Panic selling - Stock Markets are crashing

Investors are in the complete panic grip. They lost faith in the global economic recovery. They lost faith in mutual funds. Aggressive administration steps are not yielding desired results. They are withdrawing money from stocks, mutual funds and banks. Dow Jones lost 679 points and fell to below 9,000 points which was a unthinkable number just one month back. Asian stock markets are also moving in the same direction. Coordinated rate cuts by central banks failed to save stock markets from collapse.

Chart courtesy: Bloomberg.

American investors have withdrawn 72 billion dollars from mutual funds. So funds are selling their holdings to prevent liquidity crisis. All are selling all stocks without thinking about anything. How to save the global stock markets from this extreme crisis and panic selling? How to restore faith? According to analysts, it will take more than 10 years for American banks to retain complete trust. Americans just want to sit on whatever cash available. Their banks are in trouble. Their insurance companies are in trouble. Their pension funds are in trouble. If this is the situation in America even before this credit crisis affects Main Street, what will happen after hitting Main Street and job market in a big way? Unthinkable! Real panic situation!

What will happen to Indian Share Markets?

Indian economy will be definitely affected much more than what analysts are predicting. But stock markets are overeacting to the crisis due to panic situation and FII selling. I am bearish on sectors like IT, Auto, exports (rupee fall is saving grace), metals and high ened consumption. If RBI will not cut interest rates within 7-10 days, BSE Sensex will fall to below 9,000 levels. Long term investors who are sitting on cash should use upcoming crashes for accumulation. Accumulate stocks whose performance will depend on Government spending and compulsory spending. But don't buy stocks for short term gains.

Indian form of "Sub Prime Crisis":

We will see the real effect on Indian economy once NPAs of banks start to rise due to job losses. Many software engineers (both local and NRI) bought real estate properties with loans. Once crisis deepens, 20-30% of these people will lose either jobs or see cut in their wages which will lead to increase in defaults. We will see sharp fall in real estate values in the coming months which will further aggravate the crisis. 4 major states will go to polls in December which is not a good sign for share markets.

ICICI Bank with high retail loans and Axis Bank, HDFC Bank and Yes Bank with loans to developers are at high risk than other banks. Indian Government, RBI and software companies are reacting very slowly to the mounting crisis. We will see the real effects in the next few months. There is a huge real estate bubble which is set to burst at any point of time to change the future course of Indian economy. Am I too pessimistic?

Only positive aspect: When authorities of Russia and Brazil are fearing to open their stock markets, we are atleast running them smoothly with moderate losses. This is because of better growth prospects when compared to other countries. Indian economy was insulated from subprime crisis but Indian economy was not insulated from global economy. Global economic crisis will definitely affect Indian stock markets due to FII selling and mutual fund withdrawals. But Indian stock markets will outperform global stock markets over long term. That's why don't book losses out of panic. It is impossible to find bottom and identify sharp market recovery whenever it will happen. Get ready to bear extreme pain over short term.

Estimates:

1. Inflation: CNBC TV18: 12%; UTVi: 11.98%.

2. Infosys may announce 7-9% increase in net profit on Friday.

Significant statements:

1. Reserve Bank of India should cut interest rates- Rakesh Jhunjhunwala.

2. Release 1 lakh crore into financial system to save companies – Indian businessmen.

Significant decisions:

1. Ispat industries announced “cut in steel production” indicating lesser demand. Others may soon follow. Jim Rogers failed miserably to predict this commodity crisis. What will China do?

Interesting statistics:

1. The D&B Composite Business Optimism Index for fourth quarter of 2008 fell by 28.1% on year to 138.9 points, the biggest fall ever witnessed in the index.

2. Investors lost 36,50,000 crore money in 9 months. Please do not turn your paper losses into real losses by resorting to panic selling. But those who invested at 21,000 Sensex levels will not recover their money in the next 2 years. It is waste to talk about those who invested in penny stocks or speculative investments.

3. Iceland is the first bankrupted country in the recent economic history.

4. Rupee will cross 50 per dollar in the coming days.

5. India’s GDP growth for FY09 will be around 7.9% - IMF.

6. General Motors market cap reached 1930 levels.

7. Crude oil price fell to lowest levels in a year.


Shocking rumour:

1. South Korean banks are in line for bankruptcy. Unbelievable! Can Korean Government able to stop this crisis?

Final note: Investors don’t need assuring words from finance minister. They want specific actions to save the economy from slow down. What will they do to increase liquidity? My request to all investors is please do not convert your paper losses into real losses. Please forget about your investments if you are invested in good companies. Please bear these extreme pianful losses for some more days.

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