Category Archives: Currency

RBI’s Measures- Too little too late

Standard

Dear Investor

RBI suddenly woke up last week from deep sleep and realised that something went wrong. Then in Hoch poach, decided that now, we should take control of the market and should stop Rupee’s further slide, as if they were comfortable till 60. In hurry, they announced measures to tighten the liquidity, also directed Banks to reduce exposure to currency futures and SEBI also took strict measures.

Indeed, it was futile effort. B’caz second day, RBI official conveyed that RBI will let market to determine Rupee value and they just want to curb volatility. You took steps first day and tried to reverse it second day with statement!!

I have been writing since end of 2010 that RBI is behind the curve and that is forcing RBI to take actions which are not in interest of the economy and nation. RBI was late in hiking of rates at first place and that compelled RBI to raise rates to the tune of 8.50% in 2012, while with real rise in economy in 2007, RBI could contain inflation with mere 7% interest rate(Repo). Does this not show the inefficiency of policy measures?

Let us come straight to the question – Will RBI raise rates from here or will slash?

Some data first. Because, Data will determine RBI’s further action.

WPI inflation is now at 4.86%, more than 50% down from above 10% in 2011-12.

GDP is at 4.8%( last quarter) lowest of the decade.

Current Account deficit stands at 4.8% of GDP. Highest of last 3-4 decades.

External Debt has risen 350% times since 2004, stands at $ 350bn.External Debt has more than doubled since 2008.

Industrial Production index oscillated between 5% to 10% between 1994-2010. But, between 2011-2013, it is fluctuating between -5% to +5%.

Business confidence index reading has mostly stayed above 60 since 2005. But, since last quarter of 2011, it has been in the range of 48-52. Below 50 indicates contraction and above 50 indicates expansion.

Personal Savings rate has dropped to 9.3% from high of 23.15% in 2010 and average of 16.5% between 2004 to 2010.

RBI’s own findings of Industrial Outlook Survey-2012-13

  • Demand conditions in the manufacturing sector weakened during 2012-13, as reflected in the drop in production, weak new orders growth, declining capacity utilisation and subdued exports and imports.
  • The optimism on financial condition also showed some moderation with overall financial condition moderating and availability of finance remaining stagnant. Cost of external finance is perceived to rise, though by a lower proportion of respondents as compared to a year ago.
  • Profit margin continued to remain negative during the year and dropped further during Q4: 2012-13.
  • Cost of raw material continued to rise whereas sentiments for rise in selling price declined indicating lack of pricing power.
  • Business Expectation Index (BEI) based on assessment moderated during the year and in Q2:2012-13 reached a level seen at the onset of financial crisis in Q3:2008-09. The BEI based on expectations has been declining since Q3:2010-11 and remained more or less flat during the year.

Above data doesn’t need elaboration. It paints very grim & gloomy picture. Economy is in deep trouble. Those companies having high debt burden(domestic or external) are facing severe problems.

At home, Interest rates are up hence deleveraging is not happening and those raised money from international market, are in bigger trouble. Those firms, borrowed in dollar when rupee was 50 or say 55 will have to shell out 20% and 10% more respectively just to make up rupee depreciation difference, apart from interest.

That could be one of the reason, companies are establishing subsidiary or launching new projects outside India(mostly in developed world). Because, interest rates are low in developed economies and it helps them to avoid currency volatility.

RBI acted on 16th July by hiking rates as if they were comfortable when Rupee breached 50 and further 55-57-58. Please excuse me but RBI Governor should have courage to take bold actions.

Hence, it is very clear RBI is in no position to increase rates even if it chooses not to slash.

Now, let us focus on how to come out of this recession….what measures can ensure us a growth back on table…

What is the way out?

One word answer is “Growth”. Solution of all problems lie in Growth. Some fear that it will give way to inflation to rise back to double digit zone. But, Inflation is just not because of demand, it is because of supply problems in most of the cases. Vodafone was charging Rs. 16/minute but when competition increased and more telecom companies were allowed, though inflation went up, though rupee depreciated but call rates have continued to fall. Wherever Govt has freed the sector, cost has come down, it has not generated inflation.

But, it took years for Govt to allot mining and oil exploration licences. Sunil Mittal, Posco have decided to withdraw. Farmers are paying very high prices for fertilizers because we had no or very limited capacity expansion in fertilizer industry in last 2 decades. Just to raise tax revenue of Rs. 18000 crore from one company(Vodafone), Govt brings in the rule with retrospective effect which in turn makes FII to withdraw and new entrants to delay investment decisions.

But, All know and are convinced that once India starts clocking around and above 7%, FII,FDI, Dollars will start salivating and flock back to India market. Who does not want pie of our market? We are one of the largest market of the world. Marc Faber is highly recommending India to his clients in Asian region.

But

How to bring back Growth?

Cut the interest rate. There are no free lunches in the world. For Economy to grow and to alleviate people from below poverty line, to increase supply of goods and services, to meet demand issues, to ease budget deficit and thus revenue deficit, to address current account deficit and last to save rupee, the only Solution is to cut interest rates sharply as soon as possible.

At the bottom of the crisis, US decided to cut rates sharply and to keep it there for extended period, that forced capital hiding in savings account, offshore, foreign investors, companies and investors to flock back to equity, commodity market. That increased fund flow, improved confidence of investor and consumer. Not only that, US could address current account deficit problem and could alleviate concerns of its ability to service external debt. We have similar problems. Yes, some may argue that Dhaval, US is developed and large economy while India is small economy. Middle of ocean, when cyclone hits, whether you have large ship or small boat, both should try to come out of cyclone. Was that right way or wrong discussed only if you are saved.

