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.

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.

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

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 – 21^st 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, 27^th 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.



Ref: 09-036A of 25-Dec-2009 (Merry Christmas Day) Final update on 3 Jan, 2010
Download PDF file from ScribD or from Sidebar

Steven Spielberg is considered one of the most gifted and visionary director in the world. He could not only visualize but also gave concrete shapes to the characters that became life size symbols later. Unfortunately, he never handled a political, financial or economic theme for simple reason that he could not visualize the complexities of current financial crisis engulfing his own nation – United States of America.

President Obama, one of the rarest breed of gifted speakers, has turned into a con man. He is a successful diversionist not revisionist lawyer, Senator or President but to borrow the phrase from Jim Carrey’s dictionary – Liar and Liar.

I thought the uneducated Indians in the villages or woo doo tribes in sub-terrain landscape in African continent were the only bunch of superstitious religious zealots. Never before I thought that the educated mass of Americans could rival them in the practice of superstitions. If the Hindus, Muslims and Africans could follow their religious leaders blindly, the Americans too follow their political leaders with same zest and vigor. They also believe blindly or superstitiously that their King or President could do no wrong. They do not realize that USA is following a pattern of USSR and its days are now numbered

A good leader should be a good orator, but a good orator need not be a good leader. Sen. Obama, a distinguished orator, won his presidency not because of his strength but due to the weakness of GOP – or Republican Party badly bruised by erstwhile President George W Bush. He could use his oratory skills to whip up the anti-GOP sentiment to win the democratic nomination defeating the Hillary Clinton and then defeating John McCain to win the Presidency. In short, he won due to the default of the other.

Yes, he inherited the bad legacy of burning nation from the President Bush. Nothing new. Almost every President inherits some or the other bad legacy from predecessor. Even President Bush inherited the regime of artificial low interest rate from President Clinton, Rupert Rubin (then Treasury Secretary) and Alan Greenspan (Fed Chairman for 18 years by now) that sow the seeds of the massive derivative contagion.

President Obama forgot that he was appointed President for 4 years – up to January 2013 latest. Having seen his inadequacy to address the immediate financial problems, he set upon himself a convenient mode to divert the attention of the American people by any means. He adopted the following diversionary tactics successfully:

