Take a Bow To Dow!....

We have seen financial panics before.
We have seen wealth erode before.
In, 1987,/, the Dow Jones , Industrial Average crashed from 2,641 on October 2nd to 1,739 on October 15th. That was a decline of -52%.In 2 weeks.
In 1998, the Dow Jones crashed from 9,338 on July 17th to 7,539 on August 31st.
That was a decline of -24%. In 6 weeks.
The current decline in the Dow is -49% from its peak of 14,093 established on October, 12, 2007. In 51 weeks.
If things are bad now, they were also pretty bad in 1987 and 1998 yet we survived as a species.


Source:
Equitymaster.com,

Financial Turmoil

A school boy doing his Physics assignment due to his curiosity and over influence of news Channels asked his father, “Dad what do you mean by Sensex ?” , father being aware of financial crisis replied , “ Son something that falls faster than 9.81 m/s2 “. This may sound dramatic, but in past few weeks we have seen this some chain of events in which big and Historic names from the Wall Street are getting wiped out, Investment banks are falling like Domino’s.
The Big American Investment Banks are changing their models, and turning into commercial banks, and as we sit on the couch and sip our cup of coffee, we tend to feel is this the failure of the Big American Capitalist Model?, or just the greed on side of Investment Banker’s, who for sake of few basis point profit took exposure in products having fancy names but high risk. As time passes by the speed of Write-off’s and big names going belly- up would stem. And then the ‘subprime crisis’ might spread its wings into the Real Economy.
But we are safe and sound 12,000 miles away in our living rooms watching Saas-Bahu Soaps, are we? The Decoupling theory was put to bin by the screen as, Dow had a great Bow to four digit figures and Sensex tested the 10K levels, which were seen two years ago. Initially when we saw a correction in the markets it was due to capital flight on behalf of FII’s due to high risk formation in Emerging Markets, and now the same FII’s are pulling back the capital employed in EM’s just to meet there obligations abroad.
So the big question here is that can Corporate India sustain is growth and help provide the fuel for India to keep shining? I have my reservations on this issue, and got reasons for the same. The Recent IIP (Industrial Index for Production) numbers don’t quite reflect it. Services Sector is major contributor to India’s growth, and IT & ITES sector has a lion’s share of it, major revenue for this Industry comes from the BFSI in USA and Europe, which has been hit badly, yes we can argue Rupee has depreciated a lot , boosting the bottom-line of IT companies, but there top-line will be affected as the IT spending( by the existing players who still survive) will reduce eventually. If we talk about manufacturing industries, they need fuel of capital to fire them, which they are finding it difficult to raise from the Equity markets as of now, and the cost of borrowing has also gone high , so debt funding goes out of the Window. The worst hit is real-estate and Infrastructure which are abandoned by all investor, once a darling of all had turned orphan. Textiles could have benefited, from the lows of the rupee but again the weak consumer spending in USA and Europe may not let that dream suffice.
The Analyst on D-Street are screaming about cheap valuations, we use PE multiples which in a way is a technique of Relative valuation, and we compare PE ratio of our scrip with Industry PE and that of market leader, but one thing we should take into the picture is the interest rate in the system.Historically PE ratio had a negative co-relation with the Interest rates in the system*. The ability of a firm to generate earnings is a function of interest rates. So when the interest rates in the system go high the earning expectations tend to go low, and on those expectations the share price, so investor should keep in mind as he PE falls the futuristic earning will also not grow at the same rate.
There are some positives to take as the Global cut in the Interest rates, and reduction in CRR by the Central bank, but these measures are temporary & inflatory in nature. The Big Bail out and provision of liquidity for banks in USA and Europe is a good news, but now after this subprime saga the banks would be very cautious (for lack of a better word) in lending, which again might be a roadblock on track to happy days.

*The following Study at NYU exibiting a strong negative co-relation between the two. http://pages.stern.nyu.edu/~adamodar/pdfiles/pe.pdf