MANIC MARKETS – THE BLIND LEADING THE CLUELESS!

It’s been a while since my last post. Here’s the market roundup.

Not in a long while have I seen so many Financial Market Analysts absolutely puzzled by the current state of markets. Incredible intraday volatility and a total loss of confidence have resulted in a very lackluster dead cat bounce and then continued unrelenting selling.

With due respect to Warren Buffett and some other cash rich value investors who recently came up with ‘BUY’ calls; these are dangerous times in the investing world. Even prior to this crash, most investors were either fully invested or overexposed to equities. Many investors especially those nearing retirement may now realize that large exposures to the equity markets was a grave mistake!

TO BUY OR NOT TO BUY?
While I would say that there has been a panic led forced selling across world markets (including gold bullion), many stocks are now trading at attractive valuations. I would think that we will see more downside before an uptrend emerges.

Firstly, forced liquidations and realignment of risk profiles could intensify the sell off.
Secondly there is currently a great threat to the earnings growth momentum ( albeit propelled by cheap money) that the world has seen over the last 5 years. If earnings begin to stumble, cheap stocks could get cheaper.

I have been a Bullish Bear for over a year now, and although I have been conservative in my investment decisions and cautiously adding to gold positions on declines, the current crash has been incredible. I clearly wasn’t bearish enough.

GOLD & the USD
Gold has tanked over the last week on forced liquidations, margin calls and panic selling as gold was sold to raise cash. After finding support near $680, it has stabilized at $734.30.
I continue to maintain my stance on adding to gold positions on declines, buying in stages as the sell off intensifies. The rate, at which EVERYONE is being bailed out, clearly indicates that we are headed straight into a financial hurricane! AC-DC said it best; we are on the highway to hell!

Coming to the USD, as the global sell off intensifies, investors pile into the USD, and the currency has appreciated against almost all currencies excluding the Japanese Yen (which is rallying due to the unwinding carry trade).

The Litmus test of the current USD strength will occur in January next year, when USD Holders must ask themselves if they are actually safe in the currency of a ‘bankrupt nation’ whose Asian creditors are perplexed and now annoyed by the chaotic manner in which the US Leadership has let their ship run aground.

ACTIONS & CONSEQUENCES

• The US is dealing with a toxic combination of record high debt, rising unemployment and rapidly slowing growth.
• Can you really have a recovery not led by savings and investment?
• Is it not weird that the FED is asking banks to lend aggressively (even as asset prices are collapsing) to people who are already way too indebted? Weird or just crazy?
• Can the FED keep buying toxic assets at their face value – given that no one in the private sector is willing to step up to the plate. How come the Sovereign Wealth Funds are not value buying even after this crash? Do they know of coming government actions that we are not aware of?
• The fallout from the Financial and Real Estate Sectors is spreading like a cancer to the broader economy. Bailouts and rescues for Auto Loans and Credit Card loans will be next on the agenda. Basically guarantee and back stop all liabilities and defaults, so that we can get back to normal.
• Bailout after bailout; the inflationary impact (albeit with a 6-12 month time lag) of all the money supply growth currently occurring will be disastrous.

More updates on specific markets in coming posts.

BALTIC DRY INDEX : SLOWDOWN DEAD AHEAD!

ICELANDIC STOCK MARKET CRASH !

The currency has collapsed, banks have gone bust and the market closed down 77% to a level of 678.4, its lowest levels since April 2006.
http://www.independent.co.uk/news/business/news/icelandic-stock-market-crashes-on-reopening-961419.html
The reason I put this chart up, is to remind readers, that no matter what THEY tell you, despite reassurances about how everything is undercontrol, you must be aware of some simple facts.
Excessive Speculation coupled with leverage ALWAYS ends in a collapse! yes always!
Deleveraging with counterparties spread across the world is complicated and will take time to run its course.
So, do not try to call a bottom in stock markets at the moment, and consider your risk profile and investment time horizon before jumping into the ring. Don't Invest in anything that you don't understand!
For those that are ready to catch falling knives, intermediate rallies and dead cat bounces will provide exit opportunities, and expect things to get volatile (read: crazy) as the earnings season progresses.

SUSTAINABLE OR NOT ??

The DJIA soared 936.42 points, its biggest 1-day percentage gain since 1933!!!
Now that's a dead cat bounce!!