1. He started showing moon to the American people. Having seen the oil prices zooming to $ 145 per gallon, he found convenient tool to exhort the American car manufacturers to “go green” and invest into green technology that would reduce oil consumption, pollution and carbon emission.
   1. Such cars to be commissioned by 2014 to 2016 when he will no longer be around.
   2. What is the point of talking such non-sense when the immediate need was to set the financial house in order, stop the mortgage hemorrhaging, foreclosures and create the jobs and help the local Auto manufacturers to dispose off the existing car inventory in the ware house and on assembly lines?
2. He then became champion of another green technology – Solar Energy – which will take years and billions of dollars before that technology became available at reasonable cost on mass scale. Again, he was showing moon to the American people by showing distant calendar of 2016 to 2020.
3. He became then the champion of “climate change” by spearheading campaign for actions for control of carbon emission and reserving and doling out hundreds of billions of dollars of unproven and non-focused technology or even concept.
   1. He was trying to interfere in the automatic self balancing system of the nature.
   2. He went all the way to Copenhagen in “freezing cold” to talk about “global warming”. Back home in all 4 North Eastern states from Washington DC and New York were engulfed in 5 to 8 feet deep snow or ice in freezing cold when he was devoting almost half the time of his presidency on global warming.
   3. Hey, Mr. President, there is snow and ice all around – where is the evidence of global warming?
   4. In Afghanistan and Iraq his US army was exploding disastrous bombs that were emitting more Carbon dioxide than one small plant in China. Did he end the war with immediate effect
   5. Osama and Al Qaida were blasting human and real bombs everywhere killing thousand of innocents and causing tons of carbon smokes from the bombing sites. Could he get the cooperation of Bin Laden for carbon emission control?
   6. In short, he was rushing into “abstract” and “non verifiable” concepts just to divert the attention of the American people.
4. He planned and created hundreds of billions of package called “TARP Trillions” to resurrect the financial system.
   1. He was trying to kill the wealthy and efficient by chasing them all the way down to UBS, Switzerland by calling for names of 52,000 wealthy Americans who were reported to be tax dodgers.
   2. He was using hundreds of billions of new money thrown after bad money by lending support to bankrupt Citigroup, AIG, Fannie/Freddie Mae, Bank of America, Wells Fargo, Goldman Sachs, General Electric and host of other bad borrowers.
   3. In short he was trying to extract billions from efficient wealthy and passing on nearly 100 times more to inefficient banks, brokers and insurers.
5. When he could not create jobs, he invented new slogans – by equaling Saving of Jobs as Creation of New jobs.
6. When he found his plans were no longer working, he invented a new weapon. “Health Care Reform” which at the moment of this writing has almost become a law, spending over $ 1.3 trillions extra.
   1. Here again, he was showing moon again. He said that 33 millions of Americans would be insured immediately by taxing healthy Americans to pay for health insurance they no longer wanted.
   2. In short, he was hurting efficient wealth earners and healthy Americans. He did not like “efficiency” in earning income or wealth and building health.
   3. If you earn more, pay more to the state. If you are healthy, pay the tax or compulsory insurance or pay the fine ranging from $ 750 per person to $ 3000 per family of four. In other words, he became a “blood sucker” draining out the blood or pompous health from the healthy Americans.
   4. He showed the moon again by showing distant calendar. He said that American people will save $ 1.3 trillions over 10 years. Hey, Mr. President, you are elected to do job to have immediate benefit during your Presidency – that is – for 4 years lasting up to January 2013. Why do you indulge into actions that go beyond 10 years when you will no longer be around?
7. He started chasing fat bonuses to Wall Street bankers which would affect at the most $ 5 to 10 billions. But he embarked upon a journey to guarantee the worthless debt of $ 306 billions of Citigroup. $ 306 billions amount to entire Corporate America’s tax collection for full fiscal year. Was Citigroup as single big entity that important to demand the resources of entire corporate world of America?
8. He was clamoring about the deepest financial crisis over last 70 years. Hello President. Have you seen the Dow Jones index on this Christmas Eve? It is at 10,554. During the 1987 crash, the Dow dropped to less than 3000 which is about 22 years ago. If the financial crisis is of epic proportion, worst in 70 years, how come Dow Jones is still trading at 10,554 ( Up 7554 points or up by 251%?) Does it mean that the Dow is artificially supported at higher level by printing more and more money and giving to affiliated banks, brokers and funds to support the market by “artificial respiration”?
9. It is evident that President Obama has been using his oratory skills to divert the attention of the American people from core issues. He ignores the hard realities and pushing up the abstract subjects which can not be verified or justified by proper rational.

In short, the entire country of United States has gone to the dogs. There are no care takers. The educated Americans have become docile and weakened mass who are loathe to seeing the hard realities.

They bother more about tiny Afghanistan than 3 time’s larger states at home. What is Afghanistan? No one heard its name in last 50 years until George Bush went into those rugged mountains to search the rats nicknamed Al Qaida. Afghanistan is a non entity – just piss it off. And get out of it in one week. When Afghans do not care about themselves, why should Americans or other NATO forces do? It is none of their business to be out there anyway.

In short the ordinary Americans have been blinded by their loyalty to their political leaders or Presidents, Senators and Congressmen. They are equally superstitious as the mumbo jumbo Africans, religious Muslim populace loyal to white or black robed Mullahs or Ayatollahs or ignorant Hindus in villages loyal to the saffron robed politicians or priests.

The situation in the country is worsening in almost every sphere. The economy is still sliding, jobs are being lost, interest rates are convulsing with upward bias, frustrations among the populace is growing, town hall meetings are getting restive, the TV media finally gave the thumbs down and started talking against the administration, the deficits are bulging into trillions, the foreclosures are now expanding canvas to high end properties, commercial properties are sinking further,

Freddie & Fannie Mae need no more bail outs but need blank checks from the government.

