Notes from the USA – a guest post

Three successive rounds of QE (Quantitative Easing) programmes has pulled the US out of a recession and on the road to economic recovery. Or, has it? While a recession has been prevented and the value of the US Dollar is reigning supreme again, the state of the economy leaves a lot to be desired.

Those who were laid off and failed to get re-employed are simply leaving the job market, or doing part-time work at lower pay. College graduates are not finding jobs. Education loans are remaining unpaid. People are paying down debt. Durable goods are finding few buyers. Without job growth, there can be no spending growth and no economic recovery.

In this month’s guest post, KKP gives a ‘ground zero’ view of the state of the US economy, and discusses the consequences of tapering down of the current QE programme.

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Good Comes After Bad and Bad Comes After Good Comes

We have been talking about the ‘money pumping’ that the US Fed has been doing for a few years now, to ‘stop the global economy from entering into recession’. Of course, money printing (buying bonds, actually) that has created a level of debt unprecedented by any economy, in any prior times is something that has been supported by politicians and government economists. Who can stop them? No one.

We all know what happens when there is TOO MUCH float in the hands of businesses and consumers. Inflation. Too much money chasing too few goods, right? Well, the Fed now realizes that the housing market is starting to turn a bit, although most of the housing turn is money that cannot sit at 0.01% annual interest, and that is pouring into Real Estate, showing the artificial demand for ‘housing’. What is not associated with it is the reduction in Foreclosures, Short Sales and also First Time Home Buyers. Most of the housing demand is ‘upgrading’ (if it is not ‘investors’ like me).

Let’s look at jobs growth…..Unemployment is coming down, but when the government stops counting the people who are NOT paid unemployment benefits, then you are counting less people entering unemployment, and you are dropping a large number of unemployed at the back end of the pipeline (ones who have run out of their 27 or 52 weeks of unemployment benefits). Bottom line, it is showing that unemployment levels have improved from 9.5%+ to just under 7.5% recently. In reality, the Federal Reserve Act calls for 'maximum employment', not 'minimum unemployment' which is a more popular phenomenon.

The quarterly GDP is coming out with decent numbers, but the subsequent revisions are always down. True inflation is much higher, but the numbers (like India) are being reported with some skew in it, showing 3% to 4%. If that is the case, and if I am even partly right about everything above, then why “stop the QE program”? See announcement below:

“Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy – an effort to preserve flexibility and manage highly unpredictable market expectations.”

As I said, all of this is Fed’s business with very little that we can do/influence. We just have to be proactive to their moves, since some people are calling this a bubble itself, built on a ‘house of cards’ that will not need much of a ‘phook’ (whiff of air) to crumble down quickly. Markets come down 3 times faster than they go up! Remember that adage.

As and when this happens, we will feel like being driven off the cliff, with the government driving, and of course, we are in a car without a parachute.

All of this started to show that ‘US is not going to run out of money in its massive $14T economy’. The economy has not improved from the $14T number at all, so what does Obama and Bernanke have to show with the additional $4T (to a debatable $6.5T) debt that we have amassed already.

The current buying of $45 billion a month of Treasuries is to fund the government and throw liquidity at the banks to flow to the consumers. If it did not do this, of course, rates would rise and therefore, we would owe more money through debt payments, and naturally, we would have to cut our spending (government, military, other programs etc). And of course, cutting back might also starve some of the credit programs through Fannie Mae and Freddie Mac (lenders for people to buy houses). Not happening. Therefore, it will be a slow cutback of the $45B and not a sudden shutdown.

A lot of this money is showing up as ‘excess credit’ at cheap lending rates through businesses and investors, pouring money into ‘investable real estate’ and ‘investable funds in stock market’. As a result, the real estate indices are going up, and stock market indices…..well you know (going to New Highs). Consumers are feeling good, and saying that Fed has averted the ‘bad times’ and we are ‘off to the races’. Barrons, Times, Forbes, Wall Street Journal etc are all printing this positive news and smaller investors (retail) have been calling me again to find out what to invest in. Gold going down simultaneously is also part of the same move, squeezing the ‘inflation believers’ out of commodities, by putting funds into equity investments.

In reality, with this news coming out, the markets got affected a bit, but it seems we are stabilizing. Fed wins again in its move. If the support of the parent is moving away, will the child fall down again? We are in for a wild volatile ride, and Asian markets will ride up and down with this.

Keep your eyes open, and let your fingers itch to get out of the non-long-term positions……Protecting capital is a key to success.

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (Aug 2012) – a guest post

In a guest post in Feb ‘12, KKP had presented a Consumer Survey Report from ChangeWave. US consumer spending was increasing then. Consumer confidence and expectations had shown improvement for the 6th straight month.

The improvement in the US economy hasn’t quite progressed according to plan. In fact, it has taken a turn for the worse. In his July 2012 guest post, KKP had introduced two less known indicators to suggest that the US economy was slowing down. The latest survey report from ChangeWave confirms the slow down.

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Time and Expectations

Time is fundamental to every strategy for investors and traders. In the markets today, time has become incredibly compressed by the “black hole” of technology and media – causing investors to often think and act in seconds and minutes rather than days and months. This state of affairs surely affects investor psychology in many ways, both good and bad.

ChangeWave’s weekly surveys contribute to a larger mosaic that in combination informs us of the dynamics of the US economy, specific sectors, and major corporations. The data is a snapshot in time, revealing the rate of change and momentum in many critical areas of the economy and its sectors. They also provide the context in which I evaluate all other data and events.

One thing that investors continue to ignore at their own peril is that the global and US economies are experiencing a massive, long-term process of balance-sheet deleveraging. This reflects both excessive consumer debt – as well as huge public sector issues – and the effects are particularly telling in ChangeWave’s consumer surveys. With such constraints on spending, any recovery will struggle to sustain 3.5% growth or better.

The Dow has climbed back above 13,000 on the wide belief that the economy is just lousy enough to prompt Ben Bernanke to initiate another round of quantitative easing and/or some other action to lift the economy or investor spirits. If the economic outlook is more dire than “just lousy enough,” then the US Federal Reserve will be even more limited in effectiveness.

The markets have learned something about Bernanke’s view on the economy and his likely intentions. Bernanke’s counterpart across the pond, European Central Bank chief Mario Draghi, last week vowed to do whatever it takes – assuring that it will be enough. Equity markets reacted very favorably to Draghi’s remarks, which may have set the tone for the U.S. chief.

Of course, reactions to the comments and actions by the central bankers will vary widely depending on one’s time frame and expectations.

Top and Bottom Lines

In April and May, ChangeWave’s consumer surveys indicated without a doubt that the US economy was losing momentum. Subsequent surveys on both the consumer and business sides revealed that the slowdown was taking root. The sideways direction for most of the economy has characterized the recovery since 2010, and it will take much more than the Fed to break this pattern.

Going back as far as Q4 2011, Wall Street analysts’ estimates were on the whole overly optimistic in their projections of corporate revenue and earnings. As we’ve seen since early 2012, analysts have repeatedly stumbled over each other to cut estimates as companies continue to offer downward guidance.

