Economic Recovery - What it means For Market Recovery

I was reading this article on Business Standard website " Worst behind us, pre-recession demand in 2-3 years: Mittal."

In this article Laxmi Mittal talks about his expectation on the recover where he says "For (the) pre-recession demand to come back, I give 2-3 years...Everyone believes and we also believe that the decline has stopped."

What does this 2-3 years recovery means for the stock market, going by the current euphoria the market should go up and that is reason why the market is also going up as well - pricing in the recovery in a years to two time.

You can stick to investing into stocks which have healthy balance sheet and business and try avoiding (even if it is tempting) the stocks which does not have healthy balance sheet. Why this is important? because if the recovery is going to be in a years or two time then the companies should have the capacity to sustain the down turn and three indicators to pay special attention are:

- High Debt to Equity ratio.
- Large amount of bonds maturing in next six month.
- Low Cash Flow to Interest ratio.

If the company faces all the three problems then it is better to avoid investing in it as you will be the suckers at the hands of promoters and the speculators.

I will get back to you with the list of companies in India which meet these three criteria in few days time.

Till then be smart with investing your hard earn money - their are no free lunches.

Story of a Failed Smart Investor - Right at Wrong Time

Last week I was speaking at a seminar in Manila and one of the speakers had managed to put my thought process in perspective - I am of the opinion that intelligent men does not make better investors anymore and I could not pin point why?

Last week I was speaking at a seminar in Manila and one of the speaker had put forward a phrase during her presentation which kind of put my thought into perspective - she quoted an anonymous quote "Right at Wrong Time"

Right at the wrong time - meaning success in market is all about timing and it is increasingly becoming difficult to time the market as so many elements are involved which are moving the markets that is difficult for any one to predict it - so what is the way out - don't be intelligent investor but a smart investor - trade the market - book your profit and get out instead of trying to predict the direction of the market.

Take the example of Spice Jet airlines stock in India - when i looked at the fundamentals - the company has poor cash flow, high debt to equity ratio and the industry in which it is operating is facing pressure both on the revenue side and cost side (as the oil prices are going up), as an intelligent investor I would have sold the stock but guess what I would have missed a rally of 68% the stock has seen in last 3 months.

The liquidity in the market is pushing almost every stock up another good example is Grasim industries (from India again about which I had written earlier). So the question is how to be a smart investor - just go with the momentum, make your money and get out of the market.

For next few weeks I will be writing more about it in detail. Any opinion or feedback is welcome.

Equity Market Rally - The Cautious Voices

What is refreshing to see thing time around about the market rally is the kind of cautious approach taken by many news papers and opinion makers. I would like to highlight two articles which I have come across in two different websites - Business Standard in India and Bloomberg.com.

Let me start with the article on Bloomberg.com where John Dorfman , chairman of Thunderstorm Capital in Boston and a columnist for Bloomberg News as well write about the theory of Nifty50 in reference to the rising Amazon's valuations to quote from his article " Amazon’s valuations recall those of investors’ favorite stocks back in 1972 -- the Nifty 50, as they were known. The group included Xerox Corp., McDonald’s Corp. and International Business Machines Corp., whose shares traded at about 60 times earnings."

He give an very good analysis on his concerns with the steep jump in the stock prices of consumer companies - click here to read the article "Amazon, Starbucks, Sears Rose Too Far Too Fast".

Business Standard one of the biggest business publication in India where the stocks have risen by over 80% in last 3 months has two editorial back to back sounding a cautious to the current rally, the first one is "Reality check - the economic indicator still show mixed picture" which focus on the fear of the Indian Budget falling short of market expectation how it is going to impact the market sentiments.

In the other editorial " Soaring Optimism - but are the stock market signals to be trusted" the editorial talks about the positive news the market is focusing on and getting the readers attention to the negative news which are out there.

Today's Analyst - Stock Pickers or Stock Promoters?

In last two weeks four major research houses (or I should say Investment bankers) have given very positive ratings for Indian stock market. Goldman Sachs, Morgan Stanly, BNP and Merrill Lynch.

I was very curious, because the market has rallied over 80% year to date and with earnings not expected to go back to its peak any time soon why are these research houses coming out with such a glowing reports on India.

On my way back from Vietnam last week, I was reading a book called Blood on the Street by Charles Gasparino (a must read book by the way) and I got my answer when the author describe the star analyst not as stock picker but stock promoter. The Indian government has announced plans for massive disinvestment program under which the government will see its stake in large corporations to investing public. The catch is, who (which investment bank) will get the mandate to manage the asset sale?

