How the tiny Dubai has its sway on the global stock market?

The global stock market wake up to a rude shock when it was official that the state owned Dubai world and its real estate subsidiary Nakheel were in deep debt trap. The consequences of the Dubai fiasco had its share on the global stocks marked by the U.S. Standard and Poor 500 index fell by 1.7 per cent on November 27th and the Dow Jones real estate index too was down by 2.9 per cent.

When the Dubai sneezed, the Mumbai sensex caught cold by shedding about 400 points on the Friday, the November 27th. The official declaration about the Dubai debt trap revealed that it owed more than eighty billion dollars. The financial experts attributed the fiasco to non transparency in financial dealings which could possibly affect the entire global markets adversely.

The Dubai trap reminds us about the sub-prime crisis, started a year ago in the United States which laid the foundation for the subsequent stock market crash and global recession. The similarity in the sector that was targeted (real estate) shook the business confidence around the world. The US dollar started strengthening against the global currencies during the last week of November which will in turn exert great pressure against the equity markets globally.

The scenario before the crisis!

Before it was officially declared that the Dubai real estate is in red, the city was known for its conglomerate of real estate companies. It had the potential to become a world financial centre but for the bubble that had burst recently. It was considered as a status and symbol among the opulent and the super rich around the world to own a piece of real estate either as office or house in Dubai. Even those who can’t afford to have their share of cake sold their property elsewhere to have a root in Dubai to their own dismay.

The international rating agency, Standard and Poor’s, downgraded its ratings on many of the entities owed by the Dubai government due to the debt. Obviously it is seen that the world hasn’t learned the lesson it ought to, even after the sub-prime crisis and the Dubai real estate debt came as a real shock to those who had seen a silver lining in the recent economic recovery and upward movements in global equity markets. How the world will cope up with the recent Dubai debt and its effect on future stock movements across the world will be any one’s guess!

Emerging markets better developed nations in stock

Robust growth in India and China has helped to pull the markets up and thus the stocks in these countries outshine the rest of the developed nations during the year 2009. But there is a bad news for these two countries as per the report of “Survive and Prosper – Emerging Markets in the Global Recession” which predicts that these two economies would contract in the later part of this year.

Another report says that with the exception of Eastern Europe, the emerging market economies fare better than the developed countries which are definitely a silver lining in the offing. The report further adds that emerging Asian Tigers including India will remain the favorite investment destination in the years to come. Asian markets figured in the top ten list of the preferred destinations among the non-BRIC countries which is inimical to the growth of the stocks in the Eastern Europe.

The market movement in India and China showed that there is a degree of independence from developed economies as far as stock growth in concerned but the GDP gap between the developed and emerging nations remained at about 6 percentage which shows that there is a certain degree of dependence. But there is no second opinion in that the emerging markets support the global profitability. Global companies which had their branch office in emerging nations reported brisk business even during recession compared to that located in developed nations.

However, the investors are prepared to stay the course and are of the opinion that the investment from emerging markets would be better in the long run and the wait would be worthy.

Stocks on low ahead of Fed meet

Most of the markets remained closed on Monday due to holidays and the investors are keenly watching about the moves of the Fed Chairman Ben Bernanke whose reported remarks about the recession in the US as ‘likely over’ which helped the stocks to move northward during the past week. The Dow Jones industrial and Standard and Poor’s 500 index went down by 0.6 per cent in early trading.

US Recession - On the end?

The recession that has been sweeping across the globe did come to a full circle. Didn’t it? The grip of the recession on the global economy, especially that on the U.S. had come down but not yet ended at all. A survey conducted by the National Association for Business Economics’ industry found that though the demand is stabilizing, but a small majority of the respondents said that the bottom is yet to be seen.

There is a conflicting version about the degree of the deleterious effect of the recession among the industrialists. While one school of thought advocates the theory that the U.S recession is abating with few signs of immediate recovery, another group simply advocates the opposite. The results for the industry demand still declining in the second quarter of 2009 but the rate of decline has reduced considerably.

While the sector that showed tremendous recovery prospects is financial services with the index bench mark reading at +15, transportation, communications and information sectors fared poor.

