Archive for December, 2011

The panopticon is not a solution to corruption

December 27, 2011 3 comments



The Lokpal Bill (Ombudsman Bill) is being debated in the House as I write this. One is not sure if it will pass in its present form, described as lame by Anna Hazare acolytes, or in its strong form, which in my humble view would ultimately turn Indian democracy into a police state. Be that as it may, it is by now clear that team Anna has neither a clear understanding of corruption nor how the scourge can be diminished if not eradicated. Their zeal to fight corruption may be well intentioned but Anna’s preferred solution of policing corruption through a strong Lokpal is neither practical nor desirable if we are to remain a democracy. Consider.


Corruption does not occur in a vacuum. Barring the purely criminal act, corruption always occurs in an economic context and it is necessary to understand this economic context in order to minimise the scope for corruption. Consider robbery. To minimise theft it makes no sense to leave your belongings unlocked while raising a huge police force to watch over them. It is far better to insist that people take due care of their belongings and have a small police force to catch actual thieves post facto to deter others from breaking the law. So is the case for corruption. Our first order of business should be to minimise the scope for corruption. Catching violators then becomes far easier. Prevention, as they say, is better than cure. Distrust of government, the propensity to avoid taxes and to see them as unjustified extortion, concealment of wealth, preference for gold, etc, are all manifestations of defensive mechanisms against a predatory government deeply embedded in our culture for centuries. They have their roots in unstable governments, exposure to wars and invasions, and rule by alien, largely illegitimate, governments whether native, Muslim or British. Indian exposure to self-government is barely 65-years-old, a mere wink in a millennium, while practices that shape behaviour for survival take generations to change even with the right sort of education. It is naïve to expect that all the deeply ingrained attitudes changed with independence. We have come a long way but there is a long way to go too. Our easy social acceptance of corruption, and the corrupt, comes as part of our historical baggage. To be corrupt is merely being smart and not criminal. If you have any doubt on that score find out which groom of a ‘well settled’ but corrupt family was ever denied a bride for corruption. Our battle for corruption begins in this cultural milieu, which in our hypocrisy we overlook. We are corrupt partly because corruption is not a crime unless you get caught.


Corruption in India is pervasive. It is most obvious in the government and public sector because our Fabian socialism handed over large swathes of the economy to the government owing to lack of trust in private enterprise. Government babus then converted these enterprises into near monopolies and proceeded to use their assets as instruments for extracting rents from the consumers for private profit. This is the most common form of corruption. You see it in the Railways, ration shops, allocation of scarce raw materials, fertilisers, power, utilities, etc. It is best handled by breaking up monopolies, introducing fair competition through privatisation and ensuring that the demand supply gap deliberately created by the government servants to extract rents is eliminated. As the case of roaming after 3G auctions shows, the government servants are actively looking to create opportunities for rent seeking using obscure rules and ‘public good’ as an excuse. For sheer economic efficiency, public welfare and growth, this form of corruption is best tackled through economic reforms. Creating an army of cops to police everybody in these enterprises is silly, wasteful, and expensive and will not solve the basic problem of growth in demand that creates shortages. That is one reason why the so-called solution proposed by Team Anna is so silly and undesirable. Recall there used to be humongous corruption in the allocation of cars! Was the solution a police force over car manufacturers or opening up the sector to new players and competition? The case for reforms and liberalisation is so obvious that any contrary policing solution appears ludicrous. One is amazed that Team Anna was not laughed out of court.


