Issue & Markets ( The Road Ahead )

Serious negative risks to watch out for:
New:
>ICICI Venture told Jaiprakash Infratech that the marriage of $800 million is
OFF.
The bossperson of ICICI Venture isn't into taking any more risks based on her/his
fears about the future economic environment in the country.
>Kishore Biyani's Indivision Partners told Subhash Goel's Dish TV that the
Rs.250 cr deal is OFF.
>Consumer confidence in the US fell to a five year low. The US Producer
Price Index rose again. House sales fell to their lowest in nine years. The S&P
Case/Shiller Home Price index showed the biggest annual drop in its 20-
year history.
>REL say they'll buyback. Why? Why so much pressure on ADA to impress?
The key thing is that there is "pressure" on him like never before. Funding from
Wall Street is OFF, OFF, OFF .... .....that's why.
>When the Railway Budget says it's kneeling and going prostrate before
the Indian electorate...you know how desperate the Government is about its
own future. It also tells us that elections will be earlier than the scheduled one in
May 2009.
>Bloomberg cites the ET in saying that IDBI will sell shares to the government,
its shareholders and to the public. Why would they be doing this? At THIS time of
the markets? Is it then true about their own "retail" loans being in trouble?
Questions, questions.
Existing:
>Credit-inflation funded by petrodollars and cheap money
>Housing loan default in the US
>Housing loan delinquencies in India
>Malls being converted into office space
>2-Wheeler borrowing-delinquencies here
>Credit card default in the US
>Sub-prime blowups in the US
>Personal-spend dropping in the US
>Dropping prices for new houses/apartments in India
>Bank-blowups in India, and so "mergers" into larger ones
>Bonus issues by desperate promoters to shore up share prices.
>When bank mergers or corporate demergers fail to excite markets.
>When Citibank downgrades Goldman and Morgan.
...When Morgan downgrades Citibank and Goldman.
...When Goldman downgrades Citi, Morgan, Fannie Mae and Freddie Mae.
...Competitive hatred and repugnance at Wall Street is now to the fore.
Issues
>See how every crash is preceded by massive availability of cheap credit :
1. Near the end of a massive economic expansion funded by an even higher
expansion of credit, few lenders expect defaults, which is why they lend freely to
weak borrowers.
2.Even fewer borrowers, at this stage, expect their personal fortunes to change,
which is why they borrow even more freely.
Whatever it was that the borrowers were using that money for, it always creates
an asset-bubble or super-over-valuation.
And that has to get self-deflated one day.
This is what's happening in the US housing bubble right now.
India isn't too far from getting the same disease.
>Read what Robert Prechter says about credit and the "social mood" in every
boom and crash in his book Conquer the Crash: You Can Survive and
Prosper in a Deflationary Depression
http://www.amazon.com/Conquer-Crash-Survive-Deflationary-
Depression/dp/0470849827
A trend of credit expansion has two components: the general willingness to lend
and borrow and the general ability of borrowers to pay interest and principal.
These components depend respectively upon (1) the trend of people’s
confidence, i.e., whether both creditors and debtors think that debtors will be
able to pay, and (2) the trend of production, which makes it either easier or
harder in actuality for debtors to pay. So as long as confidence and production
increase, the supply of credit tends to expand. The expansion of credit ends
when the desire or ability to sustain the trend can no longer be maintained. As
confidence and production decrease, the supply of credit contracts.
The psychological aspect of deflation and depression cannot be overstated.
When the social mood trend changes from optimism to pessimism, creditors,
debtors, producers and consumers change their primary orientation from
expansion to conservation. As creditors become more conservative, they slow
their lending. As debtors and potential debtors become more conservative, they
borrow less or not at all. As producers become more conservative, they reduce
expansion plans. As consumers become more conservative, they save more and
spend less. These behaviors reduce the "velocity" of money, i.e., the speed with
which it circulates to make purchases, thus putting downside pressure on prices.
These forces reverse the former trend.
The structural aspect of deflation and depression is also crucial. The ability of the
financial system to sustain increasing levels of credit rests upon a vibrant
economy. At some point, a rising debt level requires so much energy to sustain -
in terms of meeting interest payments, monitoring credit ratings, chasing
delinquent borrowers and writing off bad loans - that it slows overall economic
performance. A high-debt situation becomes unsustainable when the rate of
economic growth falls beneath the prevailing rate of interest on money owed and
creditors refuse to underwrite the interest payments with more credit.
