Author: shyam

Austerity #fail

English: The GDP growth rates of Greece betwee...

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Market commentators over the last few days have been offering up the Greek debt deal as the reason for flat markets. Its as if once the deal goes through, things will get back to normal again and the stock markets will be off to the races. However, the resolution to Europe’s problem is not easy and is not going to be quick. It is going to get dragged out over the next couple of years and might end badly.

To put the Greek deal in context, the haircuts that are on the table will reduce their debt-GDP ratio to about 120%. This is where Italy’s ratio stands at right now. Besides, Greece’s economy shank 4.5% in 2010 and its Q2 2011 GDP shrank 7.5% from a year earlier. So chances are that this is not going to be the last round of haircuts that Greece will need to get back on its feet. Besides, the whole charade of making only the private sector take losses is going to result in higher yields going forward.

But what’s in store after the debt deal? Its German administered austerity. Austerity is guaranteed to lead to so much social unrest in all the PIIGS that something will break. As the Indian experience shows, its very easy to pander but very difficult to cut back. To give you a flavor of what’s in store: the Italians are already striking, Greece’s tax collection drive is likely to boomerang, Sarkozy is likely to lose the next presidential elections (who knew they took their AAA so seriously) and with a 46% youth unemployment rate in Spain, the official suggestion is that they “leave home”.

Austerity might have worked in the former East Germany, from where Merkel hails. But what the EU needs now is a new Marshall Plan, not a “Fiscal Compact”. Until there are visible signs that such an initiative is in the offing, enter the markets only if you have a strong stomach.

A Coal Story

The Economist has an interesting article about power generation in India. Given the near impossibility of constructing large dams and nuclear power plants, coal is taking up an ever larger pie of our energy sources. However,

Coal India is not digging fast enough. Output has been flat for the past two years.

And the private sector reacts by setting up backups to backups in typical Indian fashion:

Private generating firms are not waiting to find out the answer to this identity crisis. Instead they have assumed that the state will not deliver enough and are prepared to import vast amounts of coal to fire their plants, either by acquiring it from wholesalers or by buying foreign coal mines. Some $7 billion has been spent in the past six years on pits in Australia, Indonesia and Africa. Gautam Adani, a Gujarat-based tycoon, is building a private network of mines abroad that feeds ports and power stations in India.

The high debt loads that this entails might drag down the banks:

The central bank has been forced to reassure financial markets that a wave of defaults in the sector will not hurt the banks, which have about 7% of their loans to the power industry, mainly to generation firms.

It’s a fun read. Go read the whole article.

Two things: Methodology and Discipline

"Octopod" by Mikael Hvidtfeldt Chris...

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It there’s one thing that I observe among successful traders that I talk to, its that they are highly methodical and disciplined in what they do, almost algorithmic if I may say so. They have a defined trading methodology: a simple, uncomplicated way of looking at markets. In my experience, it doesn’t really matter if you use the Turtle trading system, Elliot Waves, RSI, whatever. But you need to zero in on what constitutes for you a ‘buy’ or a ‘sell’.

The second thing is discipline: you need to have the patience and persistence to follow the model you have defined for yourself. If your goal is to develop a model for investing over a one year time horizon, you need to give it a year before you discard it. It may be painful if real money is involved but StockViz makes it easy for you to build a portfolio and track its performance over a period of time.

StockViz also provides you with a world-class technical Screener and an Alerts system to setup your methodology for the stocks you follow. Use these tools to develop your two things.

Good luck!

Hussman’s Questions

… we should keep in mind that GDP is just the sum of consumption, real investment, government spending, and net exports, and then ask what will drive that reversal. Have the credit strains in Europe been durably addressed? Can European economies presently be expected to expand? Is there now less need for fiscal restraint in the U.S.? Has the overhang of troubled mortgages in the financial system been worked out? Have savings rates rebounded or pressure on household budgets eased? Is consumer demand is sustainably rebounding? Is there pent-up demand for capital goods despite having drawn spending forward due to expiring tax credits last year? Are exports to the rest of the world expected to accelerate? Are profit margins likely to expand from already record levels in order to accommodate growth in corporate profits? Do companies expect demand to be strong enough to commit to large-scale or multi-year investment projects? …

Read more here.