My Dear Extended Family Members,
How many more lies are we going to listen to? I am prepared to stick my neck out by accusing the President of the World’s most powerful nation, his financial deputy in chief and their coterie , The S & P’s of the world the media across the globe for the current state of the markets globally and in India.
I however would like to put on record my appreciation for Dr. Y.B. Reddy my RBI Governor and Mr. Jean-Claude Trichet the Governor of the ECB who have not listened to the world and have stuck to the task on driving their own troubled economies through these globally challenging times.
How many times did we here the term “The American Economy is resilient”, Resolve of the American people, Situation is contained in the U.S of A, the Fed is in Control (300bps cut in 6 months !!!). If that as not enough, we had experts on WALL STREET (coupled with creating Panic like situations) and on CNBC USA telling the FED what to do so that the RICH could get bailed out. We had S & P tell us that the write downs are only $ 285 billion and hey next you see Bear Sterns go bust with $ 600 billion loses and guess what Bear sold for 1/40th. of its reported book value last month - Book Value $ 80 sold for $ 2
The media in India was no different. We had experts tell us about the decoupling theory (forgetting that money is globalised), how good our corporate profitability is ,aberrations in the IIP data , talking about embedded value theory, 4% inflation and yes 9% GDP growth, on a sustained basis - and woof everything just vanished so did the experts.
I now do not know what to do Laugh OR Cry. Laugh because we were proven right or Cry that we did not go 100% into GOLD (only 30% of our AUM is in Gold at last count).
I am now writing up my third note on the same topic. We shall now face the previously unthinkable phase 3 of this crisis and the most dangerous of it all – and the last I pray.
If you recollect my note dated August 3, 2007 I had indicated that “interest rate cuts by the Fed are not the solution to the credit seizure in the United States of America (now globally). Such cuts will lead to problems which are bigger than what anyone can imagine.” ... & ...”Some observers think that the markets are exhibiting classic signs of a so-called "Minsky moment," when overleveraged borrowers must finally pay the piper for their euphoria. The result, they say, will be a credit shortage that could bring down even innocent bystanders in their wake.” I now outline in general and in my humble opinion the likely play of Phase 3 and its impact on stock markets globally and India.
In short
1) The Wealth Effect
2) Interest Rate , Bankruptcy and Hyperinflation
3) Liquidity Squeeze
4) Earnings Downgrades
5) Recapitalisation
And south we shall trek so read on ....GOLD Goes North
EROSION Of THE WEALTH EFFECT – Deflation !!!!
A real lock-up of the mortgage market, followed by a sharp decline in housing price is producing capital losses across financial participants in the globe (not India yet). It thus reverses the wealth effect. The wealth effect is the emotional effect of a person's equity in the part of his portfolio. He feels richer. He spends more. He saves less. The poverty effect reverses this mentality. He spends less. He saves more.
The transition period is what we call a recession. Capital values in formerly booming markets fall rapidly. There is a rush for liquidity and safety.
In short Consumers have lost money in both forms of equity – “Stock (global as well as in India) and Home (US of A, Spain and England) “, Capital creation and formation has become scarce which will lead to both the Industrial Houses and Retail to tighten their belts. This will result in No New capacities, lesser jobs, lesser savings, lesser sales, impact on profitability etc..... In short LOWER Profits and hence Lesser EARNINGS. What looks cheaper today will be cheaper still.
This in all likely hood is going to lead to a DEFLATION in the Asset Prices of Housing and Stocks across the USA and also across the Globe.
Just to give you an idea in India alone DEFLATION of the asset bubble has cost investors INR 25,00,000 CRORES in the last 4 weeks.... of Paper Money, real losses also for a few. Do you think one is now going to see a spending spree!!!!
THE MONETIZATION OF BANKRUPTCY – Hyperinflation!!!!
As I have emphasized before, the Federal Reserve can deal with liquidity pressures but cannot deal with solvency issues. Solvency issues are at the heart of this recession: the solvency of home borrowers and, by implication, the solvency of Fannie Mae and Freddie Mac.
Recent Federal Reserve action formalizes what has been the policy of the Fed from almost day one of the visibility of the credit and default derivative meltdown and credit market lockup.
The predictable result of monetizing bankruptcy is a significant increase in inflation, real interest rates and a sharply lower dollar.
The result of a sharply lower dollar is sharply higher gold and higher inflation regardless of the dress up process being applied to the US dollar, gold and inflation. The dress up is to prevent a stinging rebuff for the Federal Reserve paying a FARCE price for bankrupt derivative packages purely to keep the banks that are almost all on the edge solvent.
So the world and especially us have to get prepared for HIGHER REAL INTEREST RATES. You want to ask What the Port Authority of New York And New Jersey paid on it’s new issuance of bonds backed by Insurer’s recently - 20% !!!!!!!. Tax free Bonds are Yielding you close to 5% which is higher than the taxable treasury issued by the U.S.A.
Inflation on Food Products and Energy – our basic necessities are going to go through the roof.
So I want to ask Bernanke and Gang, how long can you run like a bank in a banana republic - a BANKRUPT NATION trying to BAIL OUT, Bail Out, bail out all institutions and foreclosures by printing notes and the lowering of fed rates.Though great economic harm comes from a government monopoly fiat monetary system, the loss of liberty associated with it is equally troubling .Just as empires are self-limiting in terms of money and manpower, so too is a monetary system based on illusion and fraud. When the end comes we will be given an opportunity to choose once again between honest money and liberty on one hand; chaos, poverty, and authoritarianism on the other.
The economic harm done by a fiat monetary system is pervasive, dangerous, and unfair. Though runaway inflation is injurious to almost everyone, it is more insidious for certain groups. Once inflation is recognized as a tax, it becomes clear the tax is regressive: penalizing the poor and middle class more than the rich and politically privileged. Price inflation, a consequence of inflating the money supply by the central bank, hits poor and marginal workers first and foremost. It especially penalizes savers, retirees, those on fixed incomes, and anyone who trusts government promises. Small businesses and individual enterprises suffer more than the financial elite, who borrow large sums before the money loses value.
Bernanke and Gang are not trying to save the world. They are only trying to protect WALL STREET, not even Main Street
What happens to a paper currency when its custodians decide to destroy it? We have the answer to that question illustrated for us in the headlines from Zimbabwe. Last I heard, inflation was running at 100,000% per year. The average employee made millions per day…but could barely buy a can of beans with the money. Worse still, the beans - and everything else - had disappeared from the shops…hyperinflation has destroyed the economy.
For the Heck of it the CITIZEN of U.S. Of A owes the world $ 31,000 per head and the country’s debt is going up at the pace of $ 1.7 billion a day.
Yes, that's what happens. First the money. Then, the economy. Finally, the society itself.
THE 500 TRILLION TIME BOMB.... LIQUIDITY SQUEEZE?
As Warren Buffet put it in a 2002 letter to Berkshire shareholders “We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
He saw a future that many others chose to ignore.
Derivatives are now not just risk management tools. The real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because they're private contracts between two companies or institutions.
Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements (BIS), the world's clearinghouse for central banks in Basel, Switzerland. BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil that it guzzles and gives China IOUs for the tainted drugs and lead-based toys that they buy.
To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other international monetary data:
Ø U.S. annual gross domestic product is about $15 trillion
Ø U.S. money supply is also about $15 trillion
Ø World's GDPs for all nations is approximately $50 trillion
Ø Total value of the world's real estate is estimated at about $75 trillion
Ø Total value of world's stock and bond markets is more than $100 trillion
The estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." How Much More......?
If one even puts to risk 2% of the above we are talking of a meltdown of $ 11 trillion which is probably equal to approximately 8x GDP of India
That "domino effect" is now repeating many times over, straining the world's monetary, economic and political system as the subprime housing mess metastasizes, taking the U.S. stock market , the U.S. Economy and the world economy down with it.
So Derivatives are in effect not real Money but the losses are....... A much bigger and deeper liquidity squeeze on the way.
So what does the above jargon mean ... tighter liquidity shall lead to deleveraging in Debt markets (not possible) equity markets and commodities market (the largest markets) which shall lead to a cascading effect southwards resulting in at least a few Hedge Funds , Investment Banks and Banks going bust not to mention the erosion of confidence amongst investors and Huge loses.
In Short
1) Who will keep my Sensex afloat ?
2) Who will take care of the unwinding of approximately $ 4.5 billion of P-Notes expected in this year?
3) Who will take on the brunt of at least another round of FII secondary Market sales in the next 3 months on account of redemption pressures (maybe another $ 3 billion of selling)
4) Who will now fund the promoters at cheap rates so that the can increase their stakes or artificially manipulate their prices – case in point Orchid Chemicals.
5) Who will fund approximately $ 10 Billion of IPO’s in the current year which are lined up?
6) Where will we get even $ 50 billion this year to fund India’s infrastructure needs ?
Not the MF Industry (collected NET $ 7.5 billion in FY’08) since there are miniscule collections in Bad times you see and obviously zero opportunity to churn portfolio’s by the so called Wealth Management Relationship Managers of well known banks, Not my insurance companies (another $ 10 billion), Not the banks (RBI restrictions), Not the client since he had bought scrip XYZ at say Rs. 250 in the futures market and the current price is say Rs. 150. Since he does not want to book a loss he funds it by putting up more collateral – the collateral be it an asset or cash could have been put to productive use somewhere else So........ Who?
EARNINGS DOWNGRADES ON THE WAY
From Brokerage Houses to Banks , from Services to Manufacturing one is going to see a spew of downgrades both internationally and domestically. In India people have already started talking sub 1000 EPS for FY’09 for the BSE top 30 companies. Let’s not forget that most of the Good Earnings in the last 3 Qtrs of FY’08 is based on 50% Other Income which s nothing but TREASURY Gains which have now evaporated. Hence, if you presume that the EPS of the BSE 30 for FY’09 is say 950 then at a forward P/E Multiple of even 15 my market is at 14250. MY PEG will not be greater than 1 this year and hence the warning. One can expand the P of the E once risks go away.
For those who follow the Nifty this paradox is also more interesting. We trade at 19.62 times trailing four quarter earnings , or one could argue 17 times forward earnings (including other income). If I bring this down two notches to say 15 times then Nifty should trade at around the 4000 level for FY ’09 – until all risks go away that is.
So if earlier it was liquidity now its a slowdown of earnings and couple all that with Hyperinflation on hard goods and what do we get STAGFLATION. History books from 1930 onwards that I have read (I’m not just greying just like that people I am now old) have indicated that Markets Trend south during times of STAGFLATION.
Hence it is our humble opinion that we could see Sensex levels of between 12100 to 12600 and nifty levels of 3700 – 4000 before any meaningful sideways movements. So kindly do hold on to your seats.
RECAPITALISATION
All the Kings Men shall be required to recapitalise not only the US Economy but also a host of Investment Banks and Commercial Banks. By the time we are through with all of this and the dust settles we shall balk at the amount of money that has been thrown into this deep never ending hole. All the sovereign funds (last count amounted to $ 3 trillion) and all the printing presses in the US OF A shall be required.
At some point the sovereign funds will also get tired and hence a few hedge funds, a few smaller commercial banks and a few investment banks will go bust.
“All the King’s men and all the king’s horses could not put Humpty Dumpty Together again”
The Dollar will not be even worth the paper one writes on... Gold will be worth a lot more.
A Big Thank You
“Everybody's a genius in a bull market, the old saying goes. But a bear market creates fear, uncertainty and costly mistakes.”
As the year comes to a close we at COMSOL would like to SALUTE & Thank all those who kept faith in us. We thank you for supporting our vision of the Future that others ignored.
This is for all those analysts , relationship managers and a couple of my extended family members (who are currently estranged) I cannot help but say this and I think we have earned the right for it ...
For those who doubted our research capabilities and there are only a few that I can think of who probably said or hinted that “investors who listened to us in the recent CONCOCTED bull market missed out on some attractive returns in the stock market” and “A broken clock is right twice a day. If you say things are going to be bad long enough, eventually you're going to be right."
