Independent Directors Resign from Satyam Board ....

Satyam drama has raised issues on corporate governance. Not surprising because the markets only focus on what they want. To us the crux of the issue is the role of Independent Directors. The media has taken-off on the independent directors of Satyam and most of them have resigned. Is the media justified in flaying the independent directors? Are investors right in assuming that Independent Directors will fight for the right thing?

The key is can Independent Directors be "motivated" and "independent" at the same time. If not, aren't the expectations too much from them?

Let's first see why people join the Boards of Companies to become Independent Directors - different people have different reasons - but some of them could be -

• adding to their status
• perks that help you get free business class trips to India.
• hope that they can leverage this position to further their own business
• in some cases, pretty decent income as commission on profits
• relationship / friendship with the promoters

Most of these goals are attained by "joining" and "continuing" to be on the Board. Since they have no financial gains from being on the Board, they really have no serious interest in the Company's affairs. The benefits they were looking for will keep coming to them as long as they are on the Board.

Now let's look at this from the Company's perspective. Why does it want "some people" to be on its Board as Independent Directors. Again many reasons, but some of them could be -

• Compliance requirement to have a minimum percentage of independent directors.
• Eminent members on the Board to increase the Company's stature.
• Professional advice.

The Directors are generally brought on to the Board by Promoters. The Promoters are happy to have people on Board so long as it doesn't cost much for them and they are benefiting from this relationship in some way or the other. And most importantly, as long as they are free to do what they want.

So both, the Directors and the Company, get what they want and do not want to rock the boat.

Bigger companies like Satyam may be following good Board practices (not the same as good Corporate Governance) - proper notices, Agenda, regular meetings, circulation of minutes, etc. Forget good corporate governance; there is a vast majority of companies that don't do any of these basic things.

The Satyam episode is likely to be a wake-up call to all independent directors who have till now assumed that they have nothing to lose. Several questions will come to their minds and make them rethink on their role as an independent director.

• why are they on the Board of the Companies?
• what benefit are they expecting / deriving from these relationships?
• what are the legal responsibilities?
• am I really competent and knowledgeable to help in key decisions that are taken by the Board?
• is it worth being responsible for something on which they have no control?
• is it worth taking the risk of being pursued by ED, ROC, Courts, Police, Media, etc?
• is it worth being hauled up in public or by media for actions of the Board, especially for decisions which they did not like but did not officially record as dissent to keep the good relationship going?

The media, investors and all regulatory authorities are of course right in expecting that Independent Directors will take the right decisions. After all it is their duty and responsibility. So what if they are not benefiting in any way!! Even If they have chosen to do this as a social service, they are still responsible.

ONE CANNOT AVOID RESPONSIBILITY FOR DECISIONS TAKEN AT THE BOARD MEETINGS WHERE THEY WERE PRESENT - THE RIGHT TO DISSENT WAS ALWAYS THERE - AND SO WAS THE RIGHT TO RESIGN.

THE CHOICE IS THEIRS. Most promoters cannot accept dissent and therefore it creates rifts and spoils relationships. After the Satyam episode many independent directors may choose to resign from Boards rather than create unpleasantness in their relationships.

AND IF THEY HAVE SOMETHING SIGNIFICANT TO LOSE, THEN THEY ARE NOT REALLY INDEPENDENT, ARE THEY?

Vivek Bhargava

Just when most people were turning bullish ... the market slides

This is the way of the markets and that's the reason why we believe one should not mistake this for a reversal. The market is still bearish and we are going to retest the lows sometime in next quarter, which is not too far away. Most of the positives are already factored in and therefore one should not become bullish based on them.

In an otherwise dull market, Satyam drama was one of the most intriguing ones from the capital market perspective. What were the Rajus thinking when they decided to use Satyam cash to buy their stakes in group companies? They have been fairly capital market savvy, and so it's hard to believe that they underestimated the market reaction. Perhaps it was personal greed that clouded their judgement. And god knows what their Board and Advisors were doing when this decision was taken unanimously!! It takes several years to build a reputation and very little time to ruin it. A good lesson for the others though!!

