The markets will have to go down below 7000 sensex to attract any fundamentally good buys.. cheers, Venkat, Training8m, Australia...

Hi Ramki,

I have been reading your messages but did not reply since no one was in mood to listen to my views of even sub 10000 levels, however, I had smelled the rat as the system was collapsing. I as Indian Born also would like Indian markets to prosper, but when the money has started going to wrong pockets, the hooligans stashing India`s wealth Abroad, and corrupt politicians making billions without having any credentials, what do you expect the markets to do. The markets were most vulnerable for attacks, and even today the markets are vulnerable even if you see minor dead cat bounce, the FII`s are also trapped in a big way. The people who made money are no longer seen in the markets. FII inflow stopped, Domestic people shying away, with weak sentiments even a strong fundamental company stock plummets, to any abnormal levels. Even when the markets had gone up it had extremely overstretched valuations of any company, the valuations of some stocks are still high, the companies need to shed some more fat before any buying comes in Indian stock Exchanges, hence be on sell side currently and sell at every rise and exit. Cheers, Venkat, Training8m, Queensland, Australia...

5. This cycle kept on going. Who all were exposed? Banks for lending to sub prime borrowers, Investors for investing in MBS securities, Counterparty (I-banks and insurers) in Credit Default Swap for insuring the credit defaults. All this was fine but the circle became so vicious that all these institutions took over leveraged (beyond their capacity) positions in order to make quick bucks. So, sub-prime securities backed by loans to risky borrowers in the US found a huge market first in the US and then in Europe and Asia. This market included some of the top investment banks.

6. With interest rates and inflation rising in the US, EMI for these loans started going up and there was a sense of inability to repay the loan amongst these borrowers. They started defaulting. The Bank\`s had no option but to take possession of the mortgaged property and sell it off in the market to recover the dues. Slowly and steadily the market was flooded with Bank\`s offering to sell their mortgaged assets. The market had limited buyers and excessive sellers which resulted in crashing of real estate prices. The bubble had busted. Bank\`s suffered a loss on their home loan portfolio.

7. The MBS investors were not worried as their investment was backed by Credit default swap (deemed insurance). So they did not marked down the investments in their books. Claims were raised on to the CDS counterparty seller. The Banks or monoliners who had sold credit default protection were not in a position to honor all the claims as they were undercapitalized for the same. This was the reason Bear Sterns one of the largest I-bank collapsed in a jiffy. They had 45 trillion $ of CDS exposure which was 8% of the total CDS exposure in the market. Even if one big institution fails, institutions having hedged exposure with failing institutions , became naked and they in turn became over leveraged. There was a chain reaction to follow.
8. Credit rating agencies started downgrading these I-banks and Monoliners for their inability to pay future obligations. Downgrading of these institutions forced the Banks and other investors to make provision for MTM losses as per prudent accounting principles. Losses started mounting on to the books of these investors.
9. This started having cascading impact in the market with one after the other bank/financial institution was running out of capital and no body was ready to infuse capital in ailing institutions. Fed is trying its best to bail out institutions by infusing capital, nationalizing banks, etc
10. It all started with sub prime home loan but now it is spreading across all spectrums including prime loans, auto loans, credit cards, personal loans, etc. It is a vicious circle and this is the beