Struggle to make money from stocks

The last 2 months have seen sheer mayhem on the Indian (and global) stock markets. Share prices have plunged sharply, with some companies now quoting at book value levels. This is the case with large caps, companies with fundamentally good records such as Hindalco, Tata Motors, etc. So, you can imagine the case of mid and small caps. Shareholders in smaller companies have seen their share value plummeting massively, with a massive pullout by FII's from the Indian market. Till January, there was a talk about decoupling of the Indian economy from the US and global economy, but no one talks about that now. The overall credit squeeze that started from the US economy has impacted the Indian economy now.
Now the important question is about what to do now ? There are many negative indicators in the Indian market right now:
- There are no sustained indicators about FII's stopping their selling
- The US economy is now in recession, and there are no quick trends on when the economy will pull out, and how deep this recession will be
- The Indian economy has started slowing down, with companies reporting results that are not as buoyant as you would expect
- The realty market is almost at a standstill with the number of deals having reduced significantly
- Overall consumer spending has started falling, with even the Diwali period not displaying the expected pickup
At the same time, the market is very volatile. The last session of the market saw a major jump, but no one should take this to be the pattern. At the same time, there are 2 sayings:
- The time to buy is when everybody is selling
- Fundamentally good companies are always worth buying
So, what will I do next ? I am starting to buy, at very small levels, the following companies:
Hindalco, Reliance, Suzlon (a contrarian play), Unitech (high risk, and high potential upside), Tata Motors (even though the company's results have not been so good)

Labels: Equity, FII, Future, India, Liquidity, Stock

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Things look bleak currently on the world economic scenario. The sudden and heated debated plan of $700 billion, meant to shore up US sentiment through the Government buying up the bad mortgage loans and letting credit again flow into the markets, seems to have not done much to help the US and world markets. The sentiment is so negative that the economy seems to have gone into a spiral that will only increase the chance that this downturn will be painful and long. As a result, bank credit is becoming much more difficult to get, customers (with reduced sentiment) are slowing down retail sales (and for the American economy, retail sales is a huge chunk of the economy).

The jitters were prompted by a dismal report on retail sales, a bleak outlook by the Federal Reserve and sober remarks by Fed Chairman Ben Bernanke. A government report showed that retail sales suffered their biggest drop in three years last month. With consumer spending making up two-thirds of GDP, the retail sales data stoked recession fears.
The Federal Reserve's new snapshot of business conditions showed economic activity weakened across all of the Fed's 12 regional districts. Separately, Bernanke said the government has all the "tools" it needs to fix the problems in the financial and credit markets. But he cautioned that the recovery will take time.

The economic issues have been rattling the world economy, and the responses have been a bit varied. It is hard to coordinate a response for such a grave economic issue, especially when every country wants to take a decision that is in its best interests. However, finance systems the world over are much more complex and integrated than the decision making. Funds and sentiment are currently moving much faster than individual Governments can respond, and the initiative of a few days back where the finance officials of many countries along with central bankers have been trying to get a common response to these problems. They have so far not managed to improve global sentiment, and are still searching for finding tools that would work to stop this downward spiral of the global economies.
The political scenario in the US, with a heated Presidential election ongoing, has been complicating the overall response to this situation.

Labels: Future, Liquidity, Stock, US

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Things have been happening in the US finance sector that have not happened before for a long time. The US Federal Government is proposing that it is the essential guarantor of most mega-finance companies; only allowing some of them such as Lehman Brothers to fail. The US Government has so far saved or intervened in the affairs of Bear Stearns, AIG, Fannie and Freddie, Merrill Lynch (no direct financial involvement), and the latest domino, Washington Mutual. It is the case of Washington Mutual that is different from the others since the others are involved either directly in investment banking or exposed to the mortgage industry; WaMu was a clear Main Street bank, and yet it collapsed like a house of cards, following the same script as the others (exposure to mortgage industry, liquidity problems, and then a sudden downgrade to 'junk' status by credit rating agencies that decimated its ability to raise more funds). It is also the way of takeover of WaMu that is seemingly setting a precedent. Given its precarious existence and risk of failure, Federal regulators seized the bank without even consulting with the board, and sold it off to JLMorgan Chase & Co for a much lower price than they would have to pay just a few months back. The Federal Deposit Insurance Corp. (FDIC) benefited from this transaction since JPMorgan is now responsible for the bank liabilities, and not the FDIC. However, given the method employed in this case, banks looking to get hold of another ailing bank, Wachovia, may be looking for a similar process (it proves much cheaper to buy through this method rather than an open purchase):