When the burden becomes too great for the economy to support and the trend
reverses, reductions in lending, spending and production cause debtors to earn
less money with which to pay off their debts, so defaults rise. Default and fear of
default exacerbate the new trend in psychology, which in turn causes creditors to
reduce lending further. A downward " spiral" begins, feeding on pessimism just
as the previous boom fed on optimism. The resulting cascade of debt liquidation
is a deflationary crash. Debts are retired by paying them off, " restructuring" or
default. In the first case, no value is lost; in the second, some value; in the third,
all value. In desperately trying to raise cash to pay off loans, borrowers bring all
kinds of assets to market, including stocks, bonds, commodities and real estate,
causing their prices to plummet. The process ends only after the supply of credit
falls to a level at which it is collateralized acceptably to the surviving creditors.
Why Deflationary Crashes and Depressions Go Together
A deflationary crash is characterized in part by a persistent, sustained, deep,
general decline in people's desire and ability to lend and borrow. A depression is
characterized in part by a persistent, sustained, deep, general decline in
production. Since a decline in production reduces debtors' means to repay and
service debt, a depression supports deflation. Since a decline in credit reduces
new investment in economic activity, deflation supports depression. Because
both credit and production support prices for investment assets, their prices fall in
a deflationary depression. As asset prices fall, people lose wealth, which reduces
their ability to offer credit, service debt and support production. This mix of forces
is self-reinforcing.
The U.S. has experienced two major deflationary depressions, which lasted from
1835 to 1842 and from 1929 to 1932 respectively. Each one followed a period of
substantial credit expansion. Credit expansion schemes have always ended in
bust. The credit expansion scheme fostered by worldwide central banking (see
Chapter 10) is the greatest ever. The bust, however long it takes, will be
commensurate. If my outlook is correct, the deflationary crash that lies ahead will
be even bigger than the two largest such episodes of the past 200 years.
Financial Values Can Disappear
People seem to take for granted that financial values can be created endlessly
seemingly out of nowhere and pile up to the moon. Turn the direction around and
mention that financial values can disappear into nowhere, and they insist that it is
not possible. "The money has to go somewhere...It just moves from stocks to
bonds to money funds...It never goes away...For every buyer, there is a seller, so
the money just changes hands." That is true of the money, just as it was all the
way up, but it's not true of the values, which changed all the way up.
Asset prices rise not because of "buying" per se, because indeed for every
buyer, there is a seller. They rise because those transacting agree that their
prices should be higher. All that everyone else - including those who own some
of that asset and those who do not - need do is nothing. Conversely, for prices of
assets to fall, it takes only one seller and one buyer who agree that the former
value of an asset was too high. If no other bids are competing with that buyer's,
then the value of the asset falls, and it falls for everyone who owns it. If a million
other people own it, then their net worth goes down even though they did
nothing. Two investors made it happen by transacting, and the rest of the
investors made it happen by choosing not to disagree with their price. Financial
values can disappear through a decrease in prices for any type of investment
asset, including bonds, stocks and land.
Anyone who watches the stock or commodity markets closely has seen this
phenomenon on a small scale many times. Whenever a market "gaps" up or
down on an opening, it simply registers a new value on the first trade, which can
be conducted by as few as two people. It did not take everyone's action to make
it happen, just most people's inaction on the other side. In financial market
"explosions" and panics, there are prices at which assets do not trade at all as
they cascade from one trade to the next in great leaps.
A similar dynamic holds in the creation and destruction of credit. Let's suppose
that a lender starts with a million dollars and the borrower starts with zero. Upon
extending the loan, the borrower possesses the million dollars, yet the lender
feels that he still owns the million dollars that he lent out. If anyone asks the
lender what he is worth, he says, "a million dollars," and shows the note to prove
it. Because of this conviction, there is, in the minds of the debtor and the creditor
combined, two million dollars worth of value where before there was only one.
When the lender calls in the debt and the borrower pays it, he gets back his
million dollars. If the borrower can't pay it, the value of the note goes to zero.
Either way, the extra value disappears. If the original lender sold his note for
cash, then someone else down the line loses. In an actively traded bond market,
the result of a sudden default is like a game of "hot potato": whoever holds it last
loses. When the volume of credit is large, investors can perceive vast sums of
money and value where in fact there are only repayment contracts, which are
financial assets dependent upon consensus valuation and the ability of debtors to
pay. IOUs can be issued indefinitely, but they have value only as long as their
debtors can live up to them and only to the extent that people believe that they
will.