The recession in US that started during December 2007 might be considered the longest one since the Great Depression that wreaked havoc across the globe. The optimists in the financial business look forward to see a recovery during the second half of this year but going by the present trend, the recovery process may take more time and further it is likely to be sluggish. But one can find solace in the rate at which profits are shrinking is slowing.

CIT in trouble?

Last Sunday saw hectic activity that culminated in a deal in which the CIT Group Inc's board signed off an agreement for $3 billion and it is hoped that this move will help to stave off bankruptcy. The bondholder group, which comprises Pacific Investment Management Company (PIMCO) and some other top CIT holders, is expected to provide the financing with a 2 1/2-year term to ease out the situation.

The $3 billion financing plan will be backed by CIT's remaining unsecuritized assets, which likely exceed $10 billion, the second source familiar with the matter said.

The problems of the CIP can be tracked back to the sub-prime crisis when its Chief Executive Jeffrey Peek decided to expand its activities into sub-prime mortgages and student loans which are lucrative and highly profitable but fraught with danger and added risk.

As per the independent research firm CreditSights, CIT has about $40 billion of long-term debt. It is worth to note that about $1.1 billion of debt will come due in August, followed by about $2.5 billion by the end of the year.

The tug of war between the gold and crude oil!

The rise in crude prices halted after four days of continuous surge owing to the forecast that fourth quarter contraction of the U.S economy was steeper than expected. The estimate points out that gross domestic product fell at an annual rate of 6.2%, the worst since 1982.

As the dollar showed an improvement, oil took a beating and so too the appeal of commodities as an alternative investment. The drop in crude prices happened despite the OPEC’s decision to curtail production in a bid to boost up the crude prices. It seems that the demand-supply theory doesn’t work very well here in deciding the crude prices and the data on the economic growth especially that of the U.S has a bearing on it.

In the New York Mercantile Exchange, the April delivery crude oil futures fell 46 cents or roughly 1per cent to $ 44.76 a barrel. This has to be viewed from the context that the price of crude has dropped to a whopping 70 per cent from its July 11, 2008 peak of $147.27 a barrel.

Gold loses its sheen

The past week saw the gold shed some of its sheen with 6% drop in its value, mainly because of the appreciation of dollar which rose to the highest in almost three years against six major currencies. But analysts point out that the gold bull run is far from over and it is mainly due to worries that paper currencies are being debased, especially given the tight economic situation and liquidity being pumped in to the financial system.

The demand for gold stems from the jewellery business and some of the Asian countries, especially India being the major consumer. It is hoped that the price of gold will stabilize during the second half of the next year.

It is the turn of auto industry to fall!

Falling in line with the banks after the sub-prime fiasco and the insurance giant AIG, is the auto major General Motors, which is struggling and planning to file a bankruptcy. Competing with the General Motors in the financial bungling is the Chrysler and Ford Motor, although the cash position of the Ford is far better than the GM.

When the economy is unrestrained, it is a common practice to allow the markets to determine the fate of the private companies but the present situation is entirely different and needs special attention. Ms. Dana Perino, the US President’s spokesperson was of the opinion that there were plans to use other options including the use of Troubled Assets Relief Program (TARP). The US president George W. Bush may allow the US treasury to channelize the money to Detroit from the $700 billion earmarked for the bailout, announced earlier for lifting the ailing financial institutions.

Chrysler is in need of $7 billion from government as loans while General Motors requires a whopping $18 as loan to survive the worst ever recession in the auto industry since 26 years. The failure of the US bailout of the auto majors is seen as a backward step for the distressed US economy and the lay offs from auto industry would add to the already burgeoning unemployment rate, which is increasing alarmingly as the day progresses. The new president elect Mr. Barack Obama will have a daunting task before him when he assumes office.

Slump in auto industry and its effect on crude

The collapse of the $14 billion bailout package to rescue the failing US auto industry triggered the fall of crude prices to approximately $45 in the e Trading on Friday; this happened at a time when the OPEC countries are pressing for a cut in the production of crude to shore up oil prices.

