2009: IT AIN’T OVER YET !

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.

THEN CAME THE CRASH
‘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.

CHANGING WITH THE TIMES

‘’’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.

PATIENCE IS KEY
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.

THE US BOND MARKETS & THE USD & CRUDE OIL
‘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.

GOLD
‘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!

CURRENCY VOLATILITY !!-----CHARTS

This is a vertical drop on the USDX chart; which seems to have accelerated after the FED rate cut announcement.

The currency charts below are 3month and 1year charts of the respective currencies, with the 1 year chart commencing mid December 2007

The charts are from the CNBC Currency webpage: http://www.cnbc.com/id/15839178/

The Japanese Yen strengthened consistently through 2008, as carry trade unwinding and the sell off across asset classes intensified.

The EURO and the Swiss Franc (CHF) have rebounded strongly this past fortnight. Is the ECB going to be next in line with aggressive rate cuts? Also now that the Fed is ready to buy anything and everything, (by doing whatever it takes to sort things out) is the ECB too going to get into the act?

The British Pound (GBP) has struggled this year, and as the UK housing market continues to deteriorate; 2009 is going to be particularly difficult for the British economy.

LENDER OF THE LAST & ONLY RESORT !!

Well, the Federal Reserve cut the main U.S. interest rate to a target range of between 0 - 0.25 %
Clearly the FED is now ready to do whatever it takes, even if it means bailing out all the incompetent or greedy or 'too big to fail' entities there are out there!!!
Makes me wonder why the auto bailout is still on hold?????

Sooner or later we will reach a point when there are going to be just too many to bailout/save.
Remember the days when a $700Bn bailout was a Wall Street stunning event! ( actually that was as recently as Sept 2008; we clearly have come a long way !)
Right now, the FED promises to buy MBS and Agency Debt, in order to finally stabilize the US Housing market, even as the USD continues to slide against major currencies, continuing the trend of recent days.
As I write this, Gold is up $ 20 at $855.60 and the DJIA is up over 334 POINTS AT 8900!

Somethings gotta give. Its just a matter of when not if.

USDX - WHAT'S GOING ON NOW!

In recent posts, I noted that the USD had started to lose ground against a basket of currencies.
Here's the background on the USDX.
http://thebullishbear.blogspot.com/2007/10/understanding-us-dollar-index-usdx.html
Since the USD bottomed out in mid July 2008, it has been in quite a steep uptrend, that is quite visible on the 3 year USDX chart.









According to some technical analysts, the USDX index has formed a head and shoulders trading pattern, and thus the next move will be DOWN ! Is this going to be a decisive move, or just a minor pull back after the recent USD rally? Gold meanwhile has been trading in the mid $830s.









Stockmarkets globally have recovered from recent lows, but are trading nervously ahead of the FED meet later today.
The '''Madoff scandal & ponzi scheme''' is yet another sign of the irrational excesses, lax regulation and manipulation of recent years.
Here's a an interesting take on the Madoff scandal by James West of the 'Midas Letter',
http://www.gold-eagle.com/editorials_08/west121508.html

US CONSUMER CONFIDENCE!

Things don't look too good. Upcoming factory shutdowns and layoffs in 2009 are going to add to the pain!!

And yes........the NBER has recently recognized the US Recession, as indicated by the shaded area in the chart.

COMMODITY MELTDOWN !!

When you look at a chart that has witnessed an almost vertical drop, you know that its worth a second look!!!!! As the CRB Commodity Index shows, gains accumulated over the last 3 years were wiped out in 4 months!!
This deleveraging commodity meltdown has been much faster than most expected, as speculators and leveraged hedge funds have bailed on this once '''must have sector'''. Now that the'weak hands' have been forced out, commodities look interesting again!!!
Welcome to Commodities round 2!










