Ah the markets come a full circle. What we saw in the time period of October and November 2008 and subsequently after the Satyam scandal blew out in January to the early part of March 2009 were essentially “PANIC SELLING” and investors wanting to get out of stocks, especially mid caps at any price. Over the last few days we are now seeing a phenomenon of “PANIC BUYING”. FII’s, Mutual Funds, Retails investors everyone wants to buy stocks at any price and in the same way where valuations had lost their meaning in the severe downturn the same is happening now.

As we sit to evaluate what should be the course of action going forward it is important to see a number of data points that have come out over the last few days

-Global trade continues to be in doldrums and both exports and imports of most countries are still in a severe downturn

-The Russian economy drew by a whopping 9.5% in the first quarter and 23% quarter on quarter vis a vis the last quarter of 2008

-The Japanese economy degrew by over 15% in the first quarter

-There are no signs of economic revival anywhere in the Western world. It is just that the pace of fall has slowed down

-The valuations of most markets have clearly run ahead of fundamentals with most emerging markets now trading in the range of 15-17 times 2010 earnings, up from 7-10 times in the beginning of March 2009

-The fiscal deficit projections of most governments worldwide are continuously moving up with slowing tax collections and higher spending

In the midst of all of this the significant reduction in the stress levels of the financial system has resulted in 3 month LIBOR falling to 0.75% which is a very big positive for companies either having existing FOREX loans or wanting to borrow. This has also been accompanied by a drastic fall in the spreads of corporate bonds, thus indicating that lenders are willing to lend now.

The US dollar continues to lose value and is giving rise to the theories of the “Dollar Carry Trade” where due to the extremely low levels of short term rates in the US and the perception that the dollar will continue to depreciate, a lot of hedge funds are borrowing cheap money and deploying the same in risky assets all over the world. This is similar to the Yen carry trade of the 1990’s and the early part of the current decade.

Central bankers are continuing to feed liquidity into the system and the excess liquidity is now going into all kind of assets which includes emerging markets bonds and equities and commodities.

Coming back to the main topic of the article, in my view the left out feeling is extremely strong in the markets today since most of the Mutual Funds, Hedge Funds, Retail and HNI investors etc were sitting on huge amounts of cash prior to the elections in India. Like I mentioned in the last article, although the long term prospects look much better near term challenges in terms of actually executing a large number of infrastructure projects, reviving consumer confidence, improving the employment situation which has been hit severely specially in the real estate and exports segments, carrying out reforms to gather resources to fund projects to revive the economy still remain.

The stock markets are looking extremely overbought and the markets at its peak that we saw on Tuesday had nearly doubled from the October 2008 bottom. The mid cap indices have also doubled from the bottoms of March 2009 in a period of just about 2 months. Under the circumstances I believe that investors would be better off avoiding the kind of PANIC BUYING we are seeing now and instead be patient. Markets, as they start their correction can fall by 10-20% from the top. In any case since this is the start of a new bull move where the markets are likely to do well over a period of the next several months and years and the fact that every big upside is followed by corrections it might be sensible to sit out for some time.

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