Will the Obama magic work for the financial recovery?

Mr. Barack Obama has made history and made changes in the occupant of the white house by his passion for “change.” The election to the office of the president of Obama is partly attributed to dismal policy adopted by the incumbent, George Bush.

The president elect has vowed to push an economic stimulus package through the Congress immediately when he takes over the office in January, 2009. At his first news conference in Chicago after the announcement of the results he said, “This morning we woke up to more sobering news about the state of our economy.”

One of the major tasks that require the urgent attention of the new president is the high unemployment rate which hovers around 6.5 per cent, the highest in the last 14 years. He was having consultations with the billionaire investor Warren Buffet, CEO of Google, Eric Schmidt, former Federal Reserve chairman, Paul Volcker but desisted from arriving at any major decision at that time.

On the tax front, Mr. Obama said he and his advisers would continue “to take a look at the data and see what’s taking place in the economy as a whole” and planned to announce a tax cut which would benefit 95 percent of the Americans. Another industry that cries for Mr.Obama’s attention is the automobile sector and small businesses, assistance for the state and local governments.

The average American has his heart filled up with hopes that the new president elect can do something to lift the sagging economy and in turn can improve the living conditions. But the million dollar question is “How long will it take to improve the liquidity flow and reduce the unemployment rate?” Let us hope that happens soon.

Slowdown or recession?

"The US is plunging into a nasty recession with a lot of suffering to come even if policy makers succeed in unfreezing the credit markets” quipped Mr. Paul Krugman, winner of the 2008 Nobel Prize for economics and Professor of Princeton University and New York Times columnist in an interview. He referred the situation as “baked in” and continued to add that there was a lot of downward momentum and put the unemployment rate at 7per cent, the highest figure in the past five years. The chances of the US economy falling into recession intensified with the report that retail sales had fallen for the three straight months.

What is the difference between recession and slowdown?

Many people mistake economic slowdown for recession. However, textbooks define recession as a period of two consecutive quarters of negative economic growth as measured by a country’s GDP and is expected to last anywhere between six and eighteen months. Economic slowdown on the other hand is just a slower growth in economic activities. The impact of economic slowdown may affect particular sectors whereas recession will have a wide ranging impact on most of the industries.

What is the source of concern?

It all started with sub-prime crisis in the US and the reasons for the crisis are now known to everyone. It has resulted in fall in real estate prices across US as home loans were foreclosed and the starting price of many of the properties started with an asking price of $1.99. Many important things that followed suit included the fall of Lehman brothers and with a concomitant fall in the value of Dow Jones and NASDAQ to 29 per cent till this day.

I live outside the US and am I safe?

The international economy has become like a single family because of globalization and the interdependent nature of each sector. That is the reason why when US sneezes, the rest of the nations suffer from cold. It may sound like a joke but it is true because the US is the single largest producer of natural resources. Whenever the crude skyrockets, the impact will be felt more by the Asian tigers like China and India. So, it is not a question where do you live but you are affected by the slowdown in one way or other.

Be prepared for that and fasten your seat belt.

At last, the Wall Street bailout materialized!

The bill passed by the Congress on Friday to bail out the ailing financial institutions at a cost of $700 billion has given the much needed relief to one and all and will help to reduce the panic in the global stock markets. It is expected when the government steps into the blood bath, the bleeding in the market will hopefully stop.

But wait… Don’t jump in happiness and there is a lot to do to lift the ailing US economy and in turn the global economy. What can you expect from the passage of the bill?

Stock Markets

A cooling in the nerves of the stock market is expected in the days to come along with the return in the confidence of the investors. The markets are expected to be less volatile but with the cooling global economy and lower profits for the American multinational companies will have a negative impact on the growth of stock markets.

Banks

The banks are safe. The bill makes it clear that depositors need not worry about their hard earned money because the amount of deposits covered by the FDIC is increased from $100,000 to $250,000 and there is no need to get scared even if the banks fail. The recession is already on and the economic downturn will add oil to the already burning fire.

