Saturday, January 17, 2009


It’s been almost a month since my last post and we are already in the third week of January! So let’s get started.

Well it’s now quite obvious that things are going to get a lot worse before they get better. Question is, how bad is it going to get. While I was cautious while making forecasts for 2008, the extent of the meltdown has been much much worse than I expected.
The party has ended!
Governments and Central Banks are trying to reflate the ‘dying credit bubble’ party with a new round of credit!!!!!!! & bailouts and stimulus packages continue to get larger and larger with each passing day and yet there seems to be no solution in sight.

In my last few posts of 2008, I spoke of the possibility of intermittent bear market rallies, following the sharp selloff across asset classes globally.
However, it is important to analyze the difference between short term rebounds and a longer term fundamental analysis.

Here's what we are dealing with.

Easy financing post the dot com crash, led to a global boom in Real Estate & excessive manufacturing capacity worldwide; supported by consumers( especially in the western world) who don’t save and have until now continued to consume like there was no tomorrow.

‘Overleveraged firms and individuals will struggle to service their debt.’

As Banks refuse to refinance debt and sanction new loans, bankruptcy and unemployment rates will rise & confidence levels are going to take a beating. The battle of ‘the Survival of the fittest’ is going to result in a lot of inefficient firms going belly up! Banks with lax lending standards and firms with wafer thin profit margins are going to fail !
Stocks have crashed from recent highs, and as growth momentum slows, we will see losses emerge across sectors. Even firms with strong balance sheets are going to struggle, as demand continues to slow.

Individuals used to extremely high standards of living are going to have to adjust their lifestyles, as bonuses dry up and mortgage payment loom in the weakest job market in years.

Since I started following financial markets almost 8 years ago, the newsflow is the most pessimistic I’ve seen. Bad news is crowding any good news that comes up! Bad news has spread from financial markets onto Main Street, & has everyone talking of job cuts and savings. Firms are cutting back on spending and previously planned expansions are now being shelved.

A Crisis of Confidence
Valuations have corrected drastically from the 2007/early 2008 highs, and growth rates and profit margins are being revised downward globally. Even as experts begin to acknowledge that we are indeed in a bear market or global recession mode, some are calling for a bottom in markets, saying that the worst is now behind us.

Markets are now battling a crisis of confidence and I find it extremely unlikely that stock markets would bottom so early in the downturn. Also, markets never bottom out when most analysts and experts expect them to do so; especially since the correction has not played itself out time wise.

So I think that while it may be too late to sell (without taking losses….which may be massive in some cases), it’s just way too early to buy.


‘’’Get used to living within your means & learn to save! ’’’

Keep an eye out for extraordinary companies at beaten down stock values.

Focus on companies with reliable management teams that have a proven track record.
Scams like the ‘Satyam Computers’ saga in India and the “Madoff Ponzi Scam’’ in the US, are likely to occur with increasing frequency as the downturn continues.

Corporate Governance: The importance of ‘Quality of Management’ tends to take a back seat at the heights of a stock market boom. Even if a stock is a screaming buy on valuations, avoid it at all costs if management quality is lacking.

Remember that a stock is not a buy, just because it is down 70%+ from its all time highs. Is it really cheap in terms of value, or is it just cheap in terms of price?
Value investors should also realise that an undervalued stock could stay undervalued for quite a while; there’s no easy money here. The wait is going to try your patience, resulting in many value investors getting fed up and selling out at the lows!!!
I repeat again, that a lot a firms will fail, so place your bets accordingly.

‘Bubble in US Treasuries?’
Yields on US Treasury Bonds are near record lows as the flight to safety continues.
This has continued to provide strength to the USD, even as the economic newsflow continues to deteriorate.Unemployment and continuing failures in the Banking system will thwart any attempts of a recovery. Citibank and Bank of America are desperately seeking funding as their December Quarter results have been a disaster!!!!!

Crude Oil prices are way off their record highs and a slowing global economy will probably cap any attempts of a rally in oil prices in the near term.
It will be interesting to see the impact of a low crude oil price on the US treasury market; as the flow of Petrodollars starts to dry up.

As growth slows drastically in China, and China focuses its forex reserves on funding infrastructure projects at home, Chinese investments in US Treasuries will also slow down.

Can the world economy stage a recovery before Central banks and Middle East Petrodollars lose interest in investing in US Treasuries?
A case in point could be the recent auction of German Bunds that was not fully subscribed!! It’s clearly a race against the clock.

‘The Bullish Bear Blog has always been bullish on Gold.’

Traditionally viewed as an ‘Inflation Hedge’, Gold prices have come off the March 2008 highs and are currently trading at $842.40.
Gold has outperformed and survived the steep selloff in commodity markets over the last 6 months that has eroded gains accumulated in most commodities over the past 5 years.

The meltdown across asset classes has also raised fears of deflation.
Record high debt levels and the current unwillingness of the banks to lend, has resulted in a decline in consumption and investment. Job cuts will further dent consumer confidence, thus intensifying the slowdown.

Inflation is not dead: Ignoring the inflation tsunami that’s coming up.
While current conditions appear to reflect deflation fears, it’s important not to lose sight of the long term picture. Governments and Central Banks would rather deal with inflation than deflation. Given record low interest rates and unsustainably high debt levels in the global economy ( further compounded by massively leveraged CDO & CDS derivative positions), the Authorities have no option but to try & reflate their way out of this mess.

So expect massive stimulus packages and an endless string of bailouts in 2009. Extraordinary measures taken by global Central Banks led by the US FED will result in inflation further down the line.

Outlook for 2009.
‘It’s every man, company and government for itself!!!’

Casualties of 2008 included ‘giants of the global financial markets’---- Bear Stearns, AIG, Lehman Brothers, Merrill Lynch, Freddie Mac & Fannie Mae.
All forms of government intervention and stimulus packages have failed to revive demand and reinstill confidence so far.
LIQUIDITY – There is always money to be made in any crisis. As is usually the case, if you can step in and buy assets for ‘cents on the dollar’ when everyone else is strapped for cash, you could really make a killing!! I think there will be better opportunities towards the end of 2009, so make sure you conserve cash now!

I expect currencies to be extremely volatile in 2009.
Endless bailouts are going to put a lot of stress on major currencies especially as the appetite for US Treasury Bonds starts to diminish.
So far, the USD has held on to gains largely because there is no other currency that is ready to take up the role of the world’s reserve currency. Longer term the USD is headed into troubled waters, with a low domestic savings rate and an exploding Budget Deficit, so it is indeed ironic that it is still viewed as the safe haven over precious metals like gold. Gold, a true store of value will respond positively to any negative credit event or currency crisis.

For now, let’s hope for the best and prepare for the worst!

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