India:In A Drunken Stupor

By | November 4, 2008

Use the RBI sponsored rally to sell all interest rate sensitive stocks-Real Estate, Infrastructure and Banks.

The guys at North Block and the Central Bank remind me of two drunks trying to support each other. Rightly so, their action on Mint Street reflect the pre-occupation with massive Forex Outflows, Sinking Stock markets, an Economy going downhill, huge Trade Deficit and net portfolio outflows which have cost the country atleast $ 65 bn in the last few months.

The series of CRR, SLR and Repo cuts announced on Saturday last are perhaps the last salvos, that the Duvuuri Suba Rao-Finance Minister combine can fire at the markets for now.

The liquidity that the Central Bank and the Finance Ministry has been throwing at the Economy through most of October 2008, is unlikely to end in jump starting the economic wheels stuck in mud. The only thing, “the cut”, may do in the short term is to bring down PSU bank PLRs a notch, release some money to industry but will not be enough to ratchet up Asset prices. On the flip side, throwing money at the wind will result in increased NPAs for Banks which will become visible in a year from now.

This so called Government largesse is only covering up the gap in Bank funding, caused by Dollar buying from the RBI. In what way the liquidity so released can be considered as extra resources for financing growth beats me.

Mr. Rao should have looked at the US and Japan, both nations are now at almost zero per cent rates and yet neither stocks nor the economies seem to grow.

The lesson? No one — not even the government — is more powerful than the market …

For more than a year now, the Fed has bombarded the Wall Street with government bailout packages. We have seen interest rate cut after interest rate cut.

The elected officials (and the unelected policymakers at the Fed) have seen fit to spend hundreds of billions of dollars in taxpayer money — to save Fannie Mae, Freddie Mac, AIG, and Bear Stearns.

They are handing out $250 billion to everyone from Citigroup to SunTrust, even helping banks merge in transactions partially funded with public money. And yet, by this one crucial gauge — the cost of a 30-year fixed mortgage — the government and the Fed have failed to achieve much of anything. The lesson is simple: No one … not even the government … is more powerful than the market.

Worst yet, the fear is spreading throughout the world …

Market players — mortgage bond buyers — are worried about the direction of house prices. They’re concerned about the credit quality of U.S. borrowers. This is filtering into the price of mortgage bonds, and keeping yields elevated.

Foreign investors, who used to snap up every last mortgage backed security and corporate debt security sold by Fannie Mae and Freddie Mac, appear to be backing away somewhat.

Concerns about the precise nature of the government’s support of Fannie and Freddie are also driving the two agencies’ borrowing costs up. That, in turn, puts upward pressure on mortgage rates.

Another reason for higher rates overall: Concern about the long-term fiscal position of the U.S. The government has committed more than $1 trillion to all of its various bailouts — and the list of companies begging for taxpayer money gets longer every day.

Insurers want the same kinds of government-funded capital injections that banks are getting. GM and Chrysler want government money to help them merge, close factories, and fire thousands of workers. Home builders want fresh tax credits to spur purchases.

You’d think at some point that officials in Washington and investors on Wall Street would get it. You’d think that they’d understand the only solutions to the credit mess, the deleveraging, and the real estate bust are simple: Time and price.

You simply can’t cure the popping of a multi-year debt and housing bubble by waving a magic wand — not even a $1 trillion one.

For stock investors, my prescription remains the same: When you get government-fueled, short-term rallies, you should look at them as opportunities to SELL.

At some point — once the unwinding is complete, once the recession has run its course, and so on — THEN I think you can start to bargain-hunt and bottom fish. But now is not that time, in my opinion. The conundrum is still very much with us.

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