Unemployment

A latest estimate says that the job cut is 159,000 in the month of September and is the worst in the last five years. The picture in the coming months is not rosy either and more job cuts are expected forcing the customers to be spendthrift, deepening the gloom. The major sector that contributes to the US growth, the auto industry is deep in trouble and its sales in September touched the lowest point in the last 15 years.

Tax relief?

The ordinary US citizen can expect a lesser tax relief than expected because of the bailout package. But there is good news in that the tax won’t be raised because the sale of the troubled securities would yield dividends to finance the extra burden. The loans advanced by the banks to consumers will become scarce, let it be for car, home, credit card purchase or vacations.

But homeowners have the option to renegotiate their loans with the bank but time only will judge how effective these measures are?

Blood bath in the Wall Street…

The Wall Street melt down came as a bolt from the blue to not only all stock market investors but also for the global economy as well. With the 158 years old Lehman Brothers' announcement that it was filing for bankruptcy under the chapter 11 because of the failure of the rescue efforts and acquiring of the Merrill Lynch for $50 million by the Bank of America in an all stock transactions on the same day and the bailing out of American International Group (AIG) by the US fed, the stage was set for a greater show down.

The melt down in the Wall Street has triggered global chain reactions plunging the stock market to the never seen depths. Added to the hysteria were the rising mortgage defaults and plummeting market values in US.

The US mortgage giant Bear Stearns set the stage for the fall out whose sub-prime crisis are only well known. Following suite with the Bear Stearns, problems started with Freddie Mac and Fannie Mae. The Fed has to intervene wit h a massive $200 billion to shore up these institutions.

Picking up momentum in Chinese stocks?

The melt down was a good news for the long term investors of the Chinese stock market suggesting that they see a value for the stocks whose value has gone down by almost two thirds in the last 11 months. The investors with patience have started making investments albeit in small quantities while the short term investors in panic started off loading their worth in a jiffy.

The biggest Shanghai composite index has taken a beating of nearly 66 per cent since the last October. The foreign institutional investors appear to raising their holdings in the wake current low valuations.

Not all can buy stocks at the exact bottom levels but it would be prudent in adding stocks to your portfolio in batches near the bottom levels.

The Indian stock market reacted sharply and the sensitive index, the sensex plunged 470 points or 3.35 per cent on the same day. Some blue chip companies touched their 52 week low on that day showing the magnificence of the impact.

What are the lessons to be learned from the fiasco of the Lehman Brothers and the likes for the Indian stock market and the real estate business?

If ordinary borrowers of home loans can able to trigger housing loan collapse in the US, what could be the impact of rising interest rate for home loans in India and it is the simple word “Caution ” in the air. With the Indian housing market has been showing signs of slowdown and the property prices correcting, alarm bells started ringing for the borrowers as well as for the bankers and banks will become more cautious in lending credit.

NYMEX crude drops...

Here is the good news to one and all as the crude started sliding, despite a hurricane heading towards some of the off shore oil installations in the united States. The Hurricane Gustav poised to enter the Gulf of Mexico, threatening the crude to move as much as 3 per cent over the week earlier.

The NYMEX settled down 13 cents to stabilize at $ 115.46 a barrel mainly due to a strong US dollar but earlier the week saw the crude to shoot as much as $118.76.

The US stock market is anxious about how the Hurricane Gustav will move in the days to come and the holiday to stock market on Monday due to Labor Day will add fire to the anxiety. A clear picture will emerge only after 4-5 days to assess the possible damage that may be caused by the hurricane.

The US energy companies are already on the alert mode and shut down productions and evacuated personnel to avoid further damage to the properties. The US government is ready to release its stock pile in the event of shortfall in the production of crude.

Bad news for UK economy?

The British economy is set to be performing in a poor manner and arguably it could be the worst in the last 60 years period and certainly is not sweet news to any British. The assessment follows a warning from Bank of England policy maker Mr. Darling and by the end of this year, almost 2 million people could become unemployed; the catch point of the problem is that the slowdown will be more profound and longer lasting than it was already assessed.

