Markets, Economy and everything else...: ... And all fall down

How turbulent these last 2 months have been. September and October 2008 (possibly subsequent months too, hope not) will be known as the months which finally dealt a bloody blow to the shaky financial markets.

We had some drama around US Senate approving/not approving the 'bailout' package (These days it is known as the TARP - Troubled Assets Release Program) which saw the markets swinging like yo-yos. However, the swings of that week turned out to be nothing compared to the relentless selling that has happened since. Some stocks are quoting a such ridiculous valuations that its beyond belief. Every fall seems to be an enticing opportunity, only to fall another 10% couple of days later.

No asset class is safe, neither oil, nor base/ferrous metals, nor precious metals, nor fixed income debt instruments (with counter-party credit risks at all time high, Fixed Maturity Plans expected to lead us into the next financial crisis, atleast wrt India). Not even plain-jane bank deposits (though we have come forward some way since the feared run on banks couple of weeks back e.g. ICICI). So where do people keep their money. Even keeping money at home is going to erode away its value given the 11% inflation.

.... Did I mention inflation... This is one paradox I cannot understand. With all prices tumbling down, how the f**** are we still seeing a double-digit inflation so many weeks into the credit crisis? Puzzles me no end!

This seems to be a once in a life-time crisis to which not too many people know how to react/cope with. I have been 'buying on the dips' so as to say, only to find the investment losing value with every passing day.

If 3800 Nifty levels looked like strong support only a month back, now 3800 Nifty levels represent a 50% jump from present levels!!!!! What we are facing here is unprecented fall in valuations. At current levels of 2500 Nifty, we are looking at 9x Nifty earnings, a far cry from 28x from Jan 2008 levels. In Jan 2008 Nifty was 6000+ levels.

Whether these falls are fundamental in nature or technical in nature is difficult to judge. There are talks about lot of hedge funds facing massive redemptions, forcing them to sell their assets.
I think its safe to admit, part of the rallies in global markets was driven by the ample liquidity available. Liquidity chasing everything, all kinds of asset classes. Liquidity, which also was responsible for the subprime credit crisis.
It is this liquidity which is being sucked out by a giant vaccum cleaner. That vaccum cleaner is located in the United States.

.. That brings me to another conundrum, strength of the dollar and associated falling commodity prices. When US is looking down the barrel of an all time high budget deficit, why is the US dollar strengthening? Most of the financial companies engaged in a world wide orgy of liquidity are US based, now they are all reeling that back in, at whatever price they can get. Does not the huge budget deficit in the US concerning anyone? I was expecting a run on the dollar, biggest threat being the Chinese with 1+ trillion dollars in foreign exchange reserves. Instead, I am seeing a stronger dollar.

Indian Rupee has moved from levels of 39 to a dollar last year to all time high of 50 this week!

Over 6 trillion of $ all over the world are coming home to US, resulting in a stronger dollar. On the flip side, this movement of liquidity could see the export driven US growth vanishing.

Gold is supposed to be the place to be in such turbulent times, but its falling instead, partly due to stronger dollar!

There are so many companies whose valuations are biting the dust. Few of them are quoting at values way below their book values, sometimes even below the cash/investment value they hold. This means a stock A, has (liquid) book value of 10 INR per share, and market is valuing that 10 INR at say 8 INR! This means market is no longer looking at companies as a going concern basis? And the company I am talking about has a 20% ownership stake by Government of India. Go figure!

I have not seen such times before so I will no longer go and suggest to continue accumulating. I still continue to accumulate stocks in my portfolio, but at a much slower pace, partly to do with the fact that I want to hang onto my last tranche of investible funds for better valuations.
As of today, my non-Infosys equity portoflio is down 30%. It means at Nifty levels of around 3300, I break-even, which is not too bad. And if I include my Infosys holdings, I am still up 17%!
I have been judicious in split between equity and non-equity investments on the side of being conservative, so these falls are not giving me sleepless nights.

If turbulent times continue and US continue to falter, Gold however still looks to be as the only asset of hope! (I have increased my Gold holdings) Else if all else fails, go back to basics, take up farming!

Wish all the readers better returns going ahead

This is the distribution of my holdings across sectors on a cost basis. I intend to increase my Agro, Power and Oil & Gas holdings