May 202010
 

Ref: 10-004    of 19 May, 2010 By Kalidas                      PDF Downlaod from Box.net

I am writing this article at the request of many readers who want to know how do I identify and select the stocks for trading and investment purpose. The methods I am going to share apply to almost all markets. However, I may give examples from US and Indian market with occasional reference to Hong Kong market.

I am covering stocks first and then the convertible bonds as this article series  progresses. The stock market is meant for masses. Even a small investor can dabble into the market with limited means. However, convertible bond is meant for mostly very knowledgeable investors of fairly good Net Worth (called High Net Worth or HNW) investors and Mutual Funds specializing in bonds.

First of all, let me give show you some facts of life or the eternal truth relating to Stock Market or for that matter – Capital market in general. Each of the following pronouncements is referenced later at appropriate stages to prove my point.

These are the 23 commandments of the stock market. They are not codified anywhere in the world. These are unwritten rules, always in force, never documented, always debated, always investigated, never proved, always commented on and yet never concluded.

Initially, my emphasis is to give you some trading rules on how to buy or sell the stock. Whether one is a long term, medium term or short-term investor, the fact is he must know how and when to buy and sell the stock. The real investment game will be discussed in second article after about 15 days, which will disclose my methods of identifying the stocks for various term investments. Convertible Bonds, a hybrid security between stock and bond, will be discussed in the third article.
[stextbox id=”alert” caption=”Opportunities Alert” color=”663366″ ccolor=”fa3504″ bgcolor=”ffffcc” cbgcolor=”ffccff”]Palladium, currently at $408 has dropped from $ 560 in less than 10 days. Russia is the major producer. The metal is used as good substitute for Platinum in auto industry (as catalyst in exhaust system). It is also used in Gold jewellery. This metal dropped from once at $ 1200 to <$200 when I bought at $191. The idea is to hurt Russian in every of their commodity due to their unwillingness to buy $ Treasury Bonds. Buy now. the chances are one may make over 200% to 300% in 3 years. It can be bought physically from APMEX in USA.[/stextbox]

WHAT IS STOCK MARKET?
Rule-1
The stock market is a “Devil’s Game”.
•    God, Truth, righteousness, fairness etc. always take back seat.
•    Nevertheless, God (and Gold) always have last laugh when the crash arrives.
•    Stockbrokers, Fund Managers, Rating agencies, Regulators, Analysts and Politicians are “Devil’s Advocates”
•    Death, Accidents, new Customer and Market Crash always come without notice. Always be prepared to face such eventualities and seize outstanding opportunities.
•    No one knows when the bull market began or ended; no one also knows when the bear market began and ended. Analyst’s always double talk, they are more like red ringworms with face or mouth on either side. They always “go with the wind”.
•    The Devil’s advocates always concoct theories. One of them is “Discounted theory of actual events”. Another is “Better than Expected” or “Worse than expected” when they are proved wrong.

Rule-2
Bullish Markets are symbolized by SUN and bearish (market) by MOON.
•    The markets usually rise on “sunny day” and retract on “cloudy or rainy day”. It is very much true in city like Hong Kong.
•    Look out of the window and see how the day is in early morning. Moon or night brings in more rainfall. Even cloud does not hold water and throws it away as rain. If the day is heavy or rainy, one does not feel like working nor wants to buy anything. In fact he will feel like selling or throwing the stock away the way cloud does.
•    Sun denotes brain, which imparts certainty and intellects. This is why people feel like working on sunny day. Moon represents “Mind” which is always volatile, fickle or chanchal. Moon also denotes uncertain mind or uncertainty. This is why the markets usually fall during the period of uncertainty.

Rule-3
Future earnings determine the prospects of a stock, not underlying asset value (book value)
•    Earnings, earnings and earnings alone determine the market trend either on upside or downside.
•    Current earnings or P/E are the most inaccurate guide to the intelligent investor. The trend setting investors look only at future prospects to determine his actions (Buy, Add, Sell, Reduce or Hold)
•    Looking at the book value or NAV (for stocks) is the criteria of the old age. Such valuations were useful to determine the realizable asset value in case the company goes for bankruptcy. If the company were to go for bankruptcy, there was no question of investing into that company. Those who look at the asset value alone, regardless of earning power, are destined to lose big time. As a rule, when the Analysts start pitching Asset or Book Value of the company as attractive reason, it is time to get out of that stock.

