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!

Recession is on (officially!)

So it is official. Atleast 4 of the major Economies are in recession - US, UK, Eurozone, Japan. Very soon, more will join this group. The urgency shown by the Governments and by Central Banks has shown little positive results so far.
I think the speed of this Tsunami has possibly left little time for Governments to think through. Eventhough rumbles in the nature of Bear Sterns and others hit the world before September, it seems that the post September 15 events (just about 2 months) were the watershed events-the letting go of Lehman must be rankling the Fed so badly. Until October the Fed has been grappling with the fallout of the Tsunami and as the US went through an election, it has been surprisingly inert, I mean on the fiscal side. Otherwise, what explains inaction on the Auto sector; the large employment is attraction enough for a politician to act.
The US also seems to have tied itself up with TARP. The freeing up of the Credit markets in itself can only push money market rates down across. Since markets expect the Fed to reach its zero rate (0.25%) what next? In the face of the phenomenal risk aversion and as more economies tumble down and demand is destroyed, why are Governments not taking fiscal steps?
The problem is that though the problem has built up over some years and has been assuming a shape and size in the last 15 months, the full force on the economy has been felt in the last few months. The size and the regularity of the problems have surprised Governments. Central Banks, with their clear heads (and objectives of growth, inflation, employment) have moved first, obviously with helpful prodding from Governments. But, what seems to be scarce is governmental action.
It would seem that Governments are so poorly prepared to deal with something like this, individually or collectively. But, if we were to step back and have a relook it is clear that every solution is itself quite complex. Since demand is yet to be fully destroyed, and employment has not really plummeted very severely, when recession is still at the shores of advanced nations, there has been such limited steps from developing nations. The developed nations themselves are unable to break free of their capitalism - they think the steps from Central Banks are adequate. The problem is of course, deeper. Developed countries have lived off the demand from developing countries. Since the latter are beginning to suffer GDP falls, developed nations will quickly discover that pushing the string will lead to nowhere. Until markets stay in a panic mode, funds flow into developing nations will suffer and consequently the vicious circle continues. It is my guess that the way out is going to take a few quarters.
Meanwhile, if you were to analyse the above, the following ideas must appeal -
a) the dollar is possibly close to a reversal
b) emerging market currencies would have to strengthen
c) export growth from emerging economies will have to suffer
d) fiscal health of all nations will worsen; but, as it happens usually, I suspect the developing economies will have to pay more for this
e) steeper yield curves will win respect