It is not less than cyclone when GDP is at decadal low, Industrial production, too, at decadal or two low, current account deficit at all time high and business confidence is at bottom.

Yes, there can be a argument that Dhaval, rate cuts will immediately drive Oil and Gold consumption to higher level and that will widen our trade deficit and that will put pressure on rupee !!

No, previous episodes do not suggest that. Even 2008 event does not support this argument. Even our own experience of last 1-1.5 years differs.

Say for Example – RBI cuts rate tomorrow by 1%. You will have immediately huge dollar inflow in both Equity and Debt market. Those funds, FIIs, and SWFs sitting on sidelines waiting for an opportunity, will rush to invest. We will have very good dollar flow to tackle our current account deficit and that will drive rupee up. Now, on other side, the fear is, would that not drive consumption up immediately? No, because, when RBI cut rates, Banks are not forced to pass it on imminently. Banks take 3-6 months and recently though RBI has cut the rates by 1.25%, Banks have passed on only 0.50% to consumers. Meaning, Banks will take time to start lending at lower rates. In between, you have 6 months to 1 year to align policies to stable the market and excesses.

US have eased its monetary policy to historical extend since 2008( since crisis hit)but if you look at US Dollar Index, it is still at the same level, where it was before crisis and before easing. In fact, it is up. Average of 2007-08 of Dollar Index comes around 77-76, when US was in middle of crisis and now it trades around 82.

Similarly, look at Euro, European crisis erupted in 2011-12. Average of 2010-11-12-13 comes at $ 1.35 and Euro trades at $ 1.32 right now. Meaning, European Central Bank has eased it monetary policy to historical extend but its effect on currency is almost negligible.

IN our own case, whenever RBI has eased, it has brought in foreign capital, it has driven rupee up.

Therefore, fear of currency depreciation on account of monetary easing is misplaced.

Technically, as I have written earlier, Rupee may trade between 58-62 for next 1-3 months and will form the top around this level. I do not see Rupee jumping to 65 and higher as talked by analyst at this point.

What are expectations?

I have no doubt in mind that there is only way to come out of this terrible period and that is rate cuts. Un till it is done, Economy will continue to languish at bottom, industries will remain in trouble and as data points suggest that consumption has started slowing, First time in decade, Car and 2 wheeler sales have come down, truck sales are down now for more than a year.

I do not expect Equity markets to scale newer highs and stay there unless rate cuts create favourable atmosphere. Results of Apr-Jun, 2013 quarter will sure reveal the pain in the economy.

In short, there is no better investment than Debt(Liquid, short term and Gsec), un till interest rates come down.

Therefore, stay invested in Gsecs and other debt –money market instruments with preparedness to bear short term pain.

Caution: If RBI delays the rate cuts and meanwhile Federal Reserve starts tightening aggressively, RBI will loose this easing opportunity and will have to raise rates to stop Global Capital flying out of domestic market, leaving our economy and market in shambles. Though Big investors, traders and insiders do not expect much tightening.

Hope: Coming September, Present RBI Governor retires and Govt is in no mood to extend his term. I hope, Govt will surely appoint someone whose thought process aligns with Govt and its agenda of 2014 election. To improve confidence level in the economy to face 2014 election, cost of money(interest rate) should be brought down. Hence, I am of firm belief, from September onwards RBI’s policy stance will favour Growth to inflation.

Thanks

Regards

Dhaval Shah

Blog: https://investmentacademy.wordpress.com/ Cell: 98255 28815

Disclaimer: This is a free daily investment newsletter published by Investment Academy. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. Author might have open positions in the stocks and Indices recommended above.

Advertisements

WHY INDIAN RUPEE FALLING PRECIPITOUSLY…..

Standard

New Product Launch –EQUITY TRADING ADVISORY SERVICES

WHY INDIAN RUPEE FALLING PRECIPITOUSLY…..

Register your Mobile number to receive free Trading Advisory services till 30th Sep.

Calls of last 2 days – Investors earned 4.5% in Rpower, 8 %in Gold, 20 % in Silver

To register SMS your Name and Mob No on 98255 28815

Dear Investor

I have been writing since last 3 months consistently pressing on my view that Dollar will go up and rest everything( i.e. everything be it Equity, Commodity, Precious metal or other currencies) will collapse miserably.

Today, we are witnessing the same since last 1.5 months, every asset class is crashing against dollar.

Refer articles

A Crash in Progress – https://investmentacademy.wordpress.com/2011/02/04/a-crash-in-progress/

Quick Update on A Crash in Progress – https://investmentacademy.wordpress.com/2011/02/12/a-quick-update-on-a-crash-in-progress-2/

Gold, Silver to correct 20-30%, Real Estate 40%, Commodities and Metals to follow – https://investmentacademy.wordpress.com/2011/03/15/gold-silver-to-correct-20-30-real-estate-40-commodities-and-metals-to-follow/

And few more articles, where I gave my detailed views on reasons of market correction and with precise targets.

In very short period of 2 months, Indian rupee fell sharply from Rs. 44/$ to Rs. 49.93 / $. It has created havoc amongst Exporters, Importers, Traders and Investors.

There are various reasons for that let us go through one by one

Let me take Technical parameters first..

Rupee has been forming base since April, 2010 around 44 level. And, below chart would clear much of your doubts that Why it went up ballistic Rs. 6 from 44 level to the level of 50. This is single most important reason for rupee’s sudden fall in value.

RBI vs Chinese Central Bank

To cool inflation, RBI raised interest rates but did not manage the rupee well. ( Your analyst was among the first to predict interest rate rise ). India is net importer. We import 30% more than what we export.

It has been evident since long that Commodity prices are up and going up more, it was RBI’s duty to keep check on rupee to ensure sustained exports and moderate inflation.

China has kept its currency tight under control and that has helped China to weather inflationary wave smoonthly.

Fiscal Disaster

For most part of this, Indian Govt is responsible. I had been warning since last 2 years thatWe need to keep our house in order. You can refer my article (https://investmentacademy.wordpress.com/2010/01/28/fiscal-disaster/ ) . It is seer insane mismanagement of finances which has brought us to this stage. Since 2008, Govt has been borrowing close to 4 to 4.5 lac crore from market for different budget schemes, it is close to 50-60% of Govt’s annual revenue.

It kills economy 2 ways, it keeps economy up artificially where real demand is replaced by Govt’s artificial temporary demand and It negates the effect of rise in interest rate.

I shall update this issue in detail next month.

What I Expect in Near term?

I feel Rupee should retrace some of its rise from recent high of 49.93. Should consolidate around 47.5-48 in short term and should head up again to conquer previous highs of 51.17.

Reasons are very apparent. Some rebound in stock markets and commodities from recent sell off will give respite to rupee for some time and then renewed Global sell off should push down all markets(Equity, Commodity , Bullion) and rupee ,too, will fall again sharply to lower levels of 52 and might be 54.

Regards

Dhaval Shah

Blog: https://investmentacademy.wordpress.com/

Mob: 98255 28815

Indian Rupee heading towards 36-38/$

Standard

Dear Investor

Currency movement decides the direction of the economy. In normal times, opposite statement would have been proved right. But, this time is different. Every nation is ready to wage war against their trade partners and other exporting destinations to ensure that country can continue to boast their exports and cheap currency can help them to inflate out their debt loads.

This is not the time to find the smart and strong currency but to search for the least ugly currency.

After mammoth research exercise, I have reached to the conclusion that Indian Rupee will appreciate further and will breach Rs. 40 mark per dollar in 6-10 months time period.

Let us look at Reasons:

A. Equity Market: Economists and Investors agree that India’s chalked growth engine resumed in 2002-2003. With that Equity indices too resumed upside in new uncharted territory. From around 1000 in 2002, NIFTY index reached to above 6000 end of 2007. From below chart, you can observe that Indian rupee started gaining strength from same period from 2002 and appreciated full 20% till end of 2007.

Remember, I am talking about pre crisis period, when whole world was growing at rapid pace irrespective of developed or developing economies. There was no noise and chaos like sinking economies, sovereign debt crisis or even housing slump in US, and debt to GDP ratios worsening to 250% for Japan and above 100% for many European nations.

Between 2003 and 2007, there was confidence in air for investments across the world and it looked like this growth would never end.

Even in this confidence strengthening period, with the rise of Equity market, foreign capital flowed in India to unprecedented level and on account of that Rupee appreciated to the level of Rs. 39 from Rs. 49/$.

Think about the present situation, half of the world(developed nations including Japan) is still mired into recession. Sovereign crisis is still looming large on European countries.

World knows that US, UK, Europe and Japan will grow at historical low rates for years to come. The free investment capital of the of world said to be around $ 3 tn has to find its way in some assets to keep growing at least at inflation adjusted return.

India received around $17 bn FII inflow in 2009 and around $16 bn in year 2010 till date. Put together $33 bn FII inflow from March 2009 till date could drive sensex from below 8000 to above 20000 mark. This leads me to draw a very important conclusion that Indian Equity market is very shallow in terms of depth of the market in absorbing liquidity. Remember, $ 33bn FII inflow, which gave 2.5 times return to FIIs is just 1.1% of free investment capital.

Even if India gets just 2-3% of free investable surplus of world, it is staggering 60 to 90 bn dollars.

I believe, you can imagine where it ($90 bn)can drive the rupee?

But, does FII inflow drives sensex only? No,

Inflation:
We have seen historically that due to shallow depth of Indian Equity Market, FII inflow spills over from Equity to other asset classes and drives inflation higher.

NIFTY index was around 850 in Dec 1998 and went up to 1800 in 1 short year in Jan 2000. With that inflation also jumped up. Inflation was around 5% in Dec 1998, from there it went up to 15% in Jan 2010. Look at below chart.

Also, look for recent evidence, from around 2003 till date Nifty has climbed 6 fold and with that Inflation also rose from around 3% in 2003 to 15% in recent times.

This establishes relationship between Equity Market performance and Inflation.

But, why does this relationship mean to rupee?
Well, India is still a nation wherein 20 crore people leave on the daily income of just Rs. 20. And, around 40 crore people leave on the income of around $2 a day.
Politically and Fundamentally, Indian Government and Central Bank can not afford to foster inflation, allowing it to go up out of control.
Historically, measures used by Central Bank focuses on raising interest rates to curb the demand. Yes, we know that prices go up not because of demand but because of wastage or lack of storage or lack of infrastructure which can facilitate smooth transportation across the nation.

But, RBI tool kit is limited and only powerful arsenal is jacking up interest rates.

Interest Rates: We have repeatedly experienced higher FII inflow and higher inflation drives up the cost of money. Look at below chart.

Between, 1998 and 2000 cost of money for bank went up substantially. And, again between 2003 to 2008-09, cost of money for banks went up from around 4% to around 11% by end of 2008.

