What is the bottom level for BSE Sensex?

If you use CNBC to take long term investment decisions, this article is not meant for you. This article is strictly meant for medium to long term investors but not for traders. What is the bottom level for BSE Sensex? This is the most favorite discussion topic for investor community in these days. As long as you change your decisions according to short term Sensex movements, it is difficult for you to see bigger economic picture.

Sensex fell to 7,800 from 14,000 in few sessions after the collapse of Lehman brothers. Biggest problem with current crisis is the speed of the spread and depth of the impact. Another problem is “no one knows about the magnitude of the effect.” In this dynamic scenario, it is waste to talk about long term impact. So, let us talk about short to medium term impact and how investors react in panic.

In September-October, 2008: Sensex moved from 14,000 to 7,800 – ultimate panic reaction in recent time. It means Sensex commanded a valuation of just 9 in the extreme panic environment. We can take it as ultimate bottom level.

What are the future bottom levels for Sensex if it commands a valuation of 9?

1. Basing on Q2 results (October, 2008), Sensex will be at 8,600-8,800. But many companies will announce poor results in the next quarter.

2. Basing on Q3 results (January-February, 2009), Sensex will be at 7,000-7,400 (my estimate). It may vary according to Q3 results. Then Sensex will see some bounce back before Q4 results will come out which will further disappoint investors.

3. Basing on Q4 results (March-April, 2009), Sensex will be at 5,800-6,000 (my estimate). It is waste to think beyond that in this dynamic economic environment which is changing almost on weekly basis. If things will improve before that quarter, I will update in the blog.

All these estimates are basing on the assumption that Stock markets always overreact to economic news and fundamentals (October, 2008 experience). If war clouds will strengthen in the next few weeks, Sensex will collapse to 6,000 levels by January end. As an investor, I will buy stocks like BEML which will get new orders in the war environment. Our leaders will be busy with Loksabha elections from February onwards. Anyway, economy will take back seat in the next few months despite worsening situation due to war and elections. Mean while our IT and Real estate chiefs will continue to try to fool us through their routine statements.

5 worst slogans in the last 5 quarters:

1. Q3 FY2007-08: “India is decoupled from global economy.” Sensex was at 20,000.

2. Q4 FY2007-08: “India has strong fundamentals and Indian growth story will continue.” Sensex was at 16,500.

3. Q1 FY2008-09: “World credit crisis will not affect us.” Sensex was at 14,000.

4. Q2 FY2008-09: “Indian GDP will continue to grow at 8% and stock markets are overreacting.” Sensex was at 12,600.

5. Q3 FY2008-09: “Sensex included all the negative economic news.” Sensex was at 10,000.

Worst theories and statements:

Financial analysts who take millions of salaries need to come out with some “romantic theories” to save their jobs and reputation.

1. Oil to $200

2. India decoupling theory

3. BRIC nations will save world economy

4. Obama will save America

5. China will continue to grow

6. Indian is in best position to benefit from global turmoil

7. Outsourcing will increase due to economic slow down

8. Rural economy in India will continue to grow

9. Indian middle class consumption power

10. Fall in inflation and oil will save Indian economy.

All these myths about world and Indian economy will be busted in the next few months. Are you still in illusion? Don’t forget that we are living in the globalised economy but we are not Eskimos living in Igloos at Alaska.

Status about current economy in simple terms:

1. Auto sector: Toyota Company reported first operating loss in 70 years. Honda sold its F1 team. Maruti dealers are in complete mess due to rise in inventories.

2. Gold sales: This is another indicator on the consumption power of people. Gold sales have fallen by 50% in 2008 over 2007. Fall in gold sales for the past 3 months is much worse.

3. Indian GDP: It was expected to grow at 10-11% in FY 2009-10 (1 year back estimate). Indian GDP is now expected to grow at 4.5-5% in FY2009-10.

4. China GDP: It was expected to grow at 11-13% in FY 2009-10 (1 year back estimate). China GDP is now expected to grow at 5.5-6.5% in FY2009-10.

5. Brazil GDP: It was expected to grow at 6-7% in FY 2009-10 (1 year back estimate). Brazil GDP is now expected to grow at 2-2.5% in FY2009-10.

6. Russia GDP: It was expected to grow at 8-9% in FY 2009-10 (1 year back estimate). Russia GDP is now expected to grow at 1-2% in FY2009-10.

7. World GDP: It was expected to grow at 3-4% in FY 2009-10 (1 year back estimate). It is now expected to register negative growth in FY2009-10.

8. Canada: Everyone thought that Canada is the only developed nation that will escape from global recession. But Canada recently entered into recession along with United States, England, European Nations, Japan, Hong Kong, Korea and Singapore.

9. Manufacturing companies are planning to cut production by 50% in the next 3 months.

If you can translate these statistics into real impact on our lives, it will give you real idea about future growth prospects. Stock market rallies will continue trap innocent investors to take bad decisions. Current crisis is not as bad as 1930 depression but much worse than 1970 recession.