For the current season, after all the adjusted estimates, about 70% of the companies that reported earnings so far have beaten expectations. Yet a troubling 65% have missed the top line on sales. The latter is the result of the strain on demand as ChangeWave’s data has so well illustrated. Unfortunately, there is still relatively little being done to address the weakness in consumer spending.

Despite the lagging top line, investors have been bidding up stock prices. In fact, “the average stock that has reported since earnings season began on July 10th has gained 0.70% on its report day,” according to Bespoke Investment Group. “If the season were to end today, this would be the best performance stocks have seen on their report days since Q4 2010.”

It appears The Street had already lowered expectations enough that the numbers reported were viewed as fairly positive. During the same period last year, when the economic outlook was equally tepid, the average stock fell nearly 2% on its report day.

Now let’s delve into a few more highlights from ChangeWave’s latest consumer spending survey to identify some areas of strength and weakness.

Consumer Bellwethers Lose Momentum

ChangeWave’s July ‘12 consumer survey recorded the third consecutive monthly decline in consumer spending behavior. It also registered a significant decline in spending growth. Thus, it was no surprise when the government reported last week that in Q2 2012 US GDP grew at its slowest pace in a year – rising 1.5% after a revised 2% gain in the prior quarter.

The survey also reveals multiple categories being affected by the current spending slowdown, including restaurants, household repairs, electronics and durable goods. Even discount retailers like Target (TGT), Costco (COST) and Walmart (WMT) are feeling the effects.

During this earnings season, the results of several US retail bellwethers reflect the consumer trends identified by ChangeWave in recent months:

• Slowing sales in part led Procter & Gamble (PG) to cut profit forecasts three times this year.
• UPS (UPS), the world’s largest package-delivery company, cut its full-year profit forecast after a drop in Q2 international package sales. The company projects the US will grow 1% in the remainder of 2012.
• McDonald’s (MCD), Starbucks (SBUX) and Chipotle (CMG), which are typically resilient during tough economic times, saw a bit of a slowdown in US guest-count growth in Q2.

Starbucks’ CEO said he’s been speaking with other heads of consumer companies, and most everyone saw a similar pattern of deceleration in June and July, according to Bloomberg. “So, this is not a Starbucks issue, this is a macro problem.”

Coach (COH), the largest US luxury handbag maker, reported quarterly revenue that trailed analysts’ estimates. Sales at North American stores open at least a year rose 1.7%, compared with a gain of 10% a year earlier.

Easing Pressures

ChangeWave’s July ‘12 consumer survey showed a modest improvement in consumer expectations and confidence and signs that lower gas prices may be lifting spending in other areas. The findings even uncovered easing job concerns, a strong indicator that corporations, while not yet aggressively hiring, have tempered layoffs, downsizing and other cutbacks.

When asked how much they worry about someone in their family losing their job, 28% reported they worry A Great Deal (8%) or Quite a Bit (20%), while 28% said they Do Not Worry at All – a net 9 points better than previously.

Even though Reduced Income (36%) remains the number one reason why consumers are spending less, it declined 4 points in July ‘12 to its second lowest level of the past two years.

Overall, ChangeWave’s latest consumer survey indicates that the sideways movement of the economy is entrenched and shows no signs of breaking out to either the downside (i.e. recession) or upside (i.e. robust recovery). Of course, we’ll continue to monitor consumer spending and behavior and you’ll be the first to know when the US economy finally breaks out.

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (May 2012) - a guest post

The UK and several Eurozone countries are in recession (defined as two straight quarters of negative GDP growth). The US economy has averted a recession but growth remains sluggish. The strong performance of the stock market may have lulled some people into believing that all was going to be well soon, and prosperity of the good old days was around the corner.

Not quite yet, suggests KKP in this month’s guest post. In a report from ‘ground zero’, he explains that a lot of work needs to be done by the government before the US can return to its earlier level of prosperity.

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Looking Forward to Prosperity?

Everyone knows that America means an entrepreneurial, positive-thinking, and future-oriented society. E-governance models have been developed, schools/universities are cranking out real creative talents and geniuses, and enterprises are thinking outside the box to develop solutions that were unthinkable only a few years ago. iPad3 is a perfect ‘poster child’ of this, coming completely from left-field and destroying the best-laid plans of Microsoft, Sony, Blackberry and IBM.

But, it is a sad fact that politics/politicians have not come to grips with the question of on-going national decline. Governing elites have long debated America’s power in the world (still intact today), and whether it’s eroding at the edges or from inside-out is definitely debatable. But most important politicians and pundits have much less to say other than keeping on printing money and expect that the solution lies therein. Despite the bitter public arguments over tax and budget policies, Americans who have their pulse to the ground, share the implicit assumption that even harder times are ahead for the majority of Americans, whether that means 99% or at least 75% is yet to unfold. Even with these facts out in the open, politicians are presenting this as a temporary set-back or inconvenience, with steps being taken to rebalance government’s books and a return to pre-crash prosperity in the near term. Well, near term has now become over four years, with very erratic signs of improvements, and definitely not commonly heard or talked about in the professional community (i.e. educated circles).

The evidence in front of our eyes is that on our current economic trajectory, the American middle class is staring at a further fall in its living standards. This will not bode well for the economy, since these are the people that control/affect the majority of the GDP.

The conventional chatter from the nation’s pundits declares Washington as “dysfunctional” and the bloggers continue to have a field day on the moves that are being made by these buffoons. Yet, the point of view of politicians and some economists (on the side of the government) is that Washington is actually functioning quite well as seen in the unemployment numbers, and also the latest GDP performance. Clearly, it is torn between reality and perception of reality (through complex charts). As I have said before in this blog, if you are working, it is clearly a recession, and if you cannot find a job (as a professional), then this is a long and deep recession (aka depression). The only change I will make to the above in this May 2012 article is “if you are working, it is clearly a recession with an unbelievable amount of inflation affecting take home pay, and if you cannot find a job (as a professional), then this is a long and deep recession (aka depression) that is depleting retirement savings really fast.”

We had three decades of policies that undermined the country’s global competitiveness and the bargaining position of its workers, as portrayed by the simultaneous growth in the BRIC and Latin American economies. US economy can no longer provide the means to support its three most politically important American dreams:

1. Wall Street’s dream of subsidized limitless profits;
2. the military-industrial complex’s dream of global supremacy; and
3. middle class dream of rising incomes

One out of three? Certainly plausible. Two out of three? Perhaps likely. All three? Absolutely NO WAY.