Higher interbank rates indicates higher deposit rates and Higher deposit rates attracts huge capital inflow from NRIs and from Financial Institutions.

Game squares here. With higher inflow, rupee strengthens further scaling new highs against capital exporting nations.

Look at Chart, it clearly shows upside potential for interest rates.
Make no mistake, Interest Rates will still rise further. At least 100-150 basis points before fiscal year ends.

Let us explore other factors.

Fiscal Deficit:
After 2008 crisis, Indian Govt took unprecedented steps and decided to spend out of its way allowing fiscal deficit to rise as high as 9-10% of GDP.

Year Gross fiscal deficit % rise YoY
2002-03 232591
2003-04 232062 -0.23
2004-05 233238 0.51
2005-06 239560 2.71
2006-07 230432 -3.81
2007-08 203922 -11.50
2008-09 473947 132.42
2009-10 597414 26.05

Indian Finance Minister decided to widen the fiscal whole 132% more from previous year in 2008-09 and 26% more in 2009-10.

Fiscal Deficit means, Govt decided to spend money on several schemes to sustain the demand, to help spur economic activities in country borrowing from market. Like in 2008-09, Govt earned around 6.0 lac crore through tax and other sources of revenue, borrowed 4.73 lac crore from market and spend entire around 10.5 lac crore on different schemes to boost economic activities.

But,since Govt has to repay the borrowed money with interest. And, higher Govt borrowing leads to higher interest payment. In year 2008-09, Govt spent 2.5 lac crore to pay just interest on borrowed money in previous years.

But, higher Govt spending means higher liquidity of currency in market and that helps drive currency lower.

Like higher Govt spending through deficit drived rupee lower to Rs. 52 level/$ from Rs. 39/$ in 2009.

But, Govt can not continue to spend like this. Greece, Ireland, Portugal, Spain, Iceland chose path of spending through deficits. Today, these nations are facing difficulties in raising money. People are unwilling to lend them and those who are lending, demand 4-5% higher interest rates then prevailing in world market. These nations were close to bankruptcy last year if IMF and European Union had not intervened.

Hence, India can not continue spending @10% fiscal deficit of GDP.

Our finance minister has vowed to shrink fiscal deficit and bring it back to around 3% of GDP in next few years.

With lower liquidity of currency in market, rupee hardens.

Hence, beware Govt has no option but to contract fiscal spending in years to come and that will drive rupee higher.

Post Crisis Fundamentals:
There is 180 degree shift in fundamentals now between West and East excluding Japan. Policy makers, Investors and smart money know that West will grow at subdued rates for many years to come. Not only because of 2008 crisis but demographics too are not supportive to higher growth rate. Median age of Western nations nations are now reaching to 40-45 bracket and that drives productivity on lower side.

Average age of India is now 26 and hence there is a lot of demand potential, productivity growth, huge labour force and most important lots of new inventions, ideas and resultant lots of new entrepreneurs and businesses.

This is driving Global Capital to India, China and South Asia.

More the western economies sink, more capital will flight to Asia in search of higher return.

For long long period, this strategic shift post crisis will build constant pressure on rupee.

Currency Devaluation by US, Europe:
As I have written number of times, the only way out for US and Europe is to sink their respective currencies. You have constant spat between US and China, US and Japan on front pages of newspaper where Presidents and Prime ministers are accusing each other for not allowing their currency to appreciate.

US President and Treasury secretary are building constant pressure on China to allow Yuan to appreciate further. When US says Yuan is undervalued against dollar. It means US is saying that Dollar is overvalued against China and other developing exporting economies and they should allow their currencies to harden and thus ensuring much depreciated dollar.

This is happening right in front of our eyes everyday.

Conclusion:

Make no mistake, Rupee will remain under constant pressure of appreciation in time to come.

Rupee should test 44.70 mark in coming weeks, then will consolidate around 45-46 for short period before it dives to 40 against dollar.

Stay tune my reports for continuous update on currency trends.

You can subscribe to my currency report wherein I update clients on future currency movements with specific levels. Subscription charges are Rs. 10000 per quarter.

Regards,
Dhaval Shah
Investment Academy | 98255 28815
Blog: https://investmentacademy.wordpress.com/
E-mail: investmentacademy, academyofinvestment

Quick update on Dollar, Gold, Indian Rupee and Oil

Standard

Dear Investor

I thought to represent quick update on major assets as volatility and price movements in last few days have accelerated.

Dollar:

I have been writing and updating you about dollar’s fall and that will push bullion prices up.

Yesterday, Dollar breached very important support and I have no doubt that Dollar index will go down to around 75 level in very short period.

Euro went up to 1.33 level. Euro should easily climb past 1.37 level in short period.

Gold:

With dollar’s fall, Gold should definitely zoom past $1350 level in coming weeks. Hence, hold your Gold portfolio and can add more even at this level.

Oil:
I recommended Oil investments to my core clients(subscribers) last week. As dollar goes down, Oil will zoom up very soon.
Reasons;
A. For most of the exploration companies, cost of production hovers around $70-75. Hence, downside is very minimum.
B. Research on Peak Oil theory suggest that we reached to peak oil level early to mid of 2000s and since then oil reserve is on decline.
C. As dollar is falling incessantly, Oil price has to adjust higher just to maintain the fair price level.
D. Normally, in winter demand of oil increases and reaches to peak in December. In west, winter is about to start.

Rupee:

With fall in dollar, rupee will zoom past all previous low levels, and will reach to Rs. 36-38 level in mid term.
Check your mail inbox tomorrow for detailed article on, why rupee will strengthen to 36-38 level?