While I am not a big fan of Base metals/metal ores, even these commodities have seen a sharp selloff! Given the global slowdown and recession we are in, industrial metals and ores could take a while to recover.
GOLD - meanwhile has held its own amidst all the turmoil in the credit markets, stock market and in the real economy. I repeat that Gold IS NOT A METAL, but a currency that is a true store of value.
It is one of the most liquid mediums of exchange; something that many high networth individuals who are trapped in ILLIQUID HEDGE FUNDS may now realise!

I continue to be quite optimistic on soft commodities, such as corn, wheat, soybean and other agriculturals, which continue to see growing demand in emerging markets along with the alarming possibilites of reduced acerage and farmer bankruptcies on the back of the recent food grain price collapse.
I have never been a supporter of using 'food for fuel', but irrespective of the meltdown in the ethanol industry, these food crops look interesting at this stage.

Coming to Crude Oil, although the selloff has been sharp, in the near term a demand slowdown can cap any attempts of a rally here. However you must remember that the recent strength in the USD has been showing some sings of weakening lately, and any USD currency volatility / crisis in 2009 will support crude oil prices even if demand fails to recover.
Longer term I remain an oil bull, given the lack of fresh capacities added, as also growing consumption in Asian economies.












Will post more on Crude Oil and Soft Commodities in coming weeks.

GOLD & THE FED : HEADLINES & RUMOURS!!

Don’t quite know what to make of this, but if rumors are to be believed, the IMF is about to flood the gold market with Gold!! Upto 3000 Tons of it!!!
http://www.commodityonline.com/news/IMF-to-flood-market-with-3000-tonnes-of-gold-13259-3-1.html
http://www.stockhouse.com/Columnists/2008/December/8/Horrific-gold--dump---Is-this-guy-for-real-Thom

Also, saw this other crazy headline- US FED to issue debt!!!
Don’t quite know what to make of that either!!

http://www.kitco.com/ind/West/dec102008.html
http://online.wsj.com/article/SB122888021757894023.html?mod=googlenews_wsj
http://www.bloomberg.com/apps/news?pid=20601103&sid=am8eBgidYgsI&refer=us


While I put up the above mentioned links, that I came across in my daily scan of global financial news, I must state that I have no idea that such events are about to occur or have been planned.

Here's what I do know!
If there’s one thing that I’ve learned over the past few months, it is the importance of the concept of ‘mean reversion’, something that everyone seems have forgotten after the extraordinary global growth over the last 5 year, albeit financed by ‘easy money’.
Also, give the excess manufacturing capacity (think China!) and excessive debt and overleveraging ( think U.S. Consumer and Investment banks) in the system, this deleveraging downturn is far from over!

P.S.: Gold is up $32 as I write this, currently trading at $ 808.20.

ABX - NEW LOWS- Update 4

Every time I write about the ABX Indices, I am shocked at the extent of the fall!

News lows—This is one mega subprime mess!

'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.' http://www.markit.com/

8 DEC 2008

29 AUGUST 2008

Previous posts on the ABX Indices
November 10, 2007
http://thebullishbear.blogspot.com/2007/11/subprime-mortgages-abx-indices.html

March 24, 2008

http://thebullishbear.blogspot.com/2008/03/abx-meltdown.html

August 31, 2008
http://thebullishbear.blogspot.com/2008/08/abx-3.html

3 MONTH U.S. TREASURY YIELD

Simply stunning!!! We are either headed for a catastrophic 2009 where job losses are going to escalate and growth rates are going to turn sharply negative, or the world economy is in a state of 'irrational panic'.

Yields on 3 month U.S treasuries are near zero!!!
Points to note:

• Is this a US Bond market bubble, as risk aversion has pushed international central banks to favour U.S. Treasuries over GSE debt?
• Has this bond market bubble been supporting the USD?
• As Crude Oil prices have corrected substantially, the Middle East nations are going to be less aggressive buyers of U.S. Treasuries.
• Asian Central Banks are using their accumulated Forex Reserves to stimulate local economies by funding infrastructure projects, supporting their local banking industry and aiding sectors of the economy that are witnessing slowing growth; this is going to slow down purchases of US Treasuries. China, Russia and India are cases in point!
• Lastly, when the 'shorts' sense overvaluation in any market, and once selling kicks in; beware a stampede out of this 'safe' haven.

