economic & market outlook-final report

8/3/2019 Economic & Market Outlook-Final Report

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Standing in the end of 2011 amidst all the carnage in the Indian and the global financial markets and economies, somehow, a

famous quote by Winston Churchill keeps resonating in the mind, the quote goes something like this The pessimist sees

difficulty in every opportunity. The optimist sees the opportunity in every difficulty. Though we admit that the state of

affairs that exist today all over the world, be it in terms of economic condition, political condition or in terms of share market

performance are nothing to feel cheerful about and as we have explained in the ensuing paragraphs in this report, that there

are lot of factors that points to the fact there are more pain yet to come, we feel that short term pains set stage for long term

gains. We feel that for the next 6-9 month we are going to go through a turbulent time, and in the mean time we might see

even lower level in the markets going forward. However, we feel as the market goes through this rough patch, we will witness

a level of valuation that might not have been seen even in 2008 lows and that will create a base for a new bull market to start

in FY13-14.

Let us start our analysis from the recently concluded event, the 3rd quarterly review of the RBI's credit policy. The languageand the expectation set by the RBI in the review have been in line with the economic realities and market expectation. The

following table outlines the policy action of the RBI.

Policy Action

The tone for the review was already set by the previous quarterly review wherein the governor indicated a rate hike pause

after raising rates for the 13 consecutive times to tame the all-illusive beast called 'inflation'. Considering the current global

and local economic situation the step that was taken by the RBI seemed justified then and today's action seems to reinforce

the same. RBI has been demonstrating the fact that they are proactive in taking appropriate decision in pursuit of balancing

growth and inflation. This is evident from the fact that the apex bank has decided to maintain status co while signaling the

market that it has changed its long-standing stance of being hawkish to dovish. The evidence of this can be found in the last

paragraph of the RBI press release where it has been stated and I quote While inflation remains on its projected trajectory,

downside risks to growth have clearly increased. The guidance given in the SQR was that, based on the projected inflation

trajectory, In view of the moderating growth momentum and higher downside

risks to growth, this guidance is being reiterated.

However, it must be emphasized that inflation risks remain high and inflation could quickly

recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of

further actions will depend on a continuing assessment of how these factors shape up in the months ahead.

As has been outlined in the earlier paragraph, the apex bank has taken cognizance of the recent data such as the IIP for the

October (which came at dismal -5.1%, with capital goods showing contraction of upward of -25%), the HSBC PMI data (both

manufacturing and servicing) and the Q2 GDP growth (which came at dismal 6.9%); all pointing toward a stark slowdown

compared to the government and RBI estimation. As such, a pause and a dovish tone from RBI were on the cards.

Taking cognizance of the rapid rate of rupee depreciation against the US dollar, which hit a low of Rs. 54.30/$ on 15th

December 2011, RBI took a decision to put a curb on the cancellation and rebooking of forex forward contracts and limitbank exposure in such contracts. The move is suppose to put an end to the speculative activities undertaken by the market

participants to take advantage of the unidirectional move of the Re/$ exchange rate that has been continuing for last 2.5

months. In our opinion, while this move might curb the rupee's fall in the very short run, we feel the inner dynamics of the

further rate hikes might not be warranted.

From this point on, monetary policy actions are likely to reverse the cycle,

responding to the risks to growth.

Our view on Dollar Movement against Major Currencies

Re/$

RESEARCH

26th December, 2011

ECONOMIC & MARKET

OUTLOOK FOR 2012-13

EUREKA RESEARCH 1 www.eurekasecurities.com


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ECONOMIC & MARKET OUTLOOK FOR 2012-13

26th December, 2011


macro situation that exists within the country such as widening fiscal deficit (which is expected to hit ~11% of GDP), current

account deficit and to a lesser extent, the withdrawal of FIIs will continue to keep the rupee under huge pressure going

forward.If that is not bad enough, during the course of FY'13, FCCBs worth Rs. 33,000 crore (or around $6.17 billion) are about to

mature. Under the current stock market condition where the current stock prices are trading anywhere between 1/5th to

1/9th of the conversion price agreed at the time of the issue of such instruments, it is but obvious that conversion to equity is

not going to be an option for the investors and hence around 24 companies (in BSE 500 index alone) would have to make

redemption of such debt in US dollar. This would also be another major factor that would weigh heavily on the rupee in FY13.

Otherwise, the conventional stuffs like worsening balance of payment situation, with oil, fertilizer and a pulses etc., imports,

which by the way are expected to remain strong, and muted export due to lack of international demand are going to cast its

spell on the rupee in the near term. However, theoretically speaking, this depreciated rupee should increase India's

competitiveness in the international market and hence would be supportive of the indigenous industries and should help

narrow down the current account deficit going forward by boosting the country's export. However, this phenomenon shouldtake some more time to play out in reality.

