Bear Market seen

So, we are adding more names to the doomed institutions list - B&B, Fortis(?), Wachovia(?). Apparently, everyone is hurtling downwards. How quickly things change? Britain is on a nationalisation route and the US is quietly getting ready to buy up Banks and FIs.
And apparently markets are picking up venerable names, one after the other and pummelling them into mergers, sell-downs and in the process challenging Regulators and Governments to come to the rescue of their institutions - the Dutch and Belgian Governments' joint plan for Fortis is remarkable in this context as is Wachovia's desperation to save itself from the effect of distressed assets.
Undoubtedly, many assets will turn distressed if credit spreads widen. Assets will lose value as fresh prices are discovered by banks forced to sell down. The Paulson plan is aimed at preventing this kind of a rout. As everyone rushes to the exit the price to exit increases and by legislating to buy atleast some (toxic) assets the US is seeking to build a floor and strengthen the foundation so that hopefully valuation of assets improves.
But, if Wachovia has USD 100 billion plus of distressed assets what about the system? How will the situation improve and how will recovery set in? Clearly, this requires co-ordinated Government + Central Bank actions. But, will one Paulson plan suffice? It is a plan that will unravel in instalments. What if we have a couple of fresh cases this week? The stop to the rout can come from a large size plan or by way of effective common plans driven by the might of several sovereigns.
Markets seem to be testing Sovereigns and Central Banks - when will there be a joint intevention and what forms would such intervention take?
Meanwhile, more and more countries in the west are discovering state managed "capitalism". In India and in certain other countries this model has been in existence. The West will now have to learn to run its economies where Government Owned ("Sponsored") Institutions co-existing with Private Institutions. Two outcomes would be keenly observed from here - how successful would such co-existence be, and how soon would the Government be allowed (forced?) to take its profit from such investments.
Also meanwhile, Stocks in India have performed as I expected. We had a good 6 pct plus fall on NIFTY and SENSEX. More mayhem should be expected though initially markets are expected to open stronger on Monday due to the passage of the Paulson package this weekend. But, markets should quickly move to retest the recent lows of around 12,500. I am sanguine that the sensex should hit about 10,500 in one month's time.
Buying may come in once the overseas markets stablise. Indian economy is unlikely to offer great GDP numbers until 2009-10. Many sectors such as Realty, FMCG, Infrastructure etc have to give up their high PEs. I expect a bottom to form when PE of the broad market falls to 14 or lower. Banking may recover the fastest as PEs are already very low.
Two worries loom over the Indian markets/economy - the Rupee will come under increasing pressure if global markets do not recover (and when rating agencies announce any downgrade) or if global institutions do not strengthen. There are still enough negatives in the pipeline globally - unemployment, recession, inflation etc. As Indian economy weakens in the near future, inflow of FII money will be delayed. Inflow of FDI is also likely to be slow while PEs would definitely capitulate. Remember PEs have a short gestation period and many of them have been burnt. Should forex inflows suffer as I expect, controlling the Rupee and the inflation would be challenges. The bear cycle which we entered about 2 quarters ago will have about 4 quarters to go further if the above plays out as I expect.
Stay safe! See you next week!