Asian stocks gain

Snapping the four weeks loosing streak, Asian stocks started looking up again after the news about strong US economy. Shares of Motor companies like Toyota Motor Corp, Honda Motor Co., fared better. To cap it, Cnooc, China’s largest oil explorer gained a lofty 13 percent this week. To keep pace with it was another Chinese entity, called Sinofert Holdings ltd surged 23 per cent, making the shareholders very happy.

Asian stocks in a jittery!

Asian stocks are again in the doldrums and fell for the fourth week and touching the lowest point since July 2006 mainly due to fall of technology and banking shares. Samsung Electronic Corporation fell almost 4 per cent owing to rising US whole sale prices and decrease in housing rates. Sumitomo Financial Group Inc followed suit with a reduction of 6.9 per cent in its value.

Asia’s most profitable carrier Singapore Airlines too saw the southward trend with 2.5 per cent shave off. Rise in the cost of gasoline is cited as the major reason for losses of the airlines. Rising oil prices forced the consumers to become spendthrift and with a higher inflation come an increased commodity prices.

Japan’s Nikkei 200 stock average too dropped 2.7 per cent and the overall bench mark indices saw a reduction in most of the markets. The maker of the top selling video games, Nintendo, declined 5.2 per cent to 49,000 in Osaka.

Banks got the beating!

United States housing plummeted 11 per cent last month to its nadir in 17 years and the prices paid to the US producers in July rose to 1.2 per cent. Morgan Stanley, Lehman Brothers Holdings and Goldman Sachs Group Inc hope to write off a combined $6.5 billion in the third quarter.

Mr. Ben S. Bernanke, the Chairman of the Federal Reserve outlined a proposal widely thought of as “ambitious” on Friday for overseeing the credit markets and preventing the return of the dreaded credit crisis and he described his efforts would involve an attempt by regulators to develop a more fully integrated overview of the entire financial system.

Nifty down

The Indian National Stock Exchange Index popularly called “Nifty” future lost 2.5 per cent over the week to close at 4324.1 points against the previous close of 4434.9. The Nifty August future is facing volatility with wild swings.

Are you ready to sell your stock when it crashes?

In the financial circle, end of each quarter is treated with both passion and caution. Assume that you have purchased a stock expecting that its quarterly results would be very good and with everyone’s expectation on the positive side, the value of the stock soars naturally prior to the declaration of the results. This situation is called “generation of hype”. If the results do not meet the street targets, the stock bears the brunt.

Do you think when the outcome does not meet the market expectations, you have to necessarily sell the stock or in other words, the company’s performance is not up to the mark? Then how will you assess the performance of the company and in turn the performance of the stocks? What to look for?There are some basic factors to be looked at while assessing the soundness of the stock and its worthiness to sell. Here are some…

One time expenditure
If fall in profit is due to one time affairs like legal disputes, VRS expenses for employees etc, it may not be given more importance while evaluating the stock. The contrary is true in that if the profit is due to any one time boost like sale of real estate and buildings etc. it has to be taken with a pinch of salt.

Seasonal business
Profit in some enterprises fluctuate depending on the season like Hotel business, cement industry etc. and hence the performance of a quarter alone will not reflect the health of the company in toto.

Trends in input cost
The cost of inputs determine the profit of a company and this is true in case of airlines and automobile industries. When the price of fuel goes sky high, the aviation industry incurs huge loss while the higher cost of steel dents the profit of the automobile business.

Expenses for the launch pad
By launch pad, I mean the cost incurred to launch a new project or scheme, which is of course not a continuous affair. This could also be due to expenses involved in the research and development of the product. Hence an investor shall be choosy and evaluate whether the launch pad cost really had an effect on the chosen stock.

To conclude, quarterly figures of a company need not necessarily reflect the true financial strength. Sustainability in earnings and general business conditions are more important. It is the duty and responsibility of the intelligent investor to see if there is a systemic decline in the business or profitability. If proved so, you can make the right decision to sell them off. If the fall is temporarily due to quarterly figures not meeting the street prices, then need not get panicky and sell your stocks.

The prudent investor will weather the bumps patiently to get a smart return and the wait will be definitely worthy!