The Citigroup is still oozing purple blood with additional hundreds of billions getting sour, no one wants to take the helm of Bank of America and the Fed is devising new ways of raising rates by resorting to Term Deposit lending, instead of normal Fed Fund and Discount windows. AIG is still basking under microwave heat and wilting further and further. Financial frauds are coming to light with greater intensity.

The troubled banks are getting deeper and deeper in the mud. The FDIC is running out of funds, and almost all states find their finances stretched beyond sustenance. Nevertheless, the Fed and Treasury go on printing and also guaranteeing hundreds of billions of dollars as if there is no tomorrow.

Even new IPO are being withdrawn at increasing ferocity. A leading company like National Beef, a profitable company employing thousands, was unable to raise just $ 250 millions from the market, whereas bankrupt banks have been reported to be raising over hundreds of billions within 2 days.

Are derivatives dead? I do not think so – the Fed and Treasury appear to have been using derivatives with increasing ferocity through JP Morgan Chase and HSBC to short the gold/silver and buying $ index to retain the foreigner’s interest in the country. Attempts are now being made to weaken the United Kingdom by arranging downgrade, so that the Asian reserves do not get diverted to British Pound. Further, British pound is having less weightage ( %), so the risk in physical delivery is relatively less than Euro ($ Index Weight %)

The above summaries are derived from the detailed analysis of the following specific developments in every sector/company.

1. 1. Citigroup:

Ever since losing billions of dollars in Latin American countries around 1992, this bank with Chase (now JP Morgan Chase) has been refining its balance sheets by using exotic derivatives in US and mostly offshore centers. It really has no core business. It is one of the larges assets shufflers in the world. Its balance sheet size, about $ 92 billions in 1992 – pre take over of Travelers group, has grown 22 times to $ 2.1 trillions before current meltdown, that is over 100% per year for 17 years. Unbelievable!

1. The official lending was $ 45 billions in TARP funds; its worthless bonds were guaranteed $306 billions by US administration under great Hank Paulson (ex- Goldman Sachs) and Ben Bernanke, making it investment grade AAA securities overnight. That could be the main reason for Goldman Sachs massive surge in profits. They probably knew earlier what was to come.
2. US-A (= US Administration) reported that Citi paid back $ 25 billions of TARP money. Did Citi have cash to repay? No, so how did they pay back? They converted $25 billions of TARP Debt into equity shares. That is, they repaid by book entry – one pocket to another.
3. US-A further reported that Citi would pay back $ 20 billions from new capital raised. How did they raise the capital in such worse financial scenario? The identities of new investors were not known who paid such humongous sum, who are those idiots or White Knights willing to invest billions into this bankrupt bank? Why their names are not disclosed when they have taken substantial stake into this group. This is mandatory disclosure.
4. Even Abu Dhabi Investment Fund (Sovereign funds) served notice on Citigroup to cancel their financial arrangement or refund them damages of over $ 4 billions.
5. A New York Times article recently said that the bank’s “moves will result in a $10.1 billion hit to Citigroup’s fourth-quarter results… (Source: American Banking News)
6. So, the Citi is losing in billions and has no public profile to raise $ 20 billions. Why does it want to repay the TARP billions even on paper? Because they want to avoid answering Senate and need permission to pay millions of dollars of pay packages. In India, there is a popular saying – Behti ganga me haath dho lo – that is rechristen yourself by taking a dip in flowing holy Ganges even if it is dirty and polluted.
7. There are further reports that Citi has sold almost all saleable business. Its only remaining subsidiary is reported to have billions of dollars of worthless assets.
8. 2. AIG
   1. Steel bleeding to death. No one now knows its true liability or assets. Even after consuming $ 200 billions of state funds, this Insurer could not insure itself from other losses. It needs re-insurer in the form of Fed and Treasury. Geithner is very kind to this institution.
9. 3. Bank of America
   1. It is reported on last day of 2009 that the bank is expected to report massive loan losses in 2010 stemming from its aggressive lending in credit cards, mortgages and other business lines. At one point, BofA was offering credit lines of up to $100,000 to startups backed by nothing more than the entrepreneur’s signature. And mortgage requests turned down by the bank as too risky during the credit bubble were eagerly made by Countrywide Financial Corp., which BofA acquired in 2008.
   2. It is reported to have repaid $45 billions of TARP money. What is the source? It is making that much money? No one knows. Who financed them? No one knows.
   3. No one wants to become CEO of this company. Finally, they found one from inside the company.
   4. A recent move by John McCain in the Senate on line similar to Glass Steagall Act in the past will force BofA to sell off Merrill Lynch. No one really knows what is happening in the boardroom of such banks. One day they acquire, use up hundreds of billions of dollars under TARP or some other names, and then in less than 12 months, they will be sold off. What happens to state aids? – “Confuse if you can not convince anyone.”