Top 5 stocks in 2008:

1. Hindustan lever
2. Godrej Consumer
3. Nestle
4. Colgate
5. Procter and Gamble.

Worst performers in 2008:

1. Asian Electronics
2. Prajay Engineers
3. Orbit Corporations
4. IOL Netcom
5. Jai Corporation
6. Lok Housing

Poor corporate Governance:

3 companies that fooled investors in the last 1 week: Satyam Computers, JP Associates and SRF.

Click here to read more about 15 stocks that may shock you.

Investors should prepare for more such shocks in the next few months as economic environment will deteriorate, companies will either default or resort to bad practices. I have no hopes on either SEBI or exchanges. I was surprised by the Maytas stock performance over the last 2 months when great companies like Larsen and Toubro and Punj Lloyd corrected by 50%, Maytas actually grew by 20%. It means some big investors actually knew about “Satyam deal.” SEBI and exchanges should reveal the details of Maytas Infra stock buyers in the last 3 months who kept it till the last week. Closely watch out for Satyam meeting on December 29. Will Ramalinga Raju resign? Will IBM/Oracle buy Raju stake? If both rumours are true, both Satyam and Maytas stocks will give you 50-70% returns in the next 10 days. If December 29 meeting fails to come out with concrete solution, Satyam stock will fall to below 100 levels.

Satyam Computer Services: CMP: 138.
My advice: stay away from FMCG stocks. We don’t need to invest in the stocks for 10-15% returns. It is better to keep money in fixed deposits instead of investing money in FMCG stocks. FMCG stocks are giving positive returns as money from HNIs moved into them as defensive strategy. They will actually give you negative returns if market conditions improve on later date. If you are a new investor, just sit on cash until we get a clear picture.

Final advice: If you are a new investor, please stay away from stock markets for another 6 months. It is not an investors’ market. You will get many good stocks at throw away prices by that time. I will update in the blog when conditions will improve due to these stimulus packages. My predictions may look as foolish statements over short term but you will find the ultimate truth. Just imagine the impact on our economy when Indian GDP will grow at 5% in FY2009-10 which was growing at more than 9% in FY2007-08. 2009 will be the worst year for real economy. It is easy to say in words but actual pain is unbearable.

Another big mistake: Current crisis needs globally co-ordinated stimulus package. But countries are repeating the same mistake they did in 1970’s. Each country is just trying to stimulate its own economy even though it adversely impacts the economy of other countries.

Ex. China’s lowering of its currency to improve exports and saving of inefficient American auto companies and Obama’s strategy of creating jobs in America by imposing taxes on outsourced companies.

These steps will actually shrink global economy instead of actually stimulating it. Unless G-20 leaders take coordinated decisions, we will actually see painful 2010 due to these stimulus packages.

Read this paragraph from Business Standard:

“If the US, Europe and Japan contract at 2% in 2009, and other non-BRICs show no growth, the BRICs would have to grow by 11% or so to keep world growth out of negative territory. The simple truth is that BRICs are still too small to be global locomotors unless they sustain double digit growth, which they manifestly can’t in the present environment. Of course, the fact that the Asian BRICs are still expected to enjoy moderate growth in 2009 is itself testimony to their resilience in the face of global recession. But decoupled they are not”.

Lesson: BRICs need to grow at 11% to save world economy but they are expected to grow at 4% in 2009-10. Who will save world economy? Who will save us from job losses?

About electric vehicles market:

This market grew by 500% in the last 4 years and it expected to grow by another 300% in the next 3 years. Closely watch this sector.

Stocks in that sector: Tube Investments, Electrotherm, Hero group and TVS group. Closely watch Tube Investments and is a safe buy below 30 level for long term. Electrotherm is the largest player.

As an investor, I don't like wars but I want war with Pakistan as an Indian citizen. But lack of great leadership is now crippling India both economically and politically. That's why I am bearish on our economy.



Good article: 10 defining moments of Indian Stock Market in 2008. Who will forget 2008?

Those who will bear all the pain in this bear market and still have the money for investment will become millionaires within 3-4 years. But finding right sectors and entering at right prices are crucial. New stocks and new sectors will dominate the market.
Latest Stock market news:

1. Infosys will announce Q3 results on January 13.

2. Navbharat buy back price is Rs 170.

3. MMTC is in close talks to work in association with Maytas.

4. Varhaman Textiles will buy back FCCBs.

5. Indo-Pak war situation intensified across the border.

6. Job losses increased in the Silicon Valley. HP, AMD and Cisco extnded holidays for the first time.

7. BHEL, BEL and BEML are the stocks to watch out for in the coming days.

8. Elections may improve sentiment in the Vakranghee Software counter in the next month.

Read my blog on Mobile at: http://indiashares.mobi/

Top news interest stories in the last 3 months in USA:

1. Conditions of US economy.

2. Wall street bail out.

3. Major drops in U.S Stock markets.

4. U.S Presidential election.

5. Rising unemployment.

Economy dominated news stories in 2008 and will continue to do so in 2009.

Wish you a happy and prosperous new year.

Note: I am not responsible for your investment decisions. Interaction should be done only through comments in the blog. Please do not call/mail me with stock/portfolio related queries.

Note: Mail to dr.nvkrishna@gmail.com to know about my investment offers for regular readers. New readers should not contact/disturb me regarding these offers.