What attractive returns do my friends think our family missed out on? Those who followed our advice invested in Gold and Fixed Income & Natural Resources and other commodities. Investors who listened to us instead enjoyed much greater returns by participating in the real bull markets. It’s amazing how few people have managed to figure this out! (One look at stock prices and NAV’s of Mutual Funds shall tell you that)
The “stopped clock” analogy is one I have been dealing with for years. Those NOT using it maintain that my early warnings invalidate my forecasts. It is precisely because my warnings were so early that they were so valuable to investors. In addition, such charges assume that the current downturn is unrelated to those warnings and that my critique of the Indian Stock Market was inaccurate until now. My critics, the real stopped clocks, still do not understand that the phony prosperity they were defending and that I was challenging lies at the root of the current crises. When the bubble was still inflating it is understandable that those trapped inside viewed me as a stopped clock. However, now that it has burst, it is amazing how many still cannot get the soap out of their eyes.
As stated in our note on November 8, 2007 “Have we been too cautious? Sure, we own that, but it's a fine line to balance---the near-term opportunities versus the broader implications”......& “We can debate the merits of the equity gains (the "measuring stick") but that's an academic discussion until, well, until it's not.” When we invest in an asset class we ensure that the longer term picture is clear and bail out at the first signs of trouble.
We at Comsol do not concern ourselves with which investment class is the ultimate investment of all time but rather which investment class is undervalued relative to other investments at any given time – we are also quick to turn around if circumstances change the situation on the ground.
Unfortunately it appears a few investors have a very short term bias and put too much emphasis on their recent experiences instead of history. Our Historical Track records for the last 5 years speaks for itself, irrespective of the organisations we represented. Sadly, most of these investors will not learn that their former method for investing may no longer be effective until all eggs are broken. So if you like roller coaster rides kindly go to Walt Disney instead of increasing your blood pressure levels through reckless investing.
On a lighter note an extended family member sent me this message today which i find very appropriate and hence it’s late inclusion - After the stock market crashed an investor was asked if he was a Bull Or A Bear. “Actually” he replied “I’m an Ass”
We do not do things for fat pay cheques and fat bonuses... we do it because we care and yes we are more right than wrong. At the outset of this financial year we had stated that if we manage 15% returns we would be lucky and yes we have managed 15% returns for our clients in the last 9 months on an average some more some less... BUT NO CAPITAL EROSION on an overall portfolio and none will happen even if the Stock Markets chose to go down another 20% from Current levels....
I just wish that we could wish these problems away, but like the old saying goes “Hope always dies last”.
Regds
I however would like to put on record my appreciation for Dr. Y.B. Reddy my RBI Governor and Mr. Jean-Claude Trichet the Governor of the ECB who have not listened to the world and have stuck to the task on driving their own troubled economies through these globally challenging times.
How many times did we here the term “The American Economy is resilient”, Resolve of the American people, Situation is contained in the U.S of A, the Fed is in Control (300bps cut in 6 months !!!). If that as not enough, we had experts on WALL STREET (coupled with creating Panic like situations) and on CNBC USA telling the FED what to do so that the RICH could get bailed out. We had S & P tell us that the write downs are only $ 285 billion and hey next you see Bear Sterns go bust with $ 600 billion loses and guess what Bear sold for 1/40th. of its reported book value last month - Book Value $ 80 sold for $ 2
The media in India was no different. We had experts tell us about the decoupling theory (forgetting that money is globalised), how good our corporate profitability is ,aberrations in the IIP data , talking about embedded value theory, 4% inflation and yes 9% GDP growth, on a sustained basis - and woof everything just vanished so did the experts.
I now do not know what to do Laugh OR Cry. Laugh because we were proven right or Cry that we did not go 100% into GOLD (only 30% of our AUM is in Gold at last count).
I am now writing up my third note on the same topic. We shall now face the previously unthinkable phase 3 of this crisis and the most dangerous of it all – and the last I pray.
If you recollect my note dated August 3, 2007 I had indicated that “interest rate cuts by the Fed are not the solution to the credit seizure in the United States of America (now globally). Such cuts will lead to problems which are bigger than what anyone can imagine.” ... & ...”Some observers think that the markets are exhibiting classic signs of a so-called "Minsky moment," when overleveraged borrowers must finally pay the piper for their euphoria. The result, they say, will be a credit shortage that could bring down even innocent bystanders in their wake.” I now outline in general and in my humble opinion the likely play of Phase 3 and its impact on stock markets globally and India.
