where are financial markets heading?

Vinit Tulsyan http://vinittulsyan.wordpress.com

1 Where are financial markets heading?

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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.

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. .

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.



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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

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)

http://www.federalreserve.gov/newsevents/press/monetary/20091104a.htm



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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

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



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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

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.



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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

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



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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

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.”



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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

***

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http://vinittulsyan.wordpress.com/

where are financial markets heading?

Economy & Finance