Regards,
Dhaval
Investment Academy | Baroda | 098255 28815
Blog: Http://investmentacademy.wordpress.com

Gold, Dollar, Interest Rate and Equities

Standard

Dear Investor

I believe, my investors should be more than happy as Gold is scaling new highs, Dollar is Falling and Interest Rates are climbing as predicted earlier in previous newsletters.

Gold:
I believe, You all are still holding on Gold and reaping benefits of newer highs.

I have been writing since last 2 years, recommending Gold, forecasting target of $2200. It directly implies that Gold has traveled only half the journey it is destined for.

Does that mean, Gold can be bought at current levels?

Yes, absolutely. I have no doubt about my target projection of $2200 and Gold can be bought at current levels for multiple fold returns. I am of the opinion, now Gold is about to enter into vertical rally after long consolidation period.

Gold has remained broadly into consolidation ranging between 1080 on lower side and 1240 on higher side. Recent breakout above 1270 does pose significance.

What will drive Gold higher?
All forces, I discussed earlier like lower production, higher demand, currency devaluation, sovereign risk are still acting as catalyst for higher Gold prices. But,I would stress on later 2 forces.

Currency Devaluation: there is fierce battle being fought between the nations to ensure that its currency is cheap among competitors and its benefits can be extended to boost the exports of the nation.

Some recent facts:
US is putting constant pressure on China to increase Yuan valuation. Thus, ensuring dollar devaluation as China is largest trading partner of US.

Japan has started intervening in currency management after six years as Yen zoom passed 15 years high valuation mark against dollar.
European nations have been working to keep Euro low.

Obama has kept target to double the exports from US and to achieve the target, Obama needs to ensure dollar’s waterfall. Otherwise, US companies can not compete with Europe and rest of the World due to higher dollar valuation.

Hence, rest assured the fight to keep currency low has just begun. It will intensify as Europe,US, UK and Japan starts sinking again in last quarter of this year and in 2011.
Click on below news links to read front line battle of currency devaluation
http://www.bloomberg.com/news/2010-09-15/japan-s-solo-run-on-yen-may-reveal-flaw-in-global-drive-on-export-recovery.html
http://www.bloomberg.com/news/2010-09-15/japan-intervenes-for-first-time-since-2004-as-yen-surge-threatens-recovery.html
http://www.bloomberg.com/news/2010-09-16/geithner-says-u-s-to-urge-china-to-speed-up-too-slow-yuan-appreciation.html

Do not believe Euphoric statements of policy makers and economists. Keep an eye on facts. All recent data including housing, car sales, consumer sentiment and unemployment has been showing that US is still in recession and will remain in recession for exteneded period.

Sales of new and existing homes fell to the lowest levels on record in July as a federal tax credit for buyers expired and U.S. unemployment remained near a 26-year high.

US has now 1.2 crore homes for sale but there are no buyers.

What will be the outcome of currency wars?

The only wayout from current world economic mess is currency devaluation for developed nations.

Reasons: US,Europe and UK tried out to stimulate domestic consumption. Recent data reveles that domestic consumers are in denial to consume at 2007 level and instead prefers to save more. As result of that Unemployment has remained at elevated level near 10%. Home prices have reached below 2003 price levels. Consumer sentiment has remained negative.

And, US had to revise down the GDP growth from 2.6% to 1.6% and will still be revised lower in quarters to come.

Hence, the option left with US, Europe and Uk is to look outside and to increase their exports pie.
This strategy can solve all the problems of developed nations. It can jump start entrepreneurial activities, can lower unemployment level and can increase domestic consumption again.

But, Is it so simple? Heck, no.
The biggest hurdle in the way is their currency valuation. Which keep them out from the competition irrespective of skill, infrastructure and favorable policy regime. Higher currency valuation has forced all blue chip companies of developed nations either to outsource work or to establish manufacturing units in cheap currency nations. This process ships out tens of thousands jobs out of developed nations,which they want to bring back.

Hence, US, Uk and Europe will do whatsoever it may take to devalue their currency. Battle has begun and end result would look like as stated below.

By 2012, World will have new dollar, new Euro and brand new World Reserve Currency replacing existing currencies in valuation.

G20 may decide on synchronized simultaneous devaluation of currencies and thus inflating out the debt problems of the world.

In either of the above 2 scenarios, tangible assets will zoom past the horizons and precious metals will reach to the unimaginable valuations. In this case, Gold may climb upto $ 5000. This is no exaggeration.

Sovereign Risk:
People have forgotten that Greece is still on life support and condition is no different for rest of the PIIGS(Portugal, Ireland, Italy, Greece and Spain). Their Debt to GDP ratios have only climbed higher.

UK and US are also in the same boat. Fiscal deficit, trade deficit and Public liabilities of these nations have climbed further in 2010 and worse they are still in preparation for another stimulus and welfare packages as declared by Fed Governor Bernanke.

Markets:

I continue to recommend to exit from front line IT and Banking.

Broader market is also very near to tipping point.

Regards,
Dhaval
Investment Academy | Baroda | 098255 28815
Blog: Http://investmentacademy.wordpress.com

Dollar, Euro, Pound, Gold

Standard

Dear Investor

There has been much happening in world markets. A lot of actions.

Euro and Pound fell close to 12% not much against Dollar but a lot against Gold. Gold made new high of 836 in Euro. Pound fell breathlessly 10% in short little over 1 month.

