Alexander would be Crying in his Grave...!!!

You must be wondering why am I mentioning about Alexander the Great in a finance blog. However, I believe that whatever is going on with Greece currently, the title of my blog is not inappropriate.

Since, Tuesday when the Sovereign rating of Greece was cut down to JUNK status, the whole world is wondering whether or not Greece will get any bailout or will default. The Greek bonds are currently yielding around 22% and this makes me happy, that India despite being an developing nation is yielding only around 8%. (Since all the text books are proved wrong which says that a developing country like India will always yield more than a developed economy).

The only possible thing that could save Greece from restructuring its debt (which is equivalent of a default) and bring some cheers to Alexander the Great is a bailout package. However, the biggest road block to this bailout package is the European super power Germany. The German public opinion is firmly set against dipping into the tax payers wallet to help the Greece. Thus the German Government is in a tight spot:

• On one hand it can agree to extend the aid to Greece and face a voters backlash and send its party to a crashing defeat in the regional elections in Germany on May 9th

• Or on the other just sit back and and let the Greeks default and trigger this credit problem into other larger debt burdened EU members.
  
  
• This would also lead to a problem for different private sector banks in EU area who currently holds Greek Bonds and this would lead to another crisis of its kind

However, if you believe conspiracy theory, what I see that the one of the key beneficiary of this whole Greece episode is Germany. What has this Greece problem done, is that it has substantially weakened the EURO and Germany whose major portion of GDP is export dependent is benefiting highly from this and in order to bring down the Chinese dominance the Germany is deliberately postponing the bailout, so that it can prosper in the export market.

Hence, I see no clear direction for markets at lease before 19th when Greece has to either fund its debt obligations from the bailout money (if it gets) of default. I had highlighted the kind of possible threat EURO area is to the world markets over a year back, you can use the link to re confirm. So, I would again say that the things are not as good as it looks like. Nifty has a major resistance around 5330-50 and any new long trading positions should be taken only once this hurdle is crossed.

Till then keep doing SIP in the stocks I had already discussed in my earlier posts.

Happy Investing...!!!

Is Spain the next Greece...?

PIGS as the financial media call the four countries: Portugal, Italy, Greece and Spain are one of the biggest risks to the current global financial stability. When much of the attention is grabbed by the troubled Greece, the Spanish economy is in reality in a position worse than that of the Greece.

While other European nations like France and Germany — and even Britain — are beginning to show signs of economic growth, Spain remains stuck in recession. Spain is the only G20 country that remained in recession in 4Q of 2009 and the IMF forecasts that it will remain so till 2011.

Some of the most worry some statistics from Spain, which clearly highlights the risks are:

• Unemployment for around 18% while the average for EU is only 9.5
• Although lower than average Debt to GDP ratio, it has doubled in last one year, etc

There are some noted economists who believe that it will take Spain 7-8 years running the same amount of deficits to become the next Greece, however others say that the crisis is much serious than it looks at the face.

Hence, I believe that Spain's problems coupled with debt issues of other EU countries poses a serious threat to the financial markets. We can expect more sovereign rate cuts like what has happened to Portugal and Greece last Tuesday.

When the whole financial world is busy watching data releases and macro economic scenario of United States and also busy in predicting what could save the mighty US there is a bigger financial crisis looming in the other side of the world, the Europe.

Over the past few weeks the 10 year bond spreads on government debt of Greece, Ireland, Italy, Portugal and Spain over that of benchmark for Euro currency Germany have widened sharply.Euro zone countries (including Germany) are in deep recession and the EU company debt is now 95% of GDP compared to 50% in US.

Situation is even worse in Ireland and some Eastern & Central European members. Euro is losing its strength against dollar and there is wide spread speculation that Euro zone can be disintegrated because the rules of the single currency forbid any bailout of one country by the centre or by other countries.It is also predicted that if Euro crashes, Germany is going to suffer most from any member’s default and is expected to issue joint currency bonds. S&P has recently downgraded Spain, Portugal & Greece and has issued warnings against others saying that the chances of sovereign defaults are high.

Seeing all this I believe that the next leg of fall in the markets will be triggered by the bad macroeconomic news from the Euro Zone rather than the much hyped US. The data release to watch today is 4Q GDP growth of Euro Zone (QoQ) expected at -1.3% as against -0.2 in the previous quarter and any doward shock could lead to a further downward momentum in the global markets.

Thus even if Mr. Obama bails out US, the financial crisis is far from being over as the Europe is still sulking

Gold Could See Further Selling...!!!

The shining GOLD is no more shining high. Last week it had one the biggest weekly fall on account of a strengthening US dollar, which is gaining strength because of a crisis in EURO zone.

This I believe is expected to continue further, because the four EU countries( Portugal, Spain, Greece and Italy) which are facing the maximum chances of a debt crisis holds most of there reserves in the form of Gold. Thus, prompted by the current crisis they could start liquidating there Gold reserves, which will further bring down the prices of Gold.

