In the last 10 months the world has seen a lot of changes happening very fast. The developments continue to shake all the major economies of the world. Key stock market indices of approximately all the stock markets in the world have fallen more than 50 per cent from their all-time highs. Something which started with the real estate prices falling in the US and which later built into a major financial crisis has been the main reason for the situation. The other parts of the world like Asia and South East Asia have started to feel the heat now. 

In India, we had the Sensex crossing 21,000 levels in the month of January 2008 and by October it had slipped to below 10,000 level. This move has sent shivers through the investors. Surprisingly, this time in the list of investors it is not only the retailers and the HNIs along with the FIIs and DIIs but this time round we have one more category and that is companies and firms who have been major investors in the various forms of investment avenues that the financial markets have. Some have been investors in stocks while the others have had hedging positions in the forex markets and still others have had derivatives positions in that segment. This all depending on the liking and risk appetite.  

It is said that the market is run by two sentiments – ‘Fear’ and ‘Greed’. But according to me there is one more sentiment which that has gripped the markets and that is ‘Hope’.

‘Fear’ is when the markets are going up and people are reluctant to enter as they have some bad memories of the past and want to wait for some good confirmations. This is a period when the prices are doubling over a period of 6 months. They keep on waiting and watching the prices move up with a double mind having the fear of loosing money if the market enters a correction.

The next is ‘Greed’. This is when the markets have been rallying for approx 2 years. By now the investor who was out of the markets because of fear has managed to erase his bad memories and has been able to gather all the guts to start his venture in the stock markets.

Generally, this is the last leg of the rally when making money becomes the easiest job on this planet. Somebody who has never heard of the stock markets is also attracted towards it. He invests and finds that investing money and multiplying it is the easiest. He also starts dreaming of making this business his core business. So something which started as a source of secondary income now becomes the first preference for business. He takes such a decision on the basis of calculations. He makes Rs.1 lakhs as profit in one of the trades and immediately his mind starts calculating that if he makes 20 transactions in a month he would make Rs.20 lakhs profit which if calculated on an annualized basis goes to Rs.2.4 crores and so on and so forth.

Calculations not only make him confident but they add a little ‘over’ to it making it ‘overconfidence’ for him. The person starts investing not only with his money but also using borrowed money. As the investments starts, reaping of profits is equally fast. This gives further confidence to a lot of leveraged investments from there on. This is a phase when tons and tons of newcomers are entering the market. And suddenly to everyone’s surprise, the market cracks. Now the new born experience of these investors tell them that such corrections do happen but after every correction a new top is made. To add to this there are fundamental analysts who have been and are still shouting even today CHEAP, CHEAP, CHEAP. Let’s ask them what is CHEAP – is it their recommendation which is cheap or the stocks or human life? To add to it, they give some more wisdom of the economy being robust and growth to be intact. 

Now starts the deadliest phase of ‘Hope’. This is the worst one because now the investor is leaving on his experience and the advice he gets from this cheap analyst that the markets do correct and they bounce back again. So now the investor as per his experience knows that the stocks which he has bought at the top are going to make a profit from him when the markets move up. But this time all the judgments fail and the markets never bounce back again. This investor is now stuck on ‘Hope’ and every time the markets make a new low it reaches an attractive level for this investor. He gets on the bus with a poison called ‘Averaging’. He averages his stocks using own funds. If they are exhausted then gets funds from some place or may be a loan. Averages further and the markets continue to fall. They reach a level where everybody again starts advising that now it is has reached such a level that it cannot fall further. Some averaging is done here too. Now the investor who is sitting on hopes is bruised with the losses and his ‘medicine’ that his funds are also getting exhausted. 

The markets keep on falling and now ‘Hope’ is poisoning his life. This is something which we are observing right now. Put this experience in perspective of an individual or an HNI or a fund. It is applicable in the same way every place. And it works for one simple reason and that is everybody is here to make money, if somebody is already making money then he wants more money. If somebody is already making more money then he wants more more money. This ends only with a burst. The saying ‘the bigger you are, the bigger you fall’ is true and is applicable anywhere in the world.  

Charts discount things minimum six months before then actually happen. This time too there is something which analysts, companies, policy makers and regulators are not ready to accept. I doubt that the actual situation is far more than worse. 

Let’s look at the situation from the way I understand that the things will develop and everybody is afraid of saying it today. 

To add onto the panic, this time we have the Indian companies who invested in avenues other than their core businesses. This happened because people saw huge opportunities in real estate, stock markets, forex, private equity, mutual funds and many more avenues. This is the same way as we saw above in the case of ‘Greed’. There is no limitation for ‘Greed’ and a person or a company can end into any thing for this. 

In a way our markets are not falling due to subprime fears. But our markets are falling because of two main reasons among various ones –

#FII have to keep their commitments at home. So if there are redemptions they have to sell here and pay at home.

#Our companies which have had a robust growth etc in the businesses that they did are making huge losses on the other investments front and in some cases these losses are as big as the size of the company itself. 

This is something which nobody is ready to talk of today. But the charts are telling this today itself. Somebody from the company knows this that comes out and sales deliver. The brokers who sells does not get to know the reason for the sales but he gets to the trade which helps him enter short positions in delivery or derivatives trades. 

If this situation is true then the profits that a company makes in its core business is all lost in all its other ventures. In the last 5 years of bullish markets, businessmen started feeling that anyone could diversify into any business and make money. There are many examples of arrogance which were taken during this phase. It was not only businessmen but youngsters also started feeling that getting a job and hefty pay packets was the easiest of things on this planet. History has time and again proved that arrogance kills and that’s exactly what we will be witnessing in a few months from now.

Everybody requires money for doing business. And if a company is loosing money then it is sure that its core business is going to be affected. Today we say that India growth has been revised to 7% from the earlier 9% and this number is also a good number for our country. But these are all estimates. If whatever I have put forth here have 50:50 equal chances of being wrong then these estimates are also in the same category. 

If we enter a recession then the production is going to reduce cause there will be less demand. 

If a company starts loosing it business due to the above reasons then the first thing that a company would do is ‘cost cutting’. If people in thousands loose jobs then the salaries are also going to slash cause there will be a plenty of people available.

And it has already started. Recently due to political pressure Jet Airways reinstated 1000 employees which they had sacked. Companies may continue to hold on to cost cutting measures or may not like to disclose their wrong doings but ultimately in year ending numbers all this is going to see the light of the day.

In the US the Federal Reserve intervened and managed to save the financial institutions but can we act in the same way here in India. Then it is a Big NO. The reason is that the situation is different. Where ever a citizen of our country is at problems our government would also intervene but our government would not get into giving money to the companies which are losing money. So if a bank fails in India due to this situation then Government of India and Finance Ministry will surely save it. But not an individual company.  As they cannot interfere in the working of an individual company because then it would directly be helping a management which has played foul with the money of its investors. 

Let's not forget that to add to this we have elections coming up next year. This means during that period there will be no policy matters which are going to come up for discussion. As every body would be concentrating on saving his / her seat more than saving the country. 

So Samvat 2065 is going to be a year of pink slips. People are going to loose jobs like plenty. The crisis which India is going to face in 2009 would be horrible and cannot be compared with any other recession in any part of the world in history forget 1929 and 1987 or any other year if I have missed one. 

For the markets people will keep on coming and going. The next year would be full of short timers because this new entrant has already seen the so called long timers gone into exile by the losses which the markets gave them. We would have the markets swinging up and down. Volumes would remain low due to less participation. Direction would be more driven by global cues because market players will lack domestic triggers. 

If you buy my view point then it is time that we all got ready to fight the situation.