1. 4. Fannie Mae/Freddie Mae:
   1. They are acutely distressed. They are not beneficiary of direct state guarantees, but it seems that they are. Between them, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Considering about 20% to 27% default rates, the bad loans may be running into $ 1.1 trillions.
   2. These two companies have already received over $ 110 billions of state aid so far. Call it TARP or otherwise. Instead of approaching Senates for bail out time and again, the Treasury on Thursday gave a blank check to these institutions to sidestep the Senate authority required for bail out. The upper cap of $ 400 billions is now removed. In other words, they can borrow even $ 1 trillion without approaching Senate or Congress. (That makes both stocks good buy. They will never be in trouble).

In other words, the Senate or Congress no longer counts. The President Obama, Ben Bernanke and Timothy Geithner (last two are bureaucrat not appointed by the American people). In short, in world’s largest democracy, two appointed bureaucrat, NOT elected representatives (100 Senators or 500 Congressmen) will rule America and the World Financial System. The whole world will be hostage to this trio – one elected, two appointed.

The other banks like Wells Fargo, JP Morgan Chase, General Electric, General Motors and Airlines are so vulnerable the economy and entire financial system in the United States is pushed down several fathoms deep. The derivatives in Forex trades, oil, gas and precious metals like gold and silver is bulging at alarming rate.

And yet, Dow and Nasdaq are rising to record value. They talk about recession almost comparable to 1930 or 79 years ago, but the Dow is still trading at 10,500+ , about 7500 points higher than in 1987 when the massive crash took place 22 years ago. Free money is ruling the entire world today. Here is something interesting I could pluck out from the internet (these are not my views)

The level of risk the U.S. government is taking on with many of the FHA loans is insane. The U.S. government is taking miniscule down-payments on these mortgages, over 90% of the time less then 4% down payment is out down and with the other hand the U.S government is handing out an $8,000 check, paid for by the U.S taxpayers.

The net effect is that for virtually every new mortgage which these government entities are initiating of $250,000 or less there is zero (net) down-payment. Given that a large majority of current sales in the U.S. are below this level, this means that most of the home-buyers in the U.S. this year are putting up zero down-payments.

The Federal Reserve also allows the banks to “borrow” money at 0%. The banks then “deposit” this money with the Federal Reserve as a “savings account” for which they collect interest, while paying no interest on the “loan”. In other words the Federal Reserve is simply giving the banks free money. But the money doesn’t actually sit there; the Fed uses that money to buy U.S. mortgage bonds to keep the U.S. mortgage rates artificially lower

We are therefore heading towards massive fall. We have never been so close to the death than anytime before. This time around the pain will be much severe than 1930 because the stakes and money supply is almost 50 to 100 times higher. The Gold and Silver derivatives will explode soon. Fannie/Freddie Mae will outperform due to unlimited guarantee from the state.

Would USA Collapse on its own default?  Shouldn’t the World rush to its defense?

