Where are financial markets heading?

1 Where are financial markets heading?

I expect the trends depicted below for different asset classes to continue in near to medium term. I continue
to believe my stance that November will continue to be the toughest period to be in equities, volatility along
with sideways movement will continue to rule the markets with positive biases into it, Gold will continue its
Golden Saga, INR to strengthen during November against USD, Yields will continues its downward trend with
Bond prices making newer highs.

Good economic data (ISM
Manufacturing data), Robust auto
sales despite no Cash for clunkers
elements during October,
encouraging positive ADP job data,
earnings continue to be better than
expected just cannot lift the market
higher., but WHY? Better than
expected earnings and macro data
points were primarily the reasons,
why markets made newer highs
during Sep and Oct.

FOMC statement and its direction of
interest rates was a flop show as
widely expected will further deepen
the debate going on in the markets of
Cheap Dollars chasing all asset
classes all around the world
especially emerging economies.

Two greats, Mr. Nouriel Rubini and
Mr. Jim Roger fight I believe is
healthy for the market and I thought
it’s a good time of have my own
perspective on the fear expressed by
Mr. Rubini (expressed in red box).

India and its central bank (RBI) due
to its Gold (en) buy of 200 MT made
and continues to make headlines all
round the globe and I felt so happy
about it. .
5th November, 2009

My conviction over my stance of Indian Markets not having their own legs (barring few occasions
such as Budget, RBI Policy action, national election etc.) gets stronger day by day due to the moves
witnessed by our markets since my last article. I firmly believe that Indian Markets even going
forward (1-2-3 years), will not have its own legs, where in it will be able to move or react due to its
India centric news or India centric macro data. The “DECOUPLING” theory just does not hold true in
the current context. One day move of 500 points either way on SENSEX turns one either bullish or
bearish in no time.

Vinit Tulsyan http://vinittulsyan.wordpress.com


None of the market participants all round the globe have got a reason which could be attributed to
sharp pullback in Global equity markets. The pullback has been more vicious for Indian Markets
with markets falling more than 12% in comparison to global equity markets (including emerging
markets) average of 5-7%.

Those days are gone, where in a little “better than expected” data points either on earnings
front or macro data could move the market but at the same time data points in line with
expectation or below expectation are not moving to the downside as well

US markets barring today had seen sharp cuts to the extent of 5-6% since I last wrote my article,
though the news on the data front has been mixed to positive, definitely not negative. The biggest of
all was the ISM manufacturing data, which showed expansionary manufacturing activities. The auto
sales were great for the month of October despite not having any cash for clunkers part attached to
it. The earnings continued to be on surprising side having positive biases attached to them. Even
these earnings could not lift the market despite of the fact that earnings were the most important
reason for the markets to inch higher during Sep-Oct 2009. Even the biggest purchase of the
biggest rail road company in US by Mr. Buffett could not lift the market, who endorsed his
confidence on US economy by issuing a statement that this acquisition is actually is a play on his
confidence of US economy being much better going forward.

Today, the ISM-non manufacturing data (showing performance of service sector in US) was a bit
disappointing, the ADP payroll data was better than expectation, mortgage applications rose higher
than expectation on the back of interest rates falling below 5%, but the markets inched higher.
Cisco and Qualcomm, two technology giants were expected to post better than expected earnings
and they did but

The much wider anticipated FED statement and its direction of Interest Rates a flop

The much wider anticipation build around FEDRAL RESERVE and it providing direction on Interest
5th November, 2009

rates through its minutes could not produce anything. I believe the statement was in line with
market participant view and exactly provided statements, which people had been expecting it to
provide since last couple of days. Though FED’s BORING statement did pull-back the markets from
their highs of almost 140 points on Dow Jones.

Let’s look at FOMC Statement a little close on what they exactly said?
(http://www.federalreserve.gov/newsevents/press/monetary/20091104a.htm)



Information received since the Federal Open Market Committee met in September suggests
that economic activity has continued to pick up.
Activity in the housing sector has increased over recent months.
Household spending appears to be expanding but remains constrained by ongoing
job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses
are still cutting back on fixed investment and staffing, though at a slower pace; they
continue to make progress in bringing inventory stocks into better alignment with
sales.
Although economic activity is likely to remain weak for a time, the Committee
anticipates that policy actions to stabilize financial markets and institutions, fiscal and
monetary stimulus, and market forces will support a strengthening of economic growth and
a gradual return to higher levels of resource utilization in a context of price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4
percent and continues to anticipate that economic conditions, including low rates of
resource utilization, subdued inflation trends, and stable inflation expectations, are likely to
warrant exceptionally low levels of the federal funds rate for an extended period.
To provide support to mortgage lending and housing markets and to improve overall
conditions in private credit markets, the Federal Reserve will purchase a total of $1.25
trillion of agency mortgage-backed securities and about $175 billion of agency debt

Where are equity markets headed?

