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Commentary, Economy

The Heat Is In The Kitchen


Markets all around the world are crashing.

  • India was down 4%
  • Indonesia: -9%
  • Hang Seng: -5%
  • CAC (France): -5%
  • DAX (Germany): -5%
  • FTSE (UK): –4.6%
  • The US S&P 500 is down about 4% as I write.
  • Gold is down 3% in USD
  • The Rupee went to 49 to a US Dollar today

First, we want to know the reasons. Even if they are ahead of us:

The US is in a mess. The Fed announced that it will sell short term treasuries and buy long term bonds – the 10 year is at 1.8% now, a ridiculously low number. The Fed said yesterday that it sees “significant downside risks to the economic outlook”.Housing prices, though flattening out towards the bottom, aren’t recovering fast enough and unemployment remains high. The dollar is now the image of safety. (I don’t think that’ll last for more than a year more – if you own dollars, you might want to track things closely)

Greek Default: Yes, it is going to default, we just don’t know when. The feeling is that banks are going to be in a soup, largely because there is uncertainty about their positions. It’s only when the actual default occurs that we’ll know, and honestly, you might see markets go UP when that happens.

Europe is in a bigger mess. They have overleveraged banks, they have hugely indebted countries, they have panicky governments that don’t really like each other. They have a loose monetary union without the fiscal responsibilities, because of which no one wants to take the hit for someone else’s mistakes, even if everyone benefited from it. There is either a mega-bailout in the offing or the complete collapse of the Euro (and most of the Euro area banks). Given that Germany and France will probably live through a massive system crash, I believe the latter is more likely today; but you can never underestimate megalomania and the ability of banks to lobby.

China’s slowing. Their early PMIs have been seen going down to below 50 (contraction) and the feeling now is that they’re doing their best to hide real data from the global market. Recent statements show that local counties have taken on enormous amounts of debt, that if assumed by the center (it’ll have to be) will end up being more than their GDP. They have a real estate bust happening.

India will slow down. Say what you will, but our interest rates are designed to slow us down, and they will eventually. The government has become a non-entity – nothing is moving. We have a consolidation waiting, and we will get it – it might result in extremely low GDP growth and possibly take out a number of leveraged players out of the reckoning.

Japan has the fallout of Fukushima weighing on it and a massive debt piled up, the Middle East has people on the streets fighting for freedom, New Zealand saw a GDP growth of just 0.1%.

Enough reasons?

Now let’s shut me up with my gyan.

It doesn’t matter why we went down. This is not anything new, much is known for nearly a year now. What matters is: What Are You Going To Do About It?

ICICI Bank is down 7% and HDFC Bank 9% in the US markets. The Indian ETF (INDY) Is down 6%. We’ll open low tomorrow and the intraday traders are likely to jump on to the short side. We’ll see another leg down before we see a leg up.

I am trading the market down, and I’m looking for good stocks to buy. Pure India consumption stories. There was a great monsoon; farmers will have money, especially after the MSP supported farm economy. They’ll buy bikes and tractors and TVs and toothpaste. I’ll identify but buy only on the way up (who cares if I miss a little bit).

I’m also respecting the trend. This is a strong downtrend. In this there will be sharp rallies, but the big trades will be on the short side. Discipline and stop losses are key.

Lastly, borrowing from the Hitchhikers Guide, do not panic. Everything can wait. I will miss hundreds of great trades, if I had reacted a split second after some news. It doesn’t matter – the idea isn’t to trade for five minutes, it’s to find sustainable trends and stick with them. There is more work now finding good opportunities than ever, because the market gives you too much news.

A recent item said “Markets do very well at handling one crisis at a time, but it loses itself when you get many pieces of bad news together”. It’s now that the panic has set in because of massive uncertainty. Any level of certainty will calm the markets, but certainty will only come after something gives. Expect that over the weekend. Expect large moves. Expect to feel knots in stomachs. The heat is on, and if you’re in the kitchen, you’re going to feel it.


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