Rule-4
Do not try to make small money all the time; it is enough if one makes big money at few times.
•    Most investors or speculators try to make small money (what I call “sandwich money”) in fast and furious trades; a smart and seasoned investor makes big money in few slow and steady trades.
•    Do not try to make money in every trade. It is enough if one makes money in 7 out of 10 trades.


RALLIES AND CORRECTIONS

Rule-5
Normal rallies and correction last for 2 and ½ days, good rallies and correction last for 3 and ½ days and speculative rally and correction (crash) last for 5 days or more.
•    When the stock rallies and closes near high, it means that unfilled orders will carry through on the following session (day). When it rises for 2 days, it will rise further for half day on third day and then profit taking sets in. It applies to all markets and investment products including commodities.
•    Similarly, when the stock closes near day low, it means that sell orders have not been filled and carried over. The stock continues its downward journey on following sessions.
•    Weekly high or low on good volume indicates bullish or bearish tone that is carried over to coming week. When the stock closes near week high on good volume, it determines its upward trend for the coming week.

[stextbox id=”alert” caption=”Geithnes terrorized by German Chancellor” color=”000000″ ccolor=”cc0000″ bgcolor=”ffffcc” cbgcolor=”ffccff”]

Geithner is terrorized by a lady tiger in Germany. She brushed aside even President Bush trying to massage her shoulder. Geithner is visiting Germany and UK to assess their debt crisis (engineered by him only). This author believes that many US and Hedge Funds in USA bought US$ Index and sold underlying currencies short at the instance of US treasury who wanted to shut down all alternative investments or currencies for China and Russia. They even sent Paul Volcker to UK for PR Campaign that end of European Union was near.

German Chancellor turned out to be a wily lady. She banned all derivatives and naked short selling of Euro and Euro bonds. Now when the US$ Index contract matures in June, the holder will need to cover the shorted currencies because there is no cash settlement – just physical delivery type of settlement.
Near the expiry of US$ Index contracts, the currencies like Euro, Aussie dollar and GBP will rise suddenly by 5% to 8% in less than a day ahead of expiry. Euro could rise to 1.41/$ and Aussie dollar to 0.95/$. Geithner never expected this and he will deliver lectures in Europe to allow free trading of financial product in the name of free trade. Germans are not going to listen. The lady is simply too smart for Americans.

[/stextbox]

THINGS TO NOTE
Rule-6
Never count percentages, rely on absolutes
•    Most business channels talk more of percentages, not absolutes. Watch CNBC, Bloomberg, CBS or others, the Anchors speak for percentages at least 3 times in any sentence.
•    % always look small when the base is high; similarly percentages look very high when the base is small.
•    It is the money in your pocket that counts, which is “absolute”. That is what you are going to spend.
•    When stock drops from say, 100 to 30, the % drop is 70%; when the same stock rebounds from 30 to 100 (original level) it is a jump of 233%. Absolute numbers remain same.
•    Only idiots rely on percentages; smart investors rely only on absolutes.

Rule-7

99% investors buy first and then sell; only smart 1% investors (short sellers) sell first and buy back later.
•    Stock market builds on hopes that the stock will go up so that they can make profit. This is why 99% of investors buy long (buy first and hold).
•    Smart investors (short sellers) work against such hopes and they sell first (short) and buy back later. They usually make more money than others.
•    When the short sellers sells and stock goes up, he should sell more to average up his sale price. The profit taking will set in and he will make money easily.
•    Selling first and buying (or covering later) is most businessmen do unconsciously. They get sale order first and confirm the sale. (Sold first). Then they go their suppliers to buy the goods (covering short)
•    It may not be possible for small investors to short sell due to restrictive exchange rules that normally favor the large brokers, mutual funds of hedge funds. For them, buying long is the only solution.

Rule-8
Round numbers and Beautiful girls never comes in one’s hand. Always be flexible in setting number target for sale or buy.
•    Most investors keep “round figures” as the buy or sale target which is not achieved most of the times wasting the time of investors and his brokers. 10, 20,30, 100, 500, 1000 are the round figure targets.
•    If an investor wants have his trade successfully executed, he should set the target about 10 to 15 points (or 0.5% to 1.5% depending on stock value) above or below the intended round number price. Say, if he wants to sell a stock at 30. He may write sell order at 29.85. Similarly, he wants to by at 30, he may write buy order at 30.10 or better 30.35.
•    The round number levels are as slippery as beautiful girls.  There are thousands of buyers and sellers at round numbers. Smart investors always accept lower than round number for sales or higher than round numbers for purchase.
•    Be a large hearted investor. Learn to leave something on table and do not become greedy to earn last dollar or rupee.


