Fading Dark Clouds But Its Still Not Bright Enough

FADING DARK CLOUDS… BUT… ITS’ STILL NOT BRIGHT ENOUGH…

BUT …ITS’ STILL NOT BRIGHT ENOUGH…
FADING DARK CLOUDS…

I continue my focus on Global Markets due to my conviction (refer my articles dated 10 th & 12th
March) that Indian Equity Markets will continue taking cues from Equity Markets around the
globe especially US markets and will react on a day-to-day basis to the events and development
shaping up in the global arena especially in the west. The conviction stems due to the fact that I
do not expect any significant news flow to come in either from govt. or RBI (due to their own
problems). Also I continue with my expectation that the headline macro data numbers such as
IIP figures, Inflation and GDP data will not be able to provide any direction for our market for
either medium or longer term, rather I believe that the markets might react to these headline
macro figures but only for that very day and would again start taking cues from global markets.

IS THIS IT, I BELIEVE NO, THERE IS MORE TO IT; has this rally got some more
steam left: I again feel “YES but might not be on a day to day basis BUT over short
to medium term????”

Continuing with my stance on “whether this rally has got some steam left: I believe YES” and
“this time the green tick is not light green, but looks like, it has got a darker green shade within
it” in my article dated 12th Mar’09, I continue to believe the dark clouds over global equity
markets (especially US & European markets) are fading on the back of significant slowdown in
bad news flow (especially on bad banking news flow) over past six days at-least, flow of which
was at its peak since the beginning of this year.

five
Dark clouds to fade further on the back of

events, which will provide direction to global equity
markets including Indian Markets

The dark clouds will fade in color further at-least on the back of
March 17, 2009

five events which will shape up in near future. I believe these
events will provide a direction to US equity market and in turn to Indian Equity Markets.

1. Geithner’s banking plan announced on 10th Feb’09 on banks’ toxic asset:
First and the biggest is the expectation that US Treasury Secretary will unveil details on

Vinit Tulsyan http://vinittulsyan.wordpress.com


“BANK TOXIC ASSET PLAN” (refer my previous article for dated 12th Mar’09 for
more on Geithner Toxic Asset Plan). Geithner’s program has three main elements:

a. Injecting fresh government capital into some of the country’s biggest financial
institutions;

b. Establishing a public-private partnership to handle as much as $1 trillion of
banks’ bad assets; and
c. Starting a credit facility with the Federal Reserve of as much as $1 trillion to
promote lending to consumers and businesses.

The stress test should be the opportunity to identify the toxic asset and get rid of it.
Banks on the back of this, will be able to attract private capital. And this plan if
successful, I believe will provide further positive direction to the markets. I believe if
private capital starts flowing in the banking and the financial system, then the
confidence would further gain momentum as the biggest concern for the banks since the
time this crisis started was on front of raising capital from private sources. And private
capital was just not available on the back of uncertainty prevailing the banking and
financial system. Uncertainty regarding:

a. The quantum of toxic assets prevailing on bank’s balance sheet,

b. Illiquidity prevailing in the market with respect to those assets,

c. Massive write downs taken by financial institutions on the not having a liquid
market and prevalence of “Mark-to-Market (MTM)” rule.

I believe that participation of private capital within this segment of banking industry will
at-least make this market more liquid and put at-least a floor to these toxic asset value.

2. The second event relates to G20 meet in
London and the expectation built in
March 17, 2009

around this summit, which is supposed to take
place within next two weeks, though I have little
expectation from the latter despite finance
chiefs from the Group of 20 vowed to work
together to clean up the toxic assets. I do not
expect much from this meet on the back of
different priorities, different problem characteristics within different economies, clash of



interest, China along with other emerging market economies demanding more autonomy
and others.

3. The third event is related to news flow with respect to banking industry and the
expectation and the chances that the troubled banks would be able to attract private
capital and the era of “BAILOUTS” and Govt. support are over as most of the banking
giants such as CITI, JP MORGAN, BANK OF AMERICA, HSBC, AIG announcing that
they do not need any further support from the govt. and they (CITI, JP MORGAN, BANK
OF AMERICA) had been profitable in first two of this year.