The markets are finding it hard to go up from the current levels despite several positive developments. So it is possible that we have seen the peak of this particular rally. Though we will see a bounce but it seems unlikely that we will cross it. We stand by our timeline of 10th January 2009 as a possible turning point where the ongoing rally will reverse. A solid bottom will be formed in the next fall.

Vivek Bhargava

More and more people turning bullish ....

The positive triggers keep coming to negate the effects of dismal news on any front to ensure that hope is kept alive and the markets don't go into a downward spin. In the last week of October we had said that the OCTOBER LOWS WILL HOLD IN NOVEMBER AND DECEMBER and the rally will continue till the second week of January 2009. We are now into the fag end of December and there is no danger of the lows being violated. The breadth has been good and there has been a lot of insider buying at lower levels. We expect this rally to continue upwards till 10th Jan 2009. The higher we go, the more dangerous it will become.

• Liquidity seems to be easing and interest rates are coming down.
• Inflation is going down as demand is evaporating.
• US has bailed out its auto firms for the time being.
• Japan has cut interest rates and is pumping funds to capitalize its banks.
• Indian government is releasing its stimulus package in instalments.
• Oil price has cooled off again despite OPEC production cuts. This is a big plus for the Indian Government because it has taken away the oil subsidy burden off its head for the time being so that it can take care of its other commitments.
• Rupee is appreciating and that is aiding investment flows into the markets.
• Obama is planning on a huge $850 billion stimulus package and also planning efforts to avoid 3 million job cuts.

The earnings for the current quarter will be pretty dismal. The outlook beyond that for the next few quarters is still uncertain and gloomy. This means that we will definitely see another fall, which could test the earlier lows, after the current rally has matured fully by pricing in all the positive news.

A lot of people are now turning bullish with targets ranging between 12K to 13K. The peak for this rally will be at a point when it almost makes you believe that the bear market is over and a bull market has begun.

So be careful not to get caught in this rally!! It is a bear market rally.

Vivek Bhargava

Market Resilience signals continuation of rebound atleast till 10th Jan .....

On 28th November we had mentioned that the market valuations are attractive and the indices could rebound by 15-20% led by the commodity stocks. That has played out so far with stocks like Sterlite (+26%), SAIL (+17%), Tata Steel (+40%), Reliance(+15%) and Reliance Petroleum (+7%) have moved up significantly. Obviously it han't been a one way upward journey, but still the gains were pretty swift and substantial. The only ones that didn't gain from our list were the aluminium stocks and the reason is that they had already recovered 30% from their October lows. There is quite a bit of steam left and we think these stocks have some more distance to go.

The sensex is now at 9690.07, having risen about 7% since 27th November. Given the market resilience last week and particularly on Friday, we think the market will continue its upward journey atleast for another three weeks. Again it will not be a smooth journey, but in the short term the trend is positive.

There are several positive triggers that can help this upward journey continue:

• Bailout of the US auto majors - Ford, Chrysler and GM.
• Cut in US interest rates by another 0.5% on Tuesday.
• Second stimulus package by the Indian Government.
• Interest rate cuts in India.
• NAV propping by funds at the quarter / year end.
• Chinese government's decision to increase money supply to fight recession, which will give a further boost to commodity prices.
• Appreciation of the rupee to 45 levels as dollar loses value.
• OPEC plan to cut crude production in a bid to push up oil prices (meeting planned on 17th Dec).

There WILL be a lot of action in several midcap stocks, especially those in the F&O space. These stocks can give as much as 30-40 percent returns in the next four weeks.

Every bull market has its share of fraud companies. They somehow declare fantastic results and manage to give the most spectacular returns on the way up. Investors typically chase them on the downturn because they appear to be cheap. These are the ones that do most damage to our portfolios. Fortunately, the bear market filters them out and you have a clean lot at the end of the bear market. Give another four quarters and you will know the difference between the good and bad. Till then stick to companies that are old with proven track record and have size and liquidity.

Good luck!

