New Lows all over the world .... see further slide in India ....

As we have been maintaining time and again, we are still to see the worst. The bulls will have to wait for at least another six months before they can really assert themselves.

There appears to be only one solution left to the Central Banks across the world to get out of this mess - print more currency. With inflation likely to remain in control, they will find enough support of the economists to justify printing more currency. Otherwise interest rates will start rising putting more pressure on an already beleaguered financial and economic system. The problem gets postponed to another time, another government and another set of people.

India appears to be a bit insulated from the problems and that gives us reason to be optimistic of a turnaround SIX months from now - a timeline that we had originally indicated in July 2008.

We mentioned two stocks last week - Reliance Infra and Bartronics. Reliance Infra has now declined to more attractive levels and is likely to be available at a good price in the next few days. Bartronics is good, but the problem is its weak balance sheet. And that probably is the reason why it is available at a low PE multiple. It is a stock that one should keep in radar, to be bought after the markets have bottomed out. It also has a substantial US exposure, which could present all kinds of problems in the near term.

Reliance Industries is another stock that has been strong - thanks to the KG basin news flow. However, rumours have also been going around about the huge losses that the group has incurred in the derivatives market. We don't know how much truth is there in this, but there is generally no smoke without fire. So here too one can wait for a while before taking the plunge. It is a much safer buy closer to 1000 levels or after a few months, when more bad news gets priced in. If there is any truth here, it has to come out pretty soon.

The conservatism of the Indian banking system is paying off for us. The crazy derivative instruments created by the over smart investment bankers are finally devouring the banks. The debt and equity markets provide different risk return profiles. Unfortunately, the investment bankers have left no difference between the two - debt has become as risky as equity and that too for marginal returns. The government has played into their hands by keeping interest rates too low - no reward for saving. All investments became risky and this is the price that has to be paid. We are seeing the same thing happen here as well. The only fortunate thing for us is that we don't have a deep derivatives market. A simple blunder that continues to be perpetrated in the name of economic revival - so the problems will keep recurring every now and then.

Vivek Bhargava

US Stimulus package through ... Interim Budget today ... nothing much to go after this ....

The stock markets have been rallying so far on all kinds of false expectations being built in the minds of investors. Several stocks had been pushed up sharply prior to the Railway Budget and see what happened. Same thing has been done for the Interim Budget, which is to be presented today. And the result will be the same.

The US, European and Japanese markets have been struggling and the possiblity of a big sell off when crucial support levels are breached will create panic here too. The $787 billion bailout package will not be enough according to most analysts. No one wants to talk about the price at which toxic assets should be taken out of the system. At current prices, most of top US banks would turn insolvent and a higher price will be difficult to justify to the tax payers. Interest rates in the US have also become difficult to handle. Most economists expect US to print currency, which will be highly inflationary, and only postpone the problem by a few more years.

The restrictions on H1-B hirings by US companies that seek government funding is likely to negatively impact on our software business. Why this restriction, beats us? The loss of jobs is mostly in other skill-sets, and this restriction is not going to be of any help, but then a mix of politics and economics is what compounds problems. Also, H1-B visa hirings ensure spending in the US iteself. If this move were to encourage more off-shoring, then it would be even worse for the US economy.

The decoupling theory has come back again. Chinese market has risen by 35% or so from the bottom and our markets too have been holding. One can certainly say valuations are cheap for the small and mid-cap companies, but to say that valuations are cheap in the large cap companies is definitely not correct. In the small and mid-cap companies the major problems are illiquidity, transparency, poor information flow, accouting issues, weak balance sheets, etc. The ones that do not have these problems aren't really that cheap. The operators are at play, and they are using rumours and volatility to their advantage to lure investors.

On company specific front, Reliance Infra and Bartronics attracted our attention. Reliance Infra announced another buyback program for purchase of Rs. 700 crore worth of shares over the next two months at a maximum price of Rs. 700. They seem to have enough confidence about their liquidity position and that's a big positive in this environment. Bartronics has bagged a project from Delhi MCD to set up 2000 kiosks on a BOT basis, from which it expects to earn revenus of Rs. 5000 crores over the next 9 years. It is an interesting project, which might be emulated by other State Governments throwing many more opportunities. Both these stocks present a good investment opportunity on declines.

The markets are poised at critical resistance levels. An extremely bad Q3 had to be followed by some semblance of recovery - both in price and volumes. This is what we have seen from the January data and it has helped the markets to stabilize and regain some of the losses. But sustainability of these numbers may get questioned again when the February data starts to come out in March.

We believe that there is still time and a fall is imminent sooner than later. This is the time to start working on your shopping list for the next discount sale!!.

Vivek Bhargava

Frauds make money for investors .......and it's not just companies that do them.....

Well, this is another way of looking at it. As we have mentioned in our earlier articles, fraud is always behind every bull market. Satyam may have been at one extreme end, but is there any doubt that it made money for the early investors. Is there any doubt that the dotcom fraud, in which both the entrepreneurs and analysts and big investment bankers were equally involved, was a windfall for the investors who got in early. The commodities boom, especially the last stage in which the fraud was perpetrated by the analysts and investment bankers, was also a windfall for the early investors. The real estate story was another joint effort of the promoters and the market players. Promoters used shady accounting practices and market players invented new models to justify crazy valuations.

Greed is at the core of capital markets and that's why frauds are an intrinisc part. In an earlier piece, we had warned readers to wait for frauds to get uneartherd during bear markets. when the abitlity to carry on the fraud becomes increasingly difficult.

During bull markets it's very normal for promoters to fudge numbers to show fantastic growth and profits. That's when they want to sell shares, either from personal account or from the company - most of them don't care whether the money comes into their account or into the company. It's theirs - that's how they view it.

And now the reverse will happen. You can see promoters buying back shares, or companies buying back shares. To make investors sell them, they will now deflate the profits and even show losses for the next few quarters. That's the cycle that keeps repeating. As long as you work in this cycle, you will make money. The names keep changing, the investors become wise to old names, but new ones keep coming. These are the companies that give you maximum returns on the way up and take away everything from you on the way down.

So fraud, from any quarter - be it a company or a market player - will help you make super returns as long as you can recognize them for what they are. Atleast 500 companies would have gone public from Hyderabad alone over the last 15-20 years. How many good ones are there now?

Bear markets give you the opportunity to pick and choose the good ones at your own value and in your own time - so make the best use of it. This is where you can pick up good multi-baggers, but have patience. We are not yet through with the bear market.

Vivek Bhargava