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Saturday, November 8, 2008

Economic news & Investment Strategies

Except crude prices and rate cuts, everything is bad. Inflation bounced back; IMF reduced GDP growth forecasts for India. Tata Motors and Ashok Leland are mulling to shutdown their plants. Real Estate developers are finally slashing their prices. America, Japan and Europe are cutting their IT spends. Giants like Toyota and Cisco gave gloomy forecasts. USA and Europe are reporting drastic slowdown in retails sales. Stocks are piling up at Cement, steel and auto factories. Job losses are increasing across the world. Textiles, Mining and shipping sectors are in worst slump. Will rate cuts save economy?

Dow Jones fell to below 9,000 levels as Americans are finally recognizing "the reality". I failed to understand that "why Dow Jones is still trading above 7,000 levels?"

Significant statement on current credit crisis:

Nobel Laureate Joseph E Stiglitz: Current crisis is much worse than IT crisis but not as bad as 1929 depression. The present crisis is either the worst in 25 years or in the past 75 years, but not the worst in the last 100 years. This crisis will last for a couple of years. China will be less affected and India is marginally affected. Services industries across the world will be severely affected.

Crucial economic statistics:

1. Inflation: Big negative surprise. Inflation bounced back to 10.72% from 10.68%. Petroleum ministry should cut diesel and petrol prices to see inflation in single digits. RBI may delay on rate cuts. Complex situation.

2. IMF economic data: World economy will expand by 2.2%. U.K economy will contract by 1.3% in 2009 while European Union will contract by 0.5%. U.S economy growth will contract by 0.7%.

3. According to IMF, India will grow by just 6.3% in 2009 while China will grow by 8.5%. This data illustrates the fact that current crisis will impact economies for longer than expected periods.

Positive economic news:

1. Crude oil prices fell $60 per barrel levels due to low demand despite production cuts. Oil refineries and other associated companies may not command current valuations.

2. Insider buying is occurring in the stocks of Larsen and Toubro, ICSA, IVRCL Infra and Edelweiss Capital.

3. Many PSU banks announced 75 basis point cuts on personal loans.

Negative financial news:

1. Banks will see rise in NPAs due to job losses. ICICI Bank will suffer heavily but no bank is immune to the consumer and corporate defaults.

2. Real Estate prices fell by 25-30% in the last few months in most of the areas and will fall by another 30% in the next few months. If real estate developers will not slash prices, there will be no sales. Customers are clever enough to understand the situation. Nagarjuna Construction stopped construction of future real estate projects. Don't believe in the today's headlines of Times of India on real estate sales. Consumers are not enthused by the interest rate cuts. Do you want to buy at current prices?

3. United States will cut IT spend by 5% in 2009 – Goldman Sachs Survey. IT spends declined by 9% after dotcom bubble. US companies are showing less interest in offshoring activities. IT stocks are trading much above their fundamentals in the last 1 month due to strong dollar. Stay away from this sector. There will negative spending on IT in Europe and Japan. Banking and Financial sector will cut their spending by 20-30%.

4. Tata Motors is mulling to shut Pune unit for 6 days while Ashok Leyland is opting for 3-day working week. Serious slowdown.

5. Construction companies like Lanco infra, Maytas Infra and Nagarjuna Construction are finding it difficult to announce financial closures for their pet projects. IVRCL is the only safe stock from Andhra Pradesh in this space. Accumulate on every fall.

6. Reliance Industries decided to delay Jamnagar new refinery operations to early 2009.

7. BangaloreIT.biz saw several vacant stalls and very little visitor traffic. Reflection of situation. Do you believe in NASSCOM statements?

8. Sesa Goa will see 25% growth in sales and drastic fall in profit margins due to rapid fall in iron ore prices. It is waste to talk about other iron ore producers.

Global recession news:

1. USA: Retail sales reported weakest sales in October in decades due to drastic fall in consumption.

2. UK: The Bank of England cut interest rates by 150 basis points to the lowest level since 1955 (3%). This shocking decision is an indirect acknowledgement of recession fears. Britain will go into first recession after 1991. Housing prices fell to October, 2005 levels in England.

3. EU: The European Central bank cut interest rates for the second time in less than a month. Bank of Korea cut interest rates for third time in a month.

4. Job losses: Business Social network layoff 10% of work force. Fidelity will cut 1,300 jobs.

5. Blackstone announced biggest quarterly loss since IPO and great companies like Cisco and Toyota announced gloomy forecasts.

Company quarterly results:

Decent results: Sarda Energy and Minerals.

Poor results: Good year India.


Advice to new investors: "Can I enter at these levels?" this is the question I am facing in these days from new investors. My answer is that "It depends on you, your risk profile and investment duration". Stock markets generally tend to move by future growth prospects (next 2 quarters) after results season. On this criterion, many stocks cannot justify current prices and they will fall by another 20-30% from current levels. More than 70% of companies will announce poor results in the quarter due to decrease in consumption. Fundamentals justify 6,500-7,000 levels for BSE Sensex. I don't know whether Sensex will fall to those levels or not.

Bear Markets will not disappear in a few days. They will last for months and test your patience. Even stocks of the Companies with good growth prospects will also correct along with bad stocks. Stocks in recession sensitive sectors like Real Estate, Auto, Commodities, textiles, aviation and IT etc will make ultra new lows. But bear market rallies and falls will continue to occur for some more months.

What is the investment strategy?

Short to medium term: Some stocks will continue to give 30-40% returns on every rally. Entry and exit are crucial. If you have failed to spot the rally, wait for next opportunity. This strategy will work only for experienced people.

Long term: Long term investments rarely give negative returns but timing is crucial for maximising gains. But you need to bear extreme pain as your stocks grow by 50% in 10 days and fall to your entry level within another 7 days. This will continue as long as bear market exists. But after bear markets, returns from your investments are unbelievable. So, if new investors can bear all these things, they can accumulate good stocks in SIP manner. I posted about the companies which announced good results throughout October. Go through the posts and pick your favourite stocks and accumulate them.

Stock markets are gambling centres over short term and many money spinners over long term. If you enter into share markets to make easy money by following CNBC and broker's tips, you will never make money in these markets. You need to work hard on research; You need to follow news; you need to learn lessons from your bad investments; you need to enjoy earnings from good investments; you need not change investment decisions over short term price movements; you need to give your companies enough time; You need not get panic and take bad decisions; you need not go for greed and reduce profits; If you have good grip over your company, you can take right calls.
Sourced from: Stock Market Guide
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