In short
1) The Wealth Effect
2) Interest Rate , Bankruptcy and Hyperinflation
3) Liquidity Squeeze
4) Earnings Downgrades
5) Recapitalisation
And south we shall trek so read on ....GOLD Goes North
EROSION Of THE WEALTH EFFECT – Deflation !!!!
A real lock-up of the mortgage market, followed by a sharp decline in housing price is producing capital losses across financial participants in the globe (not India yet). It thus reverses the wealth effect. The wealth effect is the emotional effect of a person's equity in the part of his portfolio. He feels richer. He spends more. He saves less. The poverty effect reverses this mentality. He spends less. He saves more.
The transition period is what we call a recession. Capital values in formerly booming markets fall rapidly. There is a rush for liquidity and safety.
In short Consumers have lost money in both forms of equity – “Stock (global as well as in India) and Home (US of A, Spain and England) “, Capital creation and formation has become scarce which will lead to both the Industrial Houses and Retail to tighten their belts. This will result in No New capacities, lesser jobs, lesser savings, lesser sales, impact on profitability etc..... In short LOWER Profits and hence Lesser EARNINGS. What looks cheaper today will be cheaper still.
This in all likely hood is going to lead to a DEFLATION in the Asset Prices of Housing and Stocks across the USA and also across the Globe.
Just to give you an idea in India alone DEFLATION of the asset bubble has cost investors INR 25,00,000 CRORES in the last 4 weeks.... of Paper Money, real losses also for a few. Do you think one is now going to see a spending spree!!!!
THE MONETIZATION OF BANKRUPTCY – Hyperinflation!!!!
As I have emphasized before, the Federal Reserve can deal with liquidity pressures but cannot deal with solvency issues. Solvency issues are at the heart of this recession: the solvency of home borrowers and, by implication, the solvency of Fannie Mae and Freddie Mac.
Recent Federal Reserve action formalizes what has been the policy of the Fed from almost day one of the visibility of the credit and default derivative meltdown and credit market lockup.
The predictable result of monetizing bankruptcy is a significant increase in inflation, real interest rates and a sharply lower dollar.
The result of a sharply lower dollar is sharply higher gold and higher inflation regardless of the dress up process being applied to the US dollar, gold and inflation. The dress up is to prevent a stinging rebuff for the Federal Reserve paying a FARCE price for bankrupt derivative packages purely to keep the banks that are almost all on the edge solvent.
So the world and especially us have to get prepared for HIGHER REAL INTEREST RATES. You want to ask What the Port Authority of New York And New Jersey paid on it’s new issuance of bonds backed by Insurer’s recently - 20% !!!!!!!. Tax free Bonds are Yielding you close to 5% which is higher than the taxable treasury issued by the U.S.A.
Inflation on Food Products and Energy – our basic necessities are going to go through the roof.
So I want to ask Bernanke and Gang, how long can you run like a bank in a banana republic - a BANKRUPT NATION trying to BAIL OUT, Bail Out, bail out all institutions and foreclosures by printing notes and the lowering of fed rates.Though great economic harm comes from a government monopoly fiat monetary system, the loss of liberty associated with it is equally troubling .Just as empires are self-limiting in terms of money and manpower, so too is a monetary system based on illusion and fraud. When the end comes we will be given an opportunity to choose once again between honest money and liberty on one hand; chaos, poverty, and authoritarianism on the other.
The economic harm done by a fiat monetary system is pervasive, dangerous, and unfair. Though runaway inflation is injurious to almost everyone, it is more insidious for certain groups. Once inflation is recognized as a tax, it becomes clear the tax is regressive: penalizing the poor and middle class more than the rich and politically privileged. Price inflation, a consequence of inflating the money supply by the central bank, hits poor and marginal workers first and foremost. It especially penalizes savers, retirees, those on fixed incomes, and anyone who trusts government promises. Small businesses and individual enterprises suffer more than the financial elite, who borrow large sums before the money loses value.
Bernanke and Gang are not trying to save the world. They are only trying to protect WALL STREET, not even Main Street
What happens to a paper currency when its custodians decide to destroy it? We have the answer to that question illustrated for us in the headlines from Zimbabwe. Last I heard, inflation was running at 100,000% per year. The average employee made millions per day…but could barely buy a can of beans with the money. Worse still, the beans - and everything else - had disappeared from the shops…hyperinflation has destroyed the economy.