Wachovia Corp.'s suitors may use a template honed by JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last week: Wait to see whether regulators will seize the bank, then buy the best assets and let the government sort out the rest, according to analysts. The bidders may try that tactic again at Charlotte, North Carolina-based Wachovia following its 27 percent plunge in New York trading yesterday, according to analysts at Goldman Sachs Group Inc. and Egan-Jones Ratings Co. They may get help from regulators, who said the U.S. benefited from seizing and selling WaMu because the Federal Deposit Insurance Corp. didn't have to tap its $45 billion insurance fund.
Wachovia dropped $3.70 to $10 in New York Stock Exchange composite trading yesterday and lost $1.50 more in extended hours. Yields on Wachovia's bonds soared to 24 percent, from 7.5 percent on Sept. 5, an indication that investors are concerned about default. Analysts questioned Wachovia's ability to stay independent after seeing loan losses tied to WaMu. JPMorgan is taking on $176 billion in mortgage-related assets and taking writedowns of about $31 billion, the New York bank said. Some of those were option ARM loans, which are prone to default because they let borrowers defer some interest and add it to the principal.

Given that Wachovia also has huge exposures to mortgage loans, other banks are licking their chops at the sidelines, waiting for the Bank to run into more problems, and begin the downward spiral of liquidity problems -> credit problems -> credit rating downgrades -> unable to raise funds. And given the financial deal to take on the massive bad mortgage assets of depressed companies is under active discussion among the politicians, but no immediate solution yet seems to be coming out, sentiment will only go worse.
What does this mean for Indian markets ? As liquidity problems arise among top US companies, they will try and get funds from wherever they can, including liquidating their stock holdings in the Indian market, causing more downturns.

Labels: Equity, India, Liquidity, Stock, US

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It has been decades now that Wall Street has been run by big investment banks. The exact names may keep changing as some of the smaller firms became bigger, and some of the bigger firms fall (and of course, names keep on changing with mergers and acquisitions), but the basic structure of large investment firms that handled investments for individual depositors as well as large institutions (as distinct from banks who depend on deposits for their cheap source of capital) has more or remained constant for so long that most people do not know of any other mechanism on Wall Street. And then suddenly, in the space of an year, Poof!, it all disappears. It started late last year when reports started coming in of problems in the category of non-collateral high-risk loans known as sub-prime. And these loans were in turn converted by financial magic into a range of investment instruments (explaining at more this level of detail will make this a highly technical discussion !) that were traded by a variety of financial institutions including banks and investment firms. When these sub-prime loans started collapsing, the sheer extent of these loans the subsequent losses caused huge losses for those holding these instruments.
Once people sensed that these investment firms were in danger, further credit to them was slow in coming, people started withdrawing their investments, and then the credit rating agencies started declaring them as various shades of high-risk, junk status. Once this happened, for all practical purposes, these institutions were finished, with the actual spiral of destruction collapsing very fast. And, now with the Administration and Federal Bank of the USA very worried, they have taken steps to prevent some of the more huge ones:

Federal regulators converted Wall Street's remaining stand-alone investment banks - Goldman Sachs and Morgan Stanley - into bank holding companies Sunday night. The move allows Goldman and Morgan to scoop up retail banks and to streamline their borrowing from the Federal Reserve. But it also puts Goldman and Morgan under the Fed's supervision, increasing the agency's regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.
And it brings to a close the era of the Wall Street investment bank, a storied institution that traded stocks and bonds, advised mergers and showered lavish bonuses on its executives. In the past eight days, the federal government announced a $700 billion plan to rescue the financial sector by buying up troubled mortgage assets and an $85 billion emergency loan to insurance titan American International Group. Also, Lehman filed for bankruptcy and Bank of America took over Merrill Lynch.

So, even though both these huge huge firms were not in immediate financial danger, they were sensing that they were in grave danger of running afoul of sentiment. In a scenario where investment banks were automatically assumed to be in danger, neither of these firms would have wanted to be the next company picked up for speculation; once in the target of negative public sentiment, even a profitable investment bank could quickly reach the edge of collapse.
This action goes against the normal distance that the US Government would like to maintain from the private market, but politicians of all shades have realized the extreme danger to the economy, and are willing to run with this. Making these investment firms as companies that will act like normal banks will give far more stability.

Labels: Equity, Future, Liquidity, Stock, US

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Topsy-turvy is the sign these days, and the market is doing its best to make sure that the market remains topsy-turvy (climbing up or down very rapidly and suddenly); analysing the market remain a difficult job. What irritates me about some analysts is the absolute certainty with which they make their predictions. Right now, for anybody investing in the market over the previous many years, the market just proves that nobody can predict what can happen.
I was just reading an article in the New York Times web page about how the US Congress was informed about the sudden fall of the financial titans, and how the US Government will have to pump in huge amounts of money; the credit environment is so bad, and the sentiment is so low, that this needs to be done else the financial economy will fall, and that too very suddenly.
All this affects the Indian stock market immensely as well. Many of these institutions own chunks of the Indian market, and in a crisis they start liquidating everything they own. At the same time, sentiment overall should not fall so badly since it is clear that central banks the world over will intervene to keep the economy from falling drastically.

Labels: Equity, Future, India, Liquidity, Stock, US

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The inflation figures that come in nowadays must be as scary for the industrial sector as it must be for the common people and the Government. If inflation remains high, then the Government, afraid of adverse political reactions, will try to curb money supply leading to a higher credit squeeze, something that has the effect of throttling industry. These measures do not lead to much benefit, since the rise of prices of commodities (and specifically oil) are global supply issues, not something that the Government can control from inside India.
So why does industry get scared ? Decrease in liquidity in the economy reduces purchasing overall, and combined with a credit squeeze, industrial growth starts to slip. However, a rapid pace of industrial growth is the only way for India to grow, and for more people to move away from poverty; so in that sense, the Government is willing to sacrifice growth and reduction in poverty for political measures that will indicate that it is desperately trying to cut prices. In such a economy, sectors that are dependent on commodities such as steel, oil, etc suffer the maximum. So steel sector is somewhat in a hole, and so are engineering and construction companies that reply on high working capital, low margins, and in many cases, cannot easily pass on raw material costs increases.
What can you do at this time ? Keep a watch out for sectors that continue to get impacted - steel, auto, brokerages and financial sector, realty, etc. The decrease in the value of the Rupee means that textiles, IT, etc are in a slightly better position. Shares that I am currently tracking:
1. TRF
2. Elecon Engineering
3. Walchandnagar
4. Reliance

Labels: Equity, Future, India, Inflation, Liquidity, Stock

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The market just is not moving, leading to a lot of disillusionment among investors. Brokerage firms report that individual retail investing is going down, FII participation is down, and it's only the Mutual Funds that are still steady (they have to keep on trying, else how will they be able to get money pouring into their coffers). The macro-economic situation remains bad (and that is probably the reason why the market has refused to take off), with high inflation not coming under control, and the Government trying severe monetary measures including a credit squeeze to try to tackle this inflation (however, this squeeze is stifling the ability of industry to get funds). Further, with the loss in Karnataka, the government is trying to do what it can to retain a positive political picture, and that also means that the massive under-recoveries by the oil companies is not getting passed onto consumers.
The short to medium term remains gloomy, and most investors are sitting it out - the losses remains from the crash, and the market sometimes shows signs of climbing, and then drops again (which is exactly what has happened in the last 2 weeks). In addition, many sectors are hurting because of low consumer demand, with the auto sector coming under significant pressure. However, as always, there has to be a silver lining. The Rupee has dropped below the Rs. 42 mark (considering that it was at the Rs. 38 mark, this is a major drop in the value of the Rupee), and this should help some sectors such as the IT sector and the textile sector to somewhat improve margins. As always, evaluate companies that are fundamentally good and in a sector that is not likely to tank, and see whether you can get bargains (one good way is to read the articles in magazines such as Dalal Steet, Business India and Business Today - there are some good analysis of companies that are carried out in these magazines and should help in an improvement in understanding).
What are some of the stocks that I am tracking:
1. Sharyan (a brokerage)
2. The ever faithful Reliance (not Reliance Power)
3. Starting to evaluate IT sector stocks such as Infosys, Wipro
4. There are pharma companies that could be a good bet for the future, so looking at this sector
5. Engineering companies such as JMC Projects, Walchandnagar

