Chartered Accountant and a Cost and Management Accountant.



Analytics / data mining professional. Around a decade of experience in analytics in the financial services space and other sectors.



Started investing in markets since 1990 as a kid when my father gifted me some shares in Mahindra & Mahindra.



My blog at : http://taxationindia.blogspot.com/

Here're my analysis (With May Update) on the economic landscape, upcoming trends and my own stock market strategy. Plan to update on monthly basis or as and when key triggers happen.

Update - 5th May 2008

Global slowdown still continues and is likely to get worse

US

- As per Prof Roubini, “ The headline +0.6% hides a fall in real final sales of domestic product as a build-up of inventories of unsold homes added 0.8% to GDP; the payback will come in Q2 as unsold inventories are unwound. In Q4 GDP growth was also 0.6% but final sales growth was a strong 2.4% and a run down of inventory of 1.8% subtracted that much to GDP. So with final sales growth slowing from +2.4% or a -0.2% the collapse in final demand in Q1 is extremely sharp. We were already in a recession in Q1 that will get much worse in Q2.”

- Home prices drop by 12.7% in the 12 months ending February. Foreclosures up by 112% in the first quarter.

- Auto sector bubble : Auto sales are showing a sharp fall and auto loan delinquency have hit a 17-year high in the fourth quarter of 2007. Auto sector too is showing 'negative equity' as in housing sector.

- Employers cut 20,000 in April, lower than expected. However this has been drive by a large jump in part-timers who wanted full-time positions.

- Stimulus package unlikely to be effective in boosting up spending.

- Services sector index shows the biggest improvement in seven months. However this is more a short term cycle playing out and the trend likely to reverse soon.

- Federal prosecutors in New York have formed a task force to examine the collapse of the market for risky home loans. Expect more skeletons tumbling out of the closet.

- Layoffs continue in financial sector. Morgan Stanley is planning to layoff another 1500 employees.

Food Inflation

Oman is to buy 200,000 tons of rice, enough to build a two-year stockpile. If more countries start stockpiling food stuff, the impact on food inflation would be severe.

Oil

Oil futures have have now crossed $120 a barrel on news of supply threats and dollar weakening. Seems to be driven more by speculation

Economic Landscape - 29th April 2008

Oil Prices





Oil prices touched the $118 levels on news about US Navy firing on some Iranian boats carrying crude oil and on reports about BP shutting down its pipelines system supplying 700,000 barrel per day to UK and a pipeline attack in Nigeria

Compared to the global demand supply scenario, these news piece in themselves are not significant enough to warrant such a sharp increase in crude oil prices over the past few days.

One of the indicator of a bubble is high sensitivity and volatility of price's to the most insignificant of news.

Is that what is happening now..?

Some Views on the current downturn in the US economy

• General Electric CEO Jeff Immelt said the U.S. economy is in the worst condition since the burst of the dotcom bubble and that housing hasn't been in such a bad shape since Great Depression. Immelt feels that things could get worse for the U.S. economy.
• Nobel prize winning Economist Joseph Stiglitz too feels that this is likely to be one of the worst economic downturns since the Great Depression.
• As per New York Stern University Professor Nouriel Roubini , Real indicators show consumers cutting back on daily expenses . Financial sector losses on credit cards, auto loans rising, and mortgage defaults likely to increase further
  

• Sixty percent of the public say they are now less comfortable about making a a bigticket financial commitment, such as buying a home or a car, than they were just six months ago,
• Consumer confidence in US is now at its 26 years low , according to University of Michigan Consumer Confidence survey . The survey found that high food and fuel prices, coupled with falling incomes and falling home values, have driven consumers to save their money rather than spend it.
• Orders to factories for bigticket manufactured goods fell for a third straight month in March, the longest string of declines since the 2001 recession.
• The unemployment rate climbed to 5.1% in March as businesses laid off the largest number of workers in five years.
• Mortgage delinquencies and foreclosure on the rise.

Key Leading indicator for a recovery

As per Peter Bernstein (Financial Historian), the housing trouble has to at least flatten out before a recovery can take place in the US economy. In essence the real estate bubble needs to burst.