HOW THE STOCKS AND INDICES MOVE?

Rule-9
Indices above 5800 move in increments of 400 and 600 pts for critical levels. They move in increments of 200 pts at other intermediary levels. Those levels are supported or resisted by 35 points on either side.
•    Say, 9,800, 10,200, 10800, 11,200………..14,200, 14,800…16,200, 16,800, 17,200, 17,800, 18,200 and so on.
•    All intermediary levels are say, 10,400, 10,600 etc. where movement increments are 200 points on either side.
•    The market operators unconsciously test the upside and downside level by about 35 points on either side of critical level. Say, the indices are falling to 10,800. The index will still go down further to 10,765 from where it will rebound. Similarly, when the index is rising and hit 10,800 level, it may go a bit further by 35 points before deciding whether to go higher or go down in profit taking.
•    If one wants to buy the Index when it is falling, he may write limit order to buy at 10,765 (If the critical level breached is 10,800). Similarly, when the index is rising he may add 35 pts to write sell order for indices (10,800 +35  = 10,835)
•    If index rises above XX,200, it is possible it will rise to Xx,800. Similarly when it falls below XX,800 and stay below that level for 2 days, it is possible it may go down further by 600 pts to test the further support of XX,200 levels. Thus, if the stock falls below 10,800 and stays for 2 days, it will go down to 10,200 unless there are strong reasons to go above 10,800 level.
•    These are rules of thumb.

WHAT MOVES THE STOCKS?

Rule-10
When really bad news hit the stock or the market due to economic events, such as market crash overseas, debt crisis, exchange crisis, etc. – allow 3 days to 5 days before jumping in.
•    Over 80% of short term trades are margin based. That is, investors borrow from banks or brokers to leverage his trades. They glee in good times, and weep in bad times.
•    When the market tanks by 5% to 10% in single session, and closes near day low, the margin calls originate on following day. If the market goes down further, the margin call pick up momentum.
•    The broker or financier issue margin call to the investor and give him notice to make good the margin, If he does not, the financing banks or brokers sell the stock on 2nd or 3rd day of the margin calls.
•    Such forced sales usually take place at about one our later after market opening. Since they are forced sellers, they usually sell at the market or bid prices. The spread widens with the result that losses to investors mount at alarming rate. It is therefore good time to buy during the time of forced selling.
•    One may buy long term on margin if the stock or market has tanked over 50%. When the market drops 70% it is time to accumulate good index stocks on margin basis.
•    In market crash, the fundamentals do not work. Pick up whichever good stock has dropped most.

Rule-11
The stock moves on its own strength, industry’s strength, country’s market strength and global market strength. (Read strength = strength + weakness)
•    When the stock moves on its own strength, it invariably makes money.
•    When the stock moves on sectoral strength, it still makes money.
•    When the stock moves on Country’s market strength, it makes less money.
•    When the stock moves on global market strength, it makes least money.

Rule-12
When the earnings of the company can be easily worked out, they tend to trade at low P/E; Similarly, when the earnings of a company can not be anticipated, the stock usually trade at high P/E ratio.
•    Single product companies such as commodity companies usually trade at low P/E because their revenue can be figured out with reference to commodity mined and market price thereof.
•    Similarly, utility companies such as Power producers, Water distributors, telecom companies and energy companies tend to trade at low P/E.
•    Similarly, holding companies trade at low P/E because its earnings could be easily figured out by summing up the profit share in subsidiary companies. Unless the holding company has its own identity and business.
•    Stock market always ignores present earnings or P/E or EPS. It always seeks to anticipate the future earning prospects or things beyond.
•    A famous song “Choli ke pichhe kya hai…” sums up this section. Suspense creates excitement that moves the stocks and the markets.

Rule-13
Given a choice, go for the stocks of subsidiary companies rather than holding company. When a person wants to buy the stock of holding company because it has not moved (or cheaper) whereas other subsidiaries did (or became expensive), it is time to get out, not get in. It is the peak.
•    Again it is the earnings and its visibility. The stock of holding companies usually trade at lower level than other subsidiaries for the reason that the earnings of holding company do not hold surprises – they are just arithmetical sum total of all subsidiaries.
•    The subsidiaries may trade at 15 times P/E but holding company at 6 to 8 times because if there are not to be growth in the earnings of subsidiaries, the earnings of holding company would have peaked.
•    UNLESS of course, the holding company has own independent activities that may cover over 50% of its total earnings including subsidiaries.