Two other sources of corruption involve sale of resources whose ownership vests in the government, and, illegal gratification that the government servants demand in purchase of goods and services on behalf of the government. The first includes things like the sale of the spectrum and the second procurement of things like food grains, etc. Lack of transparency in processes and procedures, and adoption of intricate normative criteria in sale and purchase of goods and services are the two main reasons for such corruption. Ruthless adoption of open auctions as the only valid method in sale and purchase of services would eliminate such corruption altogether. Where the government needs to pass a certain benefit, say the small scale industry, it must find another method to give out such subsidy rather than clubbing it with non-transparent price preference. You do not need a police force to eliminate such corruption. All you need is a clear head, a stout heart and a clean conscience. Bells and whistles added on to open auctions are nothing but an invitation to corruption. They are best avoided ab initio. Lastly, there is corruption where gratification is demanded to change an administrative decision, be that to conceal crime, jump a promotion queue, seek an administrative favour, etc. This form of corruption is the kind that cannot be addressed through economic reforms and the only way to deal with it is through policing. Open, easily accessible forms of redressal mechanism and ombudsmen are required to check such corruption. It would have been great if Team Anna had decided to focus entirely on such corruption and to devise the best way to fight it. Instead, it chose to cover all sorts of things that are best addressed through economic reforms rather than policing through an omniscient police force whose cost would far exceed any potential benefit to the people.


What was surprising about Team Anna’s campaign was the skimpy homework and thought that had gone into its proposals. What was really disturbing though was the overwhelming response that the campaign gathered from India’s upwardly mobile middle class. While their rage at the series of corruption scandals was understandable, their conflation of corruption with liberalisation was naïve and dangerous. The little reforms that India has had so far have vastly reduced the scope for corruption and not added to it. If the middle class betrays such poor understanding of corruption, reforms and liberalisation, what hope for change is there for India? While corruption needs to be addressed, the more vital task is to educate and inform our middle class on reforms and their role in reducing the scope for corruption. Else we will end up putting the cart before the horse.


What a pity that the enormous political capital that Team Anna enjoyed could not be used in reducing the scope for corruption through economic reforms for want of the right ideas. When will we lay the ghost of a draconian solution to rest in our polity where an authoritarian police solution to an economic problem is the default answer?


The writer is a trader. She can be reached at or @SonaliRanade on Twitter

Categories: Uncategorized

Market Notes: 25th Dec.,2011 Markets rise to challenge overhead resistance:

December 25, 2011 2 comments


Markets rise to challenge overhead resistance:



$-Index:  As expected in the last blog-post, the $-Index is rising to challenge its major overhead resistance at 81.  This level use to be the $ floor in the early years of the 90s and is a crucial level for the $ to test.  If broken, the $ could race past to 88 levels as has happened twice in the recent past.  The probability of such a move is low but caution is warranted since a “false” break above 81 is a near certainty.  However, any rally above 81 is not likely to last long and could fade sharply as the $ downtrend resumes back to 72 levels.  Expect volatile times ahead for the market.  It is advisable to short the $ only after it nicks and breaks below 81 again.  Until then a neutral position is advisable. A sustained break above 81 would invalidate this analysis.



Euro-USD:  The Euro behaved as expected and moved lower to test the 1.26 level against the $.  It currently stands at about 1.3 levels.  A much stronger base at 1.20 level follows the floor at 1.26.  It is unlikely to be challenged even as the negative news on the Euro continues to flood the market.  The Euro could turn up any time now as the market is oversold on the currency.  Look to long close to 1.26 levels depending on how the $-Index behaves around the 81 level.  Would not advise short positions on the Euro any more.



$-INR:   INR appears to be building a base around 52.25 before making up its mind about the future direction.  The Rupee is bearish until the beginning of March and may make its next significant move only after the Union budget.  Until then the INR may move in the 52.5 to 55.5 range.  It would be interesting to see INR’s behavior after the $-Index moves significantly above or below the 81 level.  Failure to strengthen against the buck even after it weakens below 81 would signal further INR weakness.



Gold:  Gold turned down from it significant overhead resistance of $1618 which marked the bottom of the metal’s fall from its peak at 1920.  That signals further weakness in the metal, which could see it testing the $1550 level soon.  Gold is essentially marking time before another lurch down to 1550 or even 1450.