These past couple of days did worry me that whether I am actually on the wrong side of the trade,
but after due introspection, I came to the conclusion that I am actually not. I continue to believe that
markets will be volatile, move sideways having positive biases occasionally (due to continued
macro data coming out of United States). I continue my stance as I wrote in my article dated
October 12, 2009 titled “October to continue lending its support to equities & OIL, a choppier,
volatile and sideways November in the store”. My believe further strengthens with the vast moves
seen by equity markets all around the globe that November would be the Toughest period to be 5th November, 2009
in equities, USD to slip further, GOLD, Bond prices to rise, Indian Rupee to strengthen further
during November.

Excerpts from my article dated 12th October 2009

November (at-least first 2-3 weeks) in my opinion will become the toughest/roughest
market to be in



From an Indian or global market perspective, markets during November (at-least first two
weeks) will be the toughest and roughest market to be in. I do not expect the market to
witness a significant or drastic drop over October levels but the choppiness, sideways
movement along with volatility will make markets absolutely difficult to trade in,
specifically, Indian markets, where more than 80-85% of daily turnover comes from Futures
& Options.

The choppiness, sideways movement and volatility will be a combination of various factors,
such as search for safe heavens by investors all around the globe. I expect GOLD to be an
outperformer during November on the back of further slippage in USD. The belief stems
from the fact that once the euphoria around earning season ends, and the debate on Interest
rates (reverse in federal banks policies all around the globe; obviously led by Federal
Reserve) and subsequently on Inflation takes center stage. The sideways movement coupled
with volatility could have positive bias into it, meaning at the end of the period, I feel
markets will be higher than where it stands today. The caveat is that there might not be huge
difference than today’s level (not at-least the kind of difference one has witnessed in
between March and end of September).

India & Indian central bank making headlines all over the world over its GOLD(EN)
purchase; though I feel it’s’ immaterial.

After a long time I have witnessed, India and Indian Central bank (RBI) being on world radar
because of RBI buying 200 MT of gold from IMF at a price of approximately 1,045 per ounce.
Though the transaction was only to the tune of ~US$ 7 billion, ~2.5% of India’s foreign reserves, it
has fueled speculation that other central banks within emerging markets will start following the
suit, with Chinese Central bank as front runner. Earlier the expectation was that IMF wanted to
dispose its 400 MT of gold, which could be sold through open market, which would expand supply;
putting pressure on gold prices.

Does this signal that RBI is trying to diversify its foreign reserves and trying to find some
5th November, 2009

alternate investment avenues, I believe it was only one off transaction but at-least am very happy
that this move took place. I am happy because this not only provides some cushion to declining
value in India’s foreign reserves due to US$ decline (though it has rebounded over last one week,
but I doubt that this rebound could be sustained due to huge imbalances in US economy eco-
system) but also due to high inflationary environment expected in India in coming quarters. Happy
that India now figures in top 10 countries having largest gold reserves in the world.



Excerpts from my article dated 12th October 2009 on GOLD

GOLD: Expected to be in limelight in wake of increasing debate over Interest rates, inflation,
sliding USD and subsequently in search of safe heavens

Even though Gold is up 17% Year-to-date, I continue to believe that Gold will further
strengthen and should emerge as one of the safest alternative investment avenues going
forward. The confidence stems more from the debate building around investors concerns
over Inflationary environment somewhat on the back of rising interest rates going forward
and its position as a perfect hedge against currency and being projected as emotional trade.
(Refer my article on Gold: Golden Fortune, dated March 8, 2009). A continuing weakening
USD will further attract more investors (including treasuries around the globe in order to
safe guard deteriorating investment in USD denominated assets), which should keep GOLD
firmly in limelight in coming days.

Excerpts from my article on Gold: Golden Fortune dated March 8, 2009

“I strongly believe that GOLD will continue its shine in years to come, though the caveat is
that it might not see the sharpest of run (in price terms) it has seen in recent times. But
increased attention by Investors (both domestic, international, sophisticated investors etc),
Households, Treasuries around the globe, and further its position as an Inflation Hedge, a
perfect hedge against Currency or in Short “A Safe Heaven”, in my view will continue. It will
continue due to FEAR embedded in everyone’s mind; the fear of losing investment value in
any of the asset class mainly in Equities. With GOLD being termed as one of the safest heaven
and is being projected as “TRADE OF EMOTIONS” in the western world; it was evident that
money from Equity Markets was getting diluted to GOLD.”