Removing all limits on Central Bank currency-swap arrangements (to meet USD demand), Governments buying Equity stakes in 'bankrupt' banks and endless liquidity infusion arrangements to solve problems of 'insolvency'.

Meanwhile, Housing numbers show no signs of improvement, unemployment numbers will rise, the auto sector bailout comes through, and quarterly results will show signs of deteriorating fundamentals.
We may not realise it yet, but the era of cheap money is over! and the perma-bulls are going to be '''stress tested.'''
As some wise commentators have pointed out,
Marc Faber - the current bailout does not address the problems of overleveraging which went unsupervised under the watchful eye of the US Fed & Treasury.
Jim Rogers - In the long term, bailing out weak and insolvent players at the expense of conservative and prudent players , defeats the very principle of free markets, & he fears the coming Inflation Holocaust more than the short term turmoil caused by letting insolvent firms go bankrupt!http://www.cnbc.com/id/27097823

ARE WE THERE YET ?

Have we hit a bottom (albeit a temporary one) for now?

And is this the dead cat bounce that everyone was waiting for?

Short these markets at your own risk!

The Nikkei 225 has really tanked!!!!

The PIRATES OF WALL STREET & PANIC + PANDEMONIUM + CRASHES + QUICK FIXES !

WHAT THE HELL IS GOING ON ?
A $700 Billion bailout FAILS and a co-ordinated global rate cut FAILS, so I guess they are working overtime on a new plan.
In the meantime, nothing has really changed -

President Bush says the economy is innovative, industrious and resillient!
The Credit Market is frozen, and the LIBOR just won't come down.
Billions and now possibly trillions of USD, and no liquidity injecting measures are working yet.
The G7 will 'take necessary steps' and has been calling for'urgent and exceptional action'

The declines in stock markets have been incredible! Whats been really surprising and rather worrying, is that there has been no dead cat bounce yet!

CATCHING FALLING KNIVES:
In the coming weeks, if total panic sets in, even conservative and unleveraged firms could fail or at least see their stock values crash if things don't stabilise soon. Be careful while bottom fishing in equities, and although you may have a long term investment horizon; focus on your risk profile and your necessary 'margin of safety' before you buy in.

My call would be for the onset of deflation, and as prices of overvalued and leveraged assets fall, the Central Banks will continue to flood the system with liquidity, and bailouts for all the PIRATES OF WALLSTREET.
As poor quarterly results and upcoming layoffs add to the woes of Wall Street in the coming weeks , the bailouts are going to get larger and larger.
Ultimately this will destroy the currencies of all participating Central Banks, and we could be in for a dose of hyperinflation as a result.

My next post will focus on charts of crashing stock indices, currency graphs, and Gold prices

POPULAR STOCKS & MARKET MELTDOWNS

Given all the turmoil in global Equity Markets, I thought I would look at some stocks that until recently were popular holdings of Foreign Institutional Investors, Traders, Hedge Funds and the investing public.

US STOCKSUntil recently Fertilizer stocks were skyrocketing ( Potash & Mosaic), as fertilizer demand and food grain prices rose sharply. You had to buy coal stocks(Peabody Energy), as Chinese demand was growing exponentially and crude oil prices were going to $200. The bankers/finance people and their BlackBerries (RIM)were taking over the world, as were the Apple iPhone & iPod. And last but not the least you had to own Goldman Sachs- the one firm that could survive and thrive no matter how bad things got.

INDIAN EQUITIES Punter favourites like Jaiprakash Associates ( which rallied despite no significant change in its fundamentals) are now back to square one. Real Estate Developers like HDIL and DLF have crashed over 73% from their 52week highs - These were a must own at one stage, as India needed housing, and surging property prices appeared to have no effect on end user & investor demand. Anil Ambani's Reliance Industrial Infrastructure ( and other group companies like Reliance Power) tanked- as irrational valuations were pricing in projects to be executed years down the line. ICICI BANK is down over 65% from its 52week highs!! MTM losses from its International operations and solvency fears are driving the stock price still lower. Analysts had prevoiusly valued the sum of parts valuation of its Asset Management + Insurance + Banking businesses at well above the current stock price.

MORAL OF THE STORY : Avoid investing in the most popular sectors, without doing your own research first, and do check that valuations leave you with an adequate ''margin of safety''. Markets have the tendency to overshoot both on the upside and the downside, so buying stocks that are expensive market favourites is never advisable.