The middle class is bearing, and will continue to bear, the brunt with lower paying jobs, sending people back to India/China/Mexico (happening in a big way for Mexico), or just forcing retirement on many who are not even ready to retire (reality), or just riding the wave of government support through ‘welfare and unemployment’ (government programs are at the highest levels in its history of 50+ years). A lot of two income earning families are now one income earners, and surviving. But if these parents have to pay for the college education (rising at 12% per year - non-stop for 20+ years) of their children, then they will be depleting their retirement savings (or taking on debt), and live a poorer life than planned during retirement. Bottom line is that there is pain written all over the middle-income group, which unfortunately includes a very large percentage of the baby boom generation (people born between 1946 and 1964). This pain will also be inflicted on the emerging economies, with many more tidal waves to hit those shores over the coming decade or two, until the developed nations (including Europe) come to grips with GDP, Debt, Jobs, Inflation and Net-Organic-Growth.

Rebuilding economic foundations is no easy task. Neither is it beyond our technical capability. At a recent party at our American neighbours, their views along with those of many of my Indian friends, were that the future is a bit more complex but, in the end, hopeful. People are worried about their jobs and income, and majority think that the next generation will be worse off than ours. Yet these people (as do the polls) show that they have faith that they, personally, and their kids will be OK, which reinforces the optimism that this government will wake up and do the right things for the future (an example is the program of re-shoring jobs). Personally, I am hopeful, but not so sure, and stick out like a sore-thumb at a lot of these gatherings. Hence taking many steps to do the right things for my portfolio, my family/kids and also analyzing/re-analyzing the heck out of macro-trends, and trying to capitalize on the curve-balls that will be thrown in the way of this ‘seemingly prosperous times’. We are definitely in for many surprises, and even more than the past, coming up in the next 1-2-3 years. Let’s plan to cope with those as best as we can….

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (Jan 2012) - a guest post

It was about 25 years back that the then head of the Department of Electronics, a dynamic government official by the name of N. Vittal, shook up the complacency in the IT industry by announcing a software export target that seemed outrageously high (by prevailing standards). The IT industry rose to the challenge, and the rest is history. Software exports mainly comprised ‘on-site body shopping’ of technically qualified software engineers.

Call center outsourcing business opened up vast employment opportunities in India for less technically savvy youth – even those located away from the major metros – and significantly expanded the size and purchasing power of the Indian middle class. In this month’s guest post, KKP points to an important trend that could potentially destroy the employment opportunities of tens of thousands of India’s educated youth.

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India Sees First Wave of Outsourcing Competition

India’s success in recent years can be attributed largely to the outsourcing trend that the Internet technologies enabled in the 1990s. Companies tripped over each other in the US to migrate their business from US and Europe to India to save on costs, while servicing customers in almost the same manner.

A recent article in the Washington Post highlights the increasingly popular trend of call center outsourcing operations moving away from India. Although India remains the preferred destination for IT support (today), the country is no longer known as the call center capital of the world since salaries and other business costs have grown significantly over the past year.

Currently, a larger number of call center outsourcing employees are working in the Philippines and Malaysia rather than in India. My team in Argentina is also telling me that there is a significant growth of this business in Argentina. For companies such as 24/7 Customer, the choice has been clear. It set up its first call center in India in 2000. Today, it has 4,500 employees in the Philippines compared with 3,000 in India.

What is so crucial about it?

It is critical to understand what US does to economies around the world. US is a Wall Street driven engine for the enterprises. This means that there will be ‘trends’ and ‘herd movements’ in one direction. And when the winds blow a different way, it will all change quite quickly. In a recent conversation, a businessman who has come from Hyderabad told me how salary cuts are going on within the call center environment, and there are plenty of people, but not enough jobs. This is Phase 1.

USA businesses will make a decision on what is good for their bottom line and change, throwing away the human component quickly and switching countries in a heart-beat. Many companies have moved their operations to the Philippines also and they are serving customers well.

But, the most important trend that I have seen is moving operations to low cost states within the US where they can hire, train and operate a US based call center at almost the same cost as those in a foreign land. Here’s proof. I open/close many credit cards and lines of credit every year, and during the month of Dec and Jan, do an inventory and clean house. In doing so, I have to make calls to open new ones, and close existing ones. Every single call I made (except for Citibank), was picked up by someone in a US call center, and they announced themselves as being in the US! Of course, they served me with a level of service that is expected in the US, and with a level of urgency that falls outside of pre-written scripts and documented processes.

So, again, why is this important for us investors?

USA did this to Japan, and today, there are more Japanese plants operating outside of Japan than in Japan. This trend might hit the shores of India, and hence India will really have to boost its ‘organic growth engine’ in a huge way to compensate for the loss of business that will come over the next 1-2 decades. It is a slow moving engine since these trends are like the Titanic making a turn, but when they turn, they turn for good.

It is also possible to offset the reduction in call center work by transitioning to the BPO type of efforts, where the margins are better. Those efforts are also underway, but the push to bring business back into the country (in US and Europe) is getting stronger as job losses in those economies begin to hurt. That is a wind of change that an investor needs to worry about (macro trend).

I am not saying that Manufacturing, Auto-parts, IT support, Software development, Tier 2/3 Support, BPO efforts etc. will all move away from India, but when the first wave is affected the other waves will slowly get affected in a small manner, if not completely get wiped out over the ensuing years.

Our investments have to reflect this since a lot of infrastructure is built around this growing middle class, and the growth of middle class is becoming dependent on the flow of business from US and Europe. With both those economies slowing, and further scaling back on outsourcing to India, we may see a much larger detrimental effect on this portion of the business. The only hope is that the local growth engine revs up in the meantime to replace this slow loss that will happen over the next decade or two.

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (Dec 2011) - a guest post

Of late, the US economy has been showing small but positive signs of stability. A double-dip recession seems to be off the table. Doom-sayers have been less prolific in their doom-sayings. No one is talking about a collapse of the dollar and revival of the gold standard any more. Gold bulls have stopped predicting levels of $6000 and $10000.

Even the noise about impending calamity emanating from Europe have been on very muted volumes. Every one seems reasonably satisfied that Europe may be heading into another recession, but the Eurozone is not going to disintegrate and the euro won’t collapse. This is what we are getting to read and hear from CNBC and Bloomberg.

But what is the reality? In this month’s guest post, KKP provides his measured opinion from Ground Zero, and advises investors to be cautious.

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All Green Light with the EU Crisis Over?

With all the moves being made in the last few weeks, and the latest punch by the ECB, is the crisis in Europe done with? The bailout of various governments by the ECB allowing them to borrow money super cheap might make it seem like that. These economies need the money to buy their sovereign debt at much higher yields and save a bundle. Sure, it is a big breakthrough in policy and a correct step towards savings these economies, but in my opinion it is far from convincing that this is a one step cure. Markets seem to believe some of it caused the yields to plunge.

The US dollar has reacted accordingly by going into a slight corrective mode, with gold, A$, C$ and Euro bouncing up a bit. Again, in my opinion, this is just a resting place for these currencies before they continue down against US$, since there is too much faith in the ‘least ugly’ (of the moment) i.e. US$.

The US economy seems to be showing typical seasonal strength. People are getting temporary jobs (seasonal jobs in retail, logistics and transportation industry) and hence the unemployment claims are lower. But, this is not going to last because come January, we will have many of those people back on the streets looking for jobs.