In this regard a skeptic would say, 'RBI has $300 billion in reserve, it can intervene in the market as soon as it goes beyond a

particular level, say Rs. 54/$'. Well, let us analyze this fact by turning our attention to the interventions made by the RBI in the

forex market in the recent months. In the month of September RBI had intervened and bought dollars in the spot market to

the tune of USD 800 million, on two days in November, i.e., November 23 and 24, RBI pumped in close to USD 3.5-4 billion.

However, apparently that did not help the rupee much as it depreciated 20% calendar year-to-date. This data points to the

fact that the RBI's ability to intervene even if it wanted to be more aggressive in doing so is pretty much limited with forex

reserves at USD 300 billion. This reserve might be good enough to cover 9-10 months of imports to the maximum. Another

point that one need to look at is the composition of the reverse, out of this $300 billion reserve, $88 billion is extremely

short-term commercial debt with will be paid back in the next 3-6 months period.

In addition to this, we feel that the Euro debt problem is not getting solved any soon and the measures that are taken so far

do not address the problem at its core. Moreover, if one goes by history no country in the world has ever been able to grow its

way out through austerity and the current euro zone situation is not going to be an exceptional one in this regard. The real

condition of the bank balance-sheet is also not known for sure because they have not provided for M to M on account of

sovereign bond/toxic loan losses, so even if the banks were to be capitalized the quantum of money required to do so is not

fully known, though a rough estimate of the bank exposure goes somewhere in the region of ~$18 trillion (source: CNBC).

On top of this, Italy, Spain, Greece, etc., are going to witness many of their bonds worth billions of dollars maturing in the next

3-6 months, for how long they would continue to borrow to refinance their old debt and meet the retirement benefits/social

security burden and who would be willing to lend them are all open questions whose answers are hard to conjecture at this

point of time. The January 2012 meeting of EU is also not going to have much of an impact because as long as Germany is onboard they are not going to let the ECB monetize or float Euro Bonds as the memory of Weimar Republic must be fresh in

their mind. This would trigger more downgrades from credit rating agencies and eventually translating into weaker Euro.

This, in turn, like a bad circular reference, which cannot be sorted out, would have negative impact on the US economy via its

bank exposure to the region.

The condition in Asia, led by China is not any rosier. China's net export contributes only 5% to its GDP and the rest is

contributed by the massive capital expenditure the country undertook in the form of construction of real estate assets,

infrastructure development and capacity creation in factories. The capital formation to GDP ratio of the country stands at

over 50%, higher than even Japan, which clocked ~32% during their hay days, which evidently is not sustainable, and we are

all well aware of which direction Japan took post 1989. With Western Europe, China's largest trading partner, and also theUS, the second largest, standing at the threshold of depression, it is expected that its trade surplus would get wiped off in

/$

RMB/$


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next 2 years time, triggering a massive slow down in factory output and hence capacity utilization, and also triggering a

monumental unemployment problem. On top of it, with numerous ghost towns and bridges to nowhere, an outcome of

debt fueled capital building, would lead to melt down of property prices and in turn enhance NPLs and debt defaults for itsbanks and local municipal authorities going forward (the signs of which is already becoming evident).

If one considers all the off-balance-sheet debt that China has accumulated and so far been very ingeniously camouflaging, its

Debt to GDP ratio would stand near 200% of GDP, which is comparable to that of Greece. These structural issues would not

allow the country to grow its domestic consumption overnight. The best estimate for per capita income of China by 2050 is

expected to be somewhere near $8500, compared to that US per capita income as reported in 2005 was ~$46000. Thus, one

can very pragmatically expect that China does not stand a chance to emerge as a savior of the global growth any sooner.

However, having said that, we do expect China to continue to grow at 6-7% over the period of next 2-3 years, as the Chinese

authority would try to prep up domestic consumption by cutting various bank rates like CRR, Repo etc., or through

privatization of infra and real estate companies. By China's standards, this can be construed as hard landing. Thus, the crux

of the matter is that we feel that Chinese Yuan is set to depreciate substantially in the years to come against US dollar.

Now, turning our attention to USA, though the recent data suggest unemployment rate coming down to 8.5% compared to

over 9% couple of quarters back and consumer spending increasing by 2% (at the cost of savings and investment), however,

the sustainability of such bump up is highly questionable. According to a study conducted by an eminent research house in

the US, where the study involved in drawing a correlation between demographic trends with that of the Dow Jones

performance. A high degree of correlation has been found between these two aforementioned variables, albeit with a 46

years lag. This means the economy and in turn the stock market, as represented by the DJIA, peaks after 46 years of peak

birth rate in the US. This birth rate also includes immigration into the country. This study mainly pinpoints the fact that the

economic boom or bust is more influenced by the demographic trends rather than the government action, contrary to the

popular belief of conventional economists.