BBA LIBOR : STRESS IN THE CREDIT MARKETS

Source: http://sharedata.lloydstsbsharedealing.com/en/money/interest/index.html

Banks are unwilling to lend, and despite the massive liquidity infusions and bailout packages, LIBOR rates are not backing down. This is raising the cost of borrowing for solvent and conservative businesses and borrowers the world over.

SO WHATS NEXT ?

Stock markets around the world are tanking, Banks are not lending, and immense wealth destruction is taking place. It is almost unreal-- as Large capitalisation stocks around the world are down 10-20% in a single trading session.

Imagine if they allow the short sellers back!

Considering how sharp the selloff has been, could we be in for a dead cat bounce?

GOLD prices have been slowing creeping upward amidst fears of imminent deflation.

I wonder if a US Fed rate cut might kick off a USD selloff despite the usual flight to safety, just as news of the $ 700 Bn Bailout kept the markets afloat for a while.

HAPPY BIRTHDAY !

THE BULLISH BEAR BLOG - Is now a year old.

And what a year it has been.

Since the Credit Crisis intensified in July-August 2007, the 'experts' have been reassuring us that things were under control, and that everything was going to be fine!!

While I was bearish on the prospects of the US Economy even a year ago, I underestimated the ferocity of the downturn. May be the delaying tactics of those in charge are no longer working.

The process of deleveraging in an interconnected financial web has been a DISASTER.

Regulators supervising undercapitalised institutions that underestimated risk, encouraged by the Monolines and Credit Rating Agencies ---> All estimating that home prices would rise forever.

Meanwhile, the currency markets are chaotic, as everyone scrambles for US Dollars! A safe currency they say! Well at the rate the bailout fiasco is going (with Bailouts III & IV to come I guess), things don't look all that good.

GOLD - SHELTER FROM THE STORM

While the recent volatility in Gold prices has been startling, the long term story is intact. As I have said before, when all is said and done, GOLD will be the one true store of value. So if there is one permanent holding in anyone's portfolio this has to be it. Use the volatility to buy on declines.

BOTTOM FISHING IN INDIAN EQUITIES

Equity Markets in India, like the rest of the emerging markets have seen continued selling.

Large capitalisation stock are down over 50% in some cases, and the once 'Long Term India Investors' have vanished.

While I am still holding on to my core holdings, paper profits are evaporating.

At the same time its important to remember that India is not an export oriented economy, like some markets in the Asian region, so its worthwhile keeping an eye out for attractive buying opportunities in companies with strong fundamentals.

Its going to be a real test of conviction especially for those that were buyers in Indian Equities recently. For long term investors who are ready to sit out the storm, there will be plenty of buying opportunities.

A year ago, it was difficult to find value in Indian Equities. Today there is panic and that value has re emerged.

Tread lightly for now - and be selective while making a list of stocks you want to buy. Not every stock that has fallen is worth looking at. Midcaps and Small Caps may provide higher returns from current prices, but are going to find the going a lot harder in tighter credit markets.

Also consider the fact that the recovery when it comes, is going to be slow and hesitant, so theres going to be no easy money now.

Interest rate sensitives in the Financial, Real Estate and Auto sectors have had a really hard time as have the Metal stocks - as Metal prices have corrected globally.

Lastly, know your own risk appetite - Investment time horizon - and the extent of volatility that you can tolerate for your portfolio

& BEFORE I FORGET = IGNORE THOSE EXPERTS!

PERMA-BULLS, BAILOUTS & BULL**** in a free market!

The Bailout grows larger everyday ($700Billion now) - ban short selling - may be ban mark to market pricing - cut taxes - raise deposit guarantee limits: The cost is going to be humongous!!!!
As the US elections near, election politics are taking centre stage.

What adds insult to injury is that the spin doctors and regulators, under whose watchful eye this whole ‘calamity’ went unsupervised, are now absolutely clueless about a way out of this financial maze.
The guys at the top are well aware of the mess they put us in, so they are now hoping to bide their time and dump this hot potato on the new guy (Obama/McCain), who by the looks of it has no clue either.

What is most annoying is that the whole scheme feels like the rush into the War in Iraq. ‘Trust us, we must do this or else…’ … or the ‘We are saving the American People and the world from financial Armageddon’ routine appears to be poorly researched and lacks adequate explanation and transparency -- unless you are in the Bernanke- Paulson- Bush camp or are a CEO in the Investment banking Industry.
What about the large, medium and small businesses that did not overtrade and borrow recklessly, or the ‘fools’ that carefully repaid their mortgages over the years? Are they going to be rewarded for their prudence and rational risk taking?