S&P 500:  An intense short covering rally between now and the end of February cannot be ruled out.  That rally, even if led by short covering, could take the S&P to test its recent high at 1380.  I realize the case for a rally in the overall bearish scenario sounds crazy but then markets would not be markets if they weren’t contrary at times.  My case for a rally in the markets rests on the possibility that the recovery from the bottom of 670 on the S&P 500 that started in March 2009 is not complete in terms of time and distance.  The internal structure of the wave up suggests that the recent move down from 1370 to 1075 was just a sharp wave 4 correction before a short covering led short 5 up.  The markets face a long period of consolidation in the years 2012 and beyond as the economies repair themselves.  Considering the bearish sentiment and oversold markets, consolidation can’t happen without the shorts being shaken out of the market.  All considered, I would stick my neck out and argue for a modest rally to 1380 levels in the first quarter next year.  Note this is not the same thing as being long term bullish on markets.  The 1260 level on the S&P 500 is not only the 200 DMA region but also a very important pivot that could swing sentiment.



Shanghai Composite:  Shanghai Composite Index continues to hammer away at the 2180 point.  Chinese markets are prone to slight excesses at crucial turning points and the behavior at 2180 is true to form.  If the SC Index rallies from 2180, it will be the strongest signal for a first quarter rally in world equity markets.  On the other hand, a breach of 2180 would invalidate my case for a rally.  The Shanghai Composite Index is worth watching like a hawk, more so because of all the world equity indices, it has been the “best behaved” in the correction following the 2007 crash.  In term of timing, a rally, even if only short covering, is past due date and could happen any day now. Wouldn’t advise bearish positions in the Chinese markets at current levels.



Sensex:  The Sensex is likely to mirror the moves in S&P 500 and the Shanghai Composite.  The market is due for a short covering led rally and that could happen at any time now.  Indian equity markets have had a much shallower correction than the rest of the world indices including the Shanghai Composite.  That could spell turbulence ahead.  The sequence of lower lows on the Sensex makes one pause for thought.  May be the next sharp rally up will reveal the market structure and direction better.  Cover the shorts first opportunity.



WTI Crude:  WTI Crude continues to head towards the $90 level in a short term from recent high of 102.  Failure to breach the 90 levels significantly will see it heading higher.  Crude simply fails to confirm the demand destruction that would result from a deflation in EU and or the US.  Crude now also reflects the fact that there are no easy replacements for the fossil fuel for most countries, while the in US need for imports, and hence the incentive to hold down prices, is rapidly diminishing.  US geostrategic interests from now would be sufficiently served by controlling access to the crude and its price rather than beating it down.  The oil game is undergoing some very profound changes wherein the US may now be on the same side as OPEC and Russia in managing the worlds oil supplies.  Interesting days are ahead.


Categories: Uncategorized

Reforms: India’s politicians must lead, not follow

December 21, 2011 Leave a comment



The wholly avoidable fiasco over allowing Foreign Direct Investment (FDI) in big box retailing exposed the lack of coherent leadership at the top. FDI in retail, as the reform was egregiously mislabelled, was not about foreign investment in retailing but allowing the corporate sector, Indian and foreign, into a whole range of activities spanning procurement of agricultural produce, storage and warehousing, processing, wholesale distribution and finally retailing. India wastes 30 to 50 percent of what it produces because of inefficiencies in post-harvest handling of food, vegetables and the like. It was a low hanging fruit of reform ripe for harvest. In the context of persistent food inflation, the need for such reform was obvious to many. Yet the government and the Congress managed to bungle such a vital step. It was supposed to be reform by stealth forgetting that the section most opposed to such reform would be well informed wholesale merchants and traders who enjoy a monopsony in agricultural procurement. If they managed to ground the reform, the government has only itself to blame for its poor strategy. The need for reform is unquestioned. How can the government get its reform strategy back on the rails?