The top reasons for home loan fiasco

The bank for all the central banks and the oldest financial institution called BIS – Bank for International Settlements is also the most respected bank. In its annual report, the bank details the global financial crisis which warrants a closer look.

The major culprit claimed to be the reason behind the home loan fiasco is unrestrained credit growth and asset price inflation. The current steep fall in the global share market and downturn in most of the rapidly growing economy is unprecedented in the post war period. With the inflation rising steadily, one may wonder whether it is the tip of the ice berg and what the future may hold for all of us.

The main reasons cited for the poor credit crisis are formulation of loans of increasingly poor quality by the banks and selling it to greedy but gullible people who will in turn leverage on short term funding to increase the profits.

The principle reason assigned for the fiasco is the long period of easy money and laxity in the supervision in its implementation. The after shocks of the home loan fiasco still continue to echo among the financial markets and no country is an exception. The entire global economy is at crossroads.

While rich countries are facing the deflationary pressures owing to the collapse of the housing and financial sector, the opposite is true in the case of growing / developing economies like India and China where resurgence of inflation is a cause of concern. Nevertheless, global slowdown in the economy due to high inflation causes uncertainties, which are mammoth in nature.

The flow of funds out of the US has started and it is now looking for safer sanctuaries. Emerging markets like India may not be opportunistic in inviting the flowing find because India is not in the list of preferred investment destinations.

But don’t loose heart with all these negative points. There is a thing to cheer about. What is it? The crude had started falling down notwithstanding its continuous scorching pace of upward climb. Hope it would come down below the magic barrier of $100 a barrel. It will definitely sound good for one and all in the days to come…

What are the reasons for falling stock market?

The stocks around the globe especially the Indian and Chinese markets are experiencing a free fall. Everyone is proposing his/her own hypothesis for the fall in stock market values. Many reasons are attributed for the fall and it includes inflation, rising global crude prices, weak currency especially in the Indian and US currencies. Recent trends in the market reveal that fundamentals apart, perceptions have a big role to play in what investors are willing to pay for the stocks.

The following aspects are considered as major reasons for the fall of stocks of Asian economies and particularly India, which witnessed one of the worst nightmares in recent times.

Prices of crude oil
Within a price band of US $93-95 during the end of December 2007, the crude basket almost shot up to $144 a barrel, a hike of nearly 54% and nobody knows where it will stop or at what higher limit it will stabilize?. A rising interest rate in US, weakening US dollar, political uncertainty in oil producing countries (OPEC), and a drop in stockpiles of oil reserves in US are all negative points pushing up the crude prices. In any growing economy that imports crude to satisfy its ever growing demand for oil, there will be an inflated import bill and a jump in trade deficit. The increased crude bill sets off successive chain reactions which hits the common man hard and results in a widespread rise in prices of all other essential commodities.

Inflationary woes
A rise in crude with concomitant rise in essential commodities bulges the inflation level and growing economies view it as one of the worst bottlenecks to move forward. Inflation affects the stock market investors in many ways. Higher commodity prices could reduce the profit margins of companies if they could not rise the product prices and inflation restrict the consumers urge to spend on lavish things like a luxury car or purchase of a new bungalow. In an attempt to reduce the inflation, the government will naturally intervene and increase the interest rate which will further squeeze the demand and big corporate companies will be compelled to postpone their expansion plans.

Political uncertainty
The refugee’s money is more sensitive to political turmoil and hence with the slightest political instability, the foreign institutional investors are ready to pack their bags. In India, with the left parties withdrawing their support to the Congress led government, the political crisis looms large on the face of the common man.

Global cues
The stock market in a country can not insulate itself against anything untoward happening in the neighboring nation and the stocks are bound to be affected, especially so when it is moving down. The emerging nations take the cue from the developed markets and both are dependent on each other. Since there is no sign of recovery in the US economy, it will definitely have a negative impact on the Asian economies which are already reeling under high crude prices and galloping inflation.