THE BAILOUT
Using tons and tons of money to buy worthless toxic junk ( that no one in the private sector is willing to buy)------- is just a bad idea if it means short term rallies in the stock market and long term damage to the American and indirectly the world economy.

I am also surprised that no Foreign Sovereign Wealth funds (read: Temasek and GIC of Singapore and Middle East Sovereign Wealth funds) have stepped up to the plate yet.
Even Warren Buffett’s deals with Goldman Sachs and now General Electric do not involve an upfront equity stake in either company, but are opportunistic deals by an astute cash rich financier.
Does this mean that the coming bailouts will wipe off all the equity of the investment banks?

Oversight and Executive pay!
Finger pointing and blame games as to who was responsible for the collapse of the first Bailout Plan are yet another meaningless distraction, as are calls for more oversight and continuous whining about exorbitant executive pay.
Oversight! We sure don’t need any more of that. Look at the fine job that the OFHEO (Office of Federal Housing Enterprise Oversight) did with Freddie Mac and Fannie Mae. As for Executive pay- the shareholders sure didn’t complain when the stock prices of the US Investment banks were at their 52 week highs.
REALITY CHECK
Well, looks like the recovery in the second half of 2008 is going to be postponed indefinitely.
In the meantime everyone is ignoring the continued weakness in US home prices, and as the quarterly results come in, we may be in for more disappointments. The new government is going to have a lot of explaining to do, as job losses increase and the virus spreads from the financial sector to the industrial sector. They may have to Bailout the US Auto Industry as well, or risk losing a LOT of votes!
Emerging markets that are major exporters too face tough times as the US Economy slows.

US DOLLAR & GOLD
The US Dollar is now rallying, as there is a flight to safety, as money is exiting all asset classes from commodities to emerging markets. The stronger USD is going to eat into the profitability of large US multinationals, whose recent earnings have been ‘subsidized’ by the weak USD. In the longer run, these short term artificial supports are going to fail, and the final recovery is going to be even more painful and delayed.

So is the market facing inflation/deflation/recession/ stagflation?
First of all, ignore the wise men who are still not willing to face facts. The US has been in recession for a while, and over the last quarter we have drifted from stagflation to nearer the edge of a possible deflation (read: deflation = decrease in money supply and prolonged periods of falling general prices)!
I must say that although I expected prices to fall (read: US real estate/US Equities/ Industrial Metals), the declines have been rather sharp.
Deleveraging after a boom that was built on foundations of easy money and lax regulation is going to be more horrible than I first thought.
With the US Fed leading the way, the Central banks are going to fight this deflationary spiral with all the money they’ve got (fighting insolvency with liquidity – not a smart move), this is going to do real harm to their currencies in the long term.

This is going to be extremely positive for Gold, and although its $100 price swings continue for now- It will be the currency that survives and continues to be a true store of value.

BULLISH BEAR ADVICE:

Focus on Capital Preservation, not Wealth Creation.

Use the wild swings in Gold Prices to buy on declines, the Central Banks and Bailouts will fuel its bull run.

Ignore all analysis / advice / research reports / recommendations of all the wise guys who have appalling track records, and have called one bottom after another for the market. Focus on the guys that have been consistent and right all along, guys like Robert R Prechter Jr., Prof. Nouriel Roubini, Michael Panzner (of Financial Armageddon), Barry Ritholtz of Big Picture, Tim Iacono of ‘The Mess that Greenspan Made blog’ and many others, who were amongst the first to warn us about the current crisis.

If you are looking to buy into stock markets anywhere----DON’T, but if you must, be aware that the recovery can take a long long long time, and there is more downside to come. Deleveraging, and tight credit affects a wide range of industries, not just the financial sector. The rising cost of working Capital and tight commercial paper markets are going to be the real WMD’s.
The Central Banks may buy all the Toxic Junk they want, but they can’t force the banks to lend.

Over the past month, I have been re-reading a book –
‘Conquer the Crash – by Robert R Prechter Jr.’. When I first read the book in 2004, I found it rather radical, and I wondered whether things could really get that bad.
Well I think it’s worth a read given the times we face today.