether this is the bottom but if large segments of the industry are going to see pain, I personally do not think we are out of the woods yet.