Rule-14
The stocks usually move in a group regardless of fundamentals. Get out of less worthy ones.
•    This is especially true in Asian bourses where most of the leading companies are family controlled enterprises.
•    Say, there is good news about Birla group in India, all stocks in Birla group will move. Similarly for Tata, Ambanis (both Mukesh and Anil known as MDAG and ADAG), Jindals etc.
•    This is the time to lighten up on stocks on good news and load up on those stocks on bad news.

Rule-15
When the stock moves on non-financial news – such as political, social or anti social news, use the opportunities to load up or sell out after a few days.
•    Stock market relies mainly on financial fundamentals, not others.
•    When the political crisis hurts the stocks, treat as buy opportunities after 3 to 5 days.
•    If anti social events such as bomb blasts take place, treat as buy opportunity and jump in immediately.
•    Never anticipate political, social and judicial events and take anticipatory position immediately before those events.
•    Similarly, when the political events engineer rallies, such as outcome of election, get out of stocks within next 5 days of such euphoria.
•    Similarly, when the political events cause steep fall, such as outcome of election – hung parliament or coalition government – treat as buy opportunities.
•    Politicians may change – they come and go – but the bureaucrats remain same. It takes long time to change established policies.
•    Normally the bureaucrats rule the nation most of the time – the politicians are merely rubber stamps. Bureaucrats or so called experts’ advice the politicians and they have domineering effects on financial policies unless the Leadership is strong and imaginative.

WHEN TO ENTER OR REFRAIN FROM THE MARKET
Rule-16
One need not be in the market all the time; however, the market should be on his radar all the time.
•    A smart investor acts like a lion. Just as the lion kills its pray only when he is hungry (not otherwise), an intelligent investor is discreet enough to participate in the market for a kill only when the market is attractive.
•    The market is a dynamic force. It should be under the watch of an investor even if he does not participate.

Rule-17
Always be a player, not the bystander or spectator. It is the player who makes a run or a century, not the bystander.
•    There are 2 batsman in the field and 20,000 spectators. It is only those with the bat facing a ball make runs or a century.

HOW TO BUY, SELL AND TRADE THE STOCKS? – FUNDAMENTAL STRATEGY
Rule-18
Do not buy or sell after reading or watching business TV channels.
•    Many brokers or investment banks have financial journalists on their roll what they call PR exercise. They feed the information with definite intent.
•    Do not let your impulsive instinct to shroud your logic or judgment.
•    When every one knows what is read or watched on media, there is little room to make good money.

Rule-19

Buy or sell “Three Weeks” ahead of expectation of event, and reverse the bet “Three Working days” ahead of scheduled event.
•    It is similar to “Buy on rumors, sell on facts” and vice versa.
•    The stocks usually move ahead of events. The brokers start tipping around after taking proprietary position.  They usually get out a day before the scheduled event.

Rule-20

Do not try be a bottom pincher OR a peak picker.
•    Always remember very few people are found near the bottom or at the peak.
•    Start buying when the stock recovers by 8% from steep fall and start selling when the stock is within 15% of target price.
•    When you feel buying just buy, and when you want to sell, just sell without waiting in the line or Queue.
•    One never succeeds in bottom fishing or peak picking. Be practical


HOW TO BUY, SELL AND TRADE THE STOCKS? – STRATEGY TO ACTIONS

Rule-21
Always sell in first 15 to 30 minutes of market opening. Buy in next 60 minutes. Sell before lunchtime, and again buy back 30 minutes before close (provided there are no adverse international events)
•    The market makers or operators make two levels in the morning trades – low and high – within which they operate all day long.
•    Always sell in first 15 to 30 minutes of trades. The rise in price is mostly not so real trade based, but operator based.
•    The stock consolidates for 60 to 90 minutes after first 30 minutes. The market makers then buy back a little to cover their short position.
•    Some market makers or operators sell ahead of lunch hours. The broker crowd is thin during lunchtime, which helps smart operators to dictate trend. It is said that a smart broker never takes lunch. This is why most steep corrections take place during lunch time (1:00 PM to 2: 00 PM) and near the close (Last 15 minutes)
•    Last 15 minutes of trades reverses the morning bets. If the stock has risen, it will fall (due to bulls liquidation), and if it has fallen, it will rise (due to short recovering) during this period.
•    If the spread between Bid and Offer widens, it means that the market makers want to sell first and buy back only later at much lower price. The stock usually falls later in the day so that they can recover their short position.
•    If the spread between bids and offer narrows down, it means that the market makers are engaged in stock accumulating stage by forcing the level down. The stock usually gets higher later in the day.