Again, 2012 is an election year, and hence we will see artificial moves made by the politicians to show improvement in the US economy so that they can ensure a win. It will again be temporary and not last long. The economy does seem to show some stabilization, but revenue and profits are ratcheting down for corporations, although the quarter to quarter comparison (from previous year) is looking positive, and hence giving a false sense of relief to investors. Net effect is that companies are cutting employees, cutting costs, and delaying investments to show those profits. Ultimately, the reduction in employment affects the supply chain of business that is inter-related, and inter-dependent on ‘jobs and employed folks’.

Housing is showing some stability although there is enough inventory out there (hidden) that keeps coming out slowly but surely. Banks are more lenient and allowing non-mortgage payers to stay in their homes for free based on government regulations. Until prices climb up, most of the purchases made between 2004-05 and 2008-09 are homes that potentially will come back out on the market as a foreclosure sale.

So, no, I do not believe EU is out of the red-light-zone, and neither is the US. Hence, times are still turbulent (with signs of positive turn in mobile computing marketplace) and keeping money safely on the sidelines or trading quickly (in and out) is the only thing we should be doing. This applies to India as well as US.

What are you doing with your money in India or in US?

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (Aug 2011) – a guest post

Going through last month’s introduction to KKP’s guest post gave me a sense of deja vu. More fear-mongering from the TV channels – this time about hurricane Irene. Flashlights, batteries, drills were flying off the shelves at Sears. Home Depot had set up a ‘command center’ with a large number of computer terminals and phones (reminded me of the NASA command center!) to ensure customer requests from the entire east coast could be attended to, and supplies provided immediately through a fleet of trucks on standby.

Doomsday stories about the economy got relegated to the back pages after the damp squib from Bernanke. But KKP thinks that the economic situation is of genuine concern, with a possible relapse into a recession. At best, it might turn into stagflation – where inflation remains low, but low interest rates do not attract enough spending.

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Why is US Economic Data CRITICAL to our Financial Health?

I’m sharing a lot of information from multiple angles here…..Pay close attention since the picture is saying a 1000 words below.

A lot of readers of Subhankar’s blog might not realize it but the big-dog still is the $15Trillion engine in the US that continues to spend beyond their means every year. This is ‘huge’, and ‘unparalleled’ to any other economy. Until there are other economies that ‘spend’ as much as a percentage of GDP, AND, import it from other nations, it is going to be really hard to avoid the cold, sneeze and flu linkages (‘when US gets a cold, rest of the world gets a flu’ syndrome).

Just look at the statistics of how many people earned more than $200K per year in income! Four million tax returns showed income more than $200K per year. 26% of the big-tax-paying-people of the full US population earned $2Trillion in sum-total. This is a wealthy nation currently, and hence very spoiled with the spending patterns, debt levels, and problems arising are also of significant proportion/magnitude. Expenses are relatively low for the basic needs; in my area, milk is still $2.25 per gallon, gasoline is $3.50 per gallon, 2 piece sofa is $599, 42” LCD TV costs $399, mid-size car costs $16,000, good pant/shirt combo is $25, vegetables are $0.39-$1.50 per pound, and finally, cost of school is approx. $300 per year (housing taxes pay for school).

In researching the cause and effects, and the current state of the economy, I came across a unique chart that sums up the PFI (Philly Fed Index) and UoM (University of Michigan) Index. This chart is very interesting and thought provoking on what is coming down in the near future - especially if you map it to the previous recessions/slow-downs.

The Bureau of Economic Analysis's (BEA) second estimate of second quarter 2011 U.S. Gross Domestic Product (GDP) was reported to be 0.98%, continuing their recent trend of revising previously reported economic growth rates down. As a quick reminder, the classic definition of the GDP can be summarized with the following equation:

GDP = Private Consumption + Gross Private Investment + Government Spending + (Exports − Imports)

So, we are entering the phase of a recessionary time and we need to brace ourselves. I have been talking about this slow down since I just do NOT see:

• Job market improving
• Salaries improving
• Corporate spending improving
• Attitude of corporate buyers still very conservative
• Housing market pretty much in doldrums / recession
• Investors talking about ‘what to buy’
• Investment choices in the market improving
• Commodities still grabbing market share of available funds
• IPO market improving
• Consumers opening their purses to spend ‘openly’

Housing is still terrible. Existing-home sales were bad recently. The inventory of homes-for-sale grew, even as mortgage rates are at all-time lows. A 30-year mortgage is at 4.15%. It is possible we could see a 30-year mortgage with a “3” handle if we slip into recession. That is going to really help since it will reduce the mortgage payments for a lot of people. It is too common to hold mortgages on houses even if you are 60 years old!

If you follow the curve above, you will clearly see the Activity index going down into the deep end, and therefore, we will see the effect of this in a lower to negative GDP very soon in 2011.

The above chart is a good predictor of the recessions, along with the Laxman Achutan ECRI report that I have posted previously. Even the ECRI noted that it was because two of the financial components added to the positive numbers there seemed to be a temporary positive effect. One was the sharp rise in M2 money supply. But a lot of that is because people are going to cash (I am present in this list as a micro-drop), which is not all that positive from a macro viewpoint. The other is the steepness of the yield curve, which is being manipulated at the short end. But, the key is yield curve is inverted, and inverted yield curves are a perfect venue to predicting a recession. Without these temporary positive contributions, the index would be down and, down three of the last four months, and in a pattern that led to a recession in late 2007.

US is all about driving around for everything since it is so large and geographically dispersed without the appropriate rail/bus system (outside of the top 100 cities). It is not unusual to drive 50 to 75 miles per day to get to job and back, with the average of 12,000 to 16,000 miles per year per person (not family). Therefore, above curve down in the chart shows the true effects of the loss of jobs, which reduces the number of cars on the road and shows the reduction in activity, consumption and therefore, justifiably a lower GDP on the cards in 2011-12.

For investors around the world, this is a sign of worry that needs to be treated seriously. I have been talking about it and reflecting in my portfolio holdings (mostly in non-US currencies, fixed income investments, and a handful of small dividend paying instruments in the US). For the Indian portfolio, it is pretty much 30%-40% in cash holding, with the rest of them being part of a long term (hold) portfolio.

What do you think about your own financial health situation in 2011 and 2012?

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (Jul 2011) – a guest post

Michael Moore’s hard-hitting documentary, ‘Bowling for Columbine’, made an interesting point. The government and the TV channels do their best to keep Americans in a state of fear – so that they consume more! Remember the Y2K scare? Shelves of department stores were empty of water, canned food, torches, batteries, guns and a myriad other goods required for survival. People bought truck loads of the stuff. On Jan 1 2000 – nothing happened. No crash, no collapse. But a lot of goods consumed.

Following the economic downturn in 2008, a similar fear scenario played out across the USA. It was going to be worse than the 1929 depression. There would be riots on the streets. The US dollar was not going to be worth the paper it was printed on. Stock markets would crash and retirement benefits will vanish into thin air (a la Enron). Yes, unemployment is still high and the housing market is in doldrums. The doomsday theories have only led to a phenomenal rush to buy gold – but Americans are not getting fooled this time. They are tightening their belts – well some are – and digging in for the long haul.