This study proves beyond doubt, with empirical evidence, that the consumption boom of the US is about to get over as the

baby boomers (the group of people responsible for unprecedented spending) are on the verge of retirement and theiroffspring are already leaving the nest and now the main focus is going to be to repay their loans and build their retirement

kitty. Under this kind of circumstances, no matter how much they are allured by record low mortgage and interest rates, they

are not coming back to consume more goods and services going forward. Thus, with consumption tapering off and a massive

drive to deleverage keeping credit creation in the economy at bay, an estimated $20 trillion contraction of money in

circulation is likely to take place. This figure, when compared against only ~2.5 trillion pumped in by the Fed through QEs, is

miniscule and it is already evident that the longevity of the impact of successive QEs has been diminishing. Thus, contrary to

the popular belief that US dollar should weaken going forward, we expect the US dollar would continue to regain strength as

the debt destruction continues and as risk aversion continue to rise, forcing financial institutions, governments and hedge

funds to park their fund in the safe haven of US treasury. All these mean that US dollar is going to become scares

commodity and the dollar demand all over the world would continue to rise, forcing it to rise against all major currencies in

the world (and rupee is not going to be an exception. One can visit the website, www.hsdent.com for details.

As has been discussed in the previous paragraphs that we are entering an era of a tough economic times where the debt

fueled excesses are getting trimmed and general level of consumption, which has been fueling the global growth since late

70's when Nixon officially abolished the dollar peg to gold and ushering in the period of unlimited fiat money. As these

excesses reduce through the curtailment of the government and private spending causing economic recession to set in, the

elevated demand for industrial commodities are going to come down substantially. On top of this, as the US dollar gets

stronger, contrary to much popular opinion, it is but obvious that an era of deflation rather than inflation would set in.

Under this kind of scenario, excepting for agro commodities (where the demand remains inelastic and decreasing

productivity, climate change, increasing urbanization and diversion of crops and cultivable area for bio fuel) whose prices in

our opinion are going to remain strong, even prices of precious metals such as Gold and Silver are going to come undersevere pressure. This will happen mainly on account of two reasons, 1) gold performs well in the time of inflation and not

Era of Deflation has ushered in


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deflation as it is considered to be good inflation hedge, 2) as the global liquidity shrinks, the market participants are going to

withdraw funds from gold (which can be considered as one of the very few asset classes that have been showing profit for all

this time) and they either may sit with cash or put it in safe havens like US treasury (as this is the only asset class whereinvestors are at least assured of getting their money back, at least in nominal terms due to the dollar's hegemony status. This

also is the only market in the world, which is large enough to absorb such huge liquidity).

While we expect that going forward, in Indian context, the food price inflation, as well as the international industrial

commodities prices are going to come down sharply. However, to what extent the fall in international commodity prices will

be offset by the depreciating rupee is yet to be seen. Thus, for now, the direction the domestic inflation will take is very

difficult to ascertain. Thus, RBI has to rely on more price and exchange rate data over the period of next couple of quarter to

be convinced about the fact that inflation has turned down for good.

Secondly, with rupee depreciating at such rapid pace, it is unlikely that RBI would take the risk of decreasing the interest rate

in a hurry, at the risk of being too academic, even if we assume that of all the factors, Interest rate parity also have someinfluence in forex rate determination, any rate cut here onward is suppose to have further depreciating effect on the rupee

even further, this is a risk, in our opinion, RBI would be reluctant to take.

However, in our view, as in the rest of the world, liquidity crisis is about to unfold in India over the course of the next financial

year, the indication of that is already visible from the inverted yield curve that we are witnessing. There are quite a few

reasons based on which we arrive at this conclusion.

Firstly, as we have stated above, that Rs. 33000 crore worth of FCCBs are about to mature in FY13, now with conversion not

being an option, all these debt needs to be refinanced as none of these companies have enough reserve or cash flow

generating capacity to finance them from the internal accrual. Thus, even though the cost of money has increased anywhere

between 400 to 700 basis points, depending on the credit rating enjoyed by companies, these companies have to come to

the debt market to refinance these FCCBs. With the credibility of these companies already substantially tarnished, it isdoubtful whether such fund could be arranged from abroad. Presuming, these companies have to arrange fund from the

domestic market, would in turn mean further pressure on the liquidity in the domestic economy.

Secondly, we feel that the government would have to enhance its borrowing programme in the next fiscal. Already, it has

been announced by the government that the treasury will sell a record Rs 4.7 lakh crore worth of securities this fiscal, up

from Rs 4.17 lakh crore budgeted in February, the figure could go higher as well. The reason is obvious, as stated earlier in this

report, the government is expected to end this fiscal with a fiscal deficit of 11% (state and central combined) of the GDP, with

corporate profit coming under severe pressure on account of RBI rate action and forex related losses, it is but obvious that

the government is going to miss its revenue collection target. However, the subsidy on oil and fertilizer alone are expected to

be off the charts, thanks to the rupee depreciation, on top of that we now have a food bill to contend with. With the

prospects of divestment under water and the twisted plan of using public sector companies' cash reserve to buy government

stake in other PSUs not finding much support, the government have little choice but to go for massive bond issuance. If that isthe case, then we can pretty much expect a crowding out effect in the economy, translating in higher bond yield going

forward. Thus, the temporary euphoria in the bond market is likely to fizzle out, and considering this scenario, RBI's

reduction of rate would not have much of an impact.