For the Heck of it the CITIZEN of U.S. Of A owes the world $ 31,000 per head and the country’s debt is going up at the pace of $ 1.7 billion a day.
Yes, that's what happens. First the money. Then, the economy. Finally, the society itself.
THE 500 TRILLION TIME BOMB.... LIQUIDITY SQUEEZE?
As Warren Buffet put it in a 2002 letter to Berkshire shareholders “We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
He saw a future that many others chose to ignore.
Derivatives are now not just risk management tools. The real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because they're private contracts between two companies or institutions.
Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements (BIS), the world's clearinghouse for central banks in Basel, Switzerland. BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil that it guzzles and gives China IOUs for the tainted drugs and lead-based toys that they buy.
To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other international monetary data:
Ø U.S. annual gross domestic product is about $15 trillion
Ø U.S. money supply is also about $15 trillion
Ø World's GDPs for all nations is approximately $50 trillion
Ø Total value of the world's real estate is estimated at about $75 trillion
Ø Total value of world's stock and bond markets is more than $100 trillion
The estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." How Much More......?
If one even puts to risk 2% of the above we are talking of a meltdown of $ 11 trillion which is probably equal to approximately 8x GDP of India
That "domino effect" is now repeating many times over, straining the world's monetary, economic and political system as the subprime housing mess metastasizes, taking the U.S. stock market , the U.S. Economy and the world economy down with it.
So Derivatives are in effect not real Money but the losses are....... A much bigger and deeper liquidity squeeze on the way.
So what does the above jargon mean ... tighter liquidity shall lead to deleveraging in Debt markets (not possible) equity markets and commodities market (the largest markets) which shall lead to a cascading effect southwards resulting in at least a few Hedge Funds , Investment Banks and Banks going bust not to mention the erosion of confidence amongst investors and Huge loses.
In Short
1) Who will keep my Sensex afloat ?
2) Who will take care of the unwinding of approximately $ 4.5 billion of P-Notes expected in this year?
3) Who will take on the brunt of at least another round of FII secondary Market sales in the next 3 months on account of redemption pressures (maybe another $ 3 billion of selling)
4) Who will now fund the promoters at cheap rates so that the can increase their stakes or artificially manipulate their prices – case in point Orchid Chemicals.
5) Who will fund approximately $ 10 Billion of IPO’s in the current year which are lined up?
6) Where will we get even $ 50 billion this year to fund India’s infrastructure needs ?
Not the MF Industry (collected NET $ 7.5 billion in FY’08) since there are miniscule collections in Bad times you see and obviously zero opportunity to churn portfolio’s by the so called Wealth Management Relationship Managers of well known banks, Not my insurance companies (another $ 10 billion), Not the banks (RBI restrictions), Not the client since he had bought scrip XYZ at say Rs. 250 in the futures market and the current price is say Rs. 150. Since he does not want to book a loss he funds it by putting up more collateral – the collateral be it an asset or cash could have been put to productive use somewhere else So........ Who?
EARNINGS DOWNGRADES ON THE WAY
From Brokerage Houses to Banks , from Services to Manufacturing one is going to see a spew of downgrades both internationally and domestically. In India people have already started talking sub 1000 EPS for FY’09 for the BSE top 30 companies. Let’s not forget that most of the Good Earnings in the last 3 Qtrs of FY’08 is based on 50% Other Income which s nothing but TREASURY Gains which have now evaporated. Hence, if you presume that the EPS of the BSE 30 for FY’09 is say 950 then at a forward P/E Multiple of even 15 my market is at 14250. MY PEG will not be greater than 1 this year and hence the warning. One can expand the P of the E once risks go away.
For those who follow the Nifty this paradox is also more interesting. We trade at 19.62 times trailing four quarter earnings , or one could argue 17 times forward earnings (including other income). If I bring this down two notches to say 15 times then Nifty should trade at around the 4000 level for FY ’09 – until all risks go away that is.
So if earlier it was liquidity now its a slowdown of earnings and couple all that with Hyperinflation on hard goods and what do we get STAGFLATION. History books from 1930 onwards that I have read (I’m not just greying just like that people I am now old) have indicated that Markets Trend south during times of STAGFLATION.