That Congress is currently blessed with two of the most inarticulate leaders in its history has never been more painfully obvious. Though out of the crisis currently besetting the government, both the prime minister and the Congress president have elected to maintain an inexplicable silence. Their conspicuous reticence has leant weight to the impression that they are reluctant to invest in reforms with requisite political capital. Some feeble attempt has been made to explain away their strange behaviour as a matter of leadership style, which is laughable. Leadership is more about a style that the situation demands rather than what a leader prefers. Reforms will not happen unless the government chalks out a cogent strategy and communicates the same in a manner that builds and sustains a constituency for reforms. FDI in retail would have been of tremendous benefit to the farmers and consumers as it cut down on waste and oligopolistic rents to give higher prices to the farmers on the one hand and lower end prices to the consumers on the other. But the top leadership made no such effort to sensitise the constituency of farmers and consumers for support of the measure. A small but vocal and moneyed lobby was easily able to derail the measure.
Implementing reforms is not a matter of leadership style alone. It is more of a sustained effort at creating a proper narrative for reforms and firmly imbedding  the narrative in the national discourse such that the need for each step of the process is self-evident to the people at large. Neither the Congress nor the government have devised a larger framework that lays out the blueprint for various reforms going forward though most of them are obvious and known. The government has not laid out the sequence and timing of the same. The case for reforms has to be a live narrative, something whose pros and cons are discussed every day in every forum and media available. Furthermore, the discourse has to go far beyond the initial reforms and sketch out the steps the existing players need to take to survive or other players need to implement to take advantage of the reform measures. In the context of the FDI in retail, the government’s intention was to increase competitiveness in the wholesale trade rather than force out the existing players or shut down the kirana (retail) trade. But because the government made no effort to sketch out the contours of the reform measures and talk to the farmers, consumers and merchants who would be in the affected loop, the government failed to diffuse the Opposition in a constructive manner while creating no positive constituency for them either. We are no longer a command and control economy. Reforms cannot be implemented by diktat. In a democracy, the burden of leadership is more onerous and the need to sell even desperately needed policies that much greater. An inarticulate leadership apparently unwilling or unable to invest the reforms with political capital is simply not the way to carry reforms forward.

Congress’ inability to reach out to the people occupying the middle ground is intriguing even though most politics is won and lost in the middle. Instead, Congress prefers to appease the extremes in the opposing camp rather than engage with the middle for support. This strategy is evident not only in dealing with economic reforms but also in many other domains. It is almost as if the party believes that if it can win over the extreme opinion in the opposite camp, all opposition to its policies will cease. This strategy is extremely naïve in a democracy. There may have been an era in our polity when you could carry everybody with you. That era is over. Every policy now will be contested and there are sharp limits beyond which a consensus cannot go. Rather than seek to appease its opponents, Congress must focus on the constituency most likely to benefit from reforms to bolster support for them. Congress must distinguish between a consensus behind the scenes with the opposition leaders and forging a consensus among the people at large. The latter is no longer possible but building a constituency for reforms is an absolute imperative and the necessary political capital for it must be created and invested. Or India may well miss the bus again.

India runs an annual current account deficit in goods and services of the order of $ 165 billion. That is roughly 10 percent of its GDP. This deficit is made up by FII inflows of about $ 30 billion, invisibles including labour remittances of about $ 90 billion and FDI of about $ 20 billion. That still leaves a gap of $ 25 billion. In 2011, FII flows have been negative and may remain so for the first half of 2012. FDI flows may be likewise negligible absent reforms. India thus faces $ 55 billion shortfall in inflows on the current account. On the other hand, India has some $ 100 billion of loan servicing obligations in 2012, all to be met out of reserves of some $ 300 billion. That would cut our reserves by more than a half. India’s last real round of reforms was precipitated by a similar balance of payments crisis that was left to fester as politicians lacked the courage and will to either reform or admit the failure and seek IMF assistance. Most of the blame for neglect lay with Rajiv Gandhi then. Are we set to repeat the fiasco?

Year 2012 is not the same as 1990. We have seen reforms take hold, and once they have been implemented, most people have welcomed them. It is the political class rather than the people who are diffident about reforms. The imperative need for them is well recognised. What does it take to convince the top two in the Congress to boldly step forth and do what is right by the country for once. If democracy is about people having faith in politicians then it is even more about politicians having faith in the good sense of their people. Time for the Congress top leadership to either give India the leadership it needs or to gracefully quit to make way for a more courageous set.