The current indications are that US will fail on its own. Its supremacy in practically every field is seriously challenged and will be at stake. Some nations are happy to see the United States fall due to its years of military adventurism, hegemony and arrogance. Its shattered economy will have delayed effects all around the world. After years of supremacy, US is at the receiving end today.

There is a saying that those who are unbeatable abroad are finally defeated on their own turf by their own people. The next war will begin in US itself when the disappointed people try to vent their anger against US administration for not being able to create enough jobs or turn around the economy.

The efforts by US-A so far are totally in wrong direction. If they read my book “Sub Prime Resolved” they will know how to address each problem with convincing solutions. The present problem in USA is lack of demand, not supply. Instead of promoting $ value by paper trading in dollar index, the US-A has to gear up the efforts to jack up physical demand everywhere. That is what makes money and creates jobs.

Should the world remain silent spectator and let the United States flatten before everyone’s eye? I do not think so.

I often hear from many quarters in Asia that “they (Americans) deserve it (collapsing economy and virtual defeat in Iraq and Afghanistan).” May be the actions of recent Presidents were egoistic and smacked of arrogance. But that should not take away all the credits and good will built since the World War II. The whole world became prosperous and democratic only because of United States of America aided actively by Britain.

It was US who saved us from the clutches of Hitler and the tyranny of Japanese imperialism. It was the single biggest contribution to the world. It was again US who saved the world from Communists and Authoritarian regime all around the world, gave the world the computers, internet, free trade, and new inventions. It was US who espoused the cause of democracy everywhere. The surfeit of knowledge that the world finds today owe its origin to United States. We have to be thankful and equally grateful to this wonderful nation. The Knowledge has migrated across the world from the soil of United States.

It is therefore payback time. However, US-A lead by Obama have to be receptive to the newly emerging wealthy countries in Asia. One can not clap with a single hand, says an old adage. When two hands come together, then only we get the sweet sound of clapping.

Instead of encouraging manipulation in the value of dollar by paper trading, US should ask the sovereign funds to invest into US property markets and import wealthy businessmen who can create jobs for the Americans.  To buy the property in USA, they have to necessarily buy the dollar which may enforce real demand. My book “Sub Prime Resolved” precisely addresses to these core issues which continues to be ignored by US-A. Let us hope that the wiser counsel prevails from the beginning of Year 2010.

Kalidas (Anil Selarka)
Hong Kong, 25 Dec, 2009 – Final update on 3 Jan, 2010

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

Ref: 09-035A of 1^st December, 2009

Are you reading it correctly? Yes, you are. Am I out of my mind? No, I am not.

Gold prices are on upswing. They are going up at the moment slowly due to rising loss of confidence of the Investors in paper currencies and also people at large. Gold is going up not because of hedge against inflation – no one consciously buy this metal with inflation in mind. Have you ever gone to a jeweler’s or gold shop to buy the gold as hedge against inflation? Definitely not.

The analysts and media who have been touting rise in gold as investor’s intention to hedge against inflation must get their head and speech examined. They have been spreading LIE at the instance of the officials of respective governments. With the loss of confidence resulting in steep decline of US dollar, the US administration has been reiterating its oft repeated stance of strong dollar policy; and when the world is not listening to buy the bankrupt dollar, they have been using media and analysts to tell the world NOT to buy gold, adding that gold market is in bubble which is going to burst one day.

Anything will burst one day.  Everyone will die one day. Does it mean that we should leave our desire to live and enjoy our life? It is nature’s cycle that what is borne today will die one day; and what is falling or rising one day will rise and fall one day. It is the eternal truth. We do not have to go to the Harvard or Wharton to learn that. This is the parental heritage.

Yes, Gold and Silver have been rising due to investor’s preference to get away from paper assets to something real. They no longer treat Real Estate as really a Real wealth! This is why they are turning to Gold. Gold is GOD, Gold is Truth, and in India there is official state Sanskrit symbol “Satya Mev Jayte” that means “Truth Alone Wins”.