Lastly, we feel that as the Indian economic condition worsens (provided the political stalemate continues, which, at this

moment seems to be the most likely scenario), banks are going to see further deterioration in its asset qualities. While,

sectors like power, construction, real estate etc., has already been causing trouble for banking sector because of increasing

NPL problem. On top of these textile and telcos are becoming a new source of worries for the Indian banking industry. Thanks

to sharp depreciation of the rupee (as majority of the funds supplied by the domestic banks to fund telcos to participate in

3G auction were borrowed from foreign financial institutions) and muted 3G uptake, the chances that these loans turning

bad are increasing by the day. Even the subscriber addition rates by telcos have dropped significantly compared to even a

year ago. Contrary to the expectation, the so-called export oriented sector, textile, is also increasingly becoming a cause of

Rate Cut by the RBI in Subsequent Policies? Looks Unlikely in the Near Term!


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worry for the banks. With demand in the western world shrinking thick and fast, even with such massive rupee depreciation,

these companies are on the verge of a slowdown. Now, as loans get restructured and in some cases becomes bad over the

course of the next financial year, the magnitude of the liquidity crisis that is about to unfold is not very hard to assess.Thus, in view of these developments, we feel that a rate cut is not going to be an option for the RBI going forward for at least

two quarters; however, a substantial cut in CRR is definitely on the offing. We expect a CRR cut to the extent of 300-400 basis

points over the course of next 2 years to be quite feasible. This could infuse liquidity to the extent of ~Rs. 36000 crore in the

system, assuming a ballpark figure of around ~Rs. 9000 crore released in the system for each percentage point decrease in

the CRR.

We feel that the current global economic condition is a perfect breeding ground for war like situation. However, we are not in

the business of prophesying, and we are definitely not in the camp of painting the so called Doomsday picture, but if we

take a closer look at the history of major wars, the present economic scenario presents an uncanny similarity as far as the

economic and political environment that preceded those wars. Let us illustrate this point with some examples, after the1797's economic deflation; there was war between US and France from 1798 to 1800. The war between US and Great Britain

in 1812 followed the depression in 1807-1808. The long depression of 1873-1879 paved the way for war between US and

Spain and the First World War which lasted till 1918. The Second World War was followed by the Great Depression of 1929-

1939. The early 1990's recession again put US on the war front against the Iraq. History shows that most of the wars have

followed the economic crisis-- there are very few occasions when world faced slowdown or recession after the wars.

Economy faced a recession after the First World War, which lasted for 3 years from 1918-1921.

If one looks at the demographic characteristics of these countries prior to these wars, one would find that during the time

they all had a large proportion of young people in the overall population, majority of them were unemployed and hence

frustrated due to the lack of productive opportunities to vent their energy and off course for lack of ways to earn money. This

if left unattended, can lead to violent social unrest, conflicts, class war, with a potential to tear the social fabric of a nation. To

quote E.F.M. Durban and John Bowlby, eminent psychologists human beings are inherently violent. While this violence is

repressed in normal society, it needs the occasional outlet provided by war. This mixes with other notions such as

displacement, where a person transfers their grievances into bias and hatred against other ethnic groups, racial groups,

religions, nations or ideologies. Now, if we turn our attention to the recent developments, unrests in Middle East and North

Africa, Occupy Wall Street, recent riots in Britain, protests in Greece, Spain, Italy, etc., all can be construed as a manifestation

of this psychology.

In this context, we are extremely wary of the fact that going forward it is going to be China and not Pakistan, that's going to

emerge as bigger threat to India if not the World. As we have outlined in the earlier paragraph where we discussed about the

Chinese economy and currency, we outlined why we feel that China is going to see a massive unemployment going forward.

This gives them enough reason to vent this public frustration into full-scale war. The repeated threat to India in terms of

advancing in Arunachal Pradesh, conflict in South China Sea, broadcasting anti India propaganda in Nepalese FM radio,creating naval bases in Myanmar, Sri Lanka, Pakistan to encircle India are all emanating ominous signs. Even the international

community has taken cognizance of this aggressive behavior of China and its desire to emerge as a super power. The recent

visit of Obama to Australia, Hillary Clinton's visit to Myanmar etc., points to the factor that the US is monitoring the

movements of the Chinese. This has certainly increased the geopolitical tension in the Asia Pacific region. We feel as China

slips to severe economic slowdown in FY12 and FY13, the possibility of conflicts are going increase many fold.

