Monday, December 17, 2007

Is the uptrend over?


In India, people are really very enthusiastic now and very busy, counting returns they would get in future and that too not in terms of percentage but how many folds their money would grow. That's pretty understandable specially in such times of boom (read bubble). Actually, I feel this is extension of that bubble, the last run before things collapse. I know there is great possibility that I am wrong and it would be one of those rare instances when you are proved wrong and yet it feels great to be proved so. But there are a few things that would make you worried.

The riskiest economies, all with current-account deficits and relatively high consumer-price inflation, are India, Turkey and Hungary. Those with current-account deficits are vulnerable to a sudden outflow of capital if global investors become more risk averse. Economies where inflation and credit growth are already high and budget deficits large, such as India, have less room to ease monetary or fiscal policy if the economy weakens.

Source: The Economist

US Housing Bubble: The worst thing in US housing bubble is yet to happen. Here is what fed says.
First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house.

So by 2008, mortgage thing should come out in full color.

The Expert Phenomenon: But the "great minds" must be correct in predicting whether there is a problem in the economy or not, at least partially. So, it must be better to listen to the "experts" rather than trust your own logic. Or we are wrong? Here are some Greenspan quotes from the '90/'91 recession: (recession started in July, 1990)
“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” - Greenspan, July 1990
“...those who argue that we are already in a recession I think are reasonably certain to be wrong.” - Greenspan, August 1990
“... the economy has not yet slipped into recession.” - Greenspan, October 1990
Japanese Money: Yen-carry-trade is another story. As dollar depreciates against most currencies and yen is one of those currencies, those who borrowed in japan will definitely like to pull their money out of markets and pay back their yen loans.

How Much is Too Much, How Long is Too Long: Now one would say how far can Indian markets fall, may be 15000 in extreme conditions and that would be a great time to enter. So, even if the markets fall we have a reason to enjoy since it gives you an opportunity to make even more profit by entering at low levels. Well, think again. In 1989, Nikkei was trading at 38,000. In 1996, it dove to 22,000 and people called it long-term buying opportunities. It continued its downward journey to 7600 in 2003. Today, its trading at 15,000. Same happened with Korea and other Asian economies too and it won't be a surprise if India joins the list in the near future.

Human Behavior: People are making beeline to buy companies trading at huge premium (read high PE) counting in how many days their million will turn billion. The two basic problems with such people are greed and sluggishness. They are sluggish to enter the market and often enter when the stock has already appreciated quite a bit and if the party continues, they gain, but when things turn the other way round, they are even more sluggish to get out of the market. They wait for the market to return which never happens. So, be prepared to collect your booty and run before the building collapses.

History shows that, mankind have predicted 9 out of last 3 recessions. The problem with a crash is that it presents a catch 22 situation to you. No one knows when its gonna crash and if its not a crash, then no one wants to miss the ride too. Sitting with cash and seeing the markets skyrocketing is painful as is investing and seeing them reduced to half or even less. A correction may be a buying opportunity as well as start of a recession that's gonna last 3 years or so. This is really critical to those individuals (read naive) investors who have missed out the previous rally and want to get in now or entered the markets in 2007.

Clouds are there in the sky, but whether it rains or not is just a possibility and whether to carry an umbrella or not is your decision. It is a known fact that it is always better to react to the situation then predict future. But here I'm clueless as to what must be the strategy in case market turns bearish. I am unable to figure out what to do in such a situation. 

Finally, here is a pictorial representation of amateur investors' psyche (including me). The credit goes to Saint for creating this piece of billion-dollar art.
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