Nowadays everybody is discussing whether recession is round the corner. Another hot topic of discussion is whether US has entered recession. There are a lot of things which are being speculated in all these discussions.
Lets analyse the situation - the financial crisis started in the US.
To say it correctly the financial crisis has been there everywhere in the world but the first ones to admit it were the companies in the US. The crisis in the United States is led by the fall in real estate prices further added to by the credit crunch. So sub prime was the main reason of the fall of these companies. The prices kept rising and so did the borrowings and over leveraging of assets is the main reason which brought down shivers to this super power.
To tackle this, the government announced a bailout package. Now irony is that the companies who are being saved are the ones who lost all money of their investors. And these wrong doers are being saved by using the tax payers money.
With such steps, it seems impossible that people will regain faith in these companies because here people are not speculating the way they do in the stock markets. And these people had genuine investments in these financial companies which cheated them. Companies whose analysts were not able to give vision to their decision makers about the incoming problems.
As we have always experienced, good things start off with one and then followed by a couple of them, which later form a huge trend of positive things.
Similarly, till the bad things don’t starting flowing in, nobody is ready to even hear this word. But once we have one bad development, immediately we are in twister of negative things. This is what happened recently.
As soon as the companies in the US started to announce bankruptcy, they were immediately followed by the rest of them who were in problem all round the world. This trend spilled over to the UK and later Europe. US has always been in the limelight because of its sheer size. This problem is much bigger than whatever we are seeing today. Such an event has not been experienced by this world in the last few decades of modern civilization. It is something happening for the first time in the last few decades.
We cannot take into account the last 100 years of history because there is a big difference between the speed of things happening before 1980s and post-2000. We cannot compare the period which did not have computers, internet, mobiles phone and television with today. So there is no point in studying the past to find a solution. This situation had never arisen and may be would not get a chance to arise ever again because times keep on changing.
Here we cannot forget that infusion of capital by the government is a temporary solution. All the businesses are linked to each other in some or the other way. It is a cycle of things - when one business starts falling, people lose jobs. If people lose jobs then they don’t have money to spend. If they don’t spend, the other businesses are in problems. So a rough wave which started in the financial sector is slowly but surely going to move to other businesses as well. When the going is good, people tend to overboard their finances and businesses. There is an over capacity of facilities. Problems of plenty is also a reason when the going gets bad. This is the situation in the whole world today.
But India is somewhat different from the rest of the world.
In the current situation for the last one month, we have seen our Finance Minister and regulators dodging issues of subprime and liquidity crunch. We have heard them suggest that subprime crisis will not have an effect on the Indian economy. Some of them have even gone forward to say that subprime is not at all a problem in India. We even had top bankers coming on national network to say that housing market is not at all a problem in India.
In a way whatever has been said is true and the reason is that India, unlike US, has people who are buying a house for the first time. They are in the grip of traditional virtues and emotions behind buying a house. The boy or girl who comes to the city from a small town or village comes with a dream. It starts with a good job and then moves on to a good house. Later comes marriage and other things. If this is true, we may have very less defaulters, if tomorrow Indian economy gets into a serious problem.
Another very important reason due to which India may not face the subprime heat is that the real estate sector is mostly driven by unaccounted money and it can go up to 50 to 60 per cent of the total business. With the kind of unaccounted money floating in the system, it will surely be difficult for a subprime crisis to happen in India. But one surely cannot deny it.
We have heard our ministers and regulators coming out on the national network saying that the growth here in India is robust and the fundamentals continue to remain strong. So if subprime is not a cause for concern, the growth remains robust and there has been no change in the fundamentals of the country, then what is the problem? Why are the stock markets falling? Is it that technical analysis is seeing something which no other analyst is able to see?
The reason behind having an exchange and allowing trading is to have an efficient price discovery. If we agree to this, then it means we know that we will be inviting speculators as well. We require them because it is they who give the required liquidity to the markets.
But along with this, we also know that a speculator cannot be called a strong hand in the market because they do not have funds which can make them powerful. So investors and traders make up the market.
It is said that the current sell off in stocks is due to speculation. But speculators have never been a strong hand in the markets. And the stock markets are always run by the strong hands.
In the present scenario, we have individual stocks which have fallen more than 70 per cent from their recent highs and to our surprise we still don’t have buying coming in to support these stocks. One reason for this could be that the strong hands know something which we do not know today.
After having fallen, these stocks do not find takers. It clearly means there is something wrong cooking in here - something which we don’t know today.
If a person goes to a doctor and if the doctor knows that the patient is going to die he does not tell him this. Instead, he asks the patient to be admitted in the hospital ensuring that he will try his level best to see that he lives happily.
The same thing is applicable here. If some company knows that it is going to make a loss tomorrow and so discloses it today, then it may have its investors running away today itself.
When you have to sell your car, do you tell the buyer that your car is damaged or has met with an accident. A seller does not do this because if he does then he might not end up selling it. The present situation is the same with nobody ready to accept the negative side of their respective stories.
We have individual stocks like Kirloskar Brothers, JP Associates and few hundreds of them which have fallen by more than 60 per cent. One can understand that a speculator may be interested in stocks which move up and down.
But in a stock like Kirloskar Brothers which has never been in the limelight we find that the stock makes a high at 520 in January 2008 and from there on falls down to the current levels of Rs 71 last week. This has never been a speculative stock so then charges put forth are all baseless. This stock can fall only on genuine delivery selling coming in and lack of fresh buying for sure. There are hundreds of other examples like this.
So the real side of the story is completely different. There is something bad cooking in these counters. Today we don’t know what it is. This is something which we will know later. The stock markets always discount things 6 months before they actually happen. So in a few months we will know the detailed story of what bad is cooking today. So only time will tell the real story.