Measures from the US Government

• The U.S. Treasury will start sending tax rebate checks to Americans next week in order to pump $50 billion into the U.S. economy by the end of May
• Fed has already cut the benchmark borrowing costs to 2.25 percent from 5.25 percent since midSeptember. Fed might drop the rates another 25 basis points, but overall they are plan to step away and observe if all the efforts going on will work or not.

India

• Inflation continues on its upward trend
  and rose to 7.33 % during the week ended April 12, compared to 7.14
  %according to data from the Ministry of Commerce and Industry. The rise
  in inflation was driven by increasing cost of food items and rising
  iron and steel prices
• GDP growth estimates now in 7% range compared to more than 8% that was expected till a few months back
• Rising fuel prices have an impact which runs across sectors including steel, cement and power generation sectors. This in turn seeps through the rest of economy by way of higher prices. Oil now rules in the $118 range compared to $ 60 range just a year back. Coal price have doubled (or more in certain cases) over the past one year. This is largely on supply side concerns as against oil, where there is likely to be a significant speculative interest.
• Real estate prices have corrected in pockets, but not consistently enough. Expect another 20 to 30% overall correction
• Slowdown beginning to make its presence felt in the 2007 Q4 corporate results. Next couple of quarters likely to show a more severe impact
• Wages and increment in Indian corporates starting to get impacted
• Interest rates ruling high, thus curbing investment and growth
• Inflation eating into Indian consumers disposable incomes.

• General Electric CEO Jeff Immelt said the U.S. economy is in the worst condition since the burst of the dotcom bubble and that housing hasn't been in such a bad shape since Great Depression. Immelt feels that things could get worse for the U.S. Economy. Similar views being shared by Nobel prize winning Economist Joseph Stiglitz and Prof. Nouriel Roubini (New York Stern University)
• Consumer confidence in US is now at its 26 years low , according to University of Michigan Consumer Confidence survey .
• The unemployment rate climbed to 5.1% in March as businesses laid off the largest number of workers in five years.

Exports have driven Japan’s economy in recent years, contributing close to half of its GDP growth on average from 2002 to 2007. But there is concern that Japan’s growth engine may be stalling. Export growth fell to 2.3% yoy in March the slowest pace in three years

UK

As mentioned in my previous posts, housing problem surfacing in UK markets. Bank of England would be issuing bonds in exchange of mortgage backed securities. However that does not tackle the fundamental problem of overvalued real estate. UK economy likely to go the US way to a large extent.

China

Consensus expects slower growth this year. In the range of 9% compared to 11% range expected earlier. Still a healthy growth rate, but the slowdown is unmistakable. Will it get worse, especially due to higher oil prices and linkage with US economy.

Cycle turnaround in next 9 -15 months?

Good news has started to trickle in. Will take time to have an impact. Things likely to get much worse before they start to get better.

US Govt pretty aggressive in tacking the situation. UK Govt also likely to be proactive. Chinese govt. is on top of the inflation and growth slowdown in their country. Japan is in initial stages of slowdown, is sensitive to it but is yet to react.

This and some other other factors which are playing out lead me to believe that the economic cycle might start taking a U turn in the next 9-15 months timeframe.

In the next set of analysis, am planning to look at :-

- factors which are likely to drive the economic cycle around

- leading indicators of a turnaround in the economic cycle

- approximate timing of stock market reaction (historically markets

- Historically India and US stock markets have started recovering a couple of months before the economy recovery is underway. Will it happen again?

#The Good

If we manage our investments right, we'll probably make more money than in any of the previous cycles. Some might be able retire early.

#The Bad

I believe the whole cycle from now till the super normal returns likely to be in range of 7 years.

#The Ugly

Nothing. Really. Unless the world comes to an end

This is the time of opportunities for the long term investor. Makes sense to start investing in a staggered manner at breach of 15K (75% probability)– 12K (50% probability)– 10 K (25% probability).

My accumulation strategy

• start to invest at 15 breach - 25%
  


• 50% when the market breaches 12k
  


• Remaining 25% at 10 breach.
  


• Buy only blue chips.
  


• Any monthly savings to be held off and invested at 12 and 10 breach.
  

These are my personal thoughts and opinions based on my analysis and judgemental calls. Sensex forecasts are more directional than exact.