Vivek Bhargava

DISCLAIMER:The views and opinions expressed here are strictly mine. In addition, my thoughts and opinions change from time to time. I consider this a necessary consequence of having an open mind. I do not undertake responsibility to update all my thoughts and opinions on this page.The information contained herein is from publicly available data or other sources believed to be reliable. I do not represent that the information contained herein is accurate or complete and it should not be relied upon as such. The user assumes the entire risk of any use made of this information.Investors should obtain advice from their own tax, financial, legal, and other advisors and only make investment decisions on the basis of the investor’s own objectives, experience, and resources.No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this page.

Will the Stimulus package stimulate??

Finally the stimulus package was announced by the government ... 30K cr or around $6B. The size is insignificant when you look at the packages announced by many other countries. RBI has also announced another repo and reverse repo rate cut by 1%. The idea is to make borrowing costs cheaper and also provide some relief to the industry. The thrust is on infrastructure spending, especially on the highways sector. The chances that it will stimulate demand are negligible.

Government spending is always a key factor in coming out of a recession. And how the government does that to make its spending most effective and also keep a check on fiscal deficits is the key challenge. If the government comes in too soon, it will exhaust its war chest before the real problem hits and the only beneficiaries will be the smarter players who can walk out with their money and profits. It would be fool hardy for the government to spend money on infrastructure when the commodity prices are still too high. Despite the correction most commodity prices are still fairly high since a part of the fall has been negated by the depreciation of the rupee. Creating infrastructure at competitive prices is important to maintain India's competitive edge. Doesn't it seem surprising that the benchmark for 1MW was Rs. 4 crore even in the mid nineties. And even after ten years it remains at pretty much the same level despite most costs having gone up quite significantly. No wonder India could never produce power at internationally competitive rates.

This recession actually provides the government an opportunity to adopt technology in a much bigger way than before. Apart from increasing the transparency levels, the bigger benefit will the higher multiplier effect that technology spending generates. The last five years are ample proof of that. The increased prospects of a buoyant economy will raise the prospects of capital inflows for infrastructure. Private sector spending will be far more efficient that government spending. The qualification norms for any type of direct spending should be stringent to ensure that only solid players are given the business opportunity. Otherwise it will mean money spent on nothing .. fuelling only the parallel economy.

The markets have gone up by more than 300 points. This has nothing to do with the stimulus package announced by the government. It's more because of the sharp jump in all Asian markets. We had mentioned about the commodity stocks sometime back. Their price behaviour subsequently has been in line with our expectations. Globally, the markets are looking for an excuse to give a rally. Further downsides will be likely only in the first quarter of next year. Till then a rally of 10-20% at the index level can be expected. The turning point is likely to be around 10-15 Jan 2009.

Vivek Bhargava.

DISCLAIMER: The views and opinions expressed here are strictly mine. In addition, my thoughts and opinions change from time to time. I consider this a necessary consequence of having an open mind. I do not undertake responsibility to update all my thoughts and opinions on this page.

The information contained herein is from publicly available data or other sources believed to be reliable. I do not represent that the information contained herein is accurate or complete and it should not be relied upon as such. The user assumes the entire risk of any use made of this information.

Investors should obtain advice from their own tax, financial, legal, and other advisors and only make investment decisions on the basis of the investor’s own objectives, experience, and resources.

No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this page.

Terror Attacks ... markets have become resilient

The frequency and intensity of terror attacks have been going up over the years and in some way markets are developing an immunity to these events. The negative effect, if any, will not last long. What's more important is the effect the terror that is in the minds of the financial markets from the past few months. And the culprits of those events are in that sense much bigger terrorists!! They have caused much bigger damage, including destroying lives of several innocent people.

The last few days have seen continuation of announcements of steps to arrest the financial meltdown. China announced a steep interest rate cut in a bid to arrest the slowdown. European Union announced a $260 billion stimulus package to boost the economy. As we said earlier, the size of these bailouts only indicates the extent of damage that is being created. Just a while ago all the government were concerned about rapidly rising commodity prices and now they are worried about deflation. The shift has happened in just a few months - most commodities peaked in July 2008 - just four months back!!!

A look at this table will tell how some of the big Indian companies have lost in just two to three months. Tata Steel lost more than 70% in just two months, when the indicies hit a low on 27th October this year. Most of these stocks haven't recovered since then.

