Sunday, August 31, 2008

ABX 3 !

Each time I write about the ABX Indices, the news continues to deteriorate.
'The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages.ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected.'

Heres the latest update!
Previous posts on the ABX Indices
November 10, 2007
March 24, 2008

Friday, August 29, 2008


2008 has not been a good year for Indian Equities:-Political uncertainty, moderating growth, galloping inflation, a rising Fiscal deficit and massive Foreign Institutional Investment outflows. GDP growth dipped below the 8% mark for the first time in the last 9 quarters, and Fuel and Fertilizer subsidies are going add stress to the Fiscal deficit.

2009 is an election year and the reform process is likely to take a backseat.

FIIs meanwhile have been sellers, and every rise is being sold into at the moment.


Valuations are a lot more reasonable now, and value is gradually emerging.

More on the outlook for the Indian Economy, and valuations of Indian Equities in the next post.

Thursday, August 28, 2008


Rising unemployment, high household debt, and a sharp slowdown in the property market has crushed economic growth in Spain.

The weightage of the Financial Services and Real Estate sector in the Madrid Stock Exchange General Index (IGBM) is 40.55% !!!
As bank lending tightens, large real estate developers could face funding problems and as the ‘sales slump’ continues, the meltdown could intensify.

Deleveraging is going to be a long and painful process.

Tuesday, August 26, 2008


Global markets continue to stumble in an uncertain business environment.
Emerging markets like Brazil (BOVESPA Index), India (BSE SENSEX), and China (Shanghai Composite) have had a particularly difficult time.
So are these slowdown fears for real? Over the next few posts I will analyze the impacts of a global slowdown in the backdrop of a highly leveraged and interconnected global economy.
To begin with here are some charts -
Shipping rates
have had a volatile 2008. In the first half of 2008 a weakening USD coupled with high oil prices pushed commodities and shipping rates to new highs.

Is Chinese demand finally slowing? Or is this just a blip on the charts due to the 2008 Olympics?

2008 has been a terrible year for equities.

Fears of a US led global slowdown and a risk averse investing environment have resulted in large outflows from emerging market equities.

2008 so far----

THE LAST 5 YEARS The Chinese stock market is down very sharply since it peaked in the last quarter of 2007.
Indian Equities have fared better, over the 6month and 5 year horizon. Over the last 3 quarters however, growth rates have moderated, and as Indian companies continue to expand, with inadequate local infrastructure(transport bottlenecks and power shortages) and domestic inflation rates of just under 13%, we are in for some challenging times ahead. The Indian Financial sector has fared much better than its global counterparts, but as lending standards tighten, interest rate sensitive sectors like Automobiles and Real Estate are likely to underperform. I will soon put up my update on the Indian Economy.

Sunday, August 17, 2008


Well I’m back to posting again after a 2 week gap! There’s a lot to catch up on so its going to take a few posts.

Gold has been slam-dunked, Oil is on its way down, the USD rebounds and the rally in Commodities is over!!!
So what happened?
Lets begin with an interesting article I came across on ‘ Central bank Intervention in currency markets’ Mystery Solved 7 Aug 2008.

The Triggers:

The slowdown in Europe will result in the ECB cutting rates.
The USA lead things on the way down, and so will be the first to recover.
The global slowdown has lead to a fall in oil consumption.

Weakening trends in the EURO and Oil and a strong USD

If there’s one thing that’s clear now, it’s that the ECB is in an equally tight spot as the FED. The FED has company!!! Does the ECB cut rates to avert a recession or does it fight inflation?

Are falling Oil prices a good sign, if they are due to contraction in demand?
Clearly speculators are bailing out too, but global demand is slowly!

The USD has pulled back sharply as the ‘Short USD/Long commodities’ trade unwound and the current uptrend is almost as severe as the breakdown in Gold. It should meet some resistance near the 78 level on the USDX.(Remember that the USDX index is EURO dominated)
So is the worst really over? (AGAIN)
While gold looks really beaten up at the moment, and Gold stocks have fared even worse, not a lot has changed in the last 2 weeks.
Central Banks are still dead scared of deflation!! And will use every means possible to get another bubble going. So that’s going to mean more intervention,bailouts and handouts to the clowns that got us into this mess in the first place.
Its also important to remember that Gold has historically never been strong in the May – August period, (usually bottoming out by August end.), so the USD rebound has added to the severity of the sell off.

I have been buying gold on declines, as it has smashed through one support after another ( $ 878.5, $ 850, $ 790), by staggering my purchases on the way down. The selloff has been so sharp that I expect a pullback especially as the Euro/USD has strong support at the 1.45 level.

So is this the return of Goldilocks? I think not!

----The US Housing market is still in a mess
----Freddie Mac and Fannie Mae need a bailout – or let’s just change the rules of the game for them!
----Are the write downs in the financials over? Or is the best yet to come? ( Like the recent settlements in the Auction rate Securities Lawsuits) More Capital raising / financial firms cutting Dividends?
----I ask again? What is the current market value of the ‘Toxic Bear Stearns securities held by the FED’ – No write downs there I hope?
----Is the strength in the USD due to any inherent fundamental change in the USD, or just due to the slowdown elsewhere?
----Can the Fed really hike rates to support the USD?—risking a meltdown in the US housing market and a collapse in US Consumer sentiment and consumption. On the other hand, how would the USD react, if the FED cut rates late into 2008?

----How long are the Central Bank Currency market interventions going to keep things afloat? Are they tackling the crux of this crisis( overleveraging and cheap credit) or just delaying an impending meltdown?
----Will the Volatile USD, (now strengthening), cause large USD holders to try to diversify out of the USD?
----Who’s going to blink first and do a bailout of a major Financial Institution- The Fed or the ECB?
----Even if the strength in the USD holds for a while yet, would you put money into stocks in an environment of inflation and slowing growth, where defaults across many sectors( not just financials) are likely to increase? I would be extremely wary of any analysts trying to call a bottom in stocks (especially the financials)!!!
----What impact is the Stronger USD going to have on the financial results of large US multinational companies whose results until recently have been ‘bolstered’ by the sliding USD. Extraordinary Forex losses in the second half maybe?