Thursday, June 08, 2006

Correction or Crash

Primer on my investment outlook

A friend asked :-
Any thoughts on the recent "correction" in the Indian stock market?
How much further to go before the dust settles down.

Do you think a buying opportunity at some point? What sectors? Cement,
Real Estate seem to have the momentum?

The last few years have seen an unprecendented growth in liquidity and ultra low interest rates. As a result, financial assets of all types have gone up in price. The recent fall seems to leave us with an oversold state with a possibility of a rebound. however, liquidity everywhere is slowing down. Interest rates everywhere are going up. It also falls to reason that if ALL financial assets could go up in the last 3 years, they could ALL go down in the next 3 years.
Personally I am short the US housing sector. I have most of my money in convertibles of companies involved in commodities but I am looking to lighten up on my holdings.
As for India, it is a bubble, make no mistake. The Indian govt runs huge deficits, and reform is still slow to come. Hot money has flown to India over the last few years, and it can flow out.
If someone entered the market 3 years ago when it was at a low base, holding on makes sense. India is overvalued and I personally would not enter now..


Anonymous Karan said...

OK at this pace market will be undervalued by the end of the year. Sure this pace probably wont continue but I feel some sectors should weather the storm even if the markets continue a downward trend over the longer term of 3 years like you say. Listed below:

1. Metals seem to be one of the worst hit sectors in the recent "crash". However, most commodity "experts" across the world seem to think that the long-term demand for metals will continue to be strong. Hindalco etc. all have seen 20+% declines. They look cheap now and if the commodity cycle is here to stay then they should be safer havens? Related to the same thesis is something like coke producers.

2. Construction also has been pretty badly hit - say something like Nagarjuna constr. Again given the surge in real estate development across the country shouldnt the future hold good for them? Related - DLF IPO later this month...


12:37 AM  
Blogger anmol said...

Undervalued/Overvalued is a relative term. I bought stock when the Sensex was below 3000. Even with a 25% correction it has gone from 3000 to 9000 in 3 years. A 200% gain! "Experts" are nearly always wrong. Also commodity bull markets are incredibly volatile. I would look for a interest-equity hybrid, a warrant or a convertible closing at or below par value. That way, even if the market crashes, your capital is intact.

12:50 PM  
Anonymous Karan said...

OK stepping back to the macro outlook for a second..You talk about tightening money supply. I was reading some over the weekend and according to one website PE firms raised $250B last year. Plus there is all the pension/retirement funds chasing high returns. Where does all the money go? BRIC seems to be the buzz word lately. So if it doesnt go to India where does it go?

"interest-equity hybrid, a warrant or a convertible closing at or below par value" Way over my head :) Individual stocks.. ADRs.. Mutual Funds.. Real Estate. Thats all I should stick to.

1:31 PM  
Blogger anmol said...

The money so far *SO FAR* has gone to BRIC. Thats true. What happens when this money leaves ?
The problem with overheated markets is at the margin. People who borrow to speculate. When prices fall, they have to sell, leading to a downward spiral and a crash.
There are hedge funds with tremendous leverage. People borrowing against their house equity to speculate. Liquidity is like a drug. As long as you take it, you stay high. When you stop, you crash and feel withdrawal symptoms.
This is my fear. Liquidity took the Sensex from 3000 to 1200. Can a reversal of liquidity take it back to 3000 ? If your stock fall 75% will you hold or sell ?
Having said this, markets are oversold, and a sharp rebound may happen soon as a trading rally. However, i do think that even commodities, that are at 25 year highs are going to crash (a fall of 30% or more). In terms of the bull market that started in 2002 or 1998 in commodities it is nothing. But if you enter now, there might be a substantial loss..
whats wrong with a 5% return in a USD deposit ?

2:12 PM  
Anonymous Karan said...

Some commodities have already taken a beating. Gold (if you consider it a commodity) is already down some 25-30% at around $550 from its recent high of ~ $720. What your opinion on it - Buy? Some people like Richard Russell are still long term bullish on it.

"Whats wrong with 5% on CD's" Nothing wrong except I dont think it even covers inflation? I have a lot to cover..

5:19 AM  
Blogger anmol said...

I used to subscribe to Russells newletter and he has been bullish since gold was 280$. He bought most of his gold investments when prices were less than 350. For him, it makes sense to hold on.
For you, consider the gold chart over the last 20 years. It has been in a price band between 250 and 500. And recently it broke out. Purely in terms of charts, its a good thing. But, if liquidity contracts, gold will go down like everything else.
Its better to look at things NOT on everyones radar. Commodities include agriculturals, and unlisted metals. Look at soybean, sugar, tea, coffee. Look at chrome, and other metals not traded on the futures markets.
All commodities have not gone up recently. And I am personally investing in aquaculture and chrome. Fish levels are reducing every year, but demand due to health reasons, and a booming middle class is increasing. Natural Gas, because the hurricane season is coming up.
Think outside the box.
I agree with your inflation outlook, what the govt publishes is BS.

11:28 PM  
Anonymous Karan said...

The problem with looking at some other commodities is trading them. Gold (and now Oil) seem to be simple to trade with ETF's tracking them. Investing in shares of companies that benefit from these under the radar commodities might be a way, but not without understanding the management competence and other factors contributing to their bottom line.

What is your take on XOM? They have seen their profits soar to records but still their stock continues to trade in a relatively narrow band. Definitly it broke out a bit but then kind of stalled.

Any suggestions on reading materials on commodity investing?

One final thought:

- Jeremy Siegel (and WisdomTree) came out with some ETF's which they call fundamentally weighted vs. traditional cap weighted indexes. Is that a good approach to passively invest your funds i.e. when you dont have access to stocks - like my 401k - which just gives me access to ETF's & MF's. Or will this become another benchmark which managers try to beat.

3:20 AM  

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