India tops in erosion of market cap

Continuing with our discussion on the stock market erosion in India, the equity values of the Indian stock market has gone down by as much as 42 per cent till now this year, giving the nation the dubious distinction of the worst performer among the emerging markets around the globe. When the losses are calculated by the foreign institutional investors, the losses would have been higher given the depreciation in the value of Indian rupee against the US dollar adding another 4% and the net loss would be 46% when measured in dollar terms. The fall is steeper in the small and mid cap stocks than the large cap stocks.

The current market cap of Indian stocks account for $968,526 millions after the erosion. But take some respite from another country that really performed poorer when compared to India. That country is Vietnam. Another regional neighbor that competed with India in economic growth too competed in the stock melt down is China which lost a whopping 42% worth, comes next to India.

Among the emerging markets in the Asia Pacific region, Australia and Brazil somewhat fared better and we can say they resisted the correction which blew through the entire globe. Their commodities fared well even during the correction phase.

To everyone’s surprise, the country responsible for the global melt down, the US with its sub prime crisis, has just shed 15% of its market cap and behaved in a very mature manner during the progress of the correction phase. Among the other developed nations, Japan lost only 9% of its market cap.

Here is a table showing the degree of erosion of wealth in different countries

Country Decline in Market Cap (%) Market cap to GDP ratio
India -46 0.9

China -42 0.4
South Korea -25 0.9
Hong Kong -24 9.0
US -15 1.3
Japan -9 1.1
Australia -8 1.2

Brazil -3 0.7
Mexico -0.5 0.5
Argentina 2 1.8
Source : Bloomberg

The Indian stock market capitalization overtook its GDP value for the first time in October 2006 and it went up to 1.8 during the market peak of January 2008. Another prominent player in the market is South Korea whose market cap to GDP ratio has gone down to below 1 in the recent correction. You may ask a question at this juncture? Whenever the value of GDP-market cap falls below 1, will it make the Indian stocks (or South Korean stocks) attractive? But the investment guru Warren Buffet is of the opinion that the value of less than 1 is a good indication about the attractive nature of any economy.

Asian stocks take the beating

With the rising crude prices trying to test the upper limit daily, the stocks, especially those belonging to the Asian continent fared badly. In fact, it was the biggest weekly fall this week in the last three months. The rising crude pushing the inflation upward, resulting in a higher interest rate thus hampering the growth of the economy and jeopardizing the livelihood of the common man.

Mitshubishi UFJ and Macquarie Group saw their fortunes down after the loss making report from the Lehman Brothers. Australia’s second largest securities company Babcock and Brown ltd suffered the worst, reportedly due to short selling. Many were of the opinion that rising inflation is the recipe to catastrophe and will compress the margins of the companies. There will be possible reduction in the earnings if the crude prices stay afloat.

China’s benchmark CSI 300 index decreased by 15% to 2979.12, the biggest ever fall recorded recently.

The G8 group of countries, in its meeting warned that soaring commodity prices may slice into economic growth. Increased commodity prices, especially that of oil and food pose a serious challenge to the stable growth and likely to increase the global inflationary pressures, the ministers warned.

A weakening dollar was attributed to the doubling of oil prices during the past 12 months. The Dallas Federal Reserve said in a paper last month that the US currency’s slide had contributed about 1/3 of the $60 increase in oil prices between 2003 and 2007.

Non stock tidbits
It is official now. China is the biggest carbon emitter last year. China’s carbon dioxide emission in 2007 was about 14% higher than the US and accounted for the two thirds of the global rise as per the Netherlands Environmental Assessment Agency (PBL).

Inflation in India – Where will it stop?

Indian economy is growing at robust pace. Just to compete with it are the prices of food items and industrial goods like steel and cement, which form the backbone of construction activity. The Indian Finance Minister was quick to intervene the galloping price rise by announcing a slew of fiscal measures. These anti inflationary steps cost the government Rs.1,500 crores. The earlier two interventions on the inflation had an impact of Rs.4,840 crores.

The main focus of the government is increasing the availability of steel products as well as softening their prices. The real estate business is already in slump and the increased steel prices are a nightmare to the construction business. Steel as a whole contributed 21.3% to the current inflation and its role in the economy can never be underestimated. The basic customs duty was cut on pig iron, granules, powders, ingots, billets, hot rolled coils etc.

