THE RALLY LIVES ON...HOPE BACKED UP WITH FEAR IS ACTUALLY DRIVING THE MARKETS, AS MARKETS TRY TO FIND A BOTTOM. HOPE ON THE BACK OF FEAR BECAUSE NOT ONLY EQUITIES ARE RALLYING BUT AFTER A LONG TIME TREASURIES AND COMMODITIES (INCLUDING OIL AND GOLD) ARE RALLYING AS WELL. BUT, IS THERE ANY STEAM LEFT TO THIS RALLY – I BELIEVE “YES”, READ ON TO FIND OUT WHY

1. [THE RALLY LIVES ON]
March 13, 2009
HOPE: The rallies lives on…BUT…they still are Bear Market Rallies
I reiterate my statements made in my earlier article that In my view, the Indian equity
market, in wake of less news flows, with anticipation of more of bad news flows rather
than good ones on domestic front will move largely on the back of 1) moves seen by
global equity markets, and 2) global news flow or as events unfold globally especially
US. These events as and when unfolds will be the guiding factors for Indian markets as I
do not see any news flow to come either from govt. (due to elections) or RBI (due to its
own problems). For details refer my previous article titled “Optimism Play – Bulls
are back at-least for now with markets trying to find a bottom on the back of
hope”.
And this is precisely the reason, why I continue to focus more on global markets
especially US markets, because I believe, the direction to our market would be provided
by the events which unfolds globally especially US markets. I continue my believe that
some news flows, on which our markets could react on, would be IIP numbers, Inflation
data, GDP data etc but only on that particular day and in my view is less expected to
provide any guidance to the markets for the medium or long term. And my views further
gets strengths from the reaction seen by our market by Today’s IIP and Inflation data,
which might have provided some comfort when Inflation data came (markets rallied
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2. [THE RALLY LIVES ON]
March 13, 2009
within that frame), market went down (when the IIP numbers came), and closed with a
modest gain as European markets and US markets futures were looking bad.
Global markets (especially US) continue their rally
As I write this article, all major US market indices such as DJIA, NASDAQ, S&P 500
were up over 3% each (close to 4%). With Dow Jones getting above 7,100 (a crucial
technical level), closing at 7,168 (up 3.4%) and S&P above 741 (a crucial level watched by
technical chartists) closing at 751 . Here are some examples of who is rallying:
Today’s gain now translates into a double digit gain for all the three major indices
in US within last three days of trading with S&P & NASDAQ rallying by 12%.
Surprisingly the S&P banking index surged 45% in last three days of trading,
GE rallying a whopping 65%.
CITI, which traded at 98 cents three days back, is now trading at 1.63, a gain of
over 60% over three days.
Bank of America has gained 86% this week.
And this brings an element of doubt in people’s mind that markets are out of woods, but
I strongly doubt it.
After a long time safe haven such as Treasuries and commodities rallied
along with equities: a sign HOPE is backed by FEAR
My previous article talked about why this optimism at-least for the time being is giving
way to HOPE, Hope that market might have seen the worst of bad events or
environment, but surprisingly on the back of FEAR. As today when markets rallied in
US (with each major indices up 3%), one interesting observation to look for was, along
with rally in equity markets after a long time treasuries and commodities including Oil
and Gold rallied as well. And the reason was clearly the fear about losing money in
equity markets.
This generally will not happen, when things starts looking good and these would rather
move on opposite direction. But the fact is that the FEAR is still deeply embedded in
investors mind, they still are looking at investing in so called safe haven such as
Treasuries and Gold. This clearly makes a point that this rally is short lived, and
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3. [THE RALLY LIVES ON]
March 13, 2009
investors are still looking for safe avenues to put their money into; as reflected in
decreasing bond yields or rising bond prices or rising
Bear Market Rallies are brilliant in changing one’s perception
How brilliant BEAR MARKET RALLIES are into changing one’s perception, BUT one
has to realize that at the end of the day they are Bear Market Rallies. The question is that
this economic turmoil, which has shock economies and banking system around the
globe starting with west and spreading into European countries and then to emerging
markets, had its foundation going in years, HOW three days or couple of more days of
rally could change the already destroyed confidence or could change the worst macro
data with respect to credit flow, mortgages, consumer spending, unemployment rate,
jobless claims, retail sales and so on and so forth… I have my strongest of doubt over it.
BUT…
I believe that problem in financial sector is just a part of the larger economic problem or
what threatens economy, which gets further complicated with problem from Credit
crisis, consumer spending, housing, retail sales, unemployment rate, jobless claims and
so on and so forth…
The global macro data suggests things are worsening and there is absolutely no sign of
stabilization as of now forget about improvement, and today’s data about Japanese
economy further getting into deep recession and Chinese exports falling even further
confirms these. If things would have started looking good, there would not be a world of
expectation from the upcoming G-20 summit in London in April with respect to a global
coordinated action and more oversight by regulators around the globe within their
respective territory or increasing and strengthening the role played by global
institutions such as IMF or World Bank. For more on BUT’s (the bad things) please refer
my earlier article dated 11th Mar’09.
