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Tuesday, May 19, 2009

Is the stock market reflecting everyone's excessive euphoria on election results?

There is a well-known myth in the stock markets - usually touted by 'experts' when the markets are moving up. It goes something like this: the stock markets always discount the future.

Nothing could be farther from the truth. Just flashback to the month of September 2007. The sub-prime crisis had begun to affect the financial sector as far back as in Feb 2007.  By the summer, it had all the signs of a full-blown crisis.

Indian stock markets had the grand finale of the bull run between Oct - Dec 2007. The markets should have fallen instead because the future was bleak. What the market really does is discount the hopes and aspirations of the buyers and sellers.

The UPA won a mandate that even surprised them. The decimation of the Left parties will surely lead to hastening of the financial reforms process. The sidelining of the third and fourth fronts by the electorate means a comparatively stable government with a set of coalition partners who won't be able to pull much weight because of the few seats they hold.

Please remember that the new government hasn't been formed yet. After it gets its house in order, it isn't going to rush into reforms and privatisations. A budget will need to be placed and approved. That will take 4-6 weeks.

There may be a strong dose of taxation to cover the huge deficits caused by loan waivers, subsidies, pay increases. The Congress party policies have always been socialistic and their poll plank of concern for the 'aam aadmi' ('average Joe') will need to be catered to. That may not be palatable for market participants.

Does all that justify a historic, first ever, double upper circuit in the Indian stock markets, followed by suspension of trading for the day? The video footage of cheering, table-thumping, laptop-kissing traders and business media analysts would probably indicate a resounding  'YES'.

But look at the volumes traded. Barely Rs 3000 Crores. Most of it in F&O. That  seems like a desperate attempt at short covering rather than frenzied buying by investors. Today's up move close to the BSE Sensex index level of 15000, followed by a flat close means there were as many sellers as buyers.

In this post in Feb '09, I had categorised financial news into good, great, bad and worse and discussed their effects on the stock market and advised investors about what they should do.

Where does news of election results fit in? Regular political news have very little impact on the markets - other than wars and terror attacks. But news of a surprising election result bringing back a pro-reform team without the excess baggage of the Left parties is definitely 'good news' for the stock markets.

Why isn't it 'great news'? Not yet. That may happen after a year or two if the pace of reforms and divestments from public sector companies really push-start our economy forward to 9% GDP growth.

Till then, we have to contend with results season. Most companies have postponed results declarations till the end of June '09. Many results will be awful. The real estate and infrastructure companies that have seen an unjustified spurt recently will face selling pressure. (Punj Lloyd has already declared a huge Q4 loss.)

My advice to investors is to stay calm, not feel 'left-out' and use the temporary price spurt on 'good news' to get out of non-performing stocks. Saner voices will prevail and euphoria will evaporate.

The BSE Sensex index is looking overbought. It may not go down to 8000, but may see 10000-12000 levels in the near future. That will be a better time to start buying.


Eswar Santhosh said...

The expectation is that PSU IPOs will come out one by one in a relatively stable market. If public appetite is back, then this would revive both the primary and secondary markets.

Mutual Funds too are sitting on cash and in their efforts to generate alpha returns, they need to deploy funds.

But, there is just this one problem: FII flow and risk appetite would continue only as long as their own house is in order. Unless this is "Indian" money flowing back in the guise of FII money (which it may not be since other Asian markets are up as well), there is a chance that any global catastrophe would result in a faster windup by FIIs.

Global cues matter now that the "big event" of elections are out of the way.

Locally, may be PSU disinvestment would make up partly for the high deficits the Govt is running. But, there are farm loan waivers to be paid to banks, "Aam Aadmi" to be satisfied etc.,

And I faintly remember that they issued some Oil Bonds. If it is up for maturity, does Govt has to pay up the amount? Or can they do some spectacular mathematics and sweep it under the off balance sheet carpet as before?

Budget could be an important event. Hope the markets do not build up too much expectations till then...

pankaj564 said...

Dear Subhankar,
i feel we have completed first leg of upmove at 14931 and now we can correct for few days to start last upmoving leg which can take us maxm upto 15580-16000 zone and that will be real selling area and i think that may come mid june . that will be top of 2009 and again we will see big correcting move.
remember we have made bottom of 7697 in oct 08 and we will be in 8th month in june 09 so as per fibo also that can be a turning point.
Pankaj Shah

Subhankar said...

Hi Eswar, Pankaj

Appreciate your views. Great expectations from the yet-to-be-formed government added to the left-out feeling of many small investors and fund managers and took the market up to a euphoric peak. Markets move on sentiments and sentiments are bullish. Lot of selling by LIC on May 19, '09.

I was listening to a TV interview of Baba Kalyani of Bharat Forge. He looked pretty grim and could not give any guidance for the next two quarters, after disclosing poor Q4 profits. If you take away foreign exchange gains, it was actually a loss.

A flood of FII money can wash away the dirt and grime of poor fundamentals. I have no idea how much higher the Sensex will ride this year. Too many unclosed gaps in the Sensex chart makes me wary.

pankaj564 said...

hi subhankar,

more over if u have observed the pattern of this upmove, mkt is taking big strides for a day or two after a consolidation for few days. so we wait for some clarity which way mkt will move, break out or break dn, so u cant take big positions and when break out occurs its a huge upmove so u cant take big position. after this upmoves it consolidates for few more days again to confuse u.seems with small investments operators r taking mkt to a good was a day of mid caps and it was anticipated but again huge moves of 20%, euphoric moves...
difficult to ride this rally ....
yesterday i had sold my recent investments and taken posiotion in saw yr discussions on it, enjoyed.u had shown short term chart actually if u see it is on a very long term trend line support also.
Pankaj Shah

Subhankar said...

You are quite correct in your observations, Pankaj. This rally has all the hallmarks of being 'engineered' by a handful - probably the US banks.

Glad you liked the HUL analysis. I've drawn the bullish channel on the 2 year chart.

pankaj564 said...

Hi Subhankar,
i was referring even longer period for hul chart. it is on a trend line giving support since 2004. actually that trend line attracted me to buy it.
Pankaj Shah

Anonymous said...

subhankarji thanks a lot for a very timely and eye opening article.This is nothing but irrational exuberance as was pointed out by Robert J Schiller in his landmark book.I particularly liked your point about more trade in F & O and very less deliveries as I also saw in NSE data in todays Business Line .While NSE total turnover is 40,151 crores delivery %age is only is mere 40%.This rally should be utilized to book some profits.

Subhankar said...

Thanks for pointing it out, Pankaj.

A lot of investors that I meet think that 1 year means long term! For me, long term in Hind Lever is more than 25 years. The result is that I hardly ever look at its chart.

Subhankar said...

You have always been generous with your feedback, Sujoy. I do appreciate it.

Eswar Santhosh said...

"A lot of investors that I meet think that 1 year means long term!"

Instant Gratification, Sire! :-)

Just because LTCG is for one year, all the principles of investing would not have to shrink in the time frame as well.

Most people are averse to holding a stock that would not move up. But other than traders who should follow the trend, it does not make sense for "investors" to seek immediate gains.

The perception that stock market is a gambler's den or the general misunderstanding of "living in the now" may be reasons.

People also think that baldness or gray hair is a pre-requisite for liking boring stocks and being patient. But it is not so. I have held a major portion of my portfolio for over 4 years now.

If some young chap reads this comment, he/she will most likely picture me as Karunanidhi who is writing in Jyothi Basu's blog :)

Subhankar said...

Your comment has motivated me to put my picture up with my profile, Eswar.

I'm old - but certainly not as old as Jyoti Basu!