As for as food products are concerned, in order to ensure adequate availability of milk in lean summer months, the basic customs duty on skim milk powder has been reduced to 5% from 15% and similarly for butteroil, it is down from 40 to 30%. An export duty of Rs.8,000 a ton has been slapped on Basmati rice.

Mr.Y.V.Reddy, the Governor of Reserve Bank of India (RBI) is optimistic about the GDP growth touching 8.5% and hope that the inflation will be contained at 5.5% level. Notwithstanding this, the RBI has hiked the cash reserve ratio by 25 base points to suck out Rs.9,000 crores from the system so that too much money won’t chase too few goods. The CRR is now at 8.25%.

With all these fiscal measures, one can only hope that the inflation would fall to such a level so that the price of the essential commodities is within the reach of common man.

More pink slips in the offing?

The deepening financial crisis and a possible recession in the US have cast their shadow on the job front of many of the financial companies. This week saw the issue of the largest number of pink slips since the beginning of the financial crisis and the latest reports quote that some 12,400 jobs have been cut mainly in Citigroup, Merrill Lynch and Walchovia corporation and it is expected that more cuts are in the offing since the losses continue to mount.

This week job cut when added to the total lay offs amount to a mammoth 36,000 jobs lost since the beginning of the crisis in US alone. Notwithstanding the present lay offs, the Citi is planning to shed another 9,000 people owing to the fiscal tightening. The Citigroup posted a $5.11 billion quarterly loss on Friday taking billions of dollars write downs related to mortgages and crisis in the credit markets.

The world’s largest brokerage, Merrill on Thursday announced a $9.7 billion in write downs. Mr. George Soros, the well known billionaire-investor described the sub-prime mortgage crisis as the worst financial crisis of our life time and he was of opinion that the global losses could be as high as a whopping $1 trillion.

London fiasco

The fall out from the US sub-prime mortgage crisis has taken its toll in the form of job losses in London financial district, the city and the estimates suggest that 40, 000 people are likely to be sacked from their jobs. This is just double of the previous estimate by the analysts, JP Morgan.

Google profits up

Google on Thursday announced that its profit has gone up more than 30% to $1.31 billion in the first quarter of the present financial year, giving the much needed breather to the online advertisement companies and publishers alike. Google’s stock reacted favorably by leaping more than 17% to end at $526 a share. The main cash resource for Google, clicks on online ads, increased by 20% in the quarter under report. Hope the Google adwords people and publishers can be seen laughing all the way to the banks…

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Stock melt down is more in the rest of the world than in US

Stock investors have been scouting for the third world or the Asian Markets whenever the US stocks get the beating. This is what is called as “decoupling” in the stock market parlance. But the recent stories tell the facts contrary to the established one. As the US is gripped by recession, its effect is more felt in the third world, so to say, some sort of chain reaction where the starter suffers the least whereas the tail end suffers the worst.

China and India, considered as the outstanding performers in terms of GDP growth, have suffered the most in stocks, in terms of the decoupling theory.

Mr. Jamie Doyle, manager of the International Portfolios for Causeway Capital Management considers the recent drop as buying opportunity, going by the adage “Invest at every dip”. However, he cautions the investors with minimal exposure to the American economy.

GE results, well below what the market had expected?

The results of the General Electric company is officially out and has sent chills through the nerves of the investors who are more worried about the performance of the market especially during the start of the first quarter of the financial year. The company reported the first quarter earnings per share of 44 cents, which was considered well below that of what Wall Street considered as the ideal one at 51 cents and a cut in its growth forecast.

GE recorded the steepest weekly fall since the September 2001 terror attacks after the release of the result. Estimates showed that the plunge had erased 55 billion dollar from the stock market value. The majority of the economists are of the opinion that US will be into recession sooner. The confidence among the US consumers has gone down to a 26 year low and high gasoline prices and the worsening labor market are cited as the possible reasons.

Non financial news

A cluster of spruces in the mountains of western Sweden is considered as the oldest living tree, at an age of 8,000 years!