Rule-22

Buy a stock after 45 minutes and before 90 minutes of opening trade.
•    Most people sell the stock in the morning after reading newspaper or watching business channels. Such selling is active after 45 minutes of opening. The market makers also recover their shorts when the real sellers rope in.
•    Most people buy the stocks only in the afternoon, saying they want to study the market. Even if they studied the market, it holds good for the day, not beyond. Anything can happen at night when dictating US market opens and closes before the world market opens from Australia to Arabia.
•    Study yourself. How many times you bought the stocks in the early morning hours? How many times you bought the stocks in the afternoon, especially after lunch hours?
•    Often, the market makers set two levels – high and low of the stock. The investor, trader or speculator – whatever name you call – will try to set these levels as his benchmark and try to get high price for his sale and low price for his buy. He rarely succeeds.
•    The stocks usually moves in first and last 30~45 minutes of a daily trading session. The stock usually hardly moves or moves sideways during intermediary 4 hours. Nothing usually happens during this time, and yet the daily trader glues to the screen doing also nothing.
•    A smart person would operate during first and last 30~45 minutes and then take time off to attend his normal work.
•    This rule does not apply when the market is in crash or deep correction mode due to other complex factors.

Rule-23
Always follow 35:85 rule while trading stocks.
•    Watch out interesting numbers 35 and 85 at all times. Study almost all active stocks for their daily pattern. One will notice day high and low around this level.
•    If the stock is valued at Rs 50, for instance, it is possible it may have fluctuated between 48.85 on downside and 51.35 in normal days.
•    When the stock goes to say 48.50, a round number, it is possible the traders might force it lower to 48.35 to see whether any support comes in. If it does, the trader recovers his short position quickly.
•    Look at today’s Gold prices – 1085, 1135, 1185, 1235 are the levels to which it touched and then either progressed or corrected.
•    It applies to any commodity, forex trades, bonds, CBs, property markets etc.

These are the 23 unwritten yet widely followed Commandments from the years long observations by the Kalidas (Anil Selarka). I am sharing this knowledge and experience with the readers of this blog.

Above are merely daily trading tactics. The real Long Term and Medium Term tactics will be discussed in next article – How to Select the Stocks and Bonds? However, the tactics as above will be used to time and control the purchase and sales activity

CAUTION: Kindly note that the contents of this article are “copyrighted”. General permission is granted to anyone only if they acknowledge the source as “this Article and the Author”. Ungrateful copycats are not welcome and will be proceeded against legally for violation of copyrights and intellectual property.

Kalidas (Anil Selarka)
Hong Kong, 19th May 2010

Jan 242010
 


Ref: 10-003 of 24 Jan, 2010            PDF Download from ScribD or Download Pool Sidebar>>Articles

Dear Readers,

The correction has started precisely on the date we mentioned – 21st January, 2010. We predicted it more than a month ago.  Now, the situation has taken turn for the worse.  The trigger was provided by President Obama’s proposed clamp down on the banks proposing far reaching regulatory actions to rein in the banks in terms of their size and activities. A separate article will appear within a few days titled – OBAMA WAR with INTERNAL TERRORISTS

Dow has lost over 5% in 3 days. S&P has dropped to 1093, slightly above critical level of 1083. I do not care for technical indicators. My forte is fundamentals. The core fundamentals are worsening.

