Its cheers for the bears

Markets don’t seem to be having enough of bad news.As if high crude prices weren’t enough May’08 Industrial Production(IIP) nos. will further ruin the investor sentiment. Industrial production rose 3.8% in May 2008, much lower than revised 6.2% growth in April 2008, the government data released on Friday, 11 July 2008, showed. Industrial production growth for April 2008 revised downwards to 6.2% from earlier 7%.
Uptil now only stock market was looking weak largely due to international factors like weakening dollar, American credit crisis and soaring crude oil prices.Now the domestic picture too seems to be getting worse with each passing day.Earnings have begun to take a hit as Infosys results have shown.Macro-economic picture is looking shaky if one looks at the current data. Andrew Holland of DSP Merill Lynch(India) stated last week that India has been reduced from hero to zero in just six months. Fitch has lowered India's long-term local currency outlook from stable to negative in a move that could make borrowings overseas more expensive and might also impact investment into the country. It, however, left the sovereign, local currency and foreign currency ratings at BBB-, which indicates investment grade. The foreign currency outlook was stable.

Ridham Desai, MD and Co-Head Equity, Morgan Stanley, said the markets have made lower tops and bottoms, which confirms that we are definitely in a bear market. Fundamentals have also given way. A lot of stock market drivers are taking us further into the red. The bottom may lie around 10,500. So, the markets are likely to se more downside for the next six months."
He feels that valuations have come off. "Markets are trading around 14 times forward earnings. They are still not cheap. Valuations will get attractive around 10 times earnings." According to Desai, the markets are seeing a bear market rally. "There can be an 20-40% upside in the markets, but investors should sell into it, as one will never know when bear market end. It can only be defined in hindsight." The markets may not go though a prolonged sideways move like the one in the 1990s, he said. For the markets to rise, Desai said, crude prices need to top out.

Crude is the elixir for the current woes in the market but tight supply, geo-political situation may not let the prices decline any time soon.Domestic political situation has thankfully improved.This will help the government to go ahead with reforms which have been pending of last four years.However American credit crisis could throw up few more surprises in coming days.Wall Street is anticipating a Bear Sterns from leading mortgage lenders Freddie Mac and Fannie Mae. These mortgage companies which own or guarantee almost half of all U.S. home loans are fighting a funding crisis. Worries that the government may nationalize struggling mortgage finance giants Fannie Mae and Freddie Mac created yet another source of problems for beleaguered U.S. banks and brokers.Fannie and Freddie, which purchase loans from banks and mortgage companies, together own or guarantee $5 trillion of debt, about half of all U.S. mortgages.So their collapse will make the things worse.
High crude prices have sent inflation out of control.Fiscal deficit is widening and surged almost 50% to US $11bn for May month.So rupee is weakening against the dollar and increasing crude prices(denominated in US dollar) are giving a double whammy to Indian investors and economy as a whole. Inflation based on the wholesale price index rose 11.91% in 12 months to 5 July 2008, above the previous week's annual rise of 11.89%, government data released on 17 July 2008, afternoon showed. It was at highest level in more than 13 years. So monetary tightening becomes inevitable.This will further hit the growth.
Political analyst are skeptical about the government’s ability to prove its majority on the floor of the Lower House on July 22. Present government will take trust vote on 22 July after its Marxist allies withdrew support over Indo-US nuclear deal citing ideological reasons.
So its time to pray for a good monsoon, stable government and some really big oil discoveries to arrest this incessant decline in the markets.Till then the bear is here to stay.