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bulls, bears and pigs of the stock market

The mayhem continues as the economic indicators show their ongoing affinity to the color RED. The Fed is close to bottoming out on its favorite pastime- rate cuts!! Market experts have made television studios their second home playing with SMA (simple moving average), EMA (exponentially moving average), OI (open interests), and other similar awe inspiring tools. Companies keep dissolving on the back of heavy underwriting, keeping historians and quiz masters busy (for making questions like “which company had its name that resembles an animal which even your father is scared of?”). Our own CNBC poster boy, Udayan Mukherjee came up with a famous one-liner that- there seem to be more theories today than people. (LoL???). In the meantime, heavyweight houses of research are coming out with stories which add more gloom to the story of recession. David Rosenburg of ML (Merrill Lynch) shares an interesting analysis that says :

"There have been five phases to this current down-cycle – the first four are still in full swing, but it is the fifth that will very likely emerge as the most difficult stage of this economic downturn and bear market :

  • The first wave was the end of the housing cycle when starts peaked and began to roll over in the first quarter of 2006.
  • The second wave was the end of the home price bubble when the Case-Shiller index began to deflate in the first quarter of 2007.
  • The third wave was the end of the credit cycle when the interbank market froze in August 2007.
  • The fourth wave was the employment cycle, which peaked when payrolls did in December 2007, prompting the Fed to reluctantly embark on an aggressive policy easing course.
  • The fifth wave will be the end of the consumer cycle and the beginning of what may well prove to be the most significant recession since the mid-1970s, and while delayed by the tax rebates, this phase seems to have commenced in June when U of M consumer sentiment collapsed to its lowest level in 28 years."

The fact that the housing fall is going to be succeeded by an inescapable credit crisis, most of the economies in the emerging markets would get a fresh beating. Housing sector was the least import induced element in the US economy, but the credit crunch see the EMs catching a cold soon with negative impact on the FOREX counters. The swelling reserves of the EMs will have to be on diet and the governors will have to start flexing their monetary and fiscal muscles.

The point reaffirms Milton Friedman’s view that ‘the world is flat’, unfortunately, on a very serious and alarming note. None of the asset classes seem to have enough fuel to raise the confidence bar over the present gloom. Equity is being dumped across the globe, gold has lost its sheen (it has even refused to operate as an inflationary hedge), and real estate has already caused enough pain. A momentary surge in the bond market has made some heads turn though (might be a welcome relief for parking pension funds and lot more!).

Of late, the market has produced many acronyms which are slowly being updated even by the retailers. The latest tocome is one amongst the ‘animal farm’. It’s called the PIGS (no assault meant to the Islamic bombardiers, take a deep breadth, take it easy). It’s the upcoming European version of slump story. Portugal, Italy, Greece and Spain are Europe\'s negative version of the fast-growing BRICs. The fear is that these countries are in a spot of bother, financially, which they cannot easily climb out of and that the ECB will be obliged into running a looser monetary policy to save them. Though they are not as economically important as Germany or England or even France, they are still a substantial chunk of nations, consumption and output for Europe. Laced with the notorious inflationary trends, interest rate spirals, burning crude and forex concerns, the market fundamentals are highly appalling. The next 6-12 months will see temporary spurt in the equity market on the back of technical bounce backs. Otherwise there isn’t much happy news for EM investors. So blowing up the EM growth story might even derail the commodity market rally. Banks are back to 9.5-10% for 500 days scheme. That is where even I’m heading. But again, with inflation peeping over, it doesn’t make a good hedge. The present scenario indicates awful lots of fallacies that surround the emerging market. It’s a time people give up common sense and leave on auto pilot. It’s not the specific stock picking, but the methodology that is so suspect -- no stop losses, a lack of any planning, TV driven -- worst than random dart throwing Eventually misery comes in.

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