We expect the bailout packages to push up commodity prices a bit, which can push up these commodity stocks. And having lost as much as they have done in such a short time, the stocks may see a decent bear market rally, which can push the indices by as much as 15-20% in the next month or two.

We think the market has seen an intermediate bottom for the time being and new lows are unlikely for the moment. The markets may move sideways and move up gradually though it is unlikely to gain in confidence. The next turnaround date is likely to be around 10th January 2009. A fresh fall may start around that date till then it is going to be all right.

The risk of going long remains high. Avoid shorts for the time being. Look for shorting opportunities at higher levels.

Vivek Bhargava

Inflation declines unexpectedly to a six-month low of 8.98%.

Is it good or bad for the markets??

We think declining inflation numbers are bad news for the markets because the fall is entirely due to vanishing demand. Inflation upto a point had been good news for the markets because it always indicated strong demand unmatched by adequate supplies, giving businesses an opportunity to make extra profits. Rising inflation actually pushed up the indices and the entire rally of 2007 was due to inflationary situation benefiting corporates.

Now we are witnessing a reversal in demand, and supply suddenly seems to be too much, resulting in a crash in commodity prices and therefoe declining inflation. But we don’t think the downcycle has played out fully.

While, during the upcycle companies were announcing mega expansion plans, now they are being forced to defer / cancel those plans for two reasons: decline in demand and shortage of capital.

Declining inflation will certainly mean reduction in interest rates over a period of time, but that does not mean funds will be easily available. Companies which have strong balance sheets and have been prudent in their capex plans will certainly be benefitting, but companies that have overextended themselves will get into a big mess going forward.

We stand by our reading that the bear market still has a long way to go. The markets will turnaround only when no has any hope left and everyone is sure that the downturn will carry on for ever!!

Our good wishes are with you, and we hope that you will be able to tide over this phase comfortably.

Vivek Bhargava
(For taking this discussion further please contact me at wealthbridgeindia@gmail.com)

DISCLAIMER:

The views and opinions expressed here are strictly mine. In addition, my thoughts and opinions change from time to time. I consider this a necessary consequence of having an open mind. I do not undertake responsibility to update all my thoughts and opinions on this page.

The information contained herein is from publicly available data or other sources believed to be reliable. I do not represent that the information contained herein is accurate or complete and it should not be relied upon as such. The user assumes the entire risk of any use made of this information.

Investors should obtain advice from their own tax, financial, legal, and other advisors and only make investment decisions on the basis of the investor’s own objectives, experience, and resources.

No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this page.

Financial Tsunami reaching Indian shores ……

It’s now a few months since I wrote my thoughts about the markets and now I am being asked by a few of the readers whether we have now reached the bottom. As I said earlier, the beauty of a bear market is that bad news comes out of the blue just when you start thinking the worst is over. Who expected a virtual collapse of the financial systems in US and Europe? The problem is whom do you trust – because no one will tell you the truth. We will be too naïve if we expect the Finance Ministers and Central Banks to tell us that there are problems and things can go bad. Analysts? Most of the guys who come on TV are telling you one thing and probably doing another.

So what should one do now? While the indices have lost 50%, stocks have eroded by 80-90%. What should we do now – buy, hold or sell?

Cracks appearing in the Indian financial system ….
The drying up of liquidity in the Indian financial system is more out of fear than real problems with the banking system. Of course, during the economic boom over the last five years, banks and financial institutions would have made bad lending and investment decisions. And bad financial decisions show up over time, not immediately. And the deterioration accelerates when the economy cracks. US and Europe are clear examples of this. When growth is fed by asset bubbles, it is unsustainable and I think we are going to experience it going forward.

The urgency with which CRR has been cut by 2.5% and a liquidity package for mutual funds has been announced is a clear indication of things turning bad. I do not know if this is going to solve the problem, but I do know that the risk aversion is going to return in a big way and people will behave differently when that happens. And no amount of cajoling by the government and RBI will help.

The financial system and industry have got used to easy and cheap credit and have made big plans accordingly. Now equity and debt are going to be equally difficult to raise, creating financial problems all over the economy.