Confidence of market participants and institutions have been falling in currencies( or better to say in Governments rapidly) and thus investing more in Gold and such precious metals, in Commodities and even in Emerging nations to safeguard the purchasing power(value) of their money.

Broadly the themes, I have been reinforcing, like all currencies are getting devalued- gold price will soar- agri commodities price will rise and China about to surge 50% higher, are truly intact.

Hitherto, we are getting more evidences of themes proving right day in day out.

Let us take one by one.

Dollar:
I wrote last on 17th Feb about “Quick Update: Dollar topped out(link: https://investmentacademy.wordpress.com/2010/02/17/quick-update-dollar-topped-out/ )” and uncannily predicted resistance
at 81 for dollar index. Dollar index has been jostling to breach it since last 15 days, but failed to overturn it.

Look at chart: A fight to cross the barrier.

Link: https://investmentacademy.files.wordpress.com/2010/03/usd.jpg
My regular blog readers know it that I was among the firsts to predict short term rally in Dollar, on 7th Dec and further reinforcing it on 17th Dec,citing European and England financial woes. I had given enough reasoning on European financial difficulties and the resultant effect on Dollar.
[ $ will continue up move!!!!, Link: https://investmentacademy.wordpress.com/2009/12/17/will-continue-up-move-2/].

What is likely next move in Dollar?
Long term decline in Dollar value is far from over. It may resume fresh decline anytime soon.

Concerns: Though Dollar is in fundamental secular bear run. But, if European countries namely England, Greece, Portugal, Ireland, Iceland, Spain and Italy falters further which is very much likely, Dollar may consolidate around this level and may breach 81 and consolidate at higher levels between 85-87. This would be short term change for dollar until its own fundamentals again override those of European nations.
As noted market observer said
” Currency market is no more a beauty contest. It is a ugly contest. And, the ugliest currency is Dollar. ”

Euro:
Euro has fallen more against Gold than against Dollar in last 2 months. Gold made new high of 836 Euro in Euro currency.

golddaily.php?d=4&p=122

Pound:

Pound has been falling breathlessly, look at the chart.
Link: https://investmentacademy.files.wordpress.com/2010/03/xbp.jpg

What next in Currency movements?
To answer, this question we need to ask How long will it take to solve sovereign debt problem?

In st rat of 2008, we heard that crisis started in America and rest of the world should survive. By the end of 2008, entire world had fallen a cliff along with US and some had fallen even more than US(specially dependent economies).

Come 2009, another center of crisis emerged, Europe including England.

Now, we know the total liabilities of Governments in entire Europe and US has reached to astronomical highs to their GDP and real economies have continued to fall, apart from Govt sponsored statistics. Thus reducing Govt’s ability to repay their debt.

Yes, efforts are being made to save the nations as nations earlier tried to save companies.

But, this is different scenario. Here comes political boundaries and vested interests of nation.

2010: A year of reckoning
Greece will be bailed out by Germany. But, then who will bail out the long list of nations Portugal, Ireland, Iceland, Spain, Italy and Finally England & US. Moody and other rating agencies have already declared that England and US may loose AAA rating if deficits are not reined in.

Probably, under pressure rating agencies may not downgrade these superpower nations but who can stop market participants from abandoning their long term bonds, treasuries and currency?

And, I am sure this situation is in making and will certainly unfold very soon driving interest rates up, taking yields down , forcing hundreds of thousands foreclosures and and thus setting reality.

I will write shortly on market outlook, Sovereign debt risk, Alternative energy scenario and on the extraordinary valuable stocks which can not only double but could give five to ten fold returns in short five years.

Regards,
Dhaval
Investment Academy | Baroda | 098255 28815
Blog: Http://investmentacademy.wordpress.com

Quick Update: Dollar topped out

Standard

Dear Investor

It looks Dollar has topped out around 80.

I wrote first uncannily predicting dollar’s short term rally[ Alert!! Imminent decline in Market with rally in Dollar, Link https://investmentacademy.wordpress.com/2009/12/07/alert-imminent-decline-in-market-with-rally-in-dollar/] further on its continuation comparing it with Euro economies [ $ will continue up move!!!!, link: https://investmentacademy.wordpress.com/2009/12/17/will-continue-up-move-2/ ].

In both of above reports, I repeatedly mentioned that This Rally is short term bounce in long term bear market of Dollar and 81 is a very stiff resistance to breach for Dollar index.

I again reiterated my long term outlook of dollar by writing further two reports on it.

[ $ is Obama’s last priority, Link: https://investmentacademy.wordpress.com/2010/01/31/is-obamas-last-priority/]

[ Obama vowed to devalue dollar, link: https://investmentacademy.wordpress.com/2010/02/04/obama-vowed-to-devalue-dollar/ ]

Let me show you long term chart of dollar today, this should clear most of the doubts, if any still left, about long term bear market of dollar.

Zeal021210B.gif

It is very clear from above chart that Dollar index topped out around 120 in 2001 and since then trading in bear market, which is now to accelerate thanks to weak fundamentals of US and FED’s printing of dollar out of thin air for an extended period and it is to continue for time to come.

Recent rise looks very much like dead cat bounce on chart.

And, my blog readers and news letter recipients know the relationship of Dollar and Gold, Dollar and Emerging markets.

With rally fading in dollar, allocations to emerging equities and Gold should definitely rise.

I expect, Gold and China to perform better in time to come as they are best contra dollar assets.

So, if you have not invested in Gold and China, time to act is NOW.

I shall write in detail, in short period.