The detail on stress test (refer point no. 1) for banking companies which the US
treasury is continuing with will assume significant importance as and when it is
unveiled. And with the probability that most of the large banks (with whom the word
“troubled” was attached six to ten days back) will clear this stress tests, and the debate
over fear of banks being “NATIONALISED” will lose its sheen. With further expectation
of most of the banks and financial institutions such as CITI, BOA, JP Morgan Chase,
HSBC, Barclay, AIG are well capitalized (as claimed by heads of these troubled banks),
and these banks will not require any further assistance either from FED or Treasury. I
am not an expert on how their financials look like, my confidence stems from the
statements made by these heads such as their banking institution was profitable in the
first two months of this year, they do not need any further assistance from the govt.. And
the biggest source of confidence comes from the market reaction towards these positives
in the last six days.

4. The fourth event is related to moves taken by US SEC (Securities and Exchange
Commission), the treasury and the fed with respect to Mark-to-Market accounting, the
Up-Tick Rule and further aid announced by Obama administration on two accounts; 1)
to ensure that lending process further smoothens and main-stream market starts sign of
stabilization and 2) to aid American business similar to the one announced today to the
tune of US$ 15 billion to help or support small business. Mr. Obama in order to east
access of credit market for small business announced today that the large 21 banks will
have to provide monthly data on money being lent to small businesses.
March 17, 2009

Positive comments by banking CEOs, the fed chairman and the treasury secretary
regarding economy and banking to some extent have been able to provide some amount
of HOPE to investors. Today’s upbeat comment by Mr. Bernanke that as long as there
was the political will to keep driving through fiscal and economic stimulus, the US



economy should begin to recover next year is further helped in improving investors risk
appetite.

5. China’s importance ahead of G-20 meet has gained momentum (partly on the back of
US$ 1.9 trillion in reserves with most of them being dollar investments) and this time
around I expect China to play a greater role in shaping up and directing the plans and
polices unfolding at the summit. China remains the biggest foreign holder of U.S.
Treasuries, after its holdings rising by US$ 12.2 billion to US$ 739.6 billion. The final
event is related to news flow unfolding in China, whose premier has again
reiterated that China will maintain its growth rate at at-least 8%. The entire world would
be watching the headline macro data figures coming out of China and would be keenly
waiting on another fiscal stimulus, expectation on which are increasing faster on the
back of continued bad data news flow regarding FDI, exports, consumer spending,
unemployment, deflationary fear etc.

BUT…Investors are still looking for alternatives such as Corporate Bond Market,
Treasuries, Gold, Oil (despite status quo maintained by OPEC regarding
production cut); implying the confidence on equities is far from close to high

Asia-Pacific groups rush to meet bond demand (Source FT.com): Companies
in the Asia-Pacific region are scrambling to raise capital by issuing domestic retail bonds
to yield-hungry investors who are shunning volatile equity markets. More than $2bn has
been raised in the region, excluding Japan, in the year to date – the highest ever first
quarter amount. The bonds are issued in local currency and unavailable to cross-border
investors. The nine individual issues include corporate names in India, Australia, New
Zealand, Thailand and the Philippines.

The region is characterized by high levels of household savings, with investors hunting
for yield amid sharp falls in interest rates. Typically, individual investors are shunning
property as well as the stock market. But one GOOD clue to take from this that investors
March 17, 2009

were attracted by the yield and it shows there is capital formation and capital at retail
level.

Other asset classes have experienced further strengthening in prices over
these last six days. The oil prices despite OPEC status quo on production cut jumped
by almost 2% at US$ 47 per barrel. Gold is just not ready to go below US$ 900 per ounce



and is not trading at US$ 924. The dollar is continuing its strength against major
currencies and bond prices are still going up in US treasuries market.

Some interesting stats on US S&P 500 broader index with respect to five days rally;
pointing that in comparison to November 2008 lows, this rally has got confidence
and strength:

The current five day rally 13% (except today)
o The sixth day drop (today) at 0.4%.

The previous five day rally 19% in Nov’08
o The sixth day drop at 9%

Thanking You,
Warm Personal Regards,

Vinit Tulsyan
http://vinittulsyan.wordpress.com

March 17, 2009


Fading Dark Clouds But Its Still Not Bright Enough

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Fading Dark Clouds But Its Still Not Bright Enough