Indian Markets Snapshot

Issues and Risks

>This was coming, but its timing obeys the Law of Amazing Coincidence :
When things can go bad, they do.
When they can go terribly bad, they do.

S&P said after US markets closed that they had downgraded $270 billion of
CDO debt.
And that they may further cut ratings on another $264 billion.
That makes for $534 billion of paper to be written-down in the balance sheets of
American banks, even if they were held as "investments".
Imagine the MTM losses in American financials by the end of today !

The reductions may increase losses at European, Asian and U.S. regional banks,
credit unions and government-sponsored enterprises such as Fannie Mae,
Freddie Mac and the 12 Federal Home Loan Banks, S&P said. Many of those
institutions haven't written down their subprime holdings to reflect a drop in
market values and these downgrades may force them to recognize losses, S&P
said.

``It is difficult to predict the magnitude of any such effect, but we believe it will
have implications for trading revenues, general business activity, and liquidity for
the banks,'' S&P said. The ratings company will start reviewing its rankings for
some banks, especially those that ``are thinly capitalized,'' it said.

And you thought last Monday and Tuesday's MTM losses in our stock markets
were bad !

>The Fed will obviously keep doing what it has to. But the reality of a slower US
economy cannot any longer be met with fiscal or monetary measures. Recall that
after the dotcom collapse in 2000, Greenspan had cut the interest rates from the
then-5% to rock bottom at 1%. The Bush administration cut taxes and tried all
kinds of stunts to apply "stimuli" to kick the economy upwards.
Sorry. Nothing happened.
The American chap then lost only some $50,000 he had put into dotcom IPOs.
But this time?
In housing alone he's been wiped out with debts borrowed on the "Wealth Effect"
of the then-crazily-high house price.
And now he's in deep trouble.
And to get him to spend on designer this and that is a waste of time and money.
All these interest rate cuts and refunds of income taxes cannot any more budge
the American consumer into going out and buying any more
designer underwears, fancy cars, gold fittings in bathrooms and expensive
holidays in the Bahamas.

His credit card is unpaid for many months; the value of his borrowed-house is
dropping every month; and he's borrowed more on the market value of
this house... which he needs to return to the lending company with compounded
interest.

The US Commerce Department said economic growth in Oct-Dec rose only
0.6%, half of what economists had estimated. Meanwhile, inflation rose 2.7%,
much higher than the desired rate of the Fed.
Life isn't so good in the US.
For that matter, it's now all crap.
Thank goodness for nemesis and hubris showing up for the hedonistic
Americana.

>The impact of all this on global stock markets will unfold week over week and
not in just one day or week.
Stock markets are a require-confirmation machine.
They'll wait patiently like nothing has happened. But when a bad-news-like thing
is announced, these markets behave like it's the end of the world ! You saw the
reaction here last Monday and Tuesday.

>This Friday will see the US Jobs Report for January, the most important statistic
awaited at Wall Street on the first Friday of every month. Everyone knows things
aren't hot on the jobs front there, but they'll still want the number to be heard out
tomorrow night and then only will they price in their view on the future of stock
markets.

>They love spewing trashy cliches on TV like "This is a great buying opportunity".
Good for them.
Let them buy.
Be clear that ....."This is a selling opportunity".

>We stay bearish about the post-first-week-of-March scenario in our stock
markets.
Our Budget itself is another macroeconomic event that will first see expectationbuying
in stock markets, and then needs to be priced in with all its mid-termelection
bias.

Please stick to the strategy of coming to 100% cash in the "unbelievable" rally of
February.
And be prepared with NIL holdings...Because only then will you be prepared
psychologically to short the Nifty after the Budget gets priced in between 29th
Feb and around 1st-to-3rd of March.

What to expect today, this week, and going forward
>Today:
...Our banks and construction shares will obviously be viewed favourably today.
...But a drop in American interest rates means a weaker dollar, a recovery in the
rupee, and so a weak view about tech shares.
...A 50 bps cut is good enough for a rising opening this morning.
..Expect some profit booking during the day.
..However, expect short covering for most part of the day and so a spike in the
Nifty.
..No rolling over of any Nifty to Feb. Wait for that. Close last weeks' Nifty longs in
the spike and wait for tomorrow.

In Feb:
...Call it a dead cat bounce or whatever else expressions they'll invent.
But an "unbelievable" rally will ensue in Feb.
It's your chance to exit your holdings this month.
NOT to buy deliveries with a more-than-20-day perspective.

From March onwards after the Budget:
>Bad news.
This terminally ill patient may look healthy on given days in Feb.
But every passing week in the US will bring one new headache or the other.
Look at how the S&P popped up from nowhere last night and downgraded $270
billion of CDO paper ! Is 270 billion dollars to be sneezed away? Where the hell
were the S&P all these months?
Where in the world were they since July last?
And recall that most of that CDO paper was earlier rated by S&P themselves !
It's the time for you to give your stock to them because they are salivating at the
low prices.
Good.
Let them buy.
You sell out your holdings to them.
And go short from March onwards.
All for fat fees for rating them Triple A or at least Double A.

So expect Moody's and Fitch not to look like asses and say nothing.
Next, they'll downgrade.
And then God alone knows what next nuclear bomb will come from which bank
or financial in the US.

Best to get out of longs this month and no longer believe "stories" from our Indian
companies.
Best to stay 100% in cash...and then short from March onwards.