The markets, which seemed to be coasting along nicely, were brought to an abrupt and steep decline after Satyam news came out. The rally would have otherwise gone along for another week or two, but now there is no chance of it sustaining. Bear markets have this amazing feature of new developments that bring about abrupt and steep ends to bear market rallies. We had been talking about 10th January 2009 earlier and were even thinking that the rally might last a little longer than that, but it was not to be so.
The markets now have a fundamental problem that goes to the heart of valuations. Can we trust the earnings of companies, especially those that don't have a history beyond the previous bull market. Frauds are invetiable whenever the market foolishly (or sometimes through deliberate manipulation) values companies at ridiculous levels. The dotcom bubble was a fraud by the analyst / fund management community on the investors. Several corporates also were party to it. These are the hazards of investing in equity markets. Fortunately we have something called a BEAR MARKET which purges the system. We believe that is exactly what is going to happen over the next 12-24 months. The bear market may end in the next 8-10 months, but it will take much longer for investors to trust companies.
Hyderabad companies have taken another hit on their credibility. Other than a few companies, Andhra Pradesh has not produced comapnies that could grow over long periods of time to become large enterprises. There are likely to many more frauds / failures on the cards over the next four quarters as cash becomes tight and the business environment becomes tougher. Hyderabad companies will have to work that much harder to overcome this stigma.
The crash of the financial industry is to do with the greed of the financial intermediaries. It is not a coincidence that the whole financial system is crashing down together across the world. The biggest culprits are the governments and central banks that have tried to use monetary policies that provided short term fixes and postponed the problems by every few years. What is happening is no different now. Pushing interest rates down to below inflation levels has created a scenario of negative real rates of return driving investors to take risks. The financial intermediaries have pounced on this opportunity and played around with investor money. The demand always is always to reduce interest rates and make credit easily available. No one wants to talk about reduction in prices, which are the real cause of the problem. Instead of allowing things to cool off on their own, the governments across the world have only been dropping interest rates and providing higher and higher money supply, thereby sowing the seeds for a bigger problem every time. The situation is the same all over the world.
The markets will bottom out as the increase in liquidity starts showing effect in a year or two and then we will have another bull run by 2012!!
Vivek Bhargava
The markets now have a fundamental problem that goes to the heart of valuations. Can we trust the earnings of companies, especially those that don't have a history beyond the previous bull market. Frauds are invetiable whenever the market foolishly (or sometimes through deliberate manipulation) values companies at ridiculous levels. The dotcom bubble was a fraud by the analyst / fund management community on the investors. Several corporates also were party to it. These are the hazards of investing in equity markets. Fortunately we have something called a BEAR MARKET which purges the system. We believe that is exactly what is going to happen over the next 12-24 months. The bear market may end in the next 8-10 months, but it will take much longer for investors to trust companies.
Hyderabad companies have taken another hit on their credibility. Other than a few companies, Andhra Pradesh has not produced comapnies that could grow over long periods of time to become large enterprises. There are likely to many more frauds / failures on the cards over the next four quarters as cash becomes tight and the business environment becomes tougher. Hyderabad companies will have to work that much harder to overcome this stigma.
The crash of the financial industry is to do with the greed of the financial intermediaries. It is not a coincidence that the whole financial system is crashing down together across the world. The biggest culprits are the governments and central banks that have tried to use monetary policies that provided short term fixes and postponed the problems by every few years. What is happening is no different now. Pushing interest rates down to below inflation levels has created a scenario of negative real rates of return driving investors to take risks. The financial intermediaries have pounced on this opportunity and played around with investor money. The demand always is always to reduce interest rates and make credit easily available. No one wants to talk about reduction in prices, which are the real cause of the problem. Instead of allowing things to cool off on their own, the governments across the world have only been dropping interest rates and providing higher and higher money supply, thereby sowing the seeds for a bigger problem every time. The situation is the same all over the world.
The markets will bottom out as the increase in liquidity starts showing effect in a year or two and then we will have another bull run by 2012!!
Vivek Bhargava
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