Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Charts & Analysis

Market hits 16K, Dollar below 40 and I have Madras Eye

Sorry for not posting this news yesterday – I’m down with conjunctivitis and staring at a white screen has been a little difficult.

The Sensex has hit 16,000! Great moment to rejoice! Break out the champagne or exchange barbie dolls (ala CNBC TV18, and the exercise even had commenters like Sudarshan Sukhani demand it). This is the beginning of the euphoria, the madness that works wonders in big bull markets. I don’t like to say “I predicted this” because predictions are stupid and wayward. But I do want to say this – the euphoria is visible, and if you are an investor you should be extremely wary.

This doesn’t mean you should miss the bus. There was euphoria in the US in 1996 – that is when Alan Greenspan uttered his famous words “Irrational Exuberance”. The DOW was around 6500 then, and it never has come down that low since. Even after 2000, the low was 7000+ – meaning, if you had listened to Greenspan and sold, you would be no better off even at the lowest day when exuberance had gone.

So my funda is to ride the wave but stay anchored to shore. A rising tide will lift all ships, including the very stupid ones, and when the tide goes away the saying goes that you find out how many clothes people are wearing. My theory is: When the tide goes away you should be lazing on the beach.

All that the above means is: Maintain strict stop losses, and don’t stay in cash. Invest in moving stocks, and the fast moving ones. I put some money in Suzlon before I left (at 1381), and it’s at 1500 today, about 10% higher. My Reliance stock – which I bought at 2012 before I left is nearly 2200 today, another 10% there. I lost some in United Spirits – bought at 1848 yesterday and it’s at 1760 or so, close to my stop loss but not there yet. Still, I’m net up – and Bartronics has added on another little bit, and so has Kamat Hotels. No point asking questions why these stocks are rising – there is no real reason for them to – but I’m planning to make some money while the fever lasts.

Why I think this is irrational exuberance (as compared to rational, which is a far more understandable thing) is that stock markets are necessarily short term in outlook and will look at one year forward, at the maximum. Interest rates are high, growth is slowing (industrial output was far lower than earlier), and the global economies are showing signs of calming down.

And most of all, the dollar is below 40 – it was at 39.9 when I last checked. That’s a serious loser for tech stocks, who will have to do really big moves to try and get their margins back. This probably means the end of the rapid salary hikes to staff, and IT/BPO is what has spawned huge interest in realty stocks and auto. Meaning that less houses will be sold (combined with high interest rates) and auto will continue to be hit.

Oil is at an all time high – above $80 – but this is partially cushioned by the falling dollar. Eventually the dollar slide will stop (as exporters complain and RBI steps in) and the rising prices of oil will hit us, meaning losses by oil marketing companies (BPCL, HPCL, IOC), further hits to Auto since the government will be forced to raise oil prices a little bit.

Today we will ignore these factors, because today is not a day to think of bad things. These always appear AFTER a crash, mysteriously vanishing during an upswing. So while no one cares about them – enjoy the ride. But remember there is a big downward move against you and plan against it.

Some people say RBI will reduce interest rates. And the fed rate will fuel the Indian economy. I don’t think so. Firstly the subprime problem isn’t over – it’s just temporarily out of whack. Inflation will come back and Bernanke will jump on the rates again. And given oil prices today, RBI’s move to lower interest rates will fuel inflation and so will a oil price hike in India. Remember that Chidambaram is going to be less worried about a stock market than inflation when elections are looming close; the life of an interest rate cut is going to be small, if it happens.

Will the RBI control the dollar back to Rs. 40? Well, considering that companies like Tata Steel, Bharti, Reliance etc. make huge foreign currency gains on their foreign loans when the dollar slides, the argument will hold both ways – it looks like the government is trying other stuff rather than controlling the rupee, like giving exporters sops, not charging them service tax etc. So the dollar slide will (and must) continue.

And finally, will the market move up> I certainly think so. This is the time to get money into the market and watch the ticker at the end of every day, ensuring I get out when my losses are minimal.

Note: This is risky. I am doing it, that doesn’t mean you should. Don’t try this because I am, for I am willing to lose money. Your money may be more sacred.

Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial