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Commentary

Hammered Down

Welcome to another episode of the Indian Stock Market free falls, where every day is getting worse than earlier. With today’s 6% slide down to 4500, we’re at the levels when the upmove really started, in August 07.

[Actually that’s when I started my trading portfolio and Jan end or so is when I finished it, with the portfolio up around 58%. I’ve sold nearly everything – readers will know that I’ve been bearish a long time now – and it looks like I was right, in hindsight.]

Now is this the bottom? Uhem. Nifty’s P/E is still 19.6, which you might agree is a tad high for the current state of the world. We should be valued at sub 15 levels, which is another 20% lower than here. That is value. Today we are still hoping for momentum.

Bear Sterns, one of the largest US investment banks, nearly went bust. Last Monday the company said, “Bear Stearns’ balance sheet, liquidity and capital remain strong.” On Thursday the stock was around $60 per share, and on Friday it tanked to $30. Today it was bought by JP Morgan for $2 per share.

$60 to $2 in TWO DAYS. What a nightmare. Will we see such a situation? I sure hope not.

Uhm. Orchid Chemicals is down some 38% today, ICICI Bank down 13.3%, and a lot others completely beaten up. It’s not a nice thing but let me say this: this is still a good enough level to get out. Not worth staying on, and there may be a rally after this to help but these are just levels to cash out. Shorting is tough at these levels, you need to look for a strong rally, preferably after this month’s expiry.

Coming to investing: We will soon come to levels where “value” becomes apparent. Please don’t rush in. There is a lot of latent bad news and we need to go through all of those, overreact, take it completely down until there seems to be no hope. And that is the time to invest.

  • Anonymous says:

    >Hi Deepak,

    You have a nice blog. Do you plan to do a post for NRI’s who are willing to invest in India? I’m looking for something like a unofficial guide to start out as I’m new to the market. Or perhaps you know of some other blogs or people I can talk to?

    -S.P. Jain

  • Anonymous says:

    >IMO going buy the past correction trend (55% from top of 1992 & 2000)we might hit the bottom at about 9800.

    And no bull run for next few years. 8 year cycle seems to be playing out well.

    Any idea on which stocks did well in the last downturn Pharma, MNC, FMCG, Agri, Energy, Utilities, GILTs …

  • Deepak Shenoy says:

    >SPJain: I have no plans to write specifically for NRIs but what I write should be applicable to most investors. I know there are restrictions on US residents not being able to invest directly, but you can get in through mutual funds.

    I don’t know of other blogs specifically targeted at NRIs but will post a link if I find one.

    anon: last downturn wise, there were some good movers, like Auto, some Pharma, Agri, Power, Infrastructure etc. BUt this time I;ll put my money on Pharma, and second tier hotels.

  • Nilesh says:

    >From your post
    “this is still a good enough level to get out”
    your are talking about trader or investor?

    Can you please suggest what should a long term investor do now.

  • Deepak Shenoy says:

    >nilesh: traders should be out of longs a long while ago:) No, this was for investors…rallies like today will help to a certain extent. P/E trailing is still 19+!

  • Anonymous says:

    >Hi I would like to ask you that if today the p/e is at 19 and you say it has to be at 15, and then as you said there is a buying opportunity, but wont the p/e go up again when every body starts buying, i personally think its based on the market wave and nothing else as people were still buying at 19000 thousand levels and the same people are staying away even when markets are at 15000 just because of the sentiment and wave is against. what to you think

  • Anonymous says:

    >You mentioned Orchid. I have bought a large bag of Orchid Chem shares today at 116. Markets can be irrational at times, but fundamentally they are always right spread over a period of some years. If they were perfect, there wouldn’t be opportunities to buy and sell, right?

    At P/E of around 4x, this is throwaway price. I will buy more, if the free fall in Orchid continues. Orchid falls under the companies I follow and I like the management and their product though not top of class, does give healthy returns.

    The market in general is still overpriced, but there are opportunities to buy cheap today, which was non-existent earlier.