In this month’s guest post, Kiran provides a ‘ground-zero’ report of the US economy.

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Global Growth Slow, But Continues…

The global recovery from 2009-10 has broadened to encompass more enterprises, more countries and more elements that show aggregate demand. Improving labour market conditions in high-income countries and strongly expanding domestic demand in developing countries augurs well for a continued maturity of the recovery that is more than two years old.

The recovery here in the USA has gained strength over the past 8 to 12 months and shows signs of becoming more self-sustaining, although all of it has happened in an atmosphere of disbelief that it is real. Of course, Aug 2^nd 2011 deadline for raising the debt limit being around the corner, makes this recovery a huge suspect in the minds of many without a Quantitative Easing – Part 3 (QE3). At this point, QE3 is not being discussed although Bernanke has hinted that he would be ready to pull it off if the situation warrants it. In the US, significant gains in levels of manufacturing and services activity, business re-investment and technology upgrades have helped improve conditions in U.S. labour and professional services markets. Most of the technology upgrades that we see are destined to either reduce labour costs, or reduce the current monthly expenditure (lower powered servers, more automation, VoIP, Telepresence, Call Center automation etc).

The recovery in Europe continues to face substantial uncertainty surrounding sovereign debt in several Eurozone members (code named PIIGS for each of the individual countries in huge debts). Germany and France have shown increasing strength; with unemployment in Germany now well below pre-crisis levels. In many other countries, growth is becoming constrained by fiscal consolidation programs, ongoing banking-sector restructuring and a skepticism regarding the financial sector. Perception is more important than reality, which is why gold is still trending upwards.

The horrible natural disaster and ensuing nuclear challenge in Japan will shape economic and human developments in that country for years to come. More importantly, all of the nuclear power plants in the US that are built similar to the one in Japan are under re-engineering to avoid a similar disaster. Despite the very real human and wealth losses associated with the crisis, its negative impact on GDP growth is expected to be temporary.

Overall, global growth is projected to ease from 3.8 percent in 2010 to 3.2 percent in 2011, before picking up to 3.6 percent in each of 2012 and 2013. The slowdown for high-income countries mainly reflects very weak growth in Japan due to the after-effects of the earthquake and tsunami. Japanese companies doing business worldwide are just starting to turn around and getting the business environment back to normal. Growth in the remaining high-income countries is expected to remain broadly stable at around 2.5 percent through 2013, despite a gradual withdrawal of the substantial fiscal and monetary stimulus introduced following the financial crisis to prevent a more serious downturn.

Contrary to the above, much of the rest of the world, meanwhile, is brimming with energy and hope. Policymakers in China, Brazil, India, and Turkey worry about too much growth, rather than too little. Rate increases in India and China are perfect proofs of efforts to curb inflation. By some measures, China is already the world’s largest economy, and emerging-market and developing countries account for more than half of the world’s output. The consulting firm McKinsey has christened Africa (part of the BRICA with the A standing for Africa), long synonymous with economic failure, as the land of “lions on the move.” That is an amazing turn for an economy – recall the pictures circulating on the Internet of kids who do not have water to drink and food to eat, and are just sitting there on the roadside. Well, a lot of that might be just a memory in Africa in the next decade.

Overall, for the cluster of developing countries growth is projected to decline from 7.3% to 6.2% between 2010 and 2012 before firming somewhat in 2013, reflecting an end to bounce-back factors that served to boost growth in 2010. The BRIC nations might have its own growth factors that are uniquely defined based on the organic growth within. Hence, their economies are more in the 8% to 10% GDP growth range, although inflation is a cause for concern in these hot economies. So, monetary tightening will continue to happen to temper the inflation.

Bringing it to today, perhaps for the first time in modern history, the future of the global economy lies in the hands of developing countries. The United States and Europe struggle on as wounded giants, casualties of the financial excesses and for the next few days, political paralysis. Economies of USA and Europe are shackled by heavy debt burdens with years of stagnation or slow growth in the offing and definitely a widening inequality – although they are not going to crash, contrary to emotional and eye catching dire predictions by some people. Analyzing the profile of family groups, and looking into their financial profiles, clearly shows the excesses in US from an income and asset standpoint. In the next one to two decades we will create ‘the haves’ and ‘the have nots’ even in these developed countries since the poor are getting poorer (with less and less government programs) and the rich will get richer buying more assets at low prices, for an eventual recovery. See below for a couple of interesting graphics:

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (Jun 2011) – a guest post

One of the best ways to find out about the true state of financial health of a company is to scrutinise its cash flow statement. The Profit and Loss statement is based on the accrual system of accounting. The cash flow statement records the actual inflows and outflows of cash, which provides a better idea about the sustainability of a company’s business model.

What about an investor’s cash flow statement? Are you keeping track of exactly how much cash inflow is being generated by your cash outflows (i.e. investments)? Specially in a sideways or sliding stock market? In this month’s guest post, KKP shares some of his thoughts on the subject.

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Lets Get Down to Cash Flow Analysis

Q1 and Q2 2011 have shown that there might be a good size recovery, giving a feeling of hope to many people in the US, as well as corporations. The economy has slowly been recovering – no doubt. But the housing and construction market rebound has remained soft despite the big QE (quantitative easing) programs from the Fed and the low-low-mortgage rates (average 30-year fixed U.S. mortgage rate is around 4.82%). The reason is simple: Stubbornly high unemployment and underemployment, and also tight lending policies from the bankers/lenders. Bankers have swung the pendulum to the other end of the spectrum and have very stringent policies. In 2002-2008, lenders would lend money to people without any money down (by doing double mortgages), and today, even if someone is providing 25% down payment (upfront cash), they are scrutinized as if they are one of the worst borrowers.

Predictions show that home prices will fall around the 5% to 10% in 2011 compared to 2010, and they will remain flat in 2012. This median forecast was part of a poll by Reuters of 21 economists who provided price forecasts. In looking at really long term trends of US home prices, it clearly shows that home prices are close to the bottom and will hover around here for a bit, and with a ‘core-recovery’ we will see a bounce up in prices (albeit very slowly).

"It is hard to see the housing market doing better until the massive headwind of foreclosures is removed and that will likely take a couple of years," said Mark Vitner, senior economist at Well Fargo Securities in Charlotte, North Carolina. With home prices still falling, many potential buyers are sidelined and banks are more stringent with loan applications and credit scores, Wells Fargo's Vitner said. "It is not that I am pessimistic about the housing market, it is just that I am not optimistic and a gradual recovery probably will not happen until 2013 or 2014, with a full normalization not until 2015," he said.

