Prepare for a smooth take off!

Wow! What a year it has been. We started at the 21000 (or thereabouts) on the Sensex in January 2008 and now we stare with questions such – Is there a bottom? It can’t pierce 8000 levels and of course the all familiar; how low can it go?

We are absolutely awed by the way things can turn in the stock markets and yes, we must admit, it can be a humbling experiance to us. We also believe strong in the idiom – keep it simple stupid (the KISS principle) cause no matter where you enter in a stock, if you enter the right stock (right business model, strong franchise and transparent management), it will all come back one day.

Meaning, imagine you invest a company at its 52 week high and the stock tanks 50% or even 70%, what would you do? If the answer to the question we put before (Is the business model right…) is affirmative, believe it will all come back one day. You will need to be patient. The fact of the matter should be that if you had the courage to buy it at the levels you bought it, you should be buying it even more at the current price.

At this moment all we can quote is what Peter Lynch said “If you believe that this business will be around after the next 20-25 years you shouldn't bother what is the current stock price is.

Its Déjà vu all over again!!

That’s what Yogi Berra, famous for his often very subtle quotes (on second thoughts of course) had said no so long ago. Now we don’t profess and don’t want to beat our drums with a trademark “we told you so” attitude, but nevertheless it does not stop us from just drawing your attention to what we wrote just few months ago in our earlier post.

We had a definitive feeling that this would happen (the Bond rally) and was the only way stocks could rally. Only, as mentioned in the post, we thought the government could be a little lethargic (as always) to step in and help the market. We were wrong.

The Bonds have rallied and how. It’s been an incredible 30% on the gilt funds in only two months! Wow, we say with a dazed look. But if what we said is indeed coming true, what is in store in the next coming months?

Happy New Year 2009?

At the outset, we can certainly tell you that it’s going to get a little rough as we head into 2009. What does that mean? That the situation is not going to turn around (for equities) like a bond rally for sure. Buyers are not going to return in droves to buy real estate, nor will car buyers flood showrooms. People will continue to stash their cash into bank vaults and “saving for the rainy day” will remain the mantra for the next few months.

We believe it will not be until there is any meaningful turnaround happens in the corporate earnings. But the first indications could come from decline in interest payouts of corporates over the next 2-3 quarters.

Next could be the outperformance of the "safety net" stocks or the ones like high dividend yield, stable cash flows - consumer staples and pharma/healthcare and finally growth stocks. Within the growth bandwagon too, we could see the last coach (realty sector) of the train not coming good until 2 years from now.

To summarise:-

• we are indeed in the middle or the last leg of the bond rally
• typically it has been witnessed that stock rally starts 6-9 months after the bond rally completes
• the cycle normally upturns with the value picks / absolute bargains starting to outperform

While we go into 2009, if you are thinking of entering the stock market, it would be akin to coming to the airport 3 hours before you flight takes off. For one there will be no one around, second you could end up first in the que, you could end up with the choicest of seats (we hate tele-check in) and yes when you know that its a large aircraft (like the A-380) you would be sure that you will almost certainly enjoy the flight and it will be a smooth and a perfect take off!


So stay tuned...