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Saturday, August 9, 2008

Inflation and Stocks investments

Inflation crossed 12% level for the 1st time in 13 years. Investors are buying real estate stocks actively on Thursday. So, Investors will never learn from their past mistakes. I can't understand the logic behind the purchase the real estate stocks in recent days. Investors are buying stocks like DLF and Unitech to burn their fingers once again. Real Estate will be the worst performing sector in the coming days. Who will save these investors? I can't understand why these innocent investors are underestimating the impact of inflation. You will see the real effects of inflation and interest rate hikes on the performance of Indian companies in the next quarter results.

Significant news:

1. Inflation was at 12.01% Vs 11.98%. Inflation for the same week in 2007 was at 4.7%. See the difference and imagine its effect on the consumption power.
2. Largest American Insurance Company AIG fell most in 39 years after 3rd straight loss.
3. US jobless claims reached March, 2002 levels.
4. Sales would slow in August- Wal-Mart.
5. Crude Oil prices broke crucial $120 resistance.

Why I am bearish on India over short term:

1. Inflation is at 13 year high.
2. Fiscal deficit is reaching alarming proportions. India is set for down gradation by International rating agencies unless it takes crucial measures.
3. RBI will continue to hike interest rates in the coming weeks. There is more than 20% downside in inflation sensitive stocks.
4. Consumption power of people will be severely affected due to these successive interest rate hikes.
5. Most Indian companies will announce disappointing results in Q2.
6. Recent pull back rally set to reverse as in any bear market.
7. There will be no aggressive reforms in the election year except in Insurance sector.

Significant statistic:

Business Optimism Index fell to 136.5 points in Q2F2009 from 153.7 points in Q1FY2009. It is expected to touch 110 points in Q3FY2009. It means business leaders are not optimistic about their business prospects. But investors are optimistic about business prospects. So they are buying their company shares at these levels. What a pity it is! Who will save these investors?

My estimation: GDP growth for FY 2009 may be at around 7.5%.

Chaturvedi committee suggested "Super profit tax" for oil companies. Bad news for Reliance Industries and Cairn Energy.

Hopes on Crude: Investors are betting on news that crude prices will fall to below $110 levels which are now trading at $116 level. Fall in crude oil prices will only act as short term trigger.

Verdict: When will RBI hike Repo rate? Who will save these careless investors? Why don't they do even basic research on fundamentals? If Central Government fails to control fiscal deficit, rating agencies will downgrade India to BB+ from BBB- (current rating). China rating is A+ while Russia rating is A-. Where will foreign investors park their money? Don't expect any control measures in election year. Investors should look at their portfolios and plan to exit overvalued stocks.
Credit Source: Dr. Krishna (Stock Market Guide)

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