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...!!!

25 bps or 50 bps...?

The Reserve Bank of India yesterday released its review of the macroeconomic and monetary developments which serves as a background to the Annual review of Monetary Policy 2009-10 being announced today, April 20^th, 2010. The crucial question is whether the rate hike will be of 25 bps or of 50 bps.

Some of the Key Highlights of the documents which we believe will set the tone of the monetary policy are:

· While recovery in private demand needs to be stronger to reinforce the growth momentum, already elevated headline inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth

· In the emerging macroeconomic scenario, monetary policy management in 2010-11 will be dominated by the challenge of moderating inflation and anchoring inflation expectations, while remaining supportive of growth impulses

· Concerns about domestic output growth are now subdued as the recovery is getting more broad-based. This is the result of a rebound in industrial output, better prospects for the Rabi crop and continuing resilience of the services sector

· The fiscal exit, as planned in the Union Budget for 2010-11, would contribute to improving the overall medium-term growth outlook, even as going forward, greater emphasis on quality of fiscal adjustment would be necessary

· Net capital inflows can be expected to increase further during the current year reflecting the prospects of higher growth and larger interest rate differentials between India and the advanced economies. Like other EMEs, however, higher capital inflows could influence asset prices, domestic liquidity conditions and the exchange rate. This will have implications for monetary management

· Going forward, the demand for money may increase with acceleration in recovery and the elevated level of inflation

· The initial inflationary pressure was predominantly conditioned by rising food and fuel prices, reflecting the impact of a deficient monsoon on agricultural output and the increase in international crude prices. In the second half of the year, with persistent supply side pressures, inflation became increasingly generalized

· The inflationary conditions, coupled with the stronger momentum seen in the pace of economic recovery, created the compelling ground for altering the Reserve Bank’s policy focus to anchoring inflation expectations

· Reserve Bank’s Survey of Professional Forecasters suggests (median) growth for 2010-11 at about 8.2 per cent

· Inflation can be expected to moderate over the next few months, from the peak levels seen in recent months. There are, however, upside risks to inflation:

o International commodity prices, particularly oil, have started to increase again. In several commodities, the import option for India to contain domestic inflation is limited, because of higher international prices

o It is important to guard against the risk of hardening of inflation expectations conditioned by near double digit headline WPI inflation.

Analysis:

The trade off between managing inflation expectations and still keeping India on the growth path is costly since the capital markets are moving way beyond the real economy. Still, we do expect a rate hike in the annual review of monetary policy due to a over emphasis by the RBI on the inflation front in the macroeconomic and monetary review document.

The street has already started to factored in a repo and reverse repo rate hike of around 25bps, however the central bank may give a negative surprise by taking this number to around 50bps also.

The way Nifty has behaved over the last 4 trading sessions clearly suggests that markets are factoring in a change in RBI’s stance. Thus we strongly believe that its time in the market to remain cautious and move away from the rate sensitive like banking, infrastructure and real estate and move towards defensives.

Happy Investing...!!!

Goldman's Deeds: Fraud or Innovation...?

Before Friday Goldman Sachs was one of the most highly regarded financial services firm in the world, the only Investment bank that dis not crumbled during the sub prime crisis and not to have shown losses in any of the quarters since years.

But the things changed after Friday, when SEC filed the lawsuit against the firm for creating one of the most innovative financial transactions called Abacus, that allowed Goldman to off-load the risk of mostly subprime home loans and commercial mortgages to investors, either as hedges for similar positions or to bet against securities itself.

In, a simple lay man term what Goldman did was to sell mortgage bonds to investors which it was sure will default and hence also purchased default swaps that offered payouts to Goldman Sachs if certain mortgage bonds didn't pay as promised, in return for regular premiums.

So, what happened that during the crisis time when the bonds sold to investors started under performing and investors lost billions of dollars, Goldman Sachs minted those dollars as a pay off for the bond's default.

This, as per SEC is a clear case of breach of investors trust and hence a law suit and the company's stock tumbled over 15% on Friday and the negative sentiments spread across the globe and the markets melted.

Hence, I would advice all to remain cautious in the markets since this news could have far wide repercussion and moreover it is certain that the RBI would hike the interest rates tomorrow. Its the time to start going for the defensives and move away from high momentum.

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.

Overvalued Zone...?

Well some say that the Indian markets are all set to mother of all the bull markets and from here there is no looking back. While others say that we are currently in a kind of over bought zone and a correction of at least 200-300 points in the Nifty index is definitely warranted.

While, what i see this is as the events holds the key to this. In the month of April there are three very important news flow that will shape the directions for markets:

• The Q4FY10 earnings of India Inc.
• Indian WPI for the month of March
• RBI's Q4 credit policy release on 20th April

While inflation is a cause of concern, given the way the food price and other key individual indices are behaving, this will also have a major impact on RBI's Q4 policy guideline. I believe that there is a strong possibility of at least a 50 bps hike in the key policy rates. This I believe could be a problem story for the ever singing markets of ours.

On the other hand the corporate India is expected to show decent Q4 numbers, however much of this growth I believe is already factored into the stock prices and hence there is nothing much left on the table that should excite the investors. Infosys Q4 results tomorrow morning will set the stage for the rest of India Inc.

Hence, I strongly believe that instead of chasing the markets at a broader level, it makes sense to invest in good stocks with reasonable valuations.

As Mr. Lynch Says

"Often, there is no correlation between the success of a company's operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies." - Peter Lynch

Happy Investing...!!