As we all know, nature intended everything to play out in well-defined cycles, be it weather, tides in the ocean, vicissitudes in

human life and so on and so forth. Even business and stock market are not immune to this phenomenon. However, if we look

at the chart of the human population growth it has been on a one way up since 1348-50 (when around a 100 million people

died on account of the so called 'black death plague' reducing total world population from 450 million to 350 million). The

following figure illustrates the point.

Risk of Heightened Geo-political Tension


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From the figure above, it is clear that since 14th century, growth in human population has been practically defying this

natural law of cycle, as propagated by Thomas Malthus.

Are the Havens too conspiring Against Us? It Seems so.

The question is what does Haven got to do with stock market, war and peace and economic boom or bust? Well it seems

a lot. We are alluding to Sunspots and solar flares. Sunspots are regions of intense magnetic activity on the sun that are

cooler than the surrounding photosphere. They are cooler, because the intense magnetic field literally pushes the

fluorescing ionized hydrogen out of the way as charged hydrogen is diamagnetic, or in other words, is repelled by the

magnetic field much in the same way as aluminum is. Intense magnetic fields create "holes" in the photosphere, which

produces the characteristic dark appearance of sunspots. With this occurrence causes the sun's magnetic field to fall indisarray, sun's magnetic field reverses causing a reversal in its polarity. In the process, this tension causes the sun's magnetic

field to snap, releasing a huge solar flare with proton storm and electromagnetic waves.

Electrical storms that frequent all planets with an atmosphere in the solar system have a cycle coupled with the sunspot

cycle. As proton storms and magnetic sectors intersect the magnetospheres of the planets, energy dissipates, primarily

through the magnetic poles, showing first as auroras and then along the magnetic lines to the opposite poles. When there is

a surplus of energy, some of it leaks down in the form of sprites above the atmosphere.

At atmospheric level, charges build in cloud forming regions and lightning is the result. It is interesting to note that the overall

charge of lightning coming from above is positive, while the lower regions closer to the surface is negative in keeping with the

proton source of energy emerging from the sun. Solar storms that are most frequent at sunspot maximum times will

overload our power transmission lines due to magnetic induction. This occurs because a proton event vibrates thegeomagnetosphere, which in turn induces current in power lines far in excess to what they are designed to carry. The result is

a black out when power lines literally snap from an overload. Such an event occurred in Quebec in 1968, which also affected

the North Eastern part of the US. Similar event happened in 1859 which destroyed all the telegraph lines in the US. However,

this effect is not limited to electrical power lines only; oil pipelines are also negatively impacted. If not properly grounded,

they build up charges measured in tens of kilo-amps, which will rupture the lines and ignite fires. On a dry, hot year, which

often typifies years of a sun spot maximum era, a side spread wildfire can arise out of this. Massive electromagnetic wave can

also cause untold damage to satellite and communication systems.

In view of this, there is a possibility that the year 2012 might not be such a good one if one happens to own a satellite or a lot

of shares in the electricity generating business. That is because 2012 is being forecast as the peak of the next sunspot cycle,

and physicists are saying it's going to be an active one. Though these cycles manifest itself in a short cycle of 11 years and a

full cycle of 22 years, this time around scientists are predicting it to be an active one. Researchers at the National Center forAtmospheric Research (NCAR) in Boulder, Colorado, have used a new model of the sun's interior to refine predictions of


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future sunspot activity. By using data going back over a century, the scientists were able to determine that the sun's

magnetic field has a memory of around 20 years. This model was able to predict the past six cycles with around 97 percent

accuracy, and has led to revised predictions about the next cycle, number 24. According to NCAR the next sunspot cycle willbe between 30 and 50 percent stronger than the current cycle, with a peak in activity in 2012.

Even human psychology is not immune from sunspot activity. Though unconscious for the most part, history of the species

tends to show more agitation during sunspot maximum events than during solar quiet periods. Those may arise from all the

other circumstances that arise at the time of solar maximum and/or the fact that we have a bio-electromagnetic field that

would be influenced by such external stimuli. Even Psychiatrists have noticed that voluntary admissions to mental hospitals

increase for two to three days after a solar-induced magnetic disturbance. Joe H. Allen, Chief of the Solar-Terrestrial Physics

Division of the National Oceanic and Atmospheric Administration, said scientists at the Kettering Magnetic Laboratory have

found that geomagnetic disturbances may produce a temporary deficiency of calcium or lithium ions inside brain cells,

which is a characteristic of progressed manic-depressives.

On the same note, it has been observed height in sunspot cycle also seem to match major global events such as war and civil

unrest. There might not be direct causal relation but history of empirical evidence points otherwise. Please refer toAnnexure 1, attached herewith this report for details. The high correlation between the events definitely points to the fact

that there are more to this than meets the eyes.