Nouriel Rubini & Jim Roger Fight: I believe it’s extremely healthy for the markets
5th November, 2009

In a CNBC interview today the noted economist Mr. Rubini warned that the "mother of all carry
trades" is growing and threatening to cause a global implosion, with investors using cheap US
dollars to embrace risk will quickly reverse course once the greenback strengthens. He intensified
his prediction, saying that the likelihood of the Fed keeping interest rates low and thus weakening
the dollar will prolong the carry trade and make it all the more painful when it starts to
unwind. According to him "Eventually there's going to be an end to this carry trade". When that
snapback of the dollar is going occur it's not going to be 2 percent or 3 percent, it's going to be more
like 25 or 20 percent. And then everybody will have to close their shorts on the dollar, they'll have



to sell these risky assets across the world and you could have this huge asset bubble going into an
asset bust."

On the other hand Jim Rogers on Bloomberg said that Nouriel Roubini is wrong about the threat of
bubbles in gold and emerging-market stocks. Many commodities are still down from record highs
and equity markets aren’t on the brink of collapse. “What bubble?” Rogers said, when asked if he
agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.” When
asked if gains made this year pointed to a bubble, he said: “It’s not a bubble if something is up 100
percent this year, but down 70 percent from its high. That’s not a bubble, that’s a good year. That’s a
great year. Maybe it’s too high for this year, but that’s not a bubble.”

I thought why not to have my perspective on these two great, respected views

I believe it’s more of a compulsion rather than choice for FED to continue keeping their rates lower
for an extended period of time, and on the wake of it, Dollar would be cheap. When dollars would be
cheap, why would not investors look to embrace or build positions in all asset classes all around the
globe especially emerging markets and what is wrong in it?

The confidence stems from the fact that emerging economies are doing great with their
respective currencies expected to strengthen against US$ going forward due to favorable
economic scenario. Coming specifically to India and its currency, I expect Indian Rupee to
continue its appreciative journey against USD in near to medium term. The confidence stems
partly from the same reasoning applying to Brazilian economy and others. On the back of
strength in Indian economy, consumption returning to normalcy, higher commodity prices, an
expected credit rating upgrade from rating agencies (on the back of govt. stability, an expected
6.5% growth, record IIP numbers etc), record foreign reserves, resilience of Indian Economy to not
only avert this economic crisis but to emerge stronger, forecasts for faster economic growth (in
coming years), all time low interest rates in developed world, money available at cheap rates,
money trying to find its way to economies where the risk & return profile is still favorable etc.

So does that lead me to believe that what Mr. Rubini is saying is wrong? Well, I am too small
to even counter Mr. Rubini’s argument, who was one of the few first to predict the economic
5th November, 2009

collapse. But I believe that US$ might reverse its course against developed world currencies,
e.g., EUROZONE, JAPAN etc., in the medium to longer term, but not as much against emerging
economies including India. So the question or skeptism about Asset bust all around the globe
including emerging economies, I believe seems doubtful.

I also support Mr. Jim Roger’s reasoning that It’s not a bubble if something is up 100 percent this
year, but down 70 percent from its high. That’s not a bubble, that’s a good year. That’s a great year.
Maybe it’s too high for this year, but that’s not a bubble.”



The reasons given above does not let me believe Mr. Rubini’s prediction of everyone closing their
shorts on the dollar, selling these risky assets across the world leading this huge asset bubble going
into an asset bust”,

35 stocks, one cannot avoid to have position in from a long term perspective

Soon (in next 7-10 days), I will be publishing an article on my pick of 35 stocks within Indian
Equities, which in my opinion provides a proxy on India’s Play. I am a firm believer of
Diversification and based on my understanding, I have picked 35 stocks from large and mid-
caps across sectors, wherein I will be putting my money to (whatever little I have). I have not
done bottom-up picking but I believe more on top-down approach and then selecting a stock.
Most of the stock capitalize on this great Indian theme, where in some of them are global
plays, turnaround stories etc. The motivation behind this idea of selecting 35 stocks came
from my article dated 22nd March 2009, titled INDIA & CHINA: “LOVE US, HATE US BUT CAN’T
IGNORE US” (http://vinittulsyan.wordpress.com/2009/03/22/india-china-love-us-hate-us-but-
cant-ignore-us-2/).

***

Thanking You,
Warm Personal Regards,

Vinit Tulsyan
http://vinittulsyan.wordpress.com

***
5th November, 2009


Where are financial markets heading?

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Where are financial markets heading?