  • Bernanke’s extension as Fed chief, once considered almost a done deal, is now in serious doubt.  If he is reconfirmed, there may be a short reprieve for the market.
  • The future of Treasury Secretary Timothy Geithner is also in doubt.  The AIG dossier is becoming murky. The testimony of Paulson with Geithner in relation to AIG affairs is due on Wednesday, 27th January, 2010.  It means that the Senators know something ignominious more than the investors are aware of.
  • There are indications that the Senators have finally realized the extent of damage done by Henry Paulson of Goldman Sachs and Ben Bernanke from Fed.
    • President Obama’s pathani demand  “We want our money back” alludes that the $306 billions non fund based guarantee given for Citigroup’s worthless debt at behest of  Paulson – Bernanke combine are maturing into real fund based liabilities.
    • Read with massive profit of Goldman Sachs, and Citigroup’s insistence to cancel out the “loss sharing agreement with the Fed/Treasury”, the Senators and the President Obama appear to have realized the “foul play” and “Criminal conspiracy” against the State. Many frauds may come to light. It could have massive effect on Wall Street. Even Warren Buffet could become controversial. His days are beginning to have “U” turn for long.
  • Two days – Saturday and Sunday, have passed since the President Obama disclosed his plan to rein in the banks, their size and their disapproved activities. The era of $25 billions of profit for the bank is gone for ever.
    • The earnings of almost all banks will be downgraded by the Analysts up to 30% to 80% that could collapse the prices of major money center banks. The entire banking structure globally will be re-assessed on severe downside. Bank of America, JP Morgan Chase, and Wells Fargo could face the burn of third degree.
    • There will be further lending squeeze from these banks raising real market interest rates.
    • If these banks can not make double digit billions of dollars of profit for next 5 years, , they will never be able to recover the past losses.  Nor will they be able to raise new capital due to poor earning prospects.  Fed/Treasury window will be shut for good.
    • In short, some major banks could become officially insolvent.
    • Goldman Sachs and Morgan Stanley may surrender banking license to avoid above restrictions.
    • The global banking giants operating in US such as Barclays, Deutsche Bank, UBS and Credit Suisse may have to realign their business. UK and Europe too could adopt similar measures with similar effects. UK and Europe always play monkey game.
  • SEC is preparing for some tough times ahead. Bloomberg reports on 23/Jan that “Concern that short-sellers accelerate stock declines may prompt the Securities and Exchange Commission to adopt a rule next month aimed at curbing bearish bets when equities are plunging.”  It adds that “The regulation would require the trades be executed above the best existing bid in the market when shares fall 10 percent in a day,” In short, alarm is on.

Massive collapse is about to set in from Monday onwards.  It is scary.  It was inevitable; we were merely waiting for the trigger. President Obama provided it. He is not to blame for what he proposes. It is the way he has presented them and timing thereof. He is under extreme pressure to perform that is telling on him for his expediency.

  • The markets may lose anywhere from 5% to 15% in short time (< 1 month), and 15% to 50% in medium term (< 4 months) if the short term correction takes place.
  • Margin calls will exacerbate the downside.
  • Mutual Fund redemptions could cause massive slides.
  • Money could become scarce overnight. Overnight Call rates could zoom and stay there for unduly long time forcing short term rates to rise. My previous article “Maturity Mismatch’ may become reality as projected.
  • Monday could be the beginning of Tsunami wave, category 7. So many things could happen swiftly in short time.
  • Massive losses to investors will become a hard reality.  What they lose this time may not be recoverable in next 3 to 7 years.
  • The only reprieve will come when the Bernanke is allowed to continue his job. While he has lost all credibility and should not be confirmed, it is in the interest of the market that he continues for a while (temporary extension) until his successor is chosen. If he loses the job, one may be waiting for him at Goldman Sachs.

This time, protecting capital is more important than the earnings. If you have capital left, there would be earnings one day.  It is not necessary to make money in every trade every day. It is enough if you made good money some time rather than a little money every time. We therefore suggest the following from Monday onwards.

There could be huge meltdown. All markets may go down Minimum 3 to 7 days continuously in varying degree.

US Market:

  1. Dow may lose another 14% (1400 to 1500 points) and then rest before going down again.
  2. If S&P goes below 1083, it will be bad sign for technical analysts. In my view that it will be breached.
  3. NASDAQ may outperform DOW.
  4. Buy Put options on S&P 100 known as OEX-100 and Nikkei 225. These are very volatile.
  5. Do not trade S&P 500, it is less liquid and does not move fast.
  6. SELL short or Buy puts on ADRs of Wipro (trading at 43% premium) and ICICI Bank (-3%) and HDFC Bank (+15% premium). The heavy premium is usually lost in meltdown. Further, one can keep short position in US market on any equity or ADRs for about 12 months by paying suitable margin. Check with your US broker first.
  7. Think of accumulating undervalued stocks like MTNL with Zero debt where discount will rise due to meltdown making it attractive. Stronger rupee tend to add more value in $ terms.
  8. Indian ADRs could develop more discount than shown today, making them more attractive.  Some counters are better bought as ADRs than underlying equities in India. If you have choice between domestic share and ADR, prefer ADR of liquid counters. (large cap stocks)
  9. A strong buy opportunity may emerge in FCCB (Foreign Currency Convertible Bonds) of Indian companies that may be hammered in meltdown. Their yields may rise, premium contracts or even trade at discount. They being denominated in $, stronger rupee will give better return than underlying shares in India. Watch out for them. Go only for well known battered counters in info tech, pharmaceuticals and telecom sector. This is for only wealthy investors having $ 1 Million or more investment budget. Not suitable for local investors due to larger size lot involved

10.  There could be political and social upheavals. Since hundreds of billions of dollars are at stake, and jobs being lost with increasing intensity, violent political removal at high level at many places is likely. This time for a change, the war will be within United States. Law may take a back seat.