Sunspot Heights since 1900


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However, all said and done, we in the investment community are more concerned with the market movement, how things

are going to pan out in the future and where we can see the ultimate bottom. In the following paragraph, we try to find

answer to such questions by applying both conventional and unconventional methodologies.

After touching a high in November 2010, the Indian stock market has established a firm trend and as we are all aware, it is on

the down side. However, in the last couple of weeks, this downward momentum has gained substantial steam. While, many

companies in the mid cap and in the small cap segment are trading below the 2008-09 lows, some companies, like BHEL,

JSPL, Jaiprakash Associates, etc., are trading below the 2008-09 lows in terms of P/E and other valuation parameters, of

course, the earnings considered here are on TTM basis. Now, the obvious question is with such valuation destruction already

have taken place, is there any room for more damage going forward. In this section we are trying to analyze and find some

credible answer to this stupendously difficult question.

In this regard, we thought, Sensex to Gold ratio analysis could be a good starting point.

The idea to use Sensex / Gold (LME) ratio came from the time tested Dow jones /Gold ratio relationship. The Dow/Gold ratio

calculation can be traced back to more than 100 years. In almost all occasions, Dow jones tops and bottoms at

predetermined level, compared to gold price. The bottom has been around 1-2 for last 100 years. Hence we have tried to use

the same relationship between Sensex and gold price to make out a case for market top and bottom.

Look at the identical nature of the 2 graphs for last 10 years.

The million Dollar Question-How Far is the Bottom from the Current Level?

Sensex / Gold ratio: This ratio has been fairly accurate about market tops and bottoms


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As the above graph shows, the moment Sensex/gold ratio goes up above 14-15 times, Indian markets have struggled to carry

on the momentum. On the other hand, it peaked at about 21 in January 2000 and 23 in November/December, 2007. Thus by

this account, the ratio did a pretty decent job at predicting the end of a long term bull market rally. On the other hand, whenthis ratio crosses 14, we have witnessed at least intermediate market correction. The above two graphs strongly corroborate

this.

On the other hand, when this ratio hits around 9, the Indian market has a tendency to find a firm bottom. This bottom was

reached at June-July, 2000, then August-December, 2002, then March-April, 2003, then January-february, 2005, then

March-April, 2010, then August-September, 2011.

Only in one occasion that is in March-2009 this ratio went down to around 7 before a superb rally commenced. Thus at the

worst case, we may witness this ratio going down to about 7 in coming days/months before a powerful up move resumes in

Indian market.

Thus Indian market stability also depends on gold price movement. Higher the gold price, at the same level, Sensex

becomes cheap. Lower the gold price, at the same level, Sensex becomes expensive. As the gold also crashed a goodamount after reaching life time high, Sensex did become cheap. But not enough to call it a formidable bottom.

As the following graph shows, gold is sitting on pretty borderline support. If this level is breached by gold in coming days,

gold can straightway come down to US$1200-1300.Gold has a tendency to do well when people rush to park money in so

called safe assets when a financial crisis is foreseen. But when a liquidity crisis actually hits, people tend to sell gold to meet

so many objectives from meeting redemption requests to compensate for losses in other assets like equity and currency.

Hence as the Euro crisis gathers storm in coming days, it is perfectly possible that gold will see correction. This does not mean

that after correction, gold will not rise in future. But gold's rise will be more measured as many questions are raised about

the counterparty risk of Gold ETF's. Hence despite direct or indirect quantitative easing in USA or Europe, it is highly unlikely

that only Gold is going to benefit.As the above graph shows, though not exactly at bottom when compared to Gold, Sensex is undervalued compared to Gold

even on historical basis. Likewise many emerging countries also look cheap when measured in terms of Gold. Hence there is

a very good chance that emerging countries like India will reward stock investors more compared to Gold investment.

Hence in worst case scenario, multiplying gold at 1300 by 7-8 multiple points to Sensex level of around 10,000-11,000. We

believe that this level will be the ultimate bottom for Sensex for many years to come.

Gold price movement


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Trailing TTM P/E ratio also points to similar level for Sensex at market bottom.

Let us consider the above graph of Sensex TTM P/E ratio for last two decades. What is striking is that starting from 12/13

TTM P/E, Sensex starts looking attractive. At worst, it can go down to 11. But from these levels, market bounce back has

been sharp.

Assuming TTM EPS of around 1000, multiplying with a P/E of 11 gives us a Sensex target of around 11000.

As part of inter market analysis, it is useful to observe relative performance between two market segments to derive a

message regarding market top or bottom. One of the popular inter market analyses is relative performance of midcap/small

cap index compared to large cap index. In Indian context, we have tries to analyze BSE Midcap/Sensex ratio to see whether

this ratio has indicated some sort of bottom .This ratio was signaling alarm in the middle of October, 2011 itself when Sensex

was recovering as it broke to new low. This ratio needs to come closer to about 0.3 or a firm rising trend to indicate market

bottom. That is not very far. But still we are not quite there despite such massive fall.