As Per the latest IMF data, as on 31st December 2009

• Portugal Holds around 75% of its reserves in Gold
• Greece around 70% of its reserves
• Italy around 60% and
• Spain around 40%

Thus, I strongly believe that the way this current crisis is unfolding, these countries will sell their gold reserves to avoid the chances of a Sovereign Default.

Hence, avoid buying GOLD on dips and if you are a trader then can go short on GOLD.

Crisis Farm From Over...?

Finally when the whole world, especially the great MEDIA is rejoicing over the fact that the worst is far away now and we are climbing a new ladder of growth, a new sovereign debt crisis is looming in Europe.

The chances of sovereign default of two of the prominent EU countries is increasing. Portugal and Greece have not grabbed much of the attention, probably because the MEDIA does not want to spoil the great recovery party. However, the probability of their governments not being able to pay of their debt has increase many folds and these is clearly reflected from the way their Credit Default Swaps (CDS) are behaving.

CDS on Portugal rose over the 200 level for the first time and the swaps on five-year Portugal debt rose 4.29 basis points to 200.51, and those for Greece rose 7.64 points to 405.05. This rise in CDS clearly highlights the fact that the things are not as good, as being proposed.

Thee, big problem with this continuing further is that:

• Firstly, this will put a downward pressure on the EURO which has already weakened below the crucial level of 1.4 and any further weakening will cause a sell of in commodities and other asset because of an unwinding of the dollar carry trade positions

• Most important implication could be a change in the sentiments, if a Dubai default can cause shimmers, the news of default of two EU countries can certainly cause earthquake.

Thus, I would advise one to remain cautious or the best is to invest in SIP and avoid investment on a lump sum basis on these dips.

Happy Investing.

Is the EU Bailout Package Enough...?

Yet again the global financial markets yesterday cheered the fact that an ailing patient (EU) has being given a strong financial medicine. All the major Indices around the world were up by almost 4% on an average on account of this strong step by the EU members. A bailout package worth almost $1 trillion.

But the question is,

• Is this something to get overexcited and start buying stocks ?
• Is this bailout package enough to give a stability to the European financial system?

Well, the answer to the first question is NO. This is not something to get overexcited and start buying stocks. Most of the rally that happened yesterday was a short covering one and any market data do not point towards any kind of a fresh buying.

The answer to the second question is that YES it has partially given stability to the global financial system, especially EU, a short term stability. The medium and the long term risks still remain. This is clear by the fact that

• The yield on the Greece's and other crisis ridden EU nations two year bond fell by a hefty amount (For Greece it almost halved), however the yield on the 10 year saw only a minor correction
• The difference between the LIBOR and the overnight indexed swap rate, the so-called Libor-OIS spread that rises as a signal banks are less willing to lend, climbed yesterday even after the rescue announcement

Thus, I strongly believe that the outlook has just improved for a very near term and there are record deficits in just about every country EU and something ultimately needs to be done about them. The current measures is just to stop a complete vertical fall and to prevent it making it look like a bubble burst. However, the slide should continue.

Moreover, what it has done is integrating a political union from an economic union, whereas the case is always the opposite around the world. Hence, if the countries getting aid do not comply to the will of the political bosses (Germany & France), could lead to an altogether different crisis.

Hence, one should use this momentum lead rally only for trading that too with strict stop loss since, nothing too good has happened.

Budget 2010: Bridging Gap Between BHARAT & INDIA

The experts say that the FY10-11 budget is one of the best budgets the government has presented in the recent years which not only introduced reforms that would instigate growth, but also focused on the mounting deficit and laid a clear road map that ensured that the country is not on the path of becoming the next Greece.

I agree to all what the experts say that the budget did so many things that is good for the economy in the longer term it includes things like:

• Reducing the tax slabs that would empower the consumer
• Moving towards simplified tax reforms
• Only partial roll-back of stimulus
• Thrust on Power generation and infrastructure, etc.

I could go on and keep talking about these things, but one of the most important take aways which I believe is not receiving media attention is that the government is is working towards bridging the gap between BHARAT & INDIA.

This is the place I believe where the growth lies, the steps like

• Allocation Rs 66, 100 cr for rural development in FY10-11
• Increased spending on rural infrastructure
• Increasing agricultural productivity
• Increased spending on primary education at rural level
• Increase spending on rural employment and other social schemes
• Higher focus on power development in rural sector, etc

will definitely instigate the growth and bridge the long time gap and empower the masses that would lead to the higher inclusive growth.

Hence, as an analyst I believe that one theme that could be worked upon in the near term and which could have the potential of creating wealth in the long term is to invest in companies that is working in rural India or rural development.

Some examples could include pharma companies that focus mainly on rural medicines, rural infrastructure companies, food processing companies , etc.

I will start working on this theme and would let you all know what stocks could be invested on and would be great if you all could also share your views on whether this theme makes any sense or not and if yes than stocks you believe could be worked on.

Till then

Happy Investing.