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Ref: 10-003 of 24 Jan, 2010 PDF Download from ScribD or Download Pool SidebarDear Readers,The correction has started precisely on the date we mentioned – 21
st
January, 2010. We predictedit more than a month ago. Now, the situation has taken turn for the worse. The trigger wasprovided by President Obama’s proposed clamp down on the banks proposing far reachingregulatory actions to rein in the banks in terms of their size and activities. A separate article willappear within a few days titled – OBAMA WAR with INTERNAL TERRORISTSDow has lost over 5% in 3 days. S&P has dropped to 1093, slightly above critical level of 1083. I donot care for technical indicators. My forte is fundamentals. The core fundamentals are worsening.
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Bernanke’s extension as Fed chief, once considered almost a done deal, is now in seriousdoubt. If he is reconfirmed, there may be a short reprieve for the market.
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The future of Treasury Secretary Timothy Geithner is also in doubt. The AIG dossier isbecoming murky. The testimony of Paulson with Geithner in relation to AIG affairs is dueon Wednesday, 27
th
January, 2010. It means that the Senators know somethingignominious more than the investors are aware of.
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There are indications that the Senators have finally realized the extent of damage done byHenry Paulson of Goldman Sachs and Ben Bernanke from Fed.
o
President Obama’s
pathani
demand “We want our money back” alludes that the$306 billions non fund based guarantee given for Citigroup’s worthless debt at behest of Paulson – Bernanke combine are maturing into real fund based liabilities.
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Read with massive profit of Goldman Sachs, and Citigroup’s insistence to cancel out the “loss sharing agreement with the Fed/Treasury”, the Senators and the President Obama appear to have realized the “foul play” and “Criminal conspiracy” against theState. Many frauds may come to light. It could have massive effect on Wall Street.Even Warren Buffet could become controversial. His days are beginning to have “U”turn for long.
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Two days – Saturday and Sunday, have passed since the President Obama disclosed hisplan to rein in the banks, their size and their disapproved activities. The era of $25 billionsof profit for the bank is gone for ever.
o
The earnings of almost all banks will be downgraded by the Analysts up to 30% to80% that could collapse the prices of major money center banks. The entire bankingstructure globally will be re-assessed on severe downside. Bank of America, JPMorgan Chase, and Wells Fargo could face the burn of third degree.
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There will be further lending squeeze from these banks raising real market interest rates.
Red Alert for Global Stocks – Tsunami 7 by Kalidas (Anil Selarka) Page 2 of 7
Copyright © 2010 Kalidas (Anil Selarka)General permission is granted to bona fide newspapers, magazines, students, professors, economists, educationalinstitutions for to reproduce or copy for non commercial purpose subject to quoting this Author or his website as originalsource. No permission is granted to quote this article out of context so as to mislead the readers
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If these banks can not make double digit billions of dollars of profit for next 5 years, ,they will never be able to recover the past losses. Nor will they be able to raise newcapital due to poor earning prospects. Fed/Treasury window will be shut for good.
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In short, some major banks could become officially insolvent.
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Goldman Sachs and Morgan Stanley may surrender banking license to avoid aboverestrictions.
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The global banking giants operating in US such as Barclays, Deutsche Bank, UBS andCredit Suisse may have to realign their business. UK and Europe too could adopt similar measures with similar effects. UK and Europe always play monkey game.
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SEC is preparing for some tough times ahead. Bloomberg reports on 23/Jan that “Concernthat short-sellers accelerate stock declines may prompt the Securities and ExchangeCommission to adopt a rule next month aimed at curbing bearish bets when equities areplunging.” It adds that “The regulation would require the trades be executed above thebest existing bid in the market when shares fall 10 percent in a day,” In short, alarm is on.Massive collapse is about to set in from Monday onwards. It is scary. It was inevitable; we weremerely waiting for the trigger. President Obama provided it. He is not to blame for what heproposes. It is the way he has presented them and timing thereof. He is under extreme pressure toperform that is telling on him for his expediency.
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The markets may lose anywhere from 5% to 15% in short time (< 1 month), and 15% to50% in medium term (< 4 months) if the short term correction takes place.
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Margin calls will exacerbate the downside.
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Mutual Fund redemptions could cause massive slides.
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Money could become scarce overnight. Overnight Call rates could zoom and stay there forunduly long time forcing short term rates to rise. My previous article “Maturity Mismatch’may become reality as projected.
