Blow Out Phase In Emerging Equity Markets

Money flows from developed nations like US, UK, Europe is getting invested in fast growing economies like India, China, Taiwan, Singapore, HongKoong, Phillipines, Russia. This flow is very strong and there is almost herd mentality among them to enter these markets in a rush. This is causing extreme inflation in assets of these economies, notably in stocks. This money also is very reluctant to react to any adverse news and under such circumstances, making money at heightened valuations is an extremely challenging task for traders. Best to remain invested in excellent quality companies with excellent free cash flows and strongest of business fundamentals coupled with strong economic link.

Industrial Commodities

Industrial commodities like copper, zinc, nickel, lead, has been rising over the last few weeks as world GDP is growing handsomely at 4.8/9%. Emerging countries continue to grow over 7% and this is also helping bullish run in these commodities. Speculative hot money is also chasing returns in these commodities and stocks related to them. Crude oil is also on a secular bull run of it's own due to several reasons. As long as world runs on ever increasing greed to acquire more and more wealth and industrial growth, commodity bull run will remain intact.

Will He Or Won't He

I believe this time US federal reserve will not cut interest rates as turmoil in financial markets from US subprime mess has been contained well and all the stock markets are either re-claiming their old heighs or making new heighs. If he does cut the rates then it will pump more dollars into the riskier assets like stocks and commodities, with more weakness in dollar. This will further create inflation among already hyper inflated riskier assets and make them more vulnerable to sudden shocks resulting in huge instability in the credit and financial markets. Thus for the sake of overall health of financial markets, US fed must not cut rates this time around, we already have enough of cheap money roaming around.

Asset Inflation

Due to continous money supply by central banks across major economies, asset prices have reached a point where it looks scary to justify this hightened exhuberance among so called value investors. This continous and extremely fast rise in asset prices is creating an asset bubble, which no body wants to burst, but still fears. The common casualty is layman person, or what economist love to term as Consumer, which bears the brunt of this artificial asset inflation and gets credit at high interest rates to buy that asset! This can't go on for ever, something might topple this top heavy giant from the cliff, what would that be, only time will tell.

Markets Cheer Rate Cut!

Stock markets are cheering 0.5% rate cut by US federal reserve but i believe Fed must have punished defaulters of subprime mortgage borrowers and lending institutions by raising interest rates rather than cutting them. Instead Fed has revisiting same starting point which started this whole cheap credit phenomenon across all asset classes. By printing more and more dollars, Fed is again pumping more cheap money into the financial system and re-assuring the market participants that in any adverse event like default mess the fed will bail them out by printing more money, thus inviting more defaulters to do default at will and get away! That's the way systemic problems linger on and system makers continue to drag them for their pity interests like to help very large lending and investment banking institutions.

Fed Rate Cut Or Not?

Will the US federal reserve cut the interest rate in his september 18 meeting, if yes then by how much, is the puzzle that stock markets are grappling with. Any cut above 25 basis points will indicate deep scars left by subprime mortgage mess and subsequent dampening effects on the economy and job losses and thus concern for stocks in the US and on nations which are export dependent on US. Japan is already facing stronger yen problem because of yen carry trade unwinding and its effect on its exports. Asian stocks have shown good resilience and will continue to outperform the US and Europen stocks as money in these developed countries will flow to growing economies(asian) in order to beat low returns available in their home markets.

Asian Stocks Close To Their Old Highs

Asian stock markets are close to re-claiming their heighs they have made prior to stock meltdown due to subprime mortgage mess in the U.S. This shows their resilience towards global shocks because unlike previous shocks like in the late ninetees when Asian financial crisis hit them very hard, this time around they have plenty of foreign exchange reserves with solid backing of a growing economy.

U.S. markets too are stabilising with european markets too following the suit. As mentioned earlier in the blog during the crash that smart money was busy buying strongest businesses in panic moments, their strategy paid off very well this time too.

Real Estate

Almost every asset class has seen sharp correction over the past few weeks, be it stocks, commodities, currency like the dollar, even Art has seen some softening in resale prices, but real estate prices have so far remained over heated in most commercial parts of the world. Even residential property rates in the emerging markets like India, China, Taiwan are over heated. Continued over heated prices is a cause of concern for business as well as genuine home seekers.
Huge money flows have gone into real estate segment, be it PE funds, massive loans from financial institutions and banks to builders and home buyers, black money has also flown with great intensity in to this area. Rentals are also ruling high making the business operations and other commercial activity less profitable or even viable to run. This has caused inflationary pressures in the final product prices. This real estate segment has to undergo a major price correction in order to restore affordability and investment viable proposition.

Not all money is credit

Markets have been bearing the brunt of mahem in the U.S. sub-prime mortgage with several U.S., Europeon and U.K. funds going burst.
Investors and traders believe that all markets have risen because of cheap credit pouring in the markets, however this is paritally true as people do have their own money to invest in case oppurtunity arises, because if all was borrowed money then markets for the past few trading sessions would not have been found the support of new buyers!

Smart buyers have been utilising this sharp fall in equities as a buying oppurtunity and are putting their own money.

Excessive borrowed money can only inflate the valuations of given assets to artificial levels but any cracks in that credit cycle can turn that tide against the borrower as he has to return the money to original lender and he does that in panic as we have seen for the past few weeks. Therefore investng with own money is the only rational strategy one must adopt.

Bonds are rallying

U.S. bonds for the past two weeks are rallying due to carnage in the stocks, as investors/traders flock to safer money avenues in these highly uncertain and volatile times in order to protect their capital from any sharp drop in stocks.

They are not bothered at the moment about low returns from bonds but rather concerned about capital erosion from risky assets like stocks. They are right in their approach as sometimes remaining in cash can give excellent buying opportunities in blue chip stocks in case they fall sharply because of some external reasons not related to their business performance.

Keep A close Watch On News Flow

As the title of this thread indicates, keep a close watch on the level of noise originating from U.S. on sub-prime mortgage crisis.
As various central banks of developed economies keep pouring money in the financial system to meet the liquidity demand and maintain the financial markets in good health, it's not far that financial markets again re-gain their strength. Patience will be the key.

Central Banks Pour The Money

Seeing liquidity crunch because of sub-prime mess in the U.S., central banks of major economies are pouring huge money in the financial system.
Several leading funds of major investment banks and institutions have been closed due to losses that they have incured in sub-prime investments in the U.S.
Yen has been strengthning for the past few days and this is also a cause of concern, critical level to watch out for yen against dollar is 115. This is very important from the yen carry trade point of view as it has in the past and in present providing huge liquidity to the financial markets.
It will also be very interesting to see if Japanese central bank raises the interest rates this time or not, again very important for yen carry trade to keep going.

Problem Of Plenty

For the past two and a half decades, U.S. federal reserve has done nothing but to print more and more dollars and that has created the problem of too much money chasing few asset classes and hence bubble like situation in each and every asset.
Asian countries are holding U.S.treasuries worth trillion of dollars just to finance U.S. consumer's shopping list and keep their growth going.
This never ending credit cycle has turned financial markets across the globe at very risk of un-sustainable inflated levels. After all where does that huge sum of money goes other than stocks, bonds, real estate, currency, they have to park it somewhere. And thats the problem for these markets.

Business And Inflation

I don't know how many people know about this that Businesses love Inflation for the reasons i believe are root cause for their profit growth.
We all know that biggest borrowers are Goverments and Big/Medium Businesses and they suck out very large portion of available credit (and that too very cheaply)in the market, leaving small players to borrow at hight Interest Rates.
Well they say:- Money is sufficient but there are very few things to buy!
Businesses can create artificial demand-supply situation(sometimes it's geniune), raise their product prices citing inflation as reason even though they are not facing input cost pressures, thus earn huge profit with similar sales growth.
And these same businesses also run banks and financial institution which give credit at high interest rates to small entities, thus further making credit costly. Cost of money is the Inflation in the hands of the borrower, more it is more it hurts.

Volatility In Stock Markets

For some days, stock markets across the world are facing volatility due to subprime mortgage problems in the U.S., yen carry trade un-winding because of strenghting of yen against the dollar, re-adjustment of risk due to sharp rise in the price of crude oil which is hovering above U.S.$75 mark for the past 2 weeks. Hedge funds which love to play the stock and currency markets with leveraged money are facing problems due to adverse movements in certain asset prices against their bet, this is also leading to volatility in the system.