Markets Indicate Distribution

Stocks Markets have been moving in a narrow band of some 2000 odd points for last 3-4 months. The nature and position of this trading band in the entire run up since 2003 tilts the probability of this being a distibution area rather than one of accumulation . Stocks apparantely are changing hands from the strong ones to the weak ones.

The narrow range movement in Indian markets is also presenting itself in similar fashion in most emerging markets like Brazil, Mexico, Turkey etc. This fact strengthens the chances of all emerging markets being in distributive phases and nearing their long term tops.

The rampant retail participation in secondary and IPO markets further reinforces this inference of mine. Reliance Power IPO led to opening of some ten lac depository accounts in 4-5 days and the IPO generated demand which is supposedly largest ever in the world. This can only be summed as “over confidence” of the participants in stock markets .

This present trading range of  the markets (inferred to be distributive range), however, may not directly culminate in to a decline. Most often markets have staged a decent rally post distrbutive phases , to be followed by more severe declines. It may play out exactly the same this time around also. However we need to be cautious, given the absence of “fear” from the markets.

 

I Am Back

I was away for last three months and could not keep up with my readings and writings on the blog. I am back and shall soon start postings.

India Growth story – How Risky? How Immune?

The recent subprime fallout and mortgagte mess in USA has sparked a risk aversion in the global credit markets . This risk aversion has not only upped the interest rates but also restricted the credit flow forcing problems in some sections of asset markets. This could be  start of a trend of risk aversion ,turning the global cycle of preference for risky assets upside down . A sustained risk aversion would surely impact the capital flows into emerging markets including India forcing them into downward spiral of growth just as the risk preference cycle sent all these economies into strong growth cycle in last four years. In the light of this risk factor it would be prudent to examine its possible fallout on Indian economy and its immunity to such global happenings.

Chetan Ahya, executive director Morgan stanley has dealt  exactly with this issue in his article ” Subprime, Risk Aversion and India”  that appeared in The Economic Times today. I strongly recommend reading it and am in absolute sync with his views on the subject.

India growth story is woven around the strong capital flows that started off in 2003 rather than structural strengths.  Therefore ,quite simply any reversal in the flow scenarios shall alter the growth possibility as rapidly. To put it simply , any siginificant reversal of asset prices in USA shall surely lead to similar or graver impact in Indian stock and reality markets as there could be reversal of flows out of India. Strong capital flows as the basis of growth inherently carry the risk of reversal with change in external environment. This risk factor has been repeatedly emphasized in most of my posts earlier.

The popular perception that India is a stand alone growth story having decoupled from US appears to a lame duck in light of the current happenings. In fact and as also pointed  by Chetan Ahya in his above referred article, India is more vulnerable than other countries. This is primarily owing to  poor macro fundamentals of the Indian economy in comparison to most of other emerging economies. High current account deficits coupled with risk of rupee depreciation as a result of outflows, poor composition of external flows in favor of short term money and and a high fiscal deficit that constrains the ability of the government to pump prime the economy in the event of any siginficant contraction are a few of weaknesses that expose us more to the harsher environments. One factor that shall come to India’s aid is its demographics and potential of a huge market. This may on balance soften some of its current macro weaknesses making it at best a “spotty case”.

My Stock Trades – Tata Steel Shorted

Last week markets covered some lost ground and today again they sprinted. I found the rates to be good and  initiated shorts on Tata Steel (Tisco) @ 607.00 selling 2025 shares.

Indian Stock Markets – Is this the Buying Time?

The fundamentals of the world economy are under the cloud. The risks of huge and persistent imbalances in the underlying environment are now begining to unfold into accidents. The stocks markets around the world are therefore falling .  The die hard bulls have turned  cautious and the popular pundits seem confounded. 

In this environment one question that one gets to hear the most  is whether the decline so far in world markets has exhausted itself ? and if this is the buying time?