WATCH THIS SPACE

WHAT'S AN INVESTOR or TRADER or SPECULATOR to do now?

Looking at these charts, its easy to see the similar manner in which markets fell, after hitting all times highs, in 1929 and 2007. (Click on the charts for a closer look)
While no two crises are identical, and government policy responses in 2007-2008 have been far more aggressive, as compared to actions taken in the aftermath of 1929, no one can guarantee that this is the ultimate solution that will solve all our troubles. (Do Paulson & Bernanke actually have things under control!!!!)

Jesse Livermore the legendary stock market speculator once said, ‘‘ The average man doesn’t wish to be told that it is a bull market or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing.’’

While I’m not saying that we are headed for another great depression, the question I’m trying to address is – ‘What’s an investor to do now?’

For example, if the Dow Jones Industrial Average(DJIA) were to come down to a level of 7000 ( Yesterday's close: 8419.09), it would imply a further drop of almost 17%.
The DJIA at 7000 would mean a crash of almost 50.58 % from the record highs.
Impossible? Here’s an analysis.

In the initial fall of the 1929 Crash, the DJIA witnessed a similar vertical drop. The current crash in the DJIA occurred over a longer time frame, with the all time high being 14,164.53 on 9th October 2007. It must be noted however, that the DJIA was trading at around the 13,000 levels as recently as May 2008.

As an investor or a speculator, would you play for a bounce or a sustainable long term recovery now? Fundamental news continues to deteriorate, take for example the fall in auto sales announced yesterday, or Bernanke’s comments that further rate cuts (without more bailouts) may not be enough to save the day!!

Should a long term investor buy in now or wait?
It’s important to consider the possibility of things really taking a turn for the worse.
I mean, some people who bought stocks in 1932 actually made money in a depression, as compared to those who bought in November 1929.

Do you sell out now?
For those that are stuck with stocks bought at much higher prices- Analyse your reasons for buying the stock in the first place. Has there been a significant deterioration in the company's business or industry fundamentals. Is the company struggling to raise debt or meet interest payments?

Lastly, do you sell out now, or wait for the illusive bounce which could be on the cards?

The answer to these questions will depend on your individual risk profile, investment/trading time horizons and ability to survive the ongoing financial storm. Yes even good businesses and companies with stong cash flows and fundamentals will see their stock prices crash in such a meltdown. Decisions must be taken by considering the adequate margins of safety you need, and the maximum losses that you are willing to take if the situation continues to deteriorate.

REMEMBER : Your LIQUIDITY position will determine your success or failure rate.

You must be able to buy, when everyone is forced to sell-----(Yes easier said than done, considering its impossible to ever call a bottom for any market).This has been the hallmark of all the great investors, traders and speculators, be they Warren Buffett, Jim Rogers, Marc Faber or George Soros.

Here’s what I’m doing now.
In my personal portfolio in India, I continue to hold on to core long term holdings. For the record,I have never held Real Estate stocks or stocks of Brokerage firms, whose values in my opinion may never ever reach their all time highs, much like the Nasdaq post 2000. I do believe that the broader market and certain stocks in particular, appear to be oversold here, so I am not a seller at these lows.
I am compiling a list of stocks I would like to buy, and am also considering investing in Index funds to play this oversold situation, for a bounce.
But as always, I will continue to add to gold positions on declines, and will use any significant stock market declines that trigger margin calls and cause selling in gold, to do so.

Lastly, as my disclaimer says 'Investors must carry out their own research & make their own informed investment decisions, using qualified independent advice. Always invest with an adequate margin of safety and know your own investment risk profile. Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities nor investments.'