Indian Markets:

Indian growth story could be dented but will remain intact than China. India is still safest place to invest. With US, Europe, UK, Japan and even China taking massive blow, India, Indian economy and even Indian Rupee (if made convertible) could become real alternative to US dollar.

Nevertheless, holed in the habit of taking cue from the Dow and Asian markets, SENSEX may tumble by 14% in a few days (2400 points). Huge margin calls from Wednesday onward could push it down further by another 1000 points. The market may reach 13,400 first, rebound for 800 pts in dead cat bounce rally, followed by sharp drop down further by 2000 points. In short, the market may lose 4600 points within one month. Even if the market recovers during intraday, it may close down near the close. Not many would want to keep their position open overnight.

However, there is a caveat. Indian budget due in February could provide relief or act as mild buffer against further sharp fall. It all depends how Government of India responds. The interest rates may be lowered, not raised to contain inflation, and Income Taxes could be lowered for Corporate and Individuals that may provide fillip to the Indian markets. This is however conjectural. Rely more on facts than rumors or opinion. Financial expediency will prevail over political one.

  1. Stock financing banks like ICICI, HDFC, Axis Bank, SBI could tumble more due to proposed changes in banking law in United States.  They will not be able to carry out their investment banking activities as before. They could be the index draggers. Do not touch them for another 1 month even with remote pole. Swap them into neutral stocks like IDBI Bank or IFCI who are domestic oriented.
  2. Stay on short side.
    1. If you do not want to sell down your portfolio, insure it by buying Out of Money Put option of NIFTY for February or March, if available.  Do not speculate, use it as hedge. The markets could have wild swings that could boost or bust the speculators.
    2. SELL 50% of remaining stocks held. You may have already sold 70% by now from the peak, if you have followed this column. What you may have is remaining 20% exposure.
    3. Possible exceptions are recovery play like Spice Jet. Ispat Industries and Dish TV who have returned to profits already or will return in one quarter.
    4. Finish your selling through out the day, taking advantage of intraday recovery. Even if the Asian markets recover during the day, continue selling. You may sell some Spice jet too if you are sitting on good profit, with a view to buying back later.
    5. Stocks like ITC and Hindustan Lever may perform better than others.
    6. SELL or reduce Mutual Funds (except LIC linked) by 70% and retain cash.
  3. Focus on buying only after 3 days of fall only the following stocks. (1) Spice jet (<56)  (2) Ispat Industries (<23), (3) Dish TV (<41) , (4) Petronet (<71), and (5) Evinex (<3.65), (6) IOC (<270), (7)IFCI (<43), (8) UCOBank (<48), (9) LIC Housing Finance
    1. Avoid Oils, Metals, Ores, Infrastructures and all other high PE stocks. Also avoid story stocks like PSU on privatization list.
    2. Avoid oil producers; prefer State Owned Refineries like IOC, HPCL, BPCL, MRPL etc. Avoid private refiners like Essar Oil and Reliance.
  4. Buy more of Gold, Gold ETF and Silver.
    1. Some may say that if Gold falls below $1065, there could be a meltdown. Do not buy those stories.  Gold rise most in uncertainty.
    2. Silver is generally stronger than Gold nowadays. Use major fall in their prices as strong buy opportunity.
    3. No targets are given because you will be in hit and run market for several days.
  5. Please note that this article is meant for regular delivery based investors. Some hedging operations are mentioned to protect their portfolio.
  6. Short term investors active in F&O segment may conduct their activities on their own impulse. This article is not meant for them.
  7. When the markets correct as above, it will provide strong platform to build Long Term Portfolio of any amount as suitable to investors. Investments made in steep correction time will provide better return than properties.
  8. Defer buying property for investment purpose until March 2010.
  9. If you are keen on investing into property for investment purpose, not for self use, better look out for commercial properties from March/April. Read my all articles on “How to invest series….” again.

