Sunday, October 05, 2008

Global Situation

USA Fever is spread to all countries directly otherwise indirectly. The fever caused most of markets to reach 3-year low. Technically most of markets are in buying level, but the problem is fundamental, which is very bad right now. We are expecting Market will recover depending on how USA recovers.

We are expecting most of market to trade in range bound in few months. Ie down side is limited but it will not go higher levels easily as the recession stage likely to continue at least 10-months in USA.

Usa & Crude Oil

Now market is looking what is new step or change in bail out package expected that can prevent from falling long recession stage (couple of years. If new package is not came expecting

1.               By quarter 2 around 117 Insurance companies can face.

2.               By next summer 110 can go same situation, most of these companies assets will be around 85000.

CRUDE will reach down levels in coming months, expecting OPEC target 70 levels.

Comparing with 1930s

The present situation is little bit scary even though compared to 1930s there are more differences than similarities between the 1930s and today:

• In the crash of 1929 the Dow Jones industrials plunged 40% in two months; this time around it has taken a year to fall 22%.
• The jobless rate jumped to 25% by 1933; it is little more than 6% today.
• The gross domestic product shrank by 25% during the early 1930s; it is up over 3% during the past year.
• Consumer prices fell by about 30% from 1929 to 1933; and the last time I looked they were still rising.
• Home prices dropped more than 30% during the Depression vs. about 16% today.
• Some 40% of all mortgages were delinquent by 1934 compared with 4% today.
• In the 1930s, more than 9,000 banks failed compared with fewer than 20 over the past couple of years.

it was policy errors, not the stock market crash, that caused the Great Depression:

• Instead of increasing the money supply, the Federal Reserve of that era reduced it by one-third.
• Instead of lowering taxes, Herbert Hoover raised them.
• And to channel whatever demand was left into U.S.-made goods, the government enacted the Smoot-Hawley Tariff Act to keep out foreign products; this only provoked our trading partners to do the same.

In 1930s after 2 year crash from 377 levels to 45 levels it had taken 20 years to reach 377 levels again. Present time there are positive news that will help USA to reach 14000 again. Even if 1 year depression happens (No strong package comes to support) less time required to reach 14000, may be few years.

India

We are not directly connected to USA so impact will be less as far as economy concerned, still will see slow down. In case of stock market impact will continue some more time, as the wiped FIIS money is huge; more over confidence is to come again.

Our economy has huge positive news, but as the loss is huge by FIIS it will take time to recover.

The main big threat to our market is liquidity even though fundamental is strong enough to reach high levels, less funds that will not help to reach high levels. So big problem is in midcap and small cap, most of these stocks can go lower levels, we mean more down side from present level. These stocks will not recover when market starts recovery, it is expected buying can se seen only by mid of next year. Even though selected stocks will out perform.

Inflation still at high levels, actual down trend will take some months.

Rupee: Rupee expected to stay between 40-46 range.

The view on 21000 (given last time) is now changed to next year. We have strong positive news, only problem is liquidity. FIIS money is wiped is very high so even though growth is compared to other countries, it will take time. Present levels are cheap & lower side is limited but to reach high levels need time. We are in time based correction mode, pause before another bull trend. Looking present developments it is possible to reach CLSA view Sensex to reach 50,000 level. For a bull trend it will take months. Be stock specific no other way to beat time wise correction.

The new friendship with USA will make new attack from SIMI, MUJAHDEEN, ALQUEDA like groups. We can expect like old parliament attack, possible to target STOCK EXCHANGES. Certainly new rules taken even though.

What to do with shares entered at higher levels.

It depends on mainly the company you had taken. Broadly we can say forget small valued stocks at least 8 months. Mid caps also same problem even though individual stocks in these sector can touch all time highs. In leaders take good stocks which have strong potential to grow; we are expecting range bound trading for some months. Certainly we can see exceptional cases.

Note: Some points are taken from Client Copy.

Happy Trading,

LakshmiStockGroup.com