I have noticed that there is a rise in the "distressed, foreclosed and short sale" homes due to the fact that the lower home prices have put mortgage balances (what you owe on the home) above the current price of the home. Therefore, the home either goes into a short sale (seller and lender put it on the market), or foreclosure (owner cannot or will not pay mortgage), or distress situation (seller does not pay mortgage, and lender cannot afford to keep the home on the books). The net result is that the price of the home has to be marked down significantly, for investors or home-upgraders or renters are willing to look at the properties.

I am currently sprucing up a home that I purchased as a ‘distressed home’, and will be renting it out before July 1^st, 2011. In addition, have offers out on Short Sales where the Seller and Lender are considering my offers for Downtown Condos (at 1/3^rd to 1/4^th the last sale price). Even with the above flat market situation predicted, I remind myself that I am buying real estate at the “equivalent of March 2009 Sensex prices”. Remember how undervalued we were in the stock market at that time, before we took off? Real estate will NOT take off in the same manner (of course), but my tarot-charts (figuratively speaking) is telling me that I am buying it close to the bottom and have no desire to price these out for sale since I will be renting them out in the near term (2 to 5 years).

In addition, I am buying these at really ‘distress’ prices, instead of chasing them, and have the ‘patience and privilege of dividends’ while I hold. Dividends are in the form of rent here so it is easy to convince myself to hold. So, equate it to holding a stock that may not move up immediately, but will pay you almost risk free 12% to 26% in return with minimum loss of capital (if so).

Bottom line is that a lot of books have been written about ‘cash flow’ production, and with this methodology, I have found how much of a parallel it holds to Selling Calls on individual stocks being held in a portfolio. Call Selling had been a very favourite methodology of mine when I was very active in the markets in the 1990’s, and most recently as a way of reducing my stock holdings. But, in both cases, it taught me how to ‘generate cash flow’ from the holdings, and ‘make a paycheck’ out of it.

Real estate has the power to make the same with almost the same amount of time involvement. Wow. Really? Yes, very true. In India, it is even better since you can literally buy a flat/condo and rent it out, making all responsibilities of maintaining the flat a responsibility of the tenant (minus big issues). I am able to replicate the same with a team of contractors to simplify my life and do virtual-maintenance (call someone to go and fix it at low cost).

For now, think cash flow, and figure out a way to generate a paycheck or cash flow from your investment holdings. If you hold RIL or HUL for a long time, the percentage yield to your purchase price could be significant enough to get a very net high yield, especially if the stock has provided splits/bonuses. With my net-buy-price of HUL under Re 1.00, the percentage yield on the annual dividend seems like a paycheck each time it comes. So, there are many ways to skin the cat, and as one gets more experienced, some of these techniques become part of the portfolio and life, and yet, it is each portion of the portfolio that needs to replicate the ‘cash flow’ generation methodology. Traders might be good at generating cash flow from ‘trading’, but very few can do it consistently, and hence doing it with many techniques/strategies will be good for your long term financial health.

Hope you can ‘draw’ some ideas from this to your thinking and add a twist to your investments that might change the overall short and long term return, such that it gives back some cash flow which can help with your own personal goals (buying gold or silver)…..Oh, that brings me to another favorite topic of mine (gold), but we will leave that for the future….

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (Mar 2011) – a guest post

The Indian markets are on a tear once again, as the FIIs have renewed their buying after a few months of profit booking. What caused the turnaround? Is it the realisation that the US and European economies are growing a lot slower than expected earlier?

In this month’s guest post, KKP takes a look at the US housing market, and points out that while there are signs of improvement, it may take quite a while before normalcy returns. KKP is a very busy person, wearing multiple hats. Yet he still finds time to write these monthly posts to enlighten this blog’s readers about the real state of the US economy.

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Current State of the Economy and the Housing Market

Guys, as I have been writing about the state of the US economy, there are many things that surprise me and others that just go ho-hum as expected. For example, the housing data for the fourth quarter of 2010 as released in Feb 2011 indicate that the recovery in the housing market continues to remain fragile. In the production sector, single-family housing permits increased and new housing starts remained steady, although completions fell. Multifamily housing permits (i.e. apartment buildings), starts, and completions all fell, although permits and completions were down only slightly.

This really means that overall, the existing resale of real estate as well as new constructions were down in the 4^th quarter. As a result, inventories of available homes at the current sales rate decreased in the fourth quarter of 2010, reaching an average rate of 8.0 months’ supply of new homes and 9.4 months’ supply of existing homes, down from rates of 8.5 and 11.7 months’ supply, respectively, in the previous quarter. This seems like contradictory data, but it is really still a soft market. Here is a graphical representation from the CSI for Chicago:

As we started March 2011, I continued the zeal to own more real estate, and my searches have led to too much competition from other buyers like me who are snapping up ‘deals’. When I say ‘deals’, this means housing that is at the low end of the market for any sub-division or area. This means that ‘bargain hunters’ like me are tracking these houses and apartment building and bidding on those. When a home comes on the market, within a week or so there are multiple buyers, who then go into Best and Final Offers, and then the highest price wins. The above is not in the ‘auction market’. In the auction market higher prices are bound to happen since the auctioneer creates this type of a competitive environment, collects all the buyers, and sets a time-line of when someone can bid on homes. I have used ‘auctions’ to my advantage to put a competitive bid on the table for a home being sold by a broker versus an auction bid in progress for a home on the same street.

Home pricing across the US is still soft, as depicted by the two graphs below. It will take some time for the tide to rise again, although all of it depends on how the overall economy performs, and how job growth fares.

My most recent home purchase was a contract that we finalized on Dec 21^st, 2010, that finally came to a conclusion this week (March’2011)…..3 months to come to a conclusion is normal these days, and this one was purchased in a bid, although not an auction. It takes a lot of courage to put hard earned money to work, but when we get a deal for 29.723 cents to the dollar, it was hard to refuse for a 4 bedroom, 2 bathroom, 2 kitchen, and 1 car garage property (basically 2 flats in one building). You might ask, why do you think it was being given away? Because these are homes where the owner cannot pay the mortgage for more than 1 year, and it was time for the Bank to own it and then the Sheriff to come and get the home evacuated. We will do some fixing up to make it pretty and upgrade a few things and rent it out. That is a successful model with a high ROI (Return on Investment) on the investment from the rents. ROIs in property investments of this kind range from 12% to 26% on the investment today, without accounting for any capital gains on the property when we eventually sell it.

Mortgage rates are slowly coming down due to soft demand, but we are still looking at 5½% to 6% borrowing rate on any home loans with people who have a decent job. If one does not have a decent job, or no job at all, it is impossible to get a mortgage from a bank, which means that their intent to buy the house is only a dream. Too many people fall into the latter category, which is why the rental market is really hot relative to buying.

Hostels/Dormitories where kids have to live while they are in college are also raising their prices simply due to demand at Universities, but also because, rents are going up. Well, an alternative that a parent has to getting a kid into a hostel is to buy a condo/apartment/flat near the university and allow their kids to stay in it. This is my plan for my kids, although it takes time to pull off a strategy of this kind. Many parents are trying based on my research and findings. This again must be due to the fact that condos have gotten cheaper and dormitory fees have gotten higher ($11,000 per year per child for 8 months of University studies which consists of 2 semesters).