Labels: Equity, Future, India, Inflation, Liquidity, Stock

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Signs of the bloodbath on the stock market are everywhere. People are hesitant to invest anymore, and the fear of the US recession is scaring the wits out of everyone who is invested in this market. And then you have the long list of people claiming that this was what they always warned out; one word of advice if you start believing in somebody who claims to have predicted the fall. Out of the thousands of people who consider themselves competent to give advice on the market, most of them knew that the market was at a high position, but almost nobody would have predicted the severity of the fall. In addition, there were many other people predicting that the market would go higher, so take all claims with a pinch of salt.
The current situation is that there is a crisis of sentiment in the market, with the constant pulling out of funds by FII's scaring people. That trend seems to be slowly coming to a halt, and on the positive side, the liquidity crunch caused by the massive withdrawal of money for the Reliance Power IPO seems to be subsiding, money has been refunded to people.
What are the positives ?
- India is still growing (with the caveat that the high interest rate regime by the RBI is affecting credit and growth)
- Sectors of industry are affected by the gains of the rupee vis-a-vis the dollar, and it is likely that these sectors will continue to hurt (textiles, IT, and many others)
- Equity remains the best growth medium around in the long run
- Liquidity in the system needs to find an outlet, and those are typically either property or equity, or a combination of both
- All expert advice is normally that when people are selling is a good time to buy (especially when considering the above factors)
What to do now ? Evaluate stocks that are in a growth path or are not in an industry that is in a slow-down, and based on fundamentals of the stock, decide on whether you want to buy or not.
Stocks that I am currently tracking:
1. Hindustan Construction: Rs. 190
2. Nirlon - Rs. 112
3. Almondz Global Securities - Rs. 82
4. Assam Company - Rs. 36
5. English Indian Clays - Rs. 2100

Labels: Equity, Future, India, Liquidity, Stock, US

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Very mixed signals the market is giving. It shows signs of weakness once you go above 20,000 and starts to decline to the 19,00 range, and then again shows sign of strength to climb again. And the trends seem to be similar, with the midcaps and small-caps being strong when at the 19k level; but as you reach above 20k, the mid-caps seem to try to fight the first day of decline. However, as the market remains weak, the mid-caps start to lose and can typically lose upto 10% or more before the weakness ends.
There are a number of factors that are pushed to show-case as to why the market should be weak - the yen unwinding (reduction of available zero cost vast sums of yens), the continuing sub-prime mortgage weakness in the US and the predictions of trillion dollar losses (in spite of the Fed declaring that it will reduce interest rates to pump in more dollars to fight the projected weakness), continuing thoughts of the US slipping into recession, political weakness in India (with the Left continuously pushing down the throat of Congress Government). So, there is a lot to be said for the bears. What are the factors in favour ? - Corporates seem to be still doing good even though there was a massive credit squeeze, there is a lot of liquidity in the global system and the equity marked in developing countries still seems like the best bet. In addition, the Government routinely makes the right noises by pushing for SEZ's and a few other points (although they still get beaten over the head by the Left on most of their initiatives).
So what are the stocks that I am currently tracking ?

1. Reliance Industries - Rs. 2719
2. Supreme Industries - Rs. 381
3. Nirlon (risky) - Rs. 114
4. KLG SYstel - Rs. 826
5. Khoday India (risky) - Rs. 291
6. Hindustan Constructions - Rs. 194
7. Gontermann Peipers (I) - Rs. 110
8. JMC Projects - Rs. 508
9. XL Telecom - Rs. 480

Labels: Equity, India, Liquidity, SEZ, Stock

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The market seems to be going into ballistic zone, with having touched the all-important 20,000 levels this week. At this point, with the amount of foreign (and domestic) money pouring into the system, there is no telling which way the market will move. There is an incredible amount of money flowing into the market here and that is pushing the market to go up. This places the market at huge risks since such flows are volatile; this is countered by the view that Indian companies and the economy continue to show strong growth and this sentiment will continue to attract money.
By the grace of God, I have held my nerve (some may call it being greedy) and have not yet cashed out, hence stocks have shown good growth. There are tremendous pushes for a correction, and if you just look at the maths, a 1000 point fall, however strong it feels, is a drop of 5% and the Indian market has shown such kinds of volatility. One thing is sure, this is a good time to try and get out of speculative and high risk stocks since they are the first ones to get impacted. And for all the good news about the sensex, many times it seems that the midcaps are under-performing the sensex, so that is also something to be factored in.
Stocks that I am currently tracking:
KLG Systel: Rs. 740
Adhunik Metaliks: Rs. 149
Hindustan Constructions: Rs. 215
Indiabulls Real Estate: Rs. 644
JMC Projects: Rs. 460

Labels: Equity, FII, India, Liquidity, Stock

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