Bahar Oct 08 Diwali Special - MMAbuDhabi Home

Global Financial Crisis
Investment:
Stock Market Round Up
- Anil Pakale
October month saw biggest of the US financial giants go down under. Names includes Freddie
Mac, Fannie Mae, Lehman Brothers, AIG, Washington Mutual and Wachovia. Well, it all started
with defaults on home mortgage loans due to fact that US legislation allowed anybody and
everybody borrow to own decent houses across united states. US is the only place you will see a
CEO and a plumber staying in villa of same specifications side by side.
It had to happen one day. The crisis spilled over to other sectors gradually. Obviously the first to
take hit was banking. Wamu and Wachovia collapsed. Citi, Royal Bank of Scotland (ABN Amro
merged into it) too look vulnerable.
As a result, most banks tightened lending and credit became difficult to come by causing panic is
finances of homes, autos. Hence Realty and Autos got affected almost instantaneously. The crisis
spread across the world in these sectors. Retail sales were affected as a result of fear psychosis.
When retail gets the hit, we move to recessionary trend. During my 15 th visit last week to US, as
usual I did a bit of shopping at Walmart, Best Buys and Circuit City. I found them busy to the
extent of 10% of what I had seen them in the past. That was a proof of retail in trouble.
Good news is that oil and gold started hitting bottoms every day. We are at 68 USD for oil and 775
USD for gold. Metals are down too. Copper, Steel, Aluminium, Steel down 40% in one month. This
is all due to the expectation of recessionary trends on consumption side. Law of economics had to
rein in, which is a good indications ahead of a rebound.
Most companies are about to declare or have declared Q2 results. Results are not too bad but not
too good either. However, since raw material costs will come down in coming 2 quaraters, you shall
see a gadual improvement in value add and hence would improve gross margins across the board.
From another angle, we see that almost all are panicking under fear. That is the time when
everybody is selling. Selling may not be co-related to fundamentals. The proof is the most
companies are now trading at theit cash holdings. This is ridiculous. What it eans, is, you get the
enterprise value (assets and potential business earnings) for free. One should just get into these
stocks without any consideration.
Many are selling since they have borrowed to buy stocks and are having to pay for margin calls.
This is not genuine selling. Most FIIs are selling. They sold 12 billion USD worth of stocks which is
the prime reason for Indian market meltdown. Again this was necessitated due to pressure on
these FIIs to have cash in US since they are getting almost bankrupt from their US operations.
My advise to investors would be to take positions in very sound companies that has sustainable
business model, visible earnings and good managements and good track record from investor
perspective.