Jobs on the other hand are very selective and almost a privilege to have, and hence everyone is working their tail off to keep their job, and advance in their career. Corporations are optimizing their resources heavily while putting a ton of automation into their business processes to eliminate heads. This steady reduction in work-force and the doldrums in the economy are going to continue to put a lid on real estate market (ownership), whereas it is going to keep the rental market alive and well for 2 to 5 years (minimum). I do see the real estate market starting to turn in 2-5 years (by 2015) assuming that we do not get any effects like Japan in the US, or economies like Japan does not affect the overall US economy or US dollar.

Technologies that make the US economy more efficient are being implemented by corporations with video conferencing, Voice over IP, variety of portals, automated scripting, cloud computing, Web 2.0, alternative energy, Pads of all kinds, mobile platform (along with automation) etc making our world simpler/faster/better. This is bringing some stability to the people who are part of the leading edge technologies (sales, implementations and operations). Service industries that serve the running of the economy are also surviving, but if the business model is weak, then those are getting weaker day by day, and the weaker ones are tumbling. This is keeping the unemployment at the published 9-10% levels, although who knows what the real number is below the surface.

We shall see what 2011-12 brings with it…..Once again, if one has a good job and is keeping up with the changes, then this economy is soft or in recession. If one is not keeping up with the technological changes, then this is a recessionary environment for them, but if one has lost their job, it definitely feels like a depression.

In the meantime, enjoy the super-bull-market of India – everything has a cycle, so just as the pundits say, things do not grow to the sky, and everything that goes up has to come down. So, capitalize while you can, since everything does not stay green all the time!!!!!! Please put views from your rose coloured glasses on the blog as usual….

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

Notes from the USA (Nov 2010) – a guest post

In this month’s guest post from the USA, KKP lucidly explains the current state of the US economy. The unemployment situation, consumer spending, real estate market and the state of mobile technology have been covered in his inimitable style. He is a very busy person, and I am grateful to him for sparing time from his tight schedule to write these posts every month. If you enjoy reading the contents – as I am sure you will – please let him know by leaving a comment.

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State of US Economy from Ground Zero

Just returned from a 10 day vacation during which we visited three different cities and was able to poll a lot of family, friends and strangers about the state of the US economy.

In a nutshell, the economy is faltering, but moving forward at a slow pace, with a small ray of light visible in Oct. and Nov. People with jobs are living their same old life, and those without are struggling pretty badly. Unemployment pay from the government is kicking in for those unemployed for over 52 weeks to let them survive. Also, there is no end in sight for those unemployed, or for those looking for a greener pasture for new/better jobs. Pay increases are rare, while the cost of living is increasing in certain sectors, especially healthcare, insurance, automobiles, and labour.

Real estate is slowing down due to the winter-season. Government homes are being sold with a bit more vigour, and new rules will allow faster processing of the same. The shopping season from Nov 15^th through Jan 5^th is a huge measure of the economy, and my feeling is that we are going to see electronics sector show marked improvement, while rest of the sectors (home, furnishings, clothing, high-end elements, décor etc) will show a pull back.

U.S Labour shows the following pictures to us, and I fully agree with it based on the recent trip:

Looking Forward

Based on a poll done with white and blue collar workers, an upswing in electronics spending is expected. Better than one-in-four respondents (26%) say they’ll spend more on consumer electronics over the next 90 days and only 29% say less – a big 8-pt jump from last month and a net 3-pt improvement over a year ago (Nov 2009).

A Jump in Laptop Buying Among Consumers is the reason for this fuel being added. The survey also found a big jump in planned laptop purchasing, with 10% saying they’ll buy a laptop in the next 90 days – 2-pts better than last month and matching the highest level in this survey in three years. Planned desktop buying is down 1-pt from previously.

The introduction of Tablets, iPads, Samsung Galaxy and other ‘Smart Phones’ is really fueling a lot of employment and the spending amongst the middle income earners. The generation of kids moving upward from the ‘dumb’ phones to ‘smart’ phones is also helping. As Microsoft, Motorola, Samsung, LG, Kyocera and others launch the ‘pad’ craze, there will be more of it. Of course, only selective buyers can afford the upfront fee, and the monthly service fee associated with it.

But, there is a place for these devices in the consumer marketplace, as well as in small businesses. Imagine waiting in a Doctors’ office and getting an iPad to check your email/voice-mail and other web-sites. You will never complain about the ‘delay’ in the doctor getting to you. This allows the doctors to book ‘more’ appointments. Just know that ‘this idea is coined by yours truly’, but people are going to start thinking about this.

All in all, unemployment is holding steady, with people being laid off on one side, and over-time being paid to currently employed, while certain electronics industries are selectively hiring.

The up move in the US stock market is breathing life into individual investors, and allowing trading firms to continue to pump money into automation, more programming for automated-trading (called High Frequency-Trading) and giving a feeling of relief to the retirement accounts that have taken a beating for the last 3 years.

Real estate is still in the doldrums, and more so now since we have zero degree centigrade weather in the Northern part of the US (normal). This slows down searching, buying and selling, which means that inventory shows a bump up. This is when investors like me put on two coats and cruise the city for ‘deals’. On the other side, as I prepare apartments for rent and put out a sign, they get rented within a week or two. This is a record time showing that more and more people are not getting loans, and/or are walking away from their homes since their mortgages are upside-down (loan is greater than value of home, by a margin).

Finally, technology is turning from ‘wired’ to ‘wireless’ with the introduction of ‘true 4G’ technology to individuals and businesses. This will ‘truly’ revolutionize the way we live, think, do, download/upload, entertain, get updates and control our own individual world. We are talking about 10mbps up and down speeds allowing HD movies to be watched while we are walking around, and controlling home devices from miles away.

This may be the ‘catalyst’ that will fuel fire into the US economy in 2012-2015 with embedded devices/chips inserted in anything/everything, making the movie with Will Smith (iRobot and Enemy of the State) a full reality. Lets see how this pans out…

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

About Economic tides and Stock Market trends

In a book written nearly 70 years ago but which is still relevant today, Edwards and Magee compared stock market trends to tides, waves and ripples in the ocean.

Major or Primary trends - 'bull market' for an up trend and 'bear market' for a down trend - last for a year or more. A 'bull market' can be compared to an incoming tide 'which carries the water farther and farther up the beach until finally it reaches high-water mark and begins to turn. Then follows the receding or ebb tide, comparable to a Bear Market'.

Intermediate or Secondary trends - that last for 3 weeks to a few months - are declines or 'corrections' in a 'bull market' and rallies or 'recoveries' in a 'bear market'. 'While the tide is rising, each succeeding wave pushes a little farther up onto the shore and, as it recedes, does not carry the water quite so far back as did its predecessor. During the tidal ebb, each advancing wave falls a little short of the mark set by the one before it, and each receding wave uncovers a little more of the beach. These waves are the Intermediate trends - Primary or Secondary depending on whether their movement is with or against the direction of the tide'.