Hence it is our humble opinion that we could see Sensex levels of between 12100 to 12600 and nifty levels of 3700 – 4000 before any meaningful sideways movements. So kindly do hold on to your seats.
RECAPITALISATION
All the Kings Men shall be required to recapitalise not only the US Economy but also a host of Investment Banks and Commercial Banks. By the time we are through with all of this and the dust settles we shall balk at the amount of money that has been thrown into this deep never ending hole. All the sovereign funds (last count amounted to $ 3 trillion) and all the printing presses in the US OF A shall be required.
At some point the sovereign funds will also get tired and hence a few hedge funds, a few smaller commercial banks and a few investment banks will go bust.
“All the King’s men and all the king’s horses could not put Humpty Dumpty Together again”
The Dollar will not be even worth the paper one writes on... Gold will be worth a lot more.
A Big Thank You
“Everybody's a genius in a bull market, the old saying goes. But a bear market creates fear, uncertainty and costly mistakes.”
As the year comes to a close we at COMSOL would like to SALUTE & Thank all those who kept faith in us. We thank you for supporting our vision of the Future that others ignored.
This is for all those analysts , relationship managers and a couple of my extended family members (who are currently estranged) I cannot help but say this and I think we have earned the right for it ...
For those who doubted our research capabilities and there are only a few that I can think of who probably said or hinted that “investors who listened to us in the recent CONCOCTED bull market missed out on some attractive returns in the stock market” and “A broken clock is right twice a day. If you say things are going to be bad long enough, eventually you're going to be right."
What attractive returns do my friends think our family missed out on? Those who followed our advice invested in Gold and Fixed Income & Natural Resources and other commodities. Investors who listened to us instead enjoyed much greater returns by participating in the real bull markets. It’s amazing how few people have managed to figure this out! (One look at stock prices and NAV’s of Mutual Funds shall tell you that)
The “stopped clock” analogy is one I have been dealing with for years. Those NOT using it maintain that my early warnings invalidate my forecasts. It is precisely because my warnings were so early that they were so valuable to investors. In addition, such charges assume that the current downturn is unrelated to those warnings and that my critique of the Indian Stock Market was inaccurate until now. My critics, the real stopped clocks, still do not understand that the phony prosperity they were defending and that I was challenging lies at the root of the current crises. When the bubble was still inflating it is understandable that those trapped inside viewed me as a stopped clock. However, now that it has burst, it is amazing how many still cannot get the soap out of their eyes.
As stated in our note on November 8, 2007 “Have we been too cautious? Sure, we own that, but it's a fine line to balance---the near-term opportunities versus the broader implications”......& “We can debate the merits of the equity gains (the "measuring stick") but that's an academic discussion until, well, until it's not.” When we invest in an asset class we ensure that the longer term picture is clear and bail out at the first signs of trouble.
We at Comsol do not concern ourselves with which investment class is the ultimate investment of all time but rather which investment class is undervalued relative to other investments at any given time – we are also quick to turn around if circumstances change the situation on the ground.
Unfortunately it appears a few investors have a very short term bias and put too much emphasis on their recent experiences instead of history. Our Historical Track records for the last 5 years speaks for itself, irrespective of the organisations we represented. Sadly, most of these investors will not learn that their former method for investing may no longer be effective until all eggs are broken. So if you like roller coaster rides kindly go to Walt Disney instead of increasing your blood pressure levels through reckless investing.
On a lighter note an extended family member sent me this message today which i find very appropriate and hence it’s late inclusion - After the stock market crashed an investor was asked if he was a Bull Or A Bear. “Actually” he replied “I’m an Ass”
We do not do things for fat pay cheques and fat bonuses... we do it because we care and yes we are more right than wrong. At the outset of this financial year we had stated that if we manage 15% returns we would be lucky and yes we have managed 15% returns for our clients in the last 9 months on an average some more some less... BUT NO CAPITAL EROSION on an overall portfolio and none will happen even if the Stock Markets chose to go down another 20% from Current levels....
I just wish that we could wish these problems away, but like the old saying goes “Hope always dies last”.
Regds
Dinesh Khemlani
