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Heated stock markets

Fundamentally nothing major has changed in micro and/or macroeconomic terms in both Indian and Global business fundamentals.

Strengths and weakness have by and remained the same and they are kind of cancelling one another thus giving a semblance of a static economy (neither recovering significantly from it ’09 woes nor receding further to the abysmal.

 

US still faces the same conundrum led by state of the health of its financials. Numbers related to industrial growth, employment and current account deficit aren’t encouraging. Some exhaustive federal measure of overhauling the insurance sector and preparedness to infuse further liquidity into the system to spur growth is at largesse. Obama, popularity is on a wane and elections prospects in Nov aren’t looking bright either. Whether Democrats will be able to hold on to majority in both senate and congress is a big ‘iff” – cometh the elections. Less than 100 days remains for Bush tax cuts policy to elapse and American already bearing inflationary economy is staring at additional tax burden. Export has shrunk and both dollar and oil are finding increasing pressure to hold on to its lofty standards. War in Afghanistan and Iran fail to die and new flashpoints with Iran and North Korea keep revisiting the fundamentals while middle east (Palestine) isn’t much better.

 

Amidst all this semi turmoil – DOW is on its upward trajectory as if there is no tomorrow. Here lies the paradox. How can this be possible? Part of the problem is the solution itself. Solution in form of bailouts was given to financial institutions which ultimately have found its way to US markets. Bond markets continue to get good cash inflow as BoJ and other print more cash. Low consumer spending has helped more fund inflow towards savings in both retirement, equity and bond funds. Corporate houses too are parking extra cash out of their retained earnings to secured t-bills investments. America remains a haute destination for global money as no matter how low the interest rates go – ultimately the “clean money” gets deposited back into its system of bond market. Supply and demand situation is exactly opposite as pre-recessionary times. It was demand stripping the supply leading to inflation while now – supply is cut to tame the low demand – leading to Inflation.

 

Pre-recession:

Demand High/ Supply High (constraint by capacity) ——–> High Inflation (numerator effect)

 

Recession and after:

Demand Low/ Supply Low (constraint by lack of demand) -> High Inflation (denominator effect)

 

The second one is more dangerous – infact very dangerous. This is a recipe for deflation and/or double dip – whatever name we might chose to give, but trouble is eminent.

 

Inspite of all these – global markets are clocking new heights and markets are close to 3 years highs if not already bettered it. Developing economies are even more heated, Investors abroad are of the opinion that it makes more sense to park their money overseas for extra bucks rather than keeping it in-house (home country). This has resulted a rush of PN notes and extra leveraged derivative market in developing economics like India. However, this path is laden with danger – flight of capital if market dynamics changes even an iota in the negative direction. This is a justification for the fact that while there is negligible interest in terms of buying stocks at high P/E levels – by DII’s the appetite just keeps growing by the day. DII’s interest or for that matter the lack of it – is however a true indicator that all is not gung ho.

 

Investors treading into the market are advised to exercise cautions as the leveraged positions can be unwound real quick and market can go for a tailspin.

Unless the earning season comes up with number (highly unlikely) which justifies overbought positions of individual counters there is no reason to believe that there is any upside potential left in terms of fundamentals alone (technical folks can differ here). Technology sector for instance is reeling under wage pressure, billing rate cuts, Obama conservative outsourcing plans reverberating in visa fee hike and echoes of keeping jobs within US from few states and additional pressure from US companies like IBM and Accenture. Under these shadows – fundamentally technology stock should not have risen but it has – beating all street estimates. Its all about – make hay while the sun shines.

 

Hate it or like it – globally we cannot grow indefinitely as long as US does not improve significantly. Global recovery cannot happen without US leading it. Inflation seen in US is looking bad on the back of low consumption, low growth and low interest rates – the tax cut withdrawal is only goanna put pressure on consumption. Festival season is coming and inventory levels are planned to be kept low. All these are not looking very good from a growth standpoint – as a free advise we are just advising investor extra caution of investments at these high levels. It is no big harm if one does not participate in a further run of couple of 100 points to the index as long as one is totally safeguarded (utopia) against potential huge downside.

Just to guide we are not having bearish outlook – we believe commodities like precious metals (gold) are still bullish inspite of clocking extraordinaly gains over the past few months.

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