To me this is just the begining of massive unwinding that has just got triggered by subprime mortgage defaults in US. There are many other risks of imbalances in the global financial environment that shall get activated by fall out of current crises. It would therefore be  prudent not to jump into the stock markets taking the current fall as correction in a bullmarket. The current fall is more likely to be the start of a long bear run. This, therfore is a better time to sell than buy.

Reflecting at the recent movements in the markets, I expect some upward correction after the good fall of about 2000 points in Bse Sensex ,from its all time high of 15800 level in July 2007.The magnitude of correction could range between 500 to 1200 points . If this expected correction materialises , it would present a good opportunity to sell out.

 

Credit Creation Cycle – Reversing Itself

The glorious envirnoment of growth in the recent years has been the product of liberal credit creation by the financial institutions all over the world. This credit creation has been helped by massive liquidity injections of Central Banks and extremely low interest rate environments . 

These enablers got topped by the ingenuity of credit creators in creating innovative instruments to help them perpetuate the lending. Instruments like collatarelaised Debt obligations (CDO), Credit default swaps (CDS), Residential mortgage backed securities (RMBS) , Commercial Mortgage Backed Secruties (CMBS) have been the recent such creations.

The modern day financial instituions bundle the loans made into a security and get them rated to sell it to potential investors like pension funds, hedge funds, insurance companies . These potential investors , who would  have otherwise invested in government securities, buy them lured by higher yields.  By selling loan portfolio in this form, the primary lender gets access to new line of funds to lend again besides pocketing the loan fee and some interest component. This access to a new fund pool, which was hitherto not available to them, has helped create more credit in a market already neck deep in it.

The recent defaults in the mortgage market , ill composition of CDO’s and un reliable rating issues has led to  virtual drying of demand for these asset backed securties. The potential buyers have woken up to the implicit dangers and are not inclined for these risks. Any more defaults is only going to strengthen this aversion . This is likely to cap the availability of funds for further credit . This apart the reduced flow of new credit could induce more defaults in heavvily leveraged economy, leading to more risk aversion and further drying up the markets.

To me this has all the making of start of a vicious cycle of credit reversal . The magnitude of its impact could be huge and beyond the most pessimistic expectations. I say this for it shall be first reversal in last 30 odd years which have been thriving on the excesses of the rampant lquidity creation . The negative chain of events of repeated contractions shall inevitably bring down the asset prices and impact the economic growth in all parts of the world. Emerging markets including India could be the worst hit as the heightened perception of risks in general could lead to large scale pull out from these markets, creating unprecedented liquidity and confidence crisis .

My Stock Trades – Weekly Report Dated 17th August,2007

This week was good despite a day off in between. We jumped back into profits and ended the week on a clean slate after squaring off all positions. We shall look for new trades in the new coming week.

My Stock Trades – Shorts Covered

Market declined nicely and I covered both Rel.Comm and PNB. Rel. Comm. was covered at 476.00 and PNB at 481.00. Given the steep declines in short period , I expect small rally of technical nature to unfold soon. In case it materialises, I plan to build my shorts again as I remain quite bearish on the markets generally.

Stocks Fall and Rupee Depreciates

As I had been fearing , the rupee has started depreciating from its high of 40.20 . It scaled 41.00 today and traded above that level for the whole day. This depreciation is important as it got exactly correlated with the falling  stocks in Indian Markets. It appears that the inflow of Dollars may get stemmed or meet resistance from outflows . This should make the rupee depreciate further . The stocks may also keep loosing strength.

It is not just the rupee but all emerging market currencies are depreciating against the dollar. Even Euro has started loosing strength against the dollar and USD Index in last week or so has climbed from 80.00 to 81.43 levels. 

My Stock Trades – Weekly Report Dated 11th August,2007

The week that went by was very volatile by any standards. My decision to stay put in the shorts did pay off partially. The portfolio is off all losses. Markets are likely to stay weak. Both PNB and Reliance communication have established downward momentum, at least for the short run. Given the murky status of world’s financial markets, future moves could be big. I remain highly optimist that my shorts should give me very good gains in the near future.