Regards,
Dhaval
Investment Academy | Baroda | 098255 28815
Blog: Http://investmentacademy.wordpress.com

Obama vowed to devalue dollar

Standard
Dear Investor
 
Last on 31st Jan, I wrote about $ is Obama’s last Priority( https://investmentacademy.wordpress.com/2010/01/31/is-obamas-last-priority/ ) and briefed on Why Obama administration will put all tools and strategies at work to ensure competitive devalued dollar?

 Today’s news confirm the intensifying currency war.

Obama’s recent comments on China:

 President Barack Obama vowed to “get much tougher” with China on trade rules, including currency rates, to ensure that U.S. goods do not face a competitive disadvantage.

 “One of the challenges that we’ve got to address internationally is currency rates and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price.”

 “The approach that we’re taking is to try to get much tougher about enforcement of existing rules, putting constant pressure on China and other countries to open up their markets in reciprocal ways,” Obama told a meeting with Senate Democrats on Wednesday.

Link

http://in.news.yahoo.com/137/20100204/760/twl-obama-vows-to-get-tough-with-china-o.html 


 
The undertone is very clear. Obama administration want to devalue dollar to help exporters and businesses.
 
This can happen two ways either China and others revalue their currency upwards and if they do not do so, US start devaluing dollar.
 
I believe this is just beginning, to regain the share of exports and thus reaching to previous GDP levels and thus reducing fiscal deficits is on every policy maker’s mind.
 
Rest assured this is going to intensify increasing currency volatility in 2010 to unprecedented levels.
 
Cheapening currency to survive will become mantra in 2010.
 

Regards,
Dhaval
Investment Academy | Baroda | 098255 28815
Blog:
Http://investmentacademy.wordpress.com


$ is Obama’s last priority

Standard

Dear Investor

 I wrote on 7th Decemebr uncanilly predicting short term upturn in dollar cycle ( Link: https://investmentacademy.wordpress.com/2009/12/07/alert-imminent-decline-in-market-with-rally-in-dollar/). 

Arguments were simple. Dollar carry trade has reached to very high level of $560 bn in very short less than a year. 

Technically Dollar was in oversold territory for a long period and recovery in US economy would also play a role. 

But, I chose to write again on 17th Dec giving more details on the issue. Comparing all Dollar Index economies namely UK, Europe, Japan, Switzerland, Australia instead of Sweden and Canada with US. 

Conclusion was, in short term it seems Euro Zone, UK, Switzerland and Japan are in greater difficulties than US. 

News flow since than has confirmed it. 

Greece, Poland, Ireland and Hungary are still in trouble and are reaching to a critical stage of crisis. Which has pushed down Euro against Dollar and yen. 

Japan has opened flood gates of liquidity to stem the rise of yen against dollar after yen made historical high aginst dollar. 

Dollar index may reach upto 81, there is a stiff resistance at that level. 

But, this is about a short term dollar cycle. What about long term? 

Make no mistake, every country will devalue its currency. That is the only politically and economically viable option in crisis when debts are high, jobs are lost and Government is facing anguish and agony of voters. 

I wrote in my 2010 forecasts ( Link: https://investmentacademy.wordpress.com/2010/01/07/2010-new-year-forecasts/), no country can afford to have strong currency. And, every country would put pressure on devaluing currency against each other. 

Why US will also resort to devalue the $? 

Becasue US has little benefits of strong currency. 

McKinsey’s latest report shows it. 

Report says: 


 

” This may seem a no-brainer given the enduring assumption that, as a former French finance minister charged in the 1960s, the United States enjoys an “exorbitant privilege” from the dollar’s reserve currency status. But the surprising result of MGI’s analysis is that the United States, in fact, enjoys hardly any net benefit at all. In 2007 and 2008, MGI estimates, the net financial benefit to the United States was between about $40 billion and $70 billion—or 0.3 percent to 0.5 percent of U.S. gross domestic product. And in the year to June 2009, when the dollar appreciated by about 10 percent due to its safe-haven role, the cost-benefit turned even less positive: We estimate a range between a net benefit of $25 billion and a net cost of $5 billion.  

There are two main benefits to the United States as issuer of the main reserve currency. First is interest from seigniorage—the profit made on issuing additional currency to nonresidents who hold U.S. notes and coins—estimated at $10 billion a year. Second is the fact that the United States is able to raise capital more cheaply because of very large purchases of U.S. Treasury securities by foreign governments and government agencies. We estimate that these purchases have reduced the U.S. borrowing rate by 50 to 60 basis points over the past few years and are worth about $90 billion to the United States. The large downside to the United States is that the reserve currency is a magnet for the world’s official reserves and liquid assets, and that these flows mean that the dollar exchange rate is higher than it would be without reserve currency status by 5 percent to 10 percent. This harms the competitiveness of U.S. exporters and companies competing with imports.”


In short, strong $ is not top prority for US.

Instead, I woud guess shortly it can become last priority.

Why $ will be last priority for US?

Obama adressed ” The state of the Union” on 29th and if any one read the entire speech, the priorities on agenda from 1st to 100 were jobs, jobs, jobs……………………..jobs only.

Hereunder, I have presented some excerpts from his speech on diverse topics.

Obama said he is commited to craeate more jobs( could be political statement), he cracked down on outsourcing to cut the tax brakes extended to these companies but last on Export is of vital importance

He said goal is to double the exports in next 5 years and want US industries to compete with emerging countries to fetch more projects and thus more jobs in US.


