Thursday, November 13, 2008

It is not about earnings downgrades

More weakness is likely in the market. This anticipation is not only due to earnings downgrades, or falling indirect tax collection.

While these factors do influence the maket, there is some fundamental change taking place the world over. Twenty years ago, the Berlin wall came down, heralding the demise of communism. This changed the world. The credit crisis is leading similar changes in the world economy. It appears that the excesses of crony capitalism will now be corrected through a reversal process - more for the people, less for the billionairs.

The stock market is already adjusting itself to the new era. But not all adjustment can be made in advance. Price earnings will be rerated, many sectors will see significant government ownership, focus will shift on fair deals for the people even at the cost of lower growth. In the long run, this will be beneficial to the markets since what benefits the country will benefit the market. But the adjustment process will be painful. More so because the investment bankers who control the money have ostritch like thinking. They have buried their heads inside a world of their own imagination - refusing to see reality.

My point is: there may be more downside. At some point, the markets will revive. But the gains seen in the 2003 - 2008 bull market were exceptional. We may not see similar gains in the coming years. That's fine, since traders should hope for steady gains rather than volatile earnings.


rajivhtc said...

namaskar sukhani ji,

thanks for your views which enlighten people like me. would appreciate if you let the investors/traders know how to deal with such a market in concrete terms. what do we do with our portfolios which are going down in value by every running day. if this is the result of investing who will invest for long term ?
okay to face this capital erosion in portfolio side, what should we now do to make good money out of trading moves ? should we buy puts aggressively ?

rajiv malik

Anant said...

Dear Mr. Sudarshan,

It is interesting to exactly understan how bull market starts and how it ends. Following is an e-mail received from a friend reproduced for benefit of all.

Once upon a time in a village in India, a man announced to the villagers that he would buy monkeys for Rs. 10.

The villagers seeing there were many monkeys around, went out to the forest and started catching them.
The man bought thousands at Rs. 10, but, as the supply started to diminish, the villagers stopped their efforts. The man further announced that he would now buy at Rs. 20. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer rate increased to Rs. 25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at Rs. 50! However, since he had to go to the city on some business, his assistant would now act as buyer, on his behalf.

In the absence of the man, the assistant told the villagers: 'Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs. 35 and when he returns from the city, you can sell them back to him for Rs. 50.'

The villagers squeezed together their savings and bought all the monkeys.

Then they never saw the man or his assistant again, only monkeys everywhere!

This story is relevent to FIIs. They go to a country. Pump in money. Take prices and Index at alarmingly high level; And then take money out of market; leaving small investors high and dry.

Anuj said...

hi anant
excellent story mate....really enjoyed a lot...and forwarded to some of my friends and they too enjoyed has a lot of meaning provided a person can understand and relate to it ....what happened to chinese and oil markets and some of the reality companies and R power in india is the case in point.....and perhaps we will see the same happening with capital goods in time to come...thats what you tend to become by joining as wall street investment bankers...CHEATERS!!!


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