Correlation - Dollar and Stocks

An eventful week has passed by. The Dow has seen a strong rally not seen in decades and Mumbai has seen its deadliest terrorist attack. The patience of Mumbaikars is wearing thin and the country has rallied to comfort Mumbai. Hopefully and finally, we may see action to stop this type of senseless violence.

Markets -

The BSE Midcap is now 28% of the all - time high, seen at the beginning of January 2008. The SENSEX is 42% of its all-time high seen almost at the same time.

The relative outperformers have been the Healthcare companies (such as Pharma Companies and Hospitals-they fell only about 38%) and FMCG companies (such as Britannia, Colgate, ITC etc -they fell only about 25%).

The Aut, IT,PSU, Metal,Realty and other sectors fell significantly and are the underperformers by a wide margin. Here companies got hit by the fall in demand,leveraging. They were also significantly overvalued and had to give up their excesses. Another practical way to look at the differences in performances is because the Healthcare and FMCG companies were well established companies which were, with exceptions, sticking to their knitting and conservative in their approach to expansion. The underperformers indulged in excesses - borrowing and spending recklessly (since this happened even during the time when the boom was clearly coming to an end-remember Tatas?).

A look at the markets across the globe reveals that this recklessness was widespread. The evidence that we have in India will look like a reflection of what has happened elsewhere. All this is known today.

The interesting question is this - if India was turning attractive in the last few years which explained the high share prices, then why the great fall in share prices? A plain practical (cynical?) answer is that this is the business cycle, the boom and bust of stock market. But, unlike earlier episodes, the economy has also kept up a nice growth rate. Indeed, until 2008-09 brought upon us the problems from faraway lands, policy makers were talking about grabbing double digit growth.

However, I think this time it is different. I mean the growth story is for real (though it may have been sown by excesses or it may have sown excesses!) and the Corporate sector has become better (as I keep saying). It is different because of increasing local demand and this potential is being well protected as the Government comes out with fiscal and monetary steps. The economy is still promising.

At the current levels of stocks the PEs are about 11 while dividend yield is getting closer to 2 pct. Both are recent low and high respsectively suggesting a bottom is close.

Meanwhile, the currency markets are exhibiting diverse behaviour - the dollar has strengthened back to its recent highs while the Yen (that carry currency) is trying to regain strength. An attempt at reversal of the dollar strength is now visible on the charts. This coincides with a few other reversal attempts and thus demands our attention - the money and credit markets are showing some signs of life, the Dow had one of its large rally in decades(in percentage terms). Across the world fiscal and monetary steps are being taken and these are market friendly.

For India, a small additional evidence is in the form of the decreasing sales from FIIs. This indicator has been very important. So, if the recent behavious of market is analysed from the perspective of FII activity, a bottom can now form given the other positive conditions. Of course, these are still in embryonic stage. Similarly, with the worries on US fiscal coming into the open, the dollar seems to be getting into a top.

Cheers!

Dow, and FTSE - bottom formation? BSE - breaking down?

An eventful week - Central Banks and Treasuries have been playing a major role in calming markets in G7. Finally, markets have begun to take wobbly steps to comfort. Capital has become king and billions are being committed to strengthen balance sheets. Banks have been forced into accepting the funds and with it will come oversight with a vengeance - politicians will be forced to have some control/review.
It wont last long for sure, since that is human nature - to refuse oversight and to demand freedom.

The reemergence of full blown business will of course take time - first step would be complete capitalisation which is inexorably linked to shareholding issues + control issues. Eventhough a full control that results from nationalisation is unlikely, oversight will be intrusive - so we have an area of conflict that will take some effort before comfort returns.
Second step would be to offer depositor (and borrower) protection more widely. A few countries have offered this and now more will be forced into this necessary trap.
Third step would be unshackle the funding and credit markets. No data has still come out to give comfot to banks so that funding can again freely flow. Central Banks will have to concentrate on this, now that the first two issues have been handled.
Lending to non-banks may unfortunately have to come later - since recession plus market disturbances are going to hit corporate profitability and credit rating.

Nevertheless, apparently a first level of support has emerged to support stock indices in G7 - the Dow and FTSE are marginally up this week. The picture for emerging economies is not that good - supports are being broken through. Which seems logical. The problem is essentially a G7 problem and of such intensity that a recession is now on the threshold. G7 countries have been most proactive too and have shown great resolve to come up with solutions. On the other hand emerging economies have felt that the waters of the tsunami would not wash onto their shores and have been blind. Now, it is clear that they will be forced to act. Korea is one shining example of the tsunami effect. The Pakistan Forex Reserves problem (which is similar to the Indian 1991 experience) suggests that some unlikely casualities are going to show up.

Meanwhile, the BSE has crashed through 10,000. However, Banking sector held up quite well. Since so many steps will come from RBI and finance ministry and since liquidity is king I am sure this sector will show good resilience for some time.

The time to accumulate on the Equity markets has begun as Warren Buffet has said. I am sanguine on this because - a)there is a coordinated approach to provide all forms of sops from all Countries b) certain markets and certain sectors have possiby been beaten unfairly and show good opportunities c) we are on the verge of entering into a low interest rate regime when funding gets cheaper and d)governments will now be forced to spend to keep away the demon of rising employment offering good demand conditions and high inflationary conditions that stock markets welcome.