Obama Said: 

On Jobs

But I realize that for every success story, there are other stories, of men and women who wake up with the anguish of not knowing where their next paycheck will come from; who send out resumes week after week and hear nothing in response. That is why jobs must be our number one focus in 2010, and that is why I am calling for a new jobs bill tonight.

On Outsourcing

 We should put more Americans to work building clean energy facilities, and give rebates to Americans who make their homes more energy efficient, which supports clean energy jobs. And to encourage these and other businesses to stay within our borders, it’s time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America.

 On Exports

Third, we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we’re launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security. We have to seek new markets aggressively, just as our competitors are. If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores. But realizing those benefits also means enforcing those agreements so our trading partners play by the rules


I believe, this is veyr clear message. To create more jobs, more businesses, manfacturing and service industries should start business in USA. But, problem is strong currency. And, that is why I havd no doubt, when benefits are little of being reserve currency of the world and at home when faced with crisis, what matters is politically and economically viable option and for that if they have to sacrifice some valuation, they won’t be bothered.

Regards,
Dhaval
Investment Academy | Baroda | 098255 28815
Blog: Http://investmentacademy.wordpress.com

$ will continue up move!!!!

Standard

Dear Investor

I wrote last on 7th October, expecting Dollar’s up move coupled with down move in Equity, Commodity and Bullion markets.

Dollar Index has soared 5% since then from the low of 74.39 to yesterday’s close of 77.50. In currency market, 5% move is considered a big move.

Yesterday, the FED retained its March deadline of completing the $1.25 trillion in mortgage-backed securities purchases and $175 billion of federal agency debt. Officials are gradually slowing the pace of purchases . Thus, signaling the withdrawal of emergency measures taken in 2008 to support the financial sector. This has short term positive effect on dollar.But, the real test will be: Will the Fed really end mortgage- backed securities purchases by the end of the first quarter? need to be seen.

Equity, Commodity and Bullion have remained sideways to 1-3% correction.

Will $ continue rally??

Yes. In short term Dollar may continue rally against major currencies. Dollar index is pegged against six major currencies of world markets.
1. Euro 2. Sterling 3. Swiss Frank 4. Canadian Dollar 5. Japanese Yuan 6. Australian Dollar

Out of six, four regions are facing major debt concerns.

1. Euro Zone
Below shown table illustrates true picture of the Euro zone health.


Greece’s predicament has escalated concerns about contagion in other European countries whose finances are in poor shape. Just this month, the ratings of Greece have been cut both by Fitch Ratings, and, late Wednesday, by Standard & Poor’s, and major agencies have warned Spain and Portugal of possible cuts.
Greece borrowed $2bn privately issuing bonds to national banks as against a normal fund raising through bond market. Greece did so because investors were demanding higher yield amid further concerns of downgrades.
This clearly shows the seriousness of situation.

Greece has been downgraded to BBB+ by S&P, the lowest in the euro region, and signaled it may be cut again.

Situation is more or less same across the eastern European nations.

Budget Deficit has ballooned to 11% plus and Debt to GDP ratio approaching higher on the scale, faster in England, Ireland, Portugal and Spain.

2. England ( Sterling )

UK’s large debt mountain and 13 % fiscal deficit has invited strong downgrade concerns from rating agencies.
In latest remark, Fitch said, Fitch Says U.K. Rating Most at Risk Among Top-Rated,citing concern over the country’s budget deficit.

3. Swiss Frank

The nations of Hungary, Poland, and Czech Republic used cheap Swiss funds in the mortgage funding, and concerns are mounting of default on sovereign debt.

The base Swiss interest rate of 1.5% pumped money into Eastern European homes. Their local currencies each fell around 40% to 60%, making for a total disaster for Swiss bankers. Translated mortgage losses are in the 70% to 80% range.. In fact Swiss bankers are struggling to achieve their equilibrium after deep damage in three aspects: toxic US bonds, devastating Eastern European mortgages, and threats to private bank accounts

4. Japanese Yen

The Bank of Japan began a solo effort to defend the US-dollar, by pumping 10-trillion yen ($115-billion) into short-term bank deposits on Dec 1st, – flooding the system with yen, and in turn, forcing US$ carry traders to cover over-extended short positions. “If there is a shortage of liquidity we are prepared to provide more funds,” Shirakawa warned, driving Japan’s five-year yield to 0.45-percent, a four-year low.

Japan is aiming 88.25 exchange rate against dollar to stabilize the exports market.

IMF says,

The IMF says Japan’s public debt could reach 227% of the size of its economy in 2010, greater than the annual output of Germany, France, Britain, and Canada combined. Japan’s government has lived beyond its means since the 1990’s thanks to a massive pool of domestic savings. Households own 1,440-trillion yen ($16.3-trillion) in assets, mostly deposited in banks, which then buy government bonds. Foreigners only hold about 8% of outstanding JGB’s.

5. Australian Dollar

Australian Dollar has risen more than 30 % against US Dollar. Hence, it seems, AUD will pare some gains as Investors will take out profit on year end.

Therefore, it seems, in short term Dollar may continue gain some more percentages before decline.

But, the larger picture is, i long run all nations will debase their currency or will get debased due to the rising deficits and rising debt to GDP ratio.

Let’s look at IMF data and its view on further rise in these ratios.

IMF says debt-to-GDP ratio of advanced countries to rise by 20 percentage points in 2009 – – biggest upturn in decades
Jun 11, 2009
Debt_gdp-ratio_US_China_UK_June112009.jpg

Conclusion:

In short term, Dollar will continue uptrend. Because, countries pegged to dollar index seem to be more in trouble than US.