The dynamics of value expansion and contraction explain why a bear market can
bankrupt millions of people. At the peak of a credit expansion or a bull market,
assets have been valued upward, and all participants are wealthy - both the
people who sold the assets and the people who hold the assets. The latter group
is far larger than the former, because the total supply of money has been
relatively stable while the total value of financial assets has ballooned. When the
market turns down, the dynamic goes into reverse. Only a very few owners of a
collapsing financial asset trade it for money at 90 percent of peak value. Some
others may get out at 80 percent, 50 percent or 30 percent of peak value. In each
case, sellers are simply transforming the remaining future value losses to
someone else. In a bear market, the vast, vast majority does nothing and gets
stuck holding assets with low or non-existent valuations. The "million dollars" that
a wealthy investor might have thought he had in his bond portfolio or at a stock's
peak value can quite rapidly become $50,000 or $5000 or $50. The rest of it just
disappears. You see, he never really had a million dollars; all he had was IOUs
or stock certificates. The idea that it had a certain financial value was in his head
and the heads of others who agreed. When the point of agreement changed, so
did the value. Poof! Gone in a flash of aggregated neurons. This is exactly what
happens to most investment assets in a period of deflation.
>ICICI Venture have called off their Private Equity funding of $800 million in
Jaiprakash Infratech.
The first announcement to marry into Jaiprakash was made with much fanfare
many weeks ago by ICICI. When such deals are called off, you should know that
the lender has gone into a funk. The lender would have taken this decision after
much pain within the lending-organisation. But the key issue is that "risk taking"
has reduced in the current crash-like environment.
But can you see how much trouble Jaiprakash are now in?
They won't have the cash six months from now. And in any case, Manoj Gaur
has said "the plan is on hold".
Can you read into the inability of lenders to take any more risks?
Can you also see how much problem ICICI Venture are in, in deploying that $800
million?
Whom do they give that cash to now?
How do they service the cash lying in their books now?
Can you see how this decision of ICICI would influence hundreds of other banks
and VCs and Private Equity players and Hedge Funds and FIIs and every kind of
till-now-freely-lending-risk-taking-lenders?
This is part of the "collective emotion" that's hurting from the change in the
"collective mood".
http://www.vccircle.com/2008/02/26/now-icici-venture-jaypee-infratechs-800-
million-deal-called-off/
>Yet another such biggish deal that's been called off is the Rs.250 cr investment
by the Kishore Biyani promoted Indivison Partners in Subhash Goel's Dish TV.
http://www.indiape.com/blog
The site above says Zee may go to court.
For what?
To force lenders to take risks just when risk taking is dead?
And to get Biyani, of all the chaps, to keep his word?
WHAT?
Coming from Biyani, nothing is surprising. Nothing at all.
But the fact remains that risk-taking is off for now.
Can you see here too how stock markets will suffer even more in the months
ahead?
Can you see how former risk takers have lost their mojos?
And how each of them contribute their bit into further depressing the "collective
emotion"?
>IBM said they'd buy back $15 billion of stock.
Wall Street took that as a sign of strength.
Meanwhile, REL here said they'd meet on 5th March to announce a buyback.
AJ of ADAG might think Dalal Street would whoop and jump with joy.
But players in this business live on the edge of cynicism, vitriol, ascerbia and love
the ulceritis-view of life...anyday... over the rosy and sweet one.
Dalal Street isn't confused about this buyback coming from REL.
ADA is getting more desperate than imagined.
It's getting obvious that the obsession with the "share price" will do more damage
than help.
It's also obvious that the investor of all sizes in India has closed his cheque book.
All these tricks won't help the share to shine.
And Wall Street, London, Tokyo and Singapore have anyway closed their own
cheque books long ago after the co-ordinated global selloff on 17th January.
Can you see the extent of the problem for our stock markets in the months
ahead?
Are you psychologically readying yourself to go short in the weeks ahead after
the Budget is fully priced in? That directional trade is where the bacon will come
from
>Oil crossed $100. When oil goes up, so does gold. And when both those go up,
cash leaves the dollar. The former king of all currencies fell to an alltime low on
the euro to 1.5006.
However, we're no long going negative about the dollar.
After 18th March, after Bernanke springs some surprise for the markets, we
could see a reversal in all this mayhem in the dollar. Adding ofcourse, to the
mayhem in global stock markets.