Categories: Uncategorized

MARKET NOTES: 17th December 2011: Gold confirms a long-term bear market

December 17, 2011 5 comments




Gold:  As expected, Gold turned down from well below the level of $1800 to plunge below its previous low of $1625.  Currently at $1602, Gold is in process of confirming 1610 as the new overhead resistance before moving down once more.  Upon a break of 1550, the next logical target for Gold would be $1400.  Gold price action has confirmed that it is indeed in a long-term bear market whose ultimate target could be as low as $1050.  Long-term investors still stuck in the metal should exist at rallies.

$-Index:  The $-Index sprung a minor surprise by turning up, rather than down, from 78.  In its current minor uptrend it may test its recent highs at 81 and even exceed it for a while before turning down again.  Consider $-Index in corrective phase with a downward bias that could test 72 before the end of April 2012.  Hence the current rally is really counter-trend but not unusual at the beginning of a downtrend as players create room for shorts.

Euro/USD:  Euro is on the way down against the $ having made a recent top at 1.48 in May 2011.  Its next logical target is 1.26 followed by it multi-year defining low at 1.20 which it may not attempt to test in the current plunge.  Hazardous to call a bottom in such volatile markets, but the Euro is close to the end of its fall and is more likely to turn up than down by the 2nd week of January in the new year.  Considering that Euro hasn’t breached even 1.26 despite the headlines, all talk of Euro’s demise looks premature.  Would be advisable to close out Euro shorts in the 1.25 region.

$-INR:  INR is in uncharted territory.  Inflation differentials over a 3 year period with the $ indicate at target of 58.  As the $-Index heads up to test its recent top of 81, [and breach for a while] INR too may reach its target of 58 before consolidating for a while.  Indian Gold holders have been cushioned by the INR depreciation against the $ in domestic markets against the collapse in Gold prices abroad.  This cushion will likely end at INR 58 at least for a while as the INR consolidates.  This will end the vicious cycle of Gold imports bringing in deflation with them giving a much-needed flip to the Indian economy from the current recession.  Where will smart money head after Gold?  Real estate?

S&P 500:  The US equity markets appears to have resumed its journey down once more.  The ultimate target of this move is logically in the region of 1000 to be reached by June next year.  Minor pullbacks notwithstanding, there is nothing bullish about the US equity markets in the near term horizon.  The next logical target for the index remains 1100.

Sensex:   The Sensex is currently poised to test 15,500 having made a low of 15,425 already.  The level is unlikely to hold as the Indian market is now marking time with the S&P 500 and is likely to continue to be bearish till mid-2012.  A good base for the Sensex exists in the region of 12,500 that could be its target once 15,500 is decisively breached.  Testing time ahead for Indian markets as well as the fundamental news turns increasingly adverse.

Crude:  As expected, cruse has turned down from 102 and is currently headed towards 90.  Upon a breach of that level, WTI crude is likely to retest its bottom at 70 before the end of March 2012.

Shanghai Composite: As detailed in the last blog post, the Chinese market decisively broke through the strong floor at 2300 to end the week at 2180.  It may rally up to 2300 again, this time to confirm the old floor as the new overhead resistance.  Upon such confirmation, the new logical target for the index becomes 1700 area it last visited in November 2008.  That level could be achieved as early as January 2012.


Categories: Uncategorized

FDI in Retail: What it means for reforms in Agriculture

December 5, 2011 4 comments


“I sell gobhi [cauliflower] at Rs 5 and potato at Rs 1 per kg from my farm. If you guys want to pay what you pay, fight the FDI in retail,” tweeted Lieutenant-General (retd) H S Panag (@rwac48).