Working capital inadequacy likely to play havoc …
People in industry know what this means. Elongated receivables cycles, piling inventories, increasing risk of bad debts and most importantly the risk aversion of banks will take its toll on the growth of businesses and in some cases we are even going to see sharp decline in revenues and profits.

Falling commodity prices to create a deflationary environment …
After grappling with inflation (which was hurting the consumers), we are now likely to witness a deflationary environment that will negatively impact the topline and bottomlines of companies from price erosion. All companies that are in the commodities business will see declines in revenues because of shrinkage in volumes and decline in selling prices. The combined effect will be a steep decline in profitability. By commodity business I mean every business where the selling price is linked to its key raw materials.

Real estate bubble about to burst …
It’s been a while since people have been talking about it, but the prices have not really tanked yet. The builders, who managed to raise a lot of equity this time, were not desperate. But the funding options for real estate players are drying on all fronts. Equity is out. Loans from banks are out. And there is no easy foreign money available. They will now have to again depend on private financing, which generally comes at 24%+ per annum. Some of them are reported to have borrowed at such levels.

And where is demand going to come from? The software guys who led the end consumer demand at exorbitant prices are no longer preferred as there is uncertainty over their careers. Profits from stock markets which create demand at the peak of a bull market has vanished. Demand from real estate players who are flush with funds from earlier sales of property is down to trickle.

So we have a perfect scenario for our own meltdown in this market – exorbitant price levels, low demand, increasing supply and absence of easy credit. It’s about to happen any time now.

Cash is king…
The best thing to do is to hold on to your cash and not rush into making investment into stocks or any other asset class. Even gold will be vulnerable to declines as losses start mounting with declining asset prices. This is going to be a prolonged bear market and stocks will be available really cheap. I don’t know how people have forgotten that stocks were available at 3-4 PE multiples until 2003 and even large caps were available at 8-9 PE multiples. Are we anywhere close to those levels for some of the major ones yet – Reliance or L&T or NTPC? The answer is NO! So, given the overall economic environment, we may have a long way to go down before things turn around and confidence returns.

Vivek Bhargava
(For taking this discussion further please contact me at wealthbridgeindia@gmail.com)

DISCLAIMER:
The views and opinions expressed here are strictly mine. In addition, my thoughts and opinions change from time to time. I consider this a necessary consequence of having an open mind. I do not undertake responsibility to update all my thoughts and opinions on this page.

The information contained herein is from publicly available data or other sources believed to be reliable. I do not represent that the information contained herein is accurate or complete and it should not be relied upon as such. The user assumes the entire risk of any use made of this information.

Investors should obtain advice from their own tax, financial, legal, and other advisors and only make investment decisions on the basis of the investor’s own objectives, experience, and resources.

No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this page.

The Bear Attack ……

The beauty of a bear market is that bad news comes out of the blue just when you start thinking the worst is over. Ranbaxy and Infosys are classic examples. Everyone seemed most bullish on these two. Ranbaxy was holding out nicely while the whole market was tumbling around it thanks to the acquisition by Daiichi Sankyo. Infosys was expected to do well after a substantial depreciation of the Rupee over the June quarter. But the numbers just didn’t meet the market expectations and guidance was muted. The worsening scenario for the financial sector in US and Europe only made things worse. Both the stocks lost over ten percent in just two days.

Bad news follows declines ….
The problem in a bear market (which is backed by economic doom and gloom) is that even the companies that we talk to have little clue about what’s going on. They are not quick to realize the changes that are taking place in the larger picture. None of the companies focus on the bigger picture of the economy since they are mostly reacting to developments that are taking place from time to time. The guidance that they provide to analysts rarely takes into account the macro economic risk factors. Hardly any companies were bullish when the markets ran ahead of the fundamentals in 2005 and I can say that right now hardly any companies are bearish about their business outlook when the markets are going down. Mostly they are surprised at the valuations that are there today. To me it just means that the market expects the fundamentals to deteriorate going forward, even if the companies don’t think so yet. The market is telling us that the bad news is somewhere on the way.