This is the reason that even an illiterate Indian is buying gold all the time. He is not illiterate, today’s Bankers, Investment Bankers, Insurers, Central Bankers, Finance Ministers, Governors are.  How do you measure the actions of all Central Bankers, including that of George Brown, the Prime Minister of UK who was the Chancellor of HM Treasury, sold Gold at the bottom of the cycle – $ 260 to $320? Almost all Central Banks sold over 3000 tons of gold at the rock bottom prices during last 15 years.

Is there any demand –supply imbalance that pushes up the gold? No. The demand-supply rule operates in normal times, not in emergency or 911 call.  And why should Gold go to US$ 6400 and Silver to $ 80 as projected by this Author? Why?

What the World Doesn’t Know

..Is the hidden the fact that “United States has lost almost all of its Gold during its covert practice for over 20 years”.  YES, the gold may be there physically at Fort Knox or HSBC Bullion Vault in USA. But that is NOT enough. Who owns the gold is more important than who keeps the gold. It is like your goods are in a warehouse or bank locker.  The warehouse-keeper or banker can not claim Title to or Ownership of those goods. These goods are kept with him in Trust.

The FED and Treasury appear to have been concealing lending of gold to hedge funds by camouflaging transactions through various central banks. When those Central Banks lend to these hedge funds to short the gold, they appear to claim the gold from Fed and Treasury who earmark the gold in its balance sheets.  In other words, the earmarked gold shown in Fed / Treasury balance sheets is in fact owned by foreign Central Bankers and is no longer owned by the United States. If the shorted gold does not return to Fed/Treasury, they will be obliged to show it as “sale” one day. That day of reckoning will come when the Foreign Central Banks start demanding the gold physically.

According to my own research almost 6100 tons of gold earmarked in the Fed/Treasury balance sheets are non-returnable. The hedge funds who shorted it at prices $260 to $360 can not buy back at today’s prices. If they can not return, their deposits will be at the most forfeited. In other words, the Fed/Treasury will be forced to recognize the forced sale of gold @ $260 to $360 or more, but not more than $430 at the most.  That is, Americans have lost their most valuable and prized asset – Gold – due to fraud perpetrated by the Fed/Treasury officials.  It happened without their knowledge because the Fed/Treasury balance sheets were never audited.  The office of OCC (Office of Controller of Currency) conducts only physical verification of the gold, not the true ownership. This is why Ron Paul, Senator, introduced a bill to audit the books of Fed. That is not enough. The gold is handled mainly by US treasury – Fed merely manages the operational part.

You must read my book “Sub Prime Resolved” Chapter 14 titled “Where is MacKenna’s Gold” which deals with this issue comprehensively in 30 pages and proves beyond doubt that “United States has lost almost 78% of its gold through covert lending practices to certain banks, investment banks and hedge funds to depress the gold prices with intent to control the inflation numbers to help them justify lower interest rates”. The book uses same official figures churned out by the Fed/Treasury.

There is further possibility of more selling after the writing of this book. Total loss could be 90%

It is a Great EXPOSE since the Watergate Scandal.
The book goes to the bottom of the statistics and its couched language (with double meaning) to conceal the truth. Most of the gold must be belonging to European countries, Switzerland, IMF, World Bank and some other major gold owners such as Australia and Canada, who live in the dream world that their gold is safe in the vaults of the Fed.

When the Truth will come out?

If there is a massive call from the States and Local Governments like California to launch a campaign against the Fed/Treasury to give them enough funds by selling part of existing gold reserve of 8134 tons,  will meet with the denials from US Administration (Fed /Treasury) on evasive grounds.

Both Fed/Treasury know pretty well that  there is no real gold ownership left with them, and that selling of gold belonging to other nations would tantamount to committing breach of trust. Even the President of United States, be it were President Clinton, George Bush or Barack Obama, may not be aware of the constructive loss of US Gold through the hedgers who acted solely at the behest of same Fed/Treasury officials having ulterior motive.

