Saturday, January 31, 2009

2009: Welcome to February

As the first month of this year 2009 comes to an end, the economic environment is no better (or no worse!). Stock markets are not bullish yet. Reading a number of blogs on Friday evening, here is a summary of my understanding on the market:

What happened ?
Banks, Brokers, Investment Banks in the USA developed a shadow banking system. What is this ? A system that is not regulated by the banking authorities. Why ? Because in an unregulated environment , the bankers could take on large amounts of leverage and invest. If the investments made money, bankers stood to make large profits. (The bankers borrowed 97 Dollars for 3 dollars of owned funds. In a bank, this was not permitted. So they set up 'shadow' entities, away from the regulated environment.)
Why no one complained ?
Because thanks to rising asset prices, everyone was happy.
What is this to do with India ?
Why do you think India enjoyed its biggest bull market in history ? Because of investments made by these shadows. These are the FII's.
So, what went wrong?
At some point, asset prices went sky high. The first problem started with 'sub prime'. Housing loans given to people did not get repaid. The shadows owned these loans. Their capital got wiped out. Then, their failures started causing price destruction in most classes. Whatever they had touched earlier had turned into gold. Now, that gold was turning into ashes.

The Future:
The shadows are gone. Governments (including the USA) are regulating the banking sector with strict rules. The enormous amounts of money (due to leverage) that was available in the past will not come in the market in the next few years.
Stock markets will fluctuate, but the next bubble is probably far away.

8 comments:

Sunil Malhotra said...

So, what a investor should do. Should he switch to tradition PSU Bank FDs or this is time to go long. If this is time to go long, then please suggest a portfolio for long term investor. If this is not the time to go long please suggest something for short terms.

shrinu said...

Always,the portfolio for an investor(for life) is savings cash(may be FD) 20%, loan dues 30%, stock market 20%, expenses 25%, insurance 5% ...annually...
then need not worry.....in INDIA best sector is POWER.

divyesh palrecha said...

hi,
my one friend gave me ur link nice write up good analysis WONDERFUL
NOW u have taken a point that banks are regulated but have we seen the total blast as yet ? i still dont see the panic in common people about the mkt which i always consider as the new begining (have very small mkt experience of 18 years as yet only harsad and ketan is seen so far)yes i m buyer but in pea nut and not with loaded ak47 just waiting with some peanut brunching
divyesh palrecha
BLUEBULL

Sunil said...

I have been a silent fan of yours for the last4-5 mnth. But some questions are:

Why NIFTY topped at 28.5PE on last 2 occasions and bottomed at 10.5 on May 03? If both tops were at same PE, can't we assume the same for bottom this time?
Sept 01 bottom of 850 was never retested. We hit 920-950 a number of times in the next 18 months. Can't we assume the same now?
Almost everyone is bearish with little (that too bearish) or no interest in the market. Should this not be an ideal time for bear market rally?
Elections round the corner, can the govt afford Sensex to go below 8000 now?

I am not a technical person, just posting something for your valued response

Sunil said...

Pl allow me to add something more. Every bull mkt has its on reason and the same is true for bear mkt. But the same ends almost at the same PE forcing me to think it's just a stage managed show.

Please do take the trouble to respond. If you do not want my comment to be public, pl e-mail yr view at mohakkhatu@gmail.com.

I'll be delighted and obliged

bns said...

it is good idea to put the money to bank fd till the market give clear idea. every second person is full of fear for money erosion at any time in the market.
big manipulators like MO...and ADR... are playing the game successfully.

Sunil Malhotra said...

Dear Shrinu,
The Power Sector in India is full of politics and freebies and now elections round the corner wouldn't Power sector would be a risky investment.

chandu said...

HELLO SIR I APPRECIATE YOUR ANALYSIS,SO FROM NOW ON WE NEED TO TAKE A BROAD LOOK AT THE MARKET.MAY BE IN NEXT FIVE YEARS WE DONT SEE A BULL MARKET.

MAKE A COMMENT

THANK YOU
CHANDRASEKHAR

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