Collapse of the US financial sector likely to impact IT business…
In a situation where India is now so closely integrated with the world, it’s getting more and more difficult to know everything that can affect our economy and businesses. The increased uncertainty means more risk and therefore lower PE multiples. It will be foolish to assume that the Indian economy will move strongly ahead while the world’s biggest economies are in a recession. Failure of financial institutions in US and Europe is bound to create problems for the IT companies that have heavy dependence on the BFSI space for their revenues. Most of them will have a substantial exposure. Whether it happens or not, investor must be cautious and not become overconfident even if the analyst con-calls don’t suggest any problems yet. Past performance is no guarantee for the future when there are dark clouds over the horizon.

Lessons from the collapse of Fannie and Freddie…

Fannie Mae and Freddie Mac have been in the news during the whole of last week. These two companies account for around 50% share of the US mortgage finance market. The problems with these companies are not new. Fannie Mae had reported a loss of $2 billion last year (2007) while Freddie Mac had reported a loss of $3 billion. The sub-prime issue has been in the news for nearly a year now. Bad news kept piling on to push these stocks deeper as the crisis kept escalating to a point where they are being considered by some experts to be technically insolvent. The US government has had to stand behind these two companies to assure investors only because they are “too big to fail.” The smaller ones like IndyMac face closure. Over the last twelve months, these blue chip stocks from the US have lost more than 85% of their value!!

So what do we learn from this?
The more you wait for real bad news to come, the more you lose.

1.The more you wait for real bad news to come, the more you lose.

2.If the clouds are really dark, rain will come. More bad news is inevitable if there are dark clouds on the macro economic front.

3.The third and most important take from this example is, never underestimate the power of a bear market. A lot can be lost. The post-dotcom bust had wiped out the second rung players. Most of the companies had lost more than 80-90% of the value, while even the blue chips like Infosys had lost more than 70% from the top. Even the recent crash of the realty stocks provides a similar picture with many of the smaller players losing 80% from the top, when the financial numbers haven’t even turned bad!!

History repeats itself …

History provides us a good time perspective on bear markets. A bear market typically takes anywhere from 12-18 months from the top to provide a strong bottom. We have just been 6 months into a bear market while some of the other markets have been in a bear market for a little longer than that. So what’s the hurry? We have a long way to go. Let things unfold themselves. As I mentioned earlier (July 7, 2008), the world needs to go through a structural adjustment phase in terms of commodity prices, equity markets, housing prices, currency rates, interest rates, etc, all of which are related to each other. And this process will take time. May be all this will get over by middle of next year sometime to provide a strong bottom for a sustained revival. Till then it is anybody’s guess as to what will happen and how much more we might lose.

The best thing to do…
The best thing to do is to wait out a period of 12 months from the top and then look for companies and businesses that seem to be on a sound footing. Investing at the bottom can provide you great returns with minimal risk.

Vivek Bhargava

(For taking this discussion further please contact me at wealthbridgeindia@gmail.com)

DISCLAIMER:
The views and opinions expressed here are strictly mine. In addition, my thoughts and opinions change from time to time. I consider this a necessary consequence of having an open mind. I do not undertake responsibility to update all my thoughts and opinions on this page.

The information contained herein is from publicly available data or other sources believed to be reliable. I do not represent that the information contained herein is accurate or complete and it should not be relied upon as such. The user assumes the entire risk of any use made of this information.

Investors should obtain advice from their own tax, financial, legal, and other advisors and only make investment decisions on the basis of the investor’s own objectives, experience, and resources.

No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this page.

BSE Sensex down 35%.What to expect now?

Vivek Bhargava

A question that is on every investors mind is what to do now. BSE Sensex has tanked by 35% since the peak of 20869 on 9th January 2008 to a close of 13454 on 4th July 2008. The mid cap and small caps have lost a lot more, wiping out the gains made over the last two years. The problem is should one cut losses and get out now or just wait till things improve.

Deluge of bad news

Bad news has been coming from all directions to make things worse by the day. It started with the sub prime crisis in the US, which led to the collapse of the US financial system, compounded further by a steep rise in the price of oil by more than 50% over the last six months. The world is going through one of its worst periods and the Asian markets have also been caught in this mess.

Various market experts and economists world over have differing opinions on what’s going wrong, when things will turn around and what should be done to overcome this downturn. But there is almost unanimity in the belief that the US markets are in a recession and the world is caught in a stagflation putting the Central Banks of developed economies in a dilemma.

Key points
Any effort to contain inflation by raising interest rates is likely to put the economies into a deeper recession and keeping interest rates down is likely to stoke inflationary fires. Everyone is digging into historical references to evaluate and find answers. In all this one thing is sure, the world needs to go through a structural adjustment phase in terms of commodity prices, equity markets, housing prices, currency rates, interest rates, etc, all of which are related to each other. And this process will take time.

The key points that seem to come out of the various discussions may be summarized as under:

1. US consumer confidence, which is already low, is likely to dip further once the impact of over a US$ 100 billion US economic stimulus package, dissipates over the next quarter or so.
2. Housing prices are falling in the US and are likely to bottom out only sometime next year.
3. Falling housing prices will put more pressure on the banking system in the US and Europe.
4. Credit card institutions are seeing increasing delays in collections from its 52 million customer base whose average credit rollover is around $5000.
5. Most developed economies are believed to be or getting into a recession.
6. Asian economies, which supply goods and services to the developed economies, are also likely to see a much smaller growth rate going forward.
7. Oil prices have been projected to touch $ 200 a barrel by end 2008, but there are varying opinions on what really will happen.
8. With expectations of a high inflation, commodities seem to be the most preferred investment. Equities are definitely considered a bad alternative, while bonds are also likely to lose as interest rates are raised to contain inflation.

Indian situation
In India, we have added problems on the political front. This is the election year and it is widely believed that the government will try to fight inflation, which has already run away from 4-5% levels a few months ago to over 11% now, in every which way possible. Cement and steel companies are being forced to cut prices. Exports of key agricultural commodities have been banned to keep domestic prices in check. The subsidy bill of the government is likely to push up the fiscal deficit – directly or indirectly. Capital has become scarce and costlier. Government spending in infrastructure will get squeezed going forward.

Coming from a situation where corporate India has had an easy going over the last 4-5 years, the outlook must appear quite grim. Many of the companies that had announced major investment plans might be forced to defer them till a clear situation emerges. The increase in commodity prices has been hurting profit margins during the last two quarters and things might deteriorate further in the coming quarters. The crash in the stock market and the ongoing correction in the real estate market, coupled with scarcity of capital, may adversely impact the consumer purchasing power going forward.

Bear grip getting stronger
So whether we look at India or the world at large, the outlook has definitely soured over the last 6 months. The global markets have entered into a bear phase, and going by historical experiences, bear markets can take at least 12-18 months to bottom out. Since we are witnessing a global meltdown, this could be a longer bear market and therefore we might still be quite far away from a bottom.

Considering that the bull market had started in 2003, when the Sensex was around 3000 points in May 2003, we need to get the perspective right. The Sensex had gone up 7 times over a period of 4 ½ years and is still more than 4 times the level it was at just 5 years ago.

The market crash till now has only been on expectations of bad days ahead, but we are still to see the bad news hitting growth and corporate earnings. And when it does, the going for the markets will actually get worse. Bad news has a way of feeding on itself to bring down markets to new lows during a bear phase, and the second phase of the bear market is actually much worse than the first fall, which always seems like a bull market correction.

So what does all this mean?
The answer is never simple and I am not sure if any one can say with certainty. The only thing that is certain today is that the risk reward ratio is not favorable in the foreseeable future. The melt down will most likely continue as the risk appetite of investors keeps going down and the panic increases. This is obviously not going to be a downward sloping straight line. There will be technical bounce backs because of oversold positions and also because market may have declined ahead of the bad news or because the bad news is not as bad as it was expected!!

Having lost more than 20% in just seven weeks, where several stocks have lost more than 50%, the market definitely appears to be oversold for the time being. And it seems to be the case with most global markets. With the earnings season for the quarter ended June 2008 just about to begin, we are likely to see the markets reacting positively creating a fairly broad based rally across global markets and also in India. But let’s not get fooled by this rally. Investor would do well to take this opportunity to withdraw money from the equity markets. Cash is always king in a bear market!!

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