Difficult to predict market direction - Udayan Mukherjee

According to me Udayan is a very good analyzer of the market and overall economy. The way he analyzes by taking one by one linkages and explains is very easy to understand. Here is verbatim of what he is saying about present condition. I have edited & highlighted the important things, you can browse through that if you dont want to read the full article. Here we go...

Difficult to predict market direction - Udayan Mukherjee

The world keeps changing every night and we come back with a completely fresh perspective - so much has changed since the markets closed last evening or yesterday afternoon. The Participatory-note (P-note) regulations have changed; the Reserve Bank of India (RBI) has surprisingly cut cash reserve ratio (CRR), global markets continue to tumble though Asia is weathering it a little bit better this morning. So global turmoil, lots of policy changes - it will all go into the melting pot today, who knows what will win; policy action or global turmoil.

These are difficult times, unprecedented times in the global markets and therefore the kind of action that we are seeing is also quite unprecedented. Things are very fluid at this point in time.

We are seeing history unfold in front of our eyes. This is something that we do not see in a decade or a couple of decades, the kind of action that we are seeing in global markets and the way regulators across the world are forced to respond to it to at least keep the patient alive. There is absolutely history unfolding and therefore the less you take in terms of big directional calls in the market, the better because we have no clue of where the situation might land us in finally. It is tough times and absolutely historic times for financial markets around us.

For many markets, it is almost like the haemorrhaging right now?

It is and I suspect that will continue because this is not about small interest rate change and it is not about throwing a little bit money at the system or anything like that. We are probably hurtling towards the global recession not just the US recession at this point in time and the kind of economic distress, which might unfold over the next few quarters, is making everybody very nervous and justifiably so.

So right now you don’t want to get into that, okay inflation at 11.99 so we are fine, Cash reserve Ratio (CRR) down more 50-bps, so we are fine or to get extremely bearish between points and say now the market will go to 8,000 Sensex and the Dow will plunge to 5,000. None of us know what is going to happen. Could any of us have predicted the events that have unfolded in the last 4-5 weeks? The biggest analyst in the world couldn’t have seen of what is going to happen.

We are in unprecedented times and none of us know how things will shape up over the next few weeks and months. It is best to say I don’t understand what is going on; it’s beyond my comprehension completely. I don’t want to stick money into assets and all right now, if I could I would dig it under the ground and sit on it since I can’t do that I just need to be in cash at this point and not be brave trying to fool myself by thinking that I am the best analyst in the world who knows exactly how this thing will pan out. When in doubt just keep your money under the mattress that is always worked in history and that is going to work right now.

It’s almost like a vortex situation everyday?

It is and the way things are now capitulating in the West is quite alarming because yesterday Europe was down 8-9% apiece. I do not remember in my memory when European markets fell 8-9% a day, Russia was down 19%. These are indices for large markets which are falling 18-19% a day; it’s not a single Midcap stock. So it’s very scary, but the pace at which these markets are falling right now lead you to believe that for the near-term you are probably headed to another intermediate bottom because things do not fall 20% a day for very long. So its getting completely overdone right now, you are seeing the absolute peak of panic, it could last for a day or two sure or maybe in the next 48 hours you will probably see a spike back in the global markets.

Also what will happen right now because everybody is panicking is that all countries will start cutting interest rates because regulators have only few things they can do to stem the panic; they can either throw money at the system or they can start cutting interest rates. I suspect before the week is out you will probably see all the Central Banks in the world putting their heads together and saying, “Everybody is panicking, our markets are just collapsing everyday. We have to do something to lend some kind of emotional supports so let’s all start cutting rates.” So I suspect that will happen in the US and Europe and everywhere that you can imagine perhaps in large parts of Asia as well and that in the near-term might provide a bit of a relief for a market which is oversold.

Right now there is complete panic in the medium-term, which is the next few quarters you have a very bad situation to muddle through globally in terms of basic economic conditions and there is no getting away from that whether rates come down 50-100 bps or not the damage is done. But in the near-term I think you will probably get a pullback and it could be a significant pullback as well because the damage is being extremely hard and many markets have ground down to five year lows. So you could get a pullback and I think the chances of getting a pullback at some point of this week are fairly high.

But these are difficult to time; it could happen today, tomorrow or could happen next Monday but its coming because there is too much panic visible and that doesn’t last very much long.

Is it an irony of the times that this Participatory-note (P-note) opening up has actually got people sulking rather than cheering?

One can understand what Securities and Exchange Board of India is trying to do and you don’t fault that. Things are difficult they are doing whatever they can. It is not difficult to go back on a decision which was taken less than a year back with great fanfare saying, “We want more transparency in our market therefore P-notes must go and you have to register yourself as FIIs. Then 11-months down the line to eat humble pie and come back and say it was never about transparency, it was only about flows. At that point we didn’t want flows because the Finance Minister told us that the rupee is getting completely out of whack and therefore SEBI should then press for transparency and close the P-note window.”

Now that there is no liquidity in the system now SEBI does not require transparency as much as dollars and therefore we close that door. It’s not an easy move for a regulator to take and their cover to a certain extent is blown on the intention of this P-note move to begin with but having said that if it helps the market then we don’t complain. If it brings in money then we don’t complain, we say okay what is good for the market is fine, we sacrifice principle for the sake of that quite easily.

But I don’t think this is big news. FIIs still continue to be on the sell side and that won’t change for a while.