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Monday could be the beginning of Tsunami wave, category 7. So many things could happenswiftly in short time.
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Massive losses to investors will become a hard reality. What they lose this time may not berecoverable in next 3 to 7 years.
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The only reprieve will come when the Bernanke is allowed to continue his job. While he haslost all credibility and should not be confirmed, it is in the interest of the market that hecontinues for a while (temporary extension) until his successor is chosen. If he loses thejob, one may be waiting for him at Goldman Sachs.This time, protecting capital is more important than the earnings. If you have capital left, therewould be earnings one day. It is not necessary to make money in every trade every day. It isenough if you made good money some time rather than a little money every time. We thereforesuggest the following from Monday onwards.There could be huge meltdown. All markets may go down Minimum 3 to 7 days continuously invarying degree.
US Market:
1.
Dow may lose another 14% (1400 to 1500 points) and then rest before going down again.2.
If S&P goes below 1083, it will be bad sign for technical analysts. In my view that it will bebreached.
Red Alert for Global Stocks – Tsunami 7 by Kalidas (Anil Selarka) Page 3 of 7
Copyright © 2010 Kalidas (Anil Selarka)General permission is granted to bona fide newspapers, magazines, students, professors, economists, educationalinstitutions for to reproduce or copy for non commercial purpose subject to quoting this Author or his website as originalsource. No permission is granted to quote this article out of context so as to mislead the readers
3.
NASDAQ may outperform DOW.4.
Buy Put options on S&P 100 known as OEX-100 and Nikkei 225. These are very volatile.5.
Do not trade S&P 500, it is less liquid and does not move fast.6.
SELL short or Buy puts on ADRs of Wipro (trading at 43% premium) and ICICI Bank (-3%) andHDFC Bank (+15% premium). The heavy premium is usually lost in meltdown. Further, onecan keep short position in US market on any equity or ADRs for about 12 months by payingsuitable margin. Check with your US broker first.7.
Think of accumulating undervalued stocks like MTNL with Zero debt where discount will risedue to meltdown making it attractive. Stronger rupee tend to add more value in $ terms.8.
Indian ADRscould develop more discount than shown today, making them more attractive.Some counters are better bought as ADRs than underlying equities in India. If you have choicebetween domestic share and ADR, prefer ADR of liquid counters. (large cap stocks)9.
A strong buy opportunity may emerge in FCCB (Foreign Currency Convertible Bonds) of Indiancompanies that may be hammered in meltdown. Their yields may rise, premium contracts oreven trade at discount. They being denominated in $, stronger rupee will give better returnthan underlying shares in India. Watch out for them. Go only for well known battered countersin info tech, pharmaceuticals and telecom sector. This is for only wealthy investors having $ 1Million or more investment budget. Not suitable for local investors due to larger size lot involved10.
There could be political and social upheavals. Since hundreds of billions of dollars are at stake,and jobs being lost with increasing intensity, violent political removal at high level at manyplaces is likely. This time for a change, the war will be within United States. Law may take aback seat.
Indian Markets:
Indian growth story could be dented but will remain intact than China. India is still safest place toinvest. With US, Europe, UK, Japan and even China taking massive blow, India, Indian economy andeven Indian Rupee (if made convertible) could become real alternative to US dollar.Nevertheless, holed in the habit of taking cue from the Dow and Asian markets, SENSEX maytumble by 14% in a few days (2400 points). Huge margin calls from Wednesday onward couldpush it down further by another 1000 points. The market may reach 13,400 first, rebound for 800pts in dead cat bounce rally, followed by sharp drop down further by 2000 points. In short, themarket may lose 4600 points within one month. Even if the market recovers during intraday, it may close down near the close. Not many would want to keep their position open overnight.However, there is a
caveat
. Indian budget due in February could provide relief or act as mild bufferagainst further sharp fall. It all depends how Government of India responds. The interest ratesmay be lowered, not raised to contain inflation, and Income Taxes could be lowered for Corporateand Individuals that may provide fillip to the Indian markets. This is however conjectural. Relymore on facts than rumors or opinion. Financial expediency will prevail over political one.1.
Stock financing banks like ICICI, HDFC, Axis Bank, SBI could tumble more due to proposedchanges in banking law in United States. They will not be able to carry out their investment banking activities as before. They could be the index draggers. Do not touch them for another 1month even with remote pole. Swap them into neutral stocks like IDBI Bank or IFCI who aredomestic oriented.
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