The gold borrowers are obviously who is who in the field of banking, investment banking and hedge funds. If they are sought to be prosecuted, with the threat of perjury, they will come out in the open with the truth.  Some may even commit suicides rather than facing self – incriminatory charges and face imprisonment for life.

When the market realizes that the US no longer has as much gold as claimed, in fact having lost almost 77% as above, hell will break lose in the media, town hall meetings, White House, IMF Head Quarters, World Bank, European Union, Great Britain, China, India and Switzerland. Many of them are the real owners of the gold who presumed that it is lying in safe place in United States. They will realize first time that “United States is no longer safe place to keep gold” owned by them.  What they own is the piece of paper from United States promising them to deliver the gold on demand.

This is why I always mention in many articles and reply to readers that “Physical is Physical, and Paper is Paper” Asset.  One would be downright stupid if he entrusts tons of gold to some one other than him.  It is like entrusting one’s wife in the care of another man. Gold is the kind of assets that must be held by the owner physically.

Turning to recent rise in gold prices, please look at the Open Interest for December 2009 and February 2010. The shorter have been rolling over the contract every two months in the hope that the prices may drop so that they can cover their short position. However, the gold has been rising for over 5 years, denying them comfort so badly required by them. Look at the following “Open Interest” positions (our comments follow thereafter):

At the time of writing, the Open Interest position relating to gold for two key months – December 2009 and February 2010 were as under:

2009.12.01           GOLD Dec 2009 (NYMEX:GC.Z09) OI   12,041 contracts (= 1.204 Million Troy Ounces)

Or 37.45 tons valued at  US$ 1.442 Billions

2009.12.01           GOLD Feb 2010 (NYMEX:GC.G10.E)               OI  364,298 contracts (= 36.429 Millions Troy Ounces)

Or massive 1,133 tons of Gold- 50% of world annual production deliverable in One month

Now, look at the following chart of 27^th November, 2009 when the gold dropped over 4.5% in matter of minutes:

In matter of minutes, massive volume of over 111,000 contracts equivalent to 11,100,000 Troy Ounces or 345 tons were recorded.

Some operators manipulated to crash gold prices in matter of minutes so that they could buy back or cover the short position for Dec 2009 period.

The contracts were rolled over into Feb 2010 contracts where the Open Interest swelled to 364,298 contracts or 36.249 millions of troy ounces or massive 1,133 tons of gold. It represents 50% of world annual gold output to be delivered in one month only.

It is possible, the shorter may try to roll over the Feb 2010 contracts into longer dated months, provided the music does not stop here. If roll over facility is stopped, the short sellers would be obliged to default or doom to their failure.

1. Just imagine. The gold prices have risen to US$ 1195 due to normal investment demand. If those buyers or large investment funds/hedge funds get the wind that there is no real gold with US, a massive rally may ensue due to heavy rush to buy back the contracts under Open Interest. The gold could propel into uncharted territory. It is just wild guess where the gold could possibly go to $1800, 2400, 3200 or 6400?
   1. The gold could go to$ 2400 due to normal Investment demand.  The gold reached the height of $ 850 in 1980s. If you use today’s inflation adjusted dollar, the price could go to $2400 presuming other factors remain constant.
   2. The US$ index now at about 74 could drop to psychological 71 level (intermediate) or 4%. It could drop further to 65 and finally solid support at 61. This means that the dollar could drop by 4% in very short term to 20% in 9 months. In other words, the rise in gold prices due to weaker dollar could rise by another $480 (20% of $2400)
   3. The recent financial crisis has thrown Central Banks (Fed, HM Treasury UK, European Central Bank, China, India, Australia, some smaller Asian nations, to print over $ 6.6 trillions of dollars equivalent. Considering the global Gold Stock of about 80,000 tons in the hands of Central Banks and Private individuals (like Indian/Chinese citizens). If you divide $ 6.6 trillions/80,000 tons of gold, the Equivalent price of excess money will be $ 2,566/ounce.
   4. Thus, the notional price of gold should be $2400 + $ 480 + $ 2566 = $5,446 ounce
   5. ADD to it if the short sellers have to rush to the market to cover their shorts which could be any number $ 1000 to $ 8000.  I am counting only $ 1000 as short covering effect, which would raise the price of gold to $ 6446 or say $6400 as the caption shows.
   6. In reality, the price could rise much higher because the $ will weaken much further, by another 40% ($ index to 40 or about). It will potentially add another $ 2000 per ounce.
   7. The price in non-dollar countries may not rise to that extent, because the effects will be muted to the extent of local currency appreciation.
   8. Gold and silver has outperformed every other Asset class in last 5 years. See the following table.