BSE Midcap/Sensex indicates some more pain left before market rally starts (data updated till 21/12/2011)


11/16

FMCG /Sensex ratio too points to more pain before a firm bottom is reached

While we feel that there could be some downside left in the market, we do not rule out a sharp bounce back before

reaching an ultimate bottom. Now, while we might sound alarmist in the report, the idea that we are trying to present

here is that bear markets should be considered a friend of serious investors and this kind of market presents the

opportunities to make substantial wealth in the future. While we are advising not to start putting money immediately,

the market is going to present very interesting opportunities to invest for the long haul and such opportunities are going

to present itself in the next financial year. While, it is extremely difficult to pin point the exact bottom, it is advisable to

take a calibrated approach and deploy small portion of the total investible fund into the market, once we go down by

another 5-7% from the present level. We from our side would try our level best to provide with the best investment ideas

that we can. Thus we end this report by wishing you happy investing for the next year, the fruit of which could be reaped

in FY14.

Unlike BSE Midcap/Sensex, FMCG/Sensex is a contrary indicator. That means a top in this ratio indicates market bottom and

a bottom in this ratio indicates market top. The ratio clearly pointed to Sensex bottom in February, 2009 inself before apowerful rally started in March, 2009. Likewise in November, 2010 itself the ratio signaled bearish mood by trending up. Now

this ratio has made new high compared to February, 2009 high. This means that final leg down in Sensex is not yet over. Once

this ratio starts coming down, we can expect Sensex to stop falling further and rising again.

Please refer to the Annexure 1 of the report below


26th December, 2011


Annexure 1

Early Solar Cycle Peaks: 1704-1770

Solar Cycle 1704-1706




Solar Cycle 1749-1751Solar

Cycle 1: 1760-1762

Solar Cycle 2: 1768-1770


1776-1783 American Revolution


1788-1791 French Revolution

1789 US Constitution adopted


12/16

Milan, Venice, Naples, Prague, Budapest, Warsaw; US Mexican War

starts; Taiping Rebellion starts

Solar Cycle 10: 1859-1861 under 100

1858 Bottom year of a depression in the U.S.

1861 American Civil War begins

1861-1865 Civil War in America, revolts in India, Italy, China

Solar Cycle 11: 1869-1871 wide 1869-1872

1869-1870 Franco/Prussian War

1869-1872 Paris Revolutionary CommuneSolar Cycle 12: 1882-1884 under 100

1883-1886 Big US labor strikes, revolt in Sudan, First Indian Congress meets

1883 Bottom year of a major depression in the U.S.


1893-1895 Zulu revolt, Cuban revolution


1904-1905 Russo-Japanese War

1905-1908 first revolts begin in Russia1905-1908 Widespread strikes, revolts among German miners, Hottentots, Turks,

Indians, Honduras

1908 Bottom year of a short depression

Solar Cycle 5: 1803-1805 under 100 wide (1802-1806)

1803-1806 Napoleon conquers Europe


1815-1817 Two wars to defeat Napoleon; German, English and

Serbian riots; Brazil, Chile and Argentina declare

independence.


1828-1832 Revolts in Turkey, Mexico, Belgium, Poland, France,

Britain; Virginia slave revolt; the Black underground

railroad begins


1837-1840 Constitutional revolts in Canada, slavery debate outlawed in US,

Texas Independence, Boer separatists occupy African lands, British-

Afghan war; Opium War

1937 Major Banking Crisis in the U.S.


1846-1848 Mexican War

1848-1851 Revolts and revolutions in Poland, Switzerland, Paris, Vienna, Berlin,


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26th December, 2011


Solar Cycle 15: 1916-1918 just barely 100

1914-1918 First World War1916-18 Irish and Indian revolts

1917 Russian Revolution

1919 The Atom is Split

Solar Cycle 16: 1927-1929 under 100 wide 1926-1929

1927-1929 Fabled American Bull Run ends in crash of the stock market in long

slow slide which bottoms in 1933

1926 Hitler in jail for NAZIs attempted Munich Putsch, begins writing Mein

Kampf which outlines how he will lead Germany to make the worlds

greatest power.

