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Opinion

Mayhem on the bourses!

What madness. Sensex closes around 8600, Nifty at 2550. We haven’t seen these levels for a long long time now, have we? We are now down 40% in a month. Anyone remember the Nifty close at last expiry (less than a month back)?

4100.

Absolute mayhem. This is a typical destructive bear market, but it’s not supposed to happen so fast, no?

A friend called me yesterday. He’s a real guru – the kind that speaks with actions, not words – and he said one thing that made it all come together. Every cycle today is shorter, he said. Information flow, and the ability to act on that information is so easy today that bull markets are compressed into a very small time period. So are bear markets. Who’d have thunk the Indian markets would be down over 60% since Jan 08, within 9 months? Yet, who’d have thunk the markets could go UP 35% in six months (July 07 to Jan 08)?

Shorter cycles means the person who survives is the guy who doesn’t get any of the news. One more thing my friend said was that people read a lot into history and translate times forget the shorter cycles. The 10 year bear market of the 70s may translate only to a 3 year bear cycle today. And stock markets may simply get more vibrant – ups and downs apart.

Less than 3% of Indian savings are in the stock markets. But a lot of our economy depends on stocks. You get retail chains who can raise funds from private investors saying they want to go public eventually. You get jobs because someone somewhere is a darling of the equity markets, and those funds need somewhere to go. You and I get a better life, an easier existence, relatively easy credit, multiple opportunities – all because the capital markets are vibrant.

If the markets need to continue to be attractive – and they are not, today – we need a solution that’s longer lasting. Full rupee convertibility (what better time to start!). Open bond and gilt markets (hello? why isn’t this there?). Listed debt and credit markets – yes, even I will want a piece of the supposedly distressed credit card or personal loan market. I have been hoping this happens, but it’s way too slow. Someone light a fire, please. Wait. Someone just did.

Finally, this is a time to be prepared. Economic recessions cause political catastrophes. And I would heartily recommend that you take your life, find out what’s the worst thing that can happen – loss of your job, your bank going bust, your housing loan being called back, etc. And figure out what you will do if this happens. Just a check list, so then if anything does not happen it is a bonus.

And what of the stock market? Markets are irrational (Someone please bring the random walk theory person here and beat him with hawaii chappals) and will forever remain so. Are they irrationally down? Or are these values that still make sense? The Nifty P/E is now around 11. That’s a historic low, but don’t let that confuse you…think about whether these companies will grow their EPS well going forward. Oh and by the way, current results are excellent. More funny-mentals. Trend of course, is down and going more down. The trend is your friend until it bends.

  • Anonymous says:

    >Interesting reading from Mike Shedlock who has been exact in his prediction of deflation for the last 2 years. He has saved me a ton as I have followed his path.
    Interesting read from him’

    http://globaleconomicanalysis.blogspot.com/2008/10/s-500-crash-count-compared-to-nikkei.html

  • TempleTree says:

    >It is scary. To invest in such a times really call for guts and convictions! No wonder why not many people buy at bottoms!

  • Anonymous says:

    >Till a month back Asia was thought to be decoupled to US/European woes and that they will survive.

    But now it has got coupled strongly and has to race to bottom like DOW/Nikkei has started.

    I will not be surprised if Nifty goes back to 1000.

    Good luck to remaining bulls living in the fool’s Paradise.

  • Anonymous says:

    >When you read stories of average Indians who have lost their nest eggs, one cannot but blame India’s Alan Greenspan (Harvard Educated Fool). This guy believed that FIIs are long term investors and said several times that they have promised him that they are here for a long haul. He opened up the capital market to this mafia. He was their cheerleader. Everytime he kept on saying that don’t panic. It reminds me of Citibank’s CEO Prince statement ” dance till the music stops”. But neither of them knew when it will stop. This FM has no clue about deflation which is engulfing the world and had no clue whatsoever about impending credit crisis. Had he read some well known blogs (instead of listening to his FII friends) he could have saved Indian investors. Will he be hauled up like Greenspan ??

  • Deepak Shenoy says:

    >Anon1: Thanks – great link!

    Anon2: Can’t help but nod. Yet, let us see what happens. Things happen too fast.

    Anon3: There’s nothign wrong with FIIs. They will come and go. The problem lies with us retail investors…we aren’t any match for them. C’mon, just 2% of Indian’s invest in our markets, and we blame FIIs for pulling out?

  • Anonymous says:

    >Hey Deepak,

    Nice blog, However I got a couple of questions

    1. Whenever this bear run stops and markets bottom out, will the bull run start immediately or will it take some time, lets say a year or so to consolidate and then a bull run?

    2. If I want to view intraday chart for any stock or index for a particular day, u have any idea on which site i can do so?

    thanks in advance

  • AGB says:

    >”A friend called me yesterday. He’s a real guru – the kind that speaks with actions, not words – and he said one thing that made it all come together. Every cycle today is shorter, he said. Information flow, and the ability to act on that information is so easy today that bull markets are compressed into a very small time period. So are bear markets”

    IMHO, Information flows, although important, are only one part of the picture.. the only thing they reflect is the speed with which traders react to news/developments.. however, this does not mean that changes in GDP or inflation are happening any faster than they were 20 or 50 years back.. as far as I can see, there’ll still be a considerable lag between shifts in monetary or fiscal policy and their effects on income/inflation/consumer spending figures.. which are the true indicators to cycles in an economy.. I think, what faster information flows create is more short term volatility without affecting the long term super structure of economic cycles..

  • Gunjan (gunjan.us@gmail.com) says:

    >The whole perspective of stock market among typical Indians is very different from what it is in US.

    Many (if not all) takes stock market as a place to ‘play’ with some money, win some and use it elsewhere. Its no different from what one would expect from some Vegas casino.

    That’s why many never look beyond market. How many % of investors really think or care about the company they are investing? I feel, very few. What they see is front end, the market, the index, sentiments, trend analysis, CNBC so called experts etc. to make up their mind and take their decision based on that.

    For many Indians, even today, news is not what really happens; news is what TV channels show!

    That’s exactly what happens with business, companies or market news. Who has time to do value research or fundamental analysis? Apples at 40 Rs/kg is still cheap (so what if deteriorated quality) then 80 Rs/kg. Same logic is applied by many, to shares.

    This is the primary reason why our market is one of the most volatile market. People still do not have confidence on the market and trading as a system.

    I fully agree with Deepak, if we have majority of investments coming from domestic people; be it retail, MF, trusts, employee funds etc.. then we would have more trust and stability in the market.

    I read something very good on valueresearchonline, “It’s only in the medium and the long-run that stock prices follow the real economy–in the short run, they only follow the money” – I think that exactly is what happening right now.

    Its tough to trust on your own strategy (no matter how well thought) when market is searching bottom every day.

    The money invested in say L&T or Tata Steel is still safer then money lying idle in some risky bank's bank account; who risk your money by investing in some junk just to make short term profit.

  • VJonDalalStreet says:

    >There is much more downside left in the sensex/nifty.

    However, one should make a note that no one and yes no one can actually time the market.

    Market is close to bottom. There could be another 10-15% more downside. Keep in mind we have already come down 60%+

    Hence one should start investing now (provided he/she is left with some money) in small steps.

    Assuming you have 1 lac to invest for a period of atleast a year or more. Then find 10 companies from the BSE 30 and spread your money into them in 2-4 buyings. Each buying should be done on a substancial dip. Or generally speaking once in a month to average out your investment.

    Thereafter forget your investment for an year or so.

    You should be a happier person by next Diwali.

    Happy Deepawali in advance!