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Whitewash in 2008…and 2009 ?…are we leading or are we being led !?

2008 has been a poor and humbling experience

At end 2007 all had predicted a continuing upward Sensex and Nifty Trend,albeit with a slower growth rate and little downside to both the Indices…we thought we were Leading…but were actually being led !

It was inconceivable at the time to predict that the Financial and Buisness Pillars of USA will crumble in 2008…Lehman,AIG,General Motors,Citicorp,Bears & Sterns,Merill Lynch,Freddic Mac and Fannie Mae…the list goes on and on…..what follwed was global financial capitulation and devastation

What continues to unfold in 2008 continues to shock everybody

USA is clearly the culprit and it is no longer amusing to read Steve Forbes and Forbes Editor, Tim continuing defending a lame USA and claiming that other countries too are responsible for bringing the World to the Financial Edge….the Epicentre of this Financial Earthquake is USA and the tremors and aftershocks are reverberating around the world 

The Quicksand Capitulation of Financial Powerhouses and leading Corporate Icons in USA ,who were revered as God, is a Black Swan Event ….As the Cover Title of a recent issue of ‘The Economist’ starkly put it “The World is on the Edge “

USA,Germany,England,Japan..all developed nations have declared a recession…all markets are down-commodities,stocks with price trade-offs between Oil,the US Dollar and Gold

So how will 2009 playout for Stocks?….Not very Good

The Hole is too deep and USA continues digging with it’s flawed thinking that supports flawed bail-out plans

Is USA,itself going Bankrupt and Broke ?

There is strong evidence of a deepening Hole in USA…If one has a look at some of the latest US Economic Indicators like the US $ 200 Billion Current Deficit,the negligible Savings Rate of One % ,the Aggregate Deposit base of US $ 415 Billion  with the depository institutions (Before adjusting the US $ 700 Billion TARP Bail-out Plan) and the Corporate Giants in the Banking and Retail and Auto Sectors collapsing or on the verge of doing so and filing for bankruptcy

Removing the Cap on Financial Leverage for the Big Five Investment Banks in 2004 was a crucial mistake….From a cap of 12 Debt to 1 Equity,the banks began to leverage to dangerous plus 40 levels…Cheap Money led to inflated Assets…when the Housing Bubble burst and defaults began scaling up the leverage risk too played up…There is a deterioating quality of assets and excessively High Debts in many US Corporate Giants…this cocktail is made all the more explosive with rising losses

Solution is to deleverage…that is,to bring down the Debt/Equity ratio…How does one do this ? You either infuse fresh and sizeable Equity or you repay Debts or both…your liquidity position is already imperiled and so you need to sell assets to repay debts…the problem is that even the value of your assets as shown in your balance sheet is overstated and need to be continuously marked down considerably to market…Fresh Equity Infusion is difficult as Issues of Trust,Sustainabilty of Business,Valuation and Liquidity have to be overcome

How long will this Deleveraging Process take ?…that’s the Question !….The Hole is Deep…that is now accepted…but how deep is it ?…that’s another big Question !…the process is likely to take years…three? five? more? 

India is not isolated or decoupled from USA

Share Prices of Companies in India continue to fall as Sensex gravitates back from 21200 levels in January to test 8000 levels currently

Prices have dropped below Valuations as indicated by traditional methods of earnings and assets…There is some justification for this…There is a real scare on earnings Growth going forward…In fact a negative rate has been forecast for Sensex Companies Earnings for FY 10 by many…Derating to single digit 6 to 8 times Multiples of Earnings is inevitable…… and any loss will reduce Book Values too 

So if the FY 10 Sensex earnings is to fall below 900 and we take a six multiple,it gives us a Sensex level of 5400 !…oof !…we’re at 8900 today…The next few quarters are going to be very tough indeed for Indian Corporates and the way i see it,only the second half in 2009 may bring in some glimmer of an upward trend,if at all.

So what should we do with stocks we already have ?…I’ll take up this call in another blog soon


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