    Orchid has a good track record. The price of my purchase is well below the lowest price I would have been willing to pay. Unless, the market has access to some inside information, I do not have, Orchid is a very low priced, high value stock today. Even if the market falls below 10K, I expect that Orchid has no more downside left. On the contrary, I even expect to get positive returns, even though markets may fall.

    -Akshay J

  • Deepak Shenoy says:

    >anon1: when the p/e falls to 15 or 12 no one will be buying. That is the time for the smarter value pickers to buy. Remember p/e can stay at 12 for a long time, some two three years at a stretch, but value pickers don’t really care since they have timed the price right.

    akshay: orchid may indeed be a good pick. THe EPS is going to be around 24 diluted, and at curent prices this is less than 5 P/E. THere are some exceptional items there worth 25 crore but even if I take those out, the EPS is 20 or so. Good pick.

  • Manickkam says:

    >I recently invested in the first downturn (when Nifty was around 4900).

    Do you suggest me to get out booking the loss anyway? Is there any way of revival in the market?

  • Anonymous says:

    >What you have mentioned about a 19+ PE being overvalued and that we should be at around 15 – is all theory and the “ideal” case.
    but markets are never at fair value, leave alone ideal values!
    Think about it – if markets were fairly valued all through the year, when would you even think of buying or selling 🙂
    So you can be waiting for a bottom of exactly 15 PE – it may or may not happen. (But i personally feel things will get worse before they get any better – but i dont have any numerical targets in mind!)

    some food for thought:
    Sensex was at 16k in June 2007, and after that around $6 billon came in
    from FIIs.
    Sensex was below 16k yesterday, and still everyone was pulling out their money!!!

    What has changed in the Indian ECONOMY in the last 9 months? Nothing! Absolutely nothing!!

  • Nitin Rao says:

    >It’s a sad turn of events for Orchid. They are now fearing for hostile takeovers as the valuation of the firm has become way too cheap.

    http://www.my2dimes.com/

    Nitin @ My 2 dimes

  • Deepak Shenoy says:

    >manickkam: There may be a way and it might be results next month. I am getting certain indicators of a fairly good result season which may prop the market back up. I know this is different from what I’ve said earlier but this is a very new development and I need to check a few things and confirm in a separate post.

    anon: Of course things have changed in the Indian economy. Dollar has crashed. Gold has gone up. Interest rates are (still) up. Real estate has slowed down. IT firms are downsizing. Banks are getting hit by derivative losses. Corporate growth has slowed. How can you say nothing has changed?

    15 is not the bottom. The bottom may be 12, 10, whatever. Markets overreact on the upside and the downside, and you have to think about which side they will overreact next.

    Nitin: Orchid is interesting fundamentally but there is lack of strength overall. It may be prudent to wait for the next Q results to take on a purchase. Also to see if there is good buying coming in – takeover means good for anyone who buys now!

  • Anonymous says:

    >This same questions are being asked all around the world when the markets (which are interlinked/coupled) are not doing well. Please see the following articles and replies from experts;

    One from CNN-Money

    http://asktheexpert.blogs.money.cnn.com/2008/03/18/avoid-the-market-carnage-stick-to-the-plan/

    another one from New York times;

    http://www.nytimes.com/2008/03/18/business/businessspecial3/18timing.html?ref=yourmoney

    It is clear from the above articles that the fundamental principle is to stay on course and not to panic or get emotional and do the worse thing to your portfolio.

  • Deepak Shenoy says:

    >anon: That is the arrogance of the rich. Let me tell you with all honesty that these people will never tell you to sell. Never. That is stupid, and silly. Sell when the outlook is looking worse. Buy when no one is buying and the outlook is not as bad.

  • Anonymous says:

    >Another good one about Gold.

    http://money.cnn.com/2008/03/06/pf/intelligent_apr.moneymag/index.htm?postversion=2008031218

    Good luck Gold bugs (who are investing at the top).