The BJP’s core support comes from the merchant class in small towns who dominate commerce in the town’s economic life. They own the wholesale trade, dealerships, large shops, and the odd factory or two that may be around to process agricultural produce. Historically, the merchant class survived Muslim and British rule intact. Both had no interest in destabilising the local trade as long as taxes or tribute were paid on time. Indeed the rulers were benign to them and did much to establish markets (mandis) and trading infrastructure in order to facilitate trade and commerce. While there were some selective favours to Muslim traders under the Mughals, by and large, the merchant class was not persecuted on religious grounds except under Aurangzeb for jazya (Islamic tax). Under the British rule, some created enough capital to transition into manufactures such as jute and cotton textiles, oil mills, etc. Thus while the merchant class survived alien rule rather well, it was also highly nationalistic and was keen to see the British vacate business lines in their favour. The merchant class’ right-wing nationalistic credentials are well grounded in our historical experience.

Independence saw the class prosper as much of the cheap British imports that held profits down were eliminated. Further, exports at depressed prices were also gradually phased out. For the merchant class therefore, independence came as a big boon. Sadly, independence was quickly followed by Nehru’s Fabian socialism that imposed a plethora of controls on trade and commerce, ranging from compulsory monopoly procurement to direct price setting and even food rationing. Much of this imposed onerous costs on trade and was seen as an unjustified imposition. The merchant class was always numerically small, though moneyed and powerful. So it took to the BJP as its protector against the ruling Congress party that was imposing the controls in the name of socialism. Hence, the BJP’s nexus with the merchant class has a valid historical reason grounded in economics. The BJP espoused their cause for liberalisation from controls. Hence, the party still carries the halo of a right-wing liberalising party. But is it right-wing and liberalising anymore?

Liberalisation by the Congress in the 1990s changed all the political equations, producing profound changes in the polity. Some of them have still not been recognised fully. With liberalisation, Congress became the party of economic reforms, although it remains home to some of the most ardent Marxists. Congress Marxists, exemplified by Sonia Gandhi and her National Advisory Council (NAC), still believe growth comes free on trees and all economics is about sharing out the goodies fairly and equitably. They have had the upper hand in UPA2. On the other hand, the need to trade, import oil, and the high level of indebtedness, both external and internal, mean that you have to create policies that generate sufficient growth to pay the bills and leave some over for distributive justice. India has some $ 100 billion in debt coming due in 2012. It is these constraints that drive economic reforms, not conviction. Now that agriculture growth has hit a wall, and inflation has surged, the constraints have an upper hand, thus bringing reformists to the fore. Foreign direct investment (FDI) in retail is a handy way of addressing agricultural reforms as well as stimulating FDI cash inflows. Hence the bugle for reforms is being trumpeted once again.

FDI in trade represents low-hanging fruit in the agricultural reform package. It is aimed at rationalising and streamlining the whole procurement, distribution and marketing chain for commodities, ranging from grains to vegetables. It includes warehousing, cold storage, agro-processing, standardisation of products and the like. Standards and seeding are two things whose impact on costs and price are profound but under-appreciated. The payoffs from investment in this area are so rich for the economy that a mere reduction in wastage estimated at 30 percent of total produce, is sufficient to pay for projected investment. If these investments have not been made it is because of the policy restrictions that are now being done away with. Why then is the BJP, as a party of reforms, opposed to the FDI and proposed reforms?

The merchant class had a harrowing time preserving their businesses under socialism. Ingenuity and pervasive corruption in the government helped mitigate some of the constraints. Over the years, the merchants created a near monopsony in agricultural procurement by restricting membership of the Agriculture Produce Marketing Committees (APMCs). FCI and others like the CCI that were supposed to compete with merchants were co-opted by subversion. Support price mechanisms provide some protection to farmers against excessive price manipulation but state intervention has other unintended consequences and is restricted to a few food staples and cash crops. Farmers prefer to grow what the state supports, leading to shortages in things like pulses, vegetables and poultry. Competition by the corporates in the agricultural markets and the backward linkages they create in farming (standard seeds, assured offtake, predetermined floor price, etc) will reduce the risk to the farmers of diversifying into multiple crops like vegetables and pulses. Since a major reason for the high food inflation is structural shortages in pulses, vegetables and the like, reforms have become imperative.

FDI in retail is a misnomer. Actually it is letting in the corporate sector into agriculture. Why should they be kept out? Let the big battle for business begin and may the best survive. How are they like the East India Company? And why should small merchants be protected against domestic competition? They are small but they are hardly poor. Then why is the FDI necessary? Two factors dictate that. The biggies too need competition and that the FDI can provide. The other is technical knowhow, best practices and branding. Some FDI investors may prefer majority control but most will opt for local tie-ups. So the FDI will bring technology and cash, including cash that otherwise may not return to India soon. There is this hugely false propaganda that kirana (retail) stores will suffer. Yes, there will be competitive pressure but they will compete, collaborate, complement. The effect will be initially more on the wholesale rather than retail shops. Mom & Pop stores who know their customers always survive. Merchant fears of competitive pressure are overblown.

More than the merchants, the BJP faces an existential crisis that cannot be wished away. India needs a strong Centre-Right party that champions reforms independently of the constraints that drive the Congress party to reforms. It needs to retain its merchant class base but is unable to protect its short-term interests. Who comes first? Its base or India? The fact is the BJP has not thought through and worked out its politics with a thorough understanding of what economic reforms entail. From being the party of reforms under socialism, it has become a party of the status quo, hunting with the communists and defending vested interests. Nor is the natural religious tilt of the BJP sufficient to cover its tattered reformist credentials. It needs to think hard and afresh whether it is the party that will lead India to reforms and liberalisation or march it backwards. If the latter, then it should not be surprised to see itself marching alone as the aspirational class desert it in droves.

If India does not have a party of economic reforms, then one must be invented. Reforms are too critical to be left to times when yawning fiscal deficits must be bridged after they have been allowed to balloon, funding ill thought out doles.



Categories: Uncategorized

MARKET NOTES: Revising the wave counts: 2nd Dec 2011

December 2, 2011 Leave a comment


MARKET NOTES:  Revising the wave counts: 2nd Dec 2011



Have done a complete review of my wave counts because the S&P 500 violated 1220 level after having rallied past it on 18th November.  The new counts are long term more bearish than I had thought, both in terms of downside targets and time.  While I am not going to discuss my wave counts, below are some of what the things that standout from the charts.



S&P 500:


The US markets appear to be sweeping out a fairly giant sized corrective wave from the top 1575 in October 2007.  The wave should terminate some time mid-June next year.  We are currently in an upward B wave in the larger C down that could terminate anytime now or before mid-December.  That is likely to be followed by some violent volatility as the markets try to find a bottom.  A plunge to test 1000 on the S&P 500 cannot be ruled out.  Now might be a good time to take some profits for those who bought the recent bottom 1115.





The Sensex on the charts has had a good correlation with the S&P 500 since July 2007 though it has significantly diverged from the highs and lows while keeping the overall rhythm.  It is hard to see that correlation break down in the immediate future.  Based on the pattern being traced on the S&P 500, the 15,500 is no longer inviolate.  A failure of the Sensex to convincingly take out 18,000 will see it return to test 15,500.  Below 15,500 significant supports exists at 14,000 followed by 13,000.  The probability of seeing the Sensex test 14,000 by mid May next year is pretty high.





As expected in the last post, the $ has turned sharply down from 80 level.  First major support for the Index is 76 followed by the bottom at 72.  The prognosis for the index is pretty bearish.  A breach of 76 will signal that the $ is going to be testing its all time low again by the middle of next year.  That will time well with the expected low in the US equity markets.





With the $ under pressure in the currency markets, a further depreciation in the INR would be unlikely under normal circumstances.  But these aren’t normal times and INR has not appreciated against the $ when the latter has been bearish.  Given the acute sensitivity of the INR to Indian equity markets, an appreciating Rupee can be ruled out till May next year.  One can therefore expect the INR to retest its recent lows at 52 after some consolidation above 50.50 to the $.  Beyond 52, we are in uncharted territory.





The bearish prognosis on Gold remains unchanged until and unless it convincingly rallies past $1800.  In fact the rally in Gold should turn south from $1775 itself.  Gold’s correlation with equity is increasing while its negative correlation with the $ is getting muted.





Categories: Uncategorized