1927-1931 Mussolini and Hitler build power on economic unrest; revolt in Viennaand China; formation of Red Army; Spanish Republic formed; mass civil

disobedience in India launches Ghandis campaign to free India

Solar Cycle 17: 1936-1938 wide 1936-1939

1936-1939 Spanish Civil War, Germany and Japan start World War II

1937-1940 US steel strike

Solar Cycle 18: 1947-1949 wide 1947-1950

1946-1949 Greek Civil War, India-Pakistan riots, Red Army wins China, Vietnam

revolts1947

1948

Flying saucer sightings begin, saucer crashes in Roswell, NM, shadow

government is set up inside the military industrial complex with the CIA

to fight communism and hide the remains of ET

1948 Gandhi assassinated, Israels War for Independence

1950-1953 Korean War

Solar Cycle 19: 1956-1958 huge peak wide 1956-60

1957

1960

Israel invades Sinai, Hungarian uprising, Cuban revolution, civil rights

movement begins in US, French-Algerian war, MauMau revolt, Iraq

revolt,

1957 Vietnam War begins1958 Eisenhower recession

1960-1961 Eisenhower warns of the danger of shadows in the unfettered

military industrial complex, Kennedy race to the moon begins

Solar Cycle 20: 1967-1969 stumpy wide 1967-1970

1965- 1967 Haight-Ashbury Flower Children launch the hippie movement

1967-69 Height of Vietnam War, peace demonstrations, worldwide student

uprisings, Czechoslovakian uprising/USSR invasion, US inner city riots,

Israeli Arab war, Woodstock and height of hippy movement,

1968 Martin Luther King and Bobby Kennedy assassinated , first big anti-war

marches in US, first US inner city riots,1969 First public men on Moon


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USSR & US sign missile treaty, USSR begins pullout from Afghanistan

1987 Crash in World Stock Markets

1989 Tianamen Square Chinese student democracy movement crushed

1989 Protest and peaceful revolution in Eastern Bloc, dismantling of Berlin

Wall,

1989-1992 Glasnost process begins dissolution of Soviet Union, end of Communist

Party domination; Communist Party coup in Russia fails

1989-91 End of apartheid in South Africa, beginnings of patriot and militia

movements in US, Somalia civil war, Yugoslavia begins slaughter in

Bosnia, Sandinistas lose Nicaraguan elections

1990 Mandela Released, East and West Germany Re-Unite

1990 Iraqi Troops Invade Kuwait

1991 The Gulf War; multi-national forces liberate Kuwait from Iraq, Balkan

Civil War begins as communist Yugoslavia collapses.


26th December, 2011


Solar Cycle 21: 1978-1980 wide 1978

-1982

1978 Worlds First Test Tube Baby Born, Carter Camp David Accords

between Israel and Egypt

1979 Three Mile Island Nuclear Plant leaks radiation

1979-82 Polish Solidarity begins, US anti-tax movement reaches heights and

elects Reagan, Shah of Iran overthrown, Iraq-Iran war begins, USSR

invades Afghanistan, Falklands War, Sandinistas oust Somas, Zimbabwe

gains independence, anti-nuclear and peace demonstrations increase

worldwide, US aid to contras in Nicaragua, US invades Grenada,

Tamils rebel in Sri Lanka

1979-1980 US Bid to Rescue Hostages Fails

1980 Iran-Iraq War begins (lasts until next peak in 1988)

1981 President. Sadat of Egypt assassinated

1982: Israel Invades S Lebanon, Falklands War

1982 Reagan recession

Solar Cycle 22: 1988-1990 wide 1988-1992

1987-88 Palestinian Infiltada begins, Eastern European dissidents organize,


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26th December, 2011


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DISCLAIMER : The information in this report has been obtained from sources, which Eureka Research believes to be reliable, butwe do not hold ourselves responsible for its completeness in accuracy. All estimates and opinions in this report constitute ourjudgement as of this date and are subject to change without notice. Eureka Research will not be responsible for the consequenceof reliance upon our opinion or statement contained herein or for any omission. Any feedback can be mailed to the following ID.

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Solar Cycle 23: 1999-2001 wide 1999-2002

1998-2000 Peace treaty in Northern Ireland, overthrow of Indonesias Suharto,

Serbian-KLA conflicts increase and US/ NATO decides to resolve

conflict through massive bombing of the whole nation, India-Pakistan

skirmishes over Kashmir increase; militias burn East Timor, drive

people into camps in West Timor; big demonstrations at WTO

meeting in Seattle; rising religious strife in India and Indonesia,

increasing civil war in Sierra Leone and Sri Lanka; overthrow of

Milosevic in Serbia;

1999 Worldwide Y2K Scare

1999 Palestinian Infiltada re-commences after virtual agreement with

Israel

2000 Dot-com bubble breaks; Supreme Court intrudes in the U.S. elections,

throws results of Florida vote to make the loser of the popular vote

into a winner of the electoral vote to become the U.S. President made

by judicial interference.

2001 Attack on World Trade Center and Pentagon; War on Terrorism begins

2000-02 Peace treaty disrupted in Northern Ireland; land confiscations in

Zimbabwe; worldwide protests against WTO/IMF/World Bank in

Seattle, Washington DC, Prague, Goteborg, Quebec City, Genoa and

other cities

2002-2003 Bush diverts War on Terrorism into personal vendetta against Saddam

Hussein, massive protests demonstrate against Iraq war


Consequence ????????

Source:http://kondratieffwinter.com/blog/esoteric/sunspots/


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economic & market outlook-final report

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