SILVER

Historically ratio of gold to silver in 80s was just 16 to 20 (When the gold reached $ 800 the silver peaked at $ 50 giving Gold/Silver ratio of only 16. In that case, why our projections give Gold a target of 6400 and only $ 80 to Silver? It should have been $400. But not so, because Silver is no substitute of gold anywhere. It is available plenty and also, an industrial metal. Every copper producer has a bye-product of Silver. Gold is never a significant bye-product of any mining operation. Further, the industrial demand of Silver may gain if new cell battery known as “Ag-Zn” (Silver Zinc battery) replaces the Ni-Cd or Lithium battery.  The new Ag-Zn battery is reported to be super conductor of electricity and heat, far superior to any other battery in the market place. It also implies that Ni and Cadmium prices will turn softer due to lesser industrial demand.

TARGET QUALIFIER

1. I have a Gold Target of $ 1500 (by March, 2010), $ 1800 (June, 2010), $ 2100 (Sep 2010), $2400 (Mar 2011), $2800 (Dec 2011) and $3200 (June 2012) in normal circumstances due to investor’s demand  and weakness in currency WITHOUT taking into account the short covering related rise or additional Central Bank purchase (such as India)
2. The target could be higher by 50% and time shorter by 25%. If the short covering takes place, Add 50% to the above target  price.
3. Dollar weakness will add more. The dollar has more credential to go lower.
   1. However, if the Obama Administration adopts the measures suggested in my book, the fall of dollar would be arrested or reversed.
   2. However, the gold prices of other countries will rise due to weakening of local currency. In U$ terms they would be corrected.
   3. If dollar is demonetized or reverse split (cancelling current dollars and replacing them 5 to 1), then the price of Gold will decline to reflect the reconstituted currency.
4. In less than 30 months, if the present liberal monetary policy is pursued, and short covering does take place, the gold price could rise to $ 6400 in 30 months. Some major banks in the world could be busted. (2 from USA, 2 from UK, One from Europe) and One from Switzerland)
5. Once the gold therefore rises to $ 3200 or about, the investors may adopt the trading strategy. Until then, they can afford to buy and hold for a period between 12 months to 18 months.
6. There could be predominant selling from India, including Central Bank to book profit. Many may be tempted to sell gold and buy home which is the average dream of any young person.  You have to allow reduction of prices on account of this factor.
7. The current prices of $1200 are therefore screaming bargain. They are still at 50% discount to inflation adjusted dollars.
8. The investor must read my book “Sub Prime Resolved” that cost only $ 59.95. It is advisable to spend $ 60 before committing large resources for investment into Gold or Silver.
   1. If he disagrees wit the finding on Gold chapter, he may not adhere to above targets, but may scale down by 30% to 50%.
   2. He may ignore the effect of short covering.
9. The investor may use the following table as guide. The figures input are dummy. See Excel spreadsheet for Download. The investors may use it to input their own variables.

Anil Selarka, Author (Kalidas)
Hong Kong, Ref: 09-035A  of  2009.12.02

Disclaimer:

Please note that this is the considered opinion of the author. The author is not liable or responsible for any loss or damage the investor may suffer if the situation does not develop as intended or forecast. This article is meant for only experienced investor or professionals who understand the vagaries of trade.