10.  Buy equities only when you strongly feel like selling gold or silver. At that time, one may buy equity or properties. Prefer “Ready to Possess” properties than properties under constructions from unknown developers who might close their shops suddenly and run away. This time around, avoid farm properties, and prefer commercial or residential properties in major metro cities or towns having population over 30 lakhs (3 Millions; +/- 20%)

Will the markets go the way as projected? I will be happy if I am proved wrong. The trouble is that I am often proved right than wrong. But do not take me for granted. Try to be rational and make your own calculated guess and decision.  There is not going to be time for analysis.

A question may arise, whether this crisis was solvable?  The answer is yes. For every problem there are multiple solutions. My father taught me once “For every problem, there are 10 solutions – just go out and find it”.  I therefore wrote the book “SUB PRIME RESOLVED” which provided comprehensive solutions. If US-A does not go the way I have suggested, the nation is set for gloom, doom and total collapse. It may not exist in present political form.

I also made several attempts to offer solutions to the US Administration as under. However, there was no response. No regrets. I did my job and would let them do theirs.

First, when I offered solutions to President Bush in August 2008 before crisis began.  However, he or his stooges in White House ignored.  My letter to President Bush is already in the repository and read by the readers. The real trouble started precisely three weeks later in September 2008.

Second, I offered similar solutions to Senator Obama while he was campaigning for Presidency.  There was no response. But I can understand that.

Third, when my book “SUB PRIME RESOLVED” was published in June 2009. I wrote to President Obama, the First Lady Michelle Obama and Vice President Joe Biden. No response either.

Fourth, when I wrote similar letter to ex-President Bill Clinton and Jimmy Carter;  they too did not care to respond.

Fifth, when I sent my book “SUB PRIME RESOLVED” to Sen. McCain, and Bobby Jindal, Governor of Louisiana and Chris Dodd, Chairman of Senate Banking Committee.  However I did not receive any reply or courtesy acknowledgement.

Sixth, when I wrote a letter to the President Obama very recently with similar letter copied to Vice President Joe Biden, Senator Christopher Dodd, Chairman of Senate Banking Committee, and Timothy Geithner, the incumbent Treasury Secretary. Again there was no reply or acknowledgement.

I threw a challenge to President Obama that if my solutions could not extract the United States from the severest financial crisis and make it healthy again within 9 months, I repeat 9 months, he can sign “Death Warrant” against me with my and my family’s full written consent.

Seventh, when I wrote to the Chair of FDIC (Federal Deposit Insurance Corporation). Again there was no reply or acknowledgement.

I wonder why we send our children to USA for higher education such as MBA when those expensive institutions do not even teach basics of Courtesy, Management and Administration to upcoming business and political leaders in United States itself. They keep their minds closed and ask us to keep ours open.

The Americans are suffering from “Superiority Complex”.  The past successes have gone to their head. They appear to feel that only they know everything, forgetting that the knowledge knows no bounds. It can spread anywhere. We are in internet age, America’s  own invention.

The White House may be thinking that this Kalidas, Anil Selarka or whoever he is, must be a crazy, egoistic, pseudo bastard.  When our Nobel Laureate economists, financial gurus and management experts in United States are not able to think of one solution, how on earth this Kalidas could have multiple solutions from Hong Kong 5000 miles away? Throw him into the dustbin for good.

There is one way Americans can come out of troubles learning from Americans only if they prefer.  Hand over the country to IBM executives. They know how to think, conceive, design, plan, implement, execute and bring positive result. They think out of the blue box. It was IBM who invented “Personal Computer”. Many years ago, the company was in shamble spending billions of dollars in advertisements.

However, they read the writing on the wall in time and did not take long to “dump” it by shifting to services and software solutions. There used to be IBM logo everywhere in the past.  The striped blue logo is rarely seen anywhere now; and yet, they are everywhere like God.  Look at them today – they are fast, nimble, profitable and as efficient as any coveted American enterprise ought to be.

President Obama has to take three decisions.

  1. Dump GDP theory. (the way IBM dumped and got out of PC business)
  2. Dump Goldman Sachs and quarantine every Goldman emission in Fed and Treasury (and everything should be fine in US and globally)
  3. Pump Gold. (bringing back monetary stability by re-standardizing dollar)

Kalidas (Anil Selarka) Ref: 10-003 of 24 January, 2010 (Sunday)
Hong Kong

Personal Blog:     http://anilselarka.com
Book Web       :     http://www.subprimeresolved.com

Disclaimer:
Readers, before you proceed:

This article is released on Sunday so that you have enough time to deliberate on information available from various sources. This is for your informational purpose only. Consult your professional broker, banker or investment adviser before acting or taking any decision. No liability of any kind attaches  to the author.