Minor trends are part of Intermediate or Secondary trends that last for only a few days, and are meaningless for investment purposes and often prone to manipulation. 'The surface of the water is constantly agitated by wavelets, ripples and "catspaws"
moving with or against or across the trend of the waves - these are analogous to the market's Minor trends, its unimportant day-to-day fluctuations'.

The vast majority of the world's population have neither any interest, nor any inclination towards investing, in the stock markets. For them, the state of the economy - the rising cost of daily groceries, interest on mortgage payments, cost of petrol are of greater significance.

To extend the ocean analogy further, I would like to compare the ebb and flow of the ocean's tide to the state of the economy. During economic up turns, production booms, jobs are plentiful, consumption of household goods and luxury goods go up - leading to expansion in production, more jobs, more consumption, till finally, inflation and higher interest costs take its toll and the economic tide turns.

Over the past several years, the economic tide is gradually flowing towards the emerging markets and ebbing from the developed markets. It didn't happen in a day and the economic balance has still not shifted completely. But the signs of this shift are becoming apparent.

A look at the world market indices will suffice. While the Shanghai Composite, Hang Seng, TSEC, KOSPI, Sensex, Bovespa are all trading above their long term averages, the Dow, FTSE, CAC, DAX are still struggling to cross their 200 day EMAs.

This gives a clear indication of where the economic recoveries will happen first. Irrespective of whether we are in an intermediate bear market rally or in the primary stages of a bull market.

Will the H1/L1 US visa restrictions 'news' affect the IT sector?

A couple of months back, I had written a post about how to use financial news. Four categories of 'news' were discussed - good, great, bad and worse. Some suggestions about how to deal with such news were given.

What if there is a fifth category? Some item that appears in the pink papers or business channels as 'news' and causes some turmoil in the stock markets - but later turns out to be a misinterpretation? It wasn't really 'news'?

It is difficult to take any action till you receive further clarifications. Or, you may have an 'insider' in the industry or sector who can separate the wheat form the chaff and go to the core issue to advise you.

The recent 'news' about the H1/L1 visa restrictions for temporary non-immigrant workers in the USA is a case in point. The business channels went to town about it, asking leading members of the IT industry how these restrictions will affect their top lines and bottom lines.

Some retail investors dumped Infosys, TCS and other IT stocks. Some even stated that the leading IT sector stocks had become 'fundamentally weak'. The 'smart money' lapped up the stocks.

Any one who has spent a few years in the IT industry and has worked in the USA would take such 'news' in their stride. Because (s)he would know that similar 'news' keeps popping up every so often only to dissolve without a trace.

Why? Because the visa restriction 'news' was only a proposal by a couple of senators - pandering to the popular misconception that most of USA's unemployment problems have been caused by jobs being outsourced to India.

It takes a very long while - some times, forever - for such restrictive proposals to become a law. The proposal needs to be tabled and passed in the US Congress and the Senate. There will be a strong Indian-American lobby that will be working against it.

Even if the proposal gets through both houses, it is likely that there will be several amendments made to the original draft proposal. Each amendment will take its own sweet time to go through.

The US President has to sign the revised proposal to turn it into a 'law'. He has the authority to turn it down, or - you guessed it - seek more amendments. Many such proposals never get to become a law. Even if it does, most of the severe restrictions are likely to get diluted.

At the end of it all, should the visa restrictions become a law, it will not take effect retrospectively. Meaning, existing H1/L1 visa holders will not be affected. Only new visa applications made after the law comes into effect will face the restrictions.

Who might get affected the most in the IT sector? It will be the small body-shoppers whose business model is to hire out programmers to different US companies.

Also affected will be large US IT companies like Microsoft, Oracle, Cisco who employ significant numbers of H1/L1 software personnel from India. They will face difficulty in finding new employees from the US job market. So they will probably be lobbying the US government to veto such a restrictive proposal.

Infosys, TCS, Wipro have globally dispersed businesses, with a large portion of the work done 'offshore' in India. They will be inconvenienced, but the effect on their top line and bottom line will be very little.

Stock Market News, Financial News - Mar 10, 2009

IOC to raise Haldia refinery capacity by Dec '09

NEW DELHI (Reuters) - Indian Oil Corp will shut a crude unit at its 120,000 barrels per day (bpd) Haldia refinery for about two months from mid-October to raise the refinery's capacity by 25 percent, a company official said on Tuesday.

"We are raising the annual capacity of Haldia refinery to 7.5 million tonnes (150,000 bpd). Our target is to increase the capacity by the end of this year," director of refineries B.N. Bankapur told Reuters.  (More ...)

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Global economy to contract in "Great Recession" - IMF

DAR ES SALAAM (Reuters) - The world economy is likely to shrink to "below zero" this year, in what many are now referring to as the "Great Recession", the head of the International Monetary Fund said on Tuesday.

"The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes," IMF Managing Director Dominique Strauss-Kahn told African political and financial leaders in the Tanzanian capital.  (More ...)

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'US economy set for 2nd half rebound'

Financial Express

The recession-hit US economy is proving weaker than economists expected just a month ago, but forecasters still think a recovery is in the cards for later this year, a survey released on Tuesday showed.

"Consumer spending and residential investment are expected to turn positive and begin boosting GDP growth in the third quarter of this year," the newsletter Blue Chip Economic Indicators said, summarizing its survey of private economists.  (More ...)

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Job market seen weak in June '09 quarter

Financial Express

The Indian job market will remain weak in the June '09 quarter with a record number of companies undecided on hiring due to economic concerns, but it will be better than in the March quarter, a survey showed.

Sixty-four per cent of employers were uncertain about their hiring plans for the coming quarter, the survey of 3,600 companies across seven industries by staffing services firm Manpower showed on Tuesday.

The net employment outlook was at a seasonally adjusted 25 per cent for April to June, above a 3- year low of 19 per cent in the March quarter but 17 percentage points below the figure in the year earlier period.  (More ...)

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Tower erection plans could dip 40%, valuations to take a hit

By Rachana Khanzode, Indian Express Finance

Valuations of tower companies are expected to take a hit, with almost a 40% cut in the projected tower erection plans of telecom companies. As many as 2,00,000 towers of the total 4,96,000 planned by 2011 are expected to be dropped, according to industry analysts. The projections for towers include those by independent tower operators, operators with tower companies and telecom operators.  (More ...)

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Two-wheeler market not hard-hit by slowdown

Indian Express Finance

Defying the downtrend blues, the two-wheeler market is still witnessing a positive growth in the consumer market, said S Srinivas, general manager, marketing, TVS Motor Company, at the launch of the latest edition of the Scooty series, 'Scooty Streak'. Speaking about TVS, he said since April 2008 up to February 2009, the company has maintained an average growth of 5%, coinciding with year-on-year growth of the same. Performance indicators like inventory cycle also remain healthy, at a span of seven to eight days, he noted.  (More ...)