The answer is the one who is bullish on the country and the one who is able to get the best selling price. So who is bullish here the investment banking house of Goldman, Morgan, Merrill and BNP.

Who can get the best price for the asset sale? well by sounding bullish, these investment banking are preparing the ground to find suckers (remember - investment is all about finding suckers), if these research houses doe not sound bullish why will any one pay high price to buy into equity market now?

So the moral of the story is all these bullish tone of the big research houses is to support their investment banking division and find suckers. One need to be cautious about this approach as the reason behind the Nasdaq crash was the glowing reports by analyst to get the investment banking business.

Are Bank Profits for Real?

It is difficult to believe the so called expert as everyone has their own agenda, if a competing analyst or broking house has an optimistic view then the other houses are forced to come out with similar or more optimistic view and vice verse.

Not many of them could predict the Sept. 08 crash, nor they could predict the current rally. As my good friend always say, all of us are expert on the left side of the chart (meaning the historical price trend).

The current rally as I had written earlier was triggered by the leaking of an internal memo by Vikaram Pandit on the huge profits Citi will be making in the 1st qtr. Now I have come across an interesting article on this subject which gives you an insight of how these banks are using (misusing) the accounting rules to book large unrealized profits.

The article is written by Keith Fitz-Gerald - click here for the link:"The Newest Ruse: Banks Capitalizing on “Toxic Assets” to Book Puffed-Up Profits" read on and send me your views.

Eqyuty Market Rally - The Panic Buying

The Euphoria about the current rally in equity market is still continuing. The bulls are in full control and are able to get in suckers in large numbers. I have come across two contrasting but interesting articles about the next direction of the market from two competing sources - Bloomberg.com and CNBC.com.

Let me start with CNBC where David Rosenberg who left BofA-Merrill in May to become chief economist of Gluskin, Sheff & Assoc where he writes why he is worried about the current market rally and he has some interesting observations which i support and believe as well. (for article click"

The article says, with stocks marching higher almost every day, he’s concerned that instead of being ahead of the economy, the stock market might be completely disconnected from it.

Has the market hasn't priced in all this? Rosenberg doesn’t think so. He doesn't think the stock market is ahead of the economy, but rather detached from it. It's not uncommon to have “a disconnect for a time between the stock market and our economic reality,” he tells the Fast Money desk.

So what is causing the rally? he believes and which again I agree, strong fund flows and strong technical are currently powering stocks higher, not fundamentals. In other words investors are so afraid of missing the next leg higher they're creating panic buying."

Yes the point to take away is panic buying.

On the other hand, Bloomberg.com carried an interesting but opposite views of the CNBC articles "Emotional’ Gauge Turns Bullish for U.S. Stocks: Chart of Day" It talks about an interesting technical study called "Coppock guide" which predict that the market will rally further.

I believe we are witnessing panic buying and every one has been so underweight in the recent rally, people are catching up and getting into the markets at these levels.

Successful Investment Idea is All About Finding Suckers!

"Successful Investment Idea is All About Finding Suckers"!

Not sure if it is the Friday effect, I am confused how to react to this story on Bloomberg.com "India's Economy Expands 5.8%, Faster Than Forecast; Stocks, Rupee Advance". To me the best way to jack up the market is for the so called experts to get their forecast wrong - actual beat the expectation and market rally and everybody is happy and no one complain about the analyst getting their prediction wrong.

I am convince about my observation " successful investment is all about finding suckers" the more suckers you find the more successful your investment strategy is. You have purchased a stock (or recommended a stock to buy) then the only way to jack up the price (or to make your investment successful) is to find suckers who will believe in your story and buy the stock and more number of people you find to believe in your story higher the stock price will go.

To the so call experts luck, as my friend has put in a thousand suckers are born every minute in equity market. Financial market is all bout marketing, viability and reach and less about the analytical capability and that include the so call Warren Buffet as well.

For example, if you as a common man find an excellent investment opportunity in a stock because of its fundamentals and you buy it then what happens, will the stock price goes up not sure it will as you may be the only guy buying it so no demand means pricing not moving up and if Warren Buffet says he had purchased the same stock what happens " the stock will open limit up the next day and Warren Buffet will turn back tell you see I told you the stock is a good one to invest - so its all about finding others to believe in your story and better the story teller, bigger the story teller better will be impact on the stock price.

But my dear friend, we all are here to make quick money and not to find the merits or demerits about the markets so be careful, follow the trend make money and get out.

Before I end, I want to point out a an interesting article written by one of my favorite columnist William Pesek who write in Bloomberg.com "Roubini Finds Economy Even He Can Be Bullish On" - an interesting article on Lessons US can learn from South Korea.

Happy Weekend.