>Reports from the US yesterday saw home sales tumbling, producer price
indices rising and consumer confidence falling the most in five years.
>The "economists" that Bloomberg and CNN interview for their estimates seem
to be chaps who're way way off reality. That's now. But in the earlier days till the
booming month of December 2007, these same chaps had the booming numbers
pat on.
But now?
Now they're so so far off from what's really happening.
To us, it's the same old issue of wish-fulfillment of those individuals who cannot
get why stock markets and economies have fallen or slowed down. They express
those formerly-super-positive wishes into their "estimates" when they speak to
Bloomberg or CNN.
Look at these:
...Economists surveyed by Briefing.com expected the Jan Producer Price Index
(PPI) to rise by 0.4%
The reality was that PPI rose by 1%.
...Economists expected a 0.2% rise in "core PPI", which is the PPI stripped of
volatile food and energy prices.
The reality was a 0.4% gain.
...Economists estimated consumer confidence in Feb would fall 82.0.
The reality was that it fell to 75. That was also a five-year low !
>A report showed that home prices in 20 key markets slumped 9.1% in 2007.
The S&P Case/Shiller Home Price index showed the biggest annual drop in its
20-year history.
NOW do you see why the American house-borrwer is in the deepest hole of his
life?
And why his confidence is shattered, his savings gone, and has no free cash to
buy chewing gum or coffee at Starbucks.
View on currencies, interest rates and commodities
>Euro/Dollar: Home sales fell more in the US, Consumer confidence fell the
most in five years and Producer Price Indices rose even more. All these added
fuel to the booming commodity-futures markets in all parts of the world. Oil
crossed $100 while Hedge Funds shifted cash there, gold rose even more to
$955 as a hedge against looming-inflation and the mood is one of abject gloom
for the future of stock markets.
The dollar crashed to an alltime low on the euro to cross 1.5000.... to 1.5006.
Yes, it will slip more. But see an end to all this mayhem in the dollar once the Fed
says its say on 18th March.
Be ready to reverse all dollar-shorts.
Be very ready to earn from the oncoming shift-back of global cash to the dollar.
>Gold: Oil and gold have a decent corelationship. Oil at $100 helped gold to rise
to its own alltime close at $955.
Here too, don't assume that gold will rise forever.
Don't believe all the internet pages and emails and TV donkeys who tell you to
buy gold, buy gold company shares etc.
There's a craziness going on in gold like it went on in stock markets till just two
months ago.
And all this rise in glod is because leveraged monies of Hedge Funds are
pushing it higher and higher.
This too will end soon.
So be ready with your reversal stops for long-gold.
>Silver: This metal zoomed in yesterdays' craziness in all commodities led by oil
and gold. The stop here stays far at 21776.
>Crude: The stop is now at 3763. Just ride this uptrend but always watch your
back.
>Zinc: The stop stays at 93.
The Mood
>Punting-hopes are back in full swing.
>The Railway Budget did everything to beg you to please-please-vote-us-back.
In slumping economic times, no incumbent government is voted back. That's a
queer behaviour of the electorate for hundreds of years. They tend to blame the
government for all the failings in stock markets, money markets, housing prices,
depression, unemployment etcetera.
So while the Congress may think it's done a lot in this Railway thing to come
back to power just because they cut train tickets by 5%, they really have a long
thing coming !
>However, now we know that the FM, who would've anyway cleared Laloo
Prasad's populism with the PM before Laloo could announce yesterday, will also
do the same stupid things of handing out lollies and gifts to the electorate in his
Budget on Friday.
Not that it'll cut any ice to the bad bad mood of punters who got ravaged since
18th January.
But the post-Budget mood is one of the last big rally this year.
Be ready to exit your deliveries at that stage.

What to expect today, this week, and going forward.

From March onwards after the Budget:
>A "surprisingly good rally" after the Budget.
>That might last a week to ten days.
>And then the mayhem nearer to the Fed's meet on 18th March.

Day trades ...Only with TIGHT stops...DO NOT c/o
>Buy Onmobile for today with tight stops
>Buy JP Associates...noise will go on that since ICICI Venture told them to take
a walk about that $800 funding, JP will announce the next financier "any minute"
now.... Which it cannot, won't and shouldn't. But the punting market would love to
believe itself into anything just when a big blow occurred on a large group like
that of Jaiprakash and Manoj Gaur.
>Buy the Nifty for the day...as well as to carryover the longs till after the Budget
gets priced in.