In the last three days or since Friday, markets around the globe have started looking
good, though our market unfortunately was deprived of this “Goody-Goody” look, due to
two continuous holidays. And I am sure market participants in India would have been
wondering, why these two holidays had to come in this period.
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4. [THE RALLY LIVES ON]
March 13, 2009
Markets especially in the west have started looking good, all of a sudden. Environment
starts looking better when everyone starts seeing a green tick on the indices, but this
time the green tick is not light green, but looks like, it has got a darker green shade
within it.
Why are markets rallying and has it got some steam left? I believe YES,
BUT…, as I wrote in my previous article dated 11th Mar’09
Financials have led this rally with S&P Financial Index up 45% over last three
trading days.
It all started with Mr. Pandit comments about his bank performance during
January and February of 2009.
What had to be followed was more words of encouragement by another banking
giant CEO, Mr. Dimon of JP Morgan Change & Co. He also pointed that his
bank has been profitable during first two months of this calendar year. Refer my
earlier articles dated 11th Mar’09 on why are the banks stocks looking
good?
The retail sales in US fell by lower than expected number.
General Motors, which desperately needed money in the month of January,
without which the larger speculation in the market was that GM would go
bankrupt, now saying that they would not need the 2 billion US$.
General Electric which was up 65% over last three trading sessions, rating was
downgraded but just one notch lower to AA+ against the expectation of AA-.
Dollar losing strength against major currencies over the last couple of days is
further supporting this rally as well.
The Mark to Market Accounting Factor
o The debate over MTM continues with odds in favor of not entirely
suspending this rule but at-least modifying it in the current scenario and
find a method which will enable banks or financial institution to value
their illiquid assets more efficiently. For more details refer my previous
article titled “Optimism Play – Bulls are back at-least for now with
markets trying to find a bottom on the back of hope”
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5. [THE RALLY LIVES ON]
March 13, 2009
The expectation that Up-Tick rule would be restored
o The regulatory authorities in US taking a second look at the uptick rule;
the uptick rule limits short-selling in stocks. The uptick rule allows short
sales only when the last sale price was higher than the previous price.
Under this rule one cannot sell a stock, if the last tick is negative, it has to
be positive. It will prevent short sellers from piling on. The expectation is
that it will discourage short sellers in taking position; as most of them had
been held responsible for hammering down the stock prices. (for more
details refer my earlier article date 11th Mar’09)
The Obama Factor
o Mr. Obama’s word of assurance that people deposits are safe and he is a
firm believer of free market economy.
o His reiteration that he even does not like the idea of spending govt. money
on the back of already one Trillion US$ of deficit that he inherited, but
these extraordinary times requires extraordinary measures. And that is
why he has chosen to investment in infrastructure spending, which will get
the economic cycle moving starting with jobs creation.
o He emphasized that to get out of this BUST and BUBBLE cycle; his
administration has chosen to invest in areas through his budget, which are
areas of future growth such as education, healthcare, research, science &
technology and energy etc.
o One apprehension, which everyone is having on Mr. Obama is his
spending spree and subsequently larger deficits and apprehension over his
plans to reduce the deficits by half during his first term, again a word of
assurance that he has clearly identified areas through which this deficit
could really be halved and he is not using budget gimmicks to make
deficits look smaller.
o Mr. Obama words on Tax Plans will further surely encourage markets, as
he again reiterated that with respect to taxes:
 Till 2010 no taxes for individuals and corporate houses would be
raised. Their taxes would remain the same.
 After 2010 97% of tax payers will still not be paying any increased
taxes.
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6. [THE RALLY LIVES ON]
March 13, 2009
95% of working families will receive tax credits even till 2010.

The Geithner Factor
o Till now markets had little expectations from Mr. Treasury Secretary Plan,
but with increased news flow, now the expectation is having some positive
bias. The positivity has come because of market expectation of his details
on dealing with getting rid of TOXIC ASSETS from banks balance sheet,
which he will be outlining in next couple of days. This time market believes
that his plan to involve private sector in dealing with toxic assets will
bring in transparency and will put in a floor for these toxic assets pricing.
The markets are largely awaiting his plans to get unveiled and HOPING
that these toxic assets in form of SUB-PRIME MORTGAGES, MBS, ABS,
CDS, CDOs, CLOs etc , most of them which are illiquid; bringing in private
investors or private parties will bring in some sort of liquidity and stability
in this market, which is the need of the time. Financials, in my view will
further benefit from this move as the large write-downs they had to
provide on their books (thanks to an accounting phenomena called Mark-
to-Market or MTM) without any support of liquidity will slow down as
private investors enter this market and they try and find the true value of
these assets; helping in providing at-least a floor in terms of pricing these
complicated toxic assets.
Expectation from G-20 to align a different interest, which looks
increasingly possible at this point in time.
o Time for every govt. to provide support to stimulate demand
o Financial regulation for a stable global financial system
o Looking for ways to solve problem towards emerging markets as emerging
markets have gained in importance in this world economic scenario
o Not dropping back to the bad word called “PROTECTIONISM”
Thanking You,
Warm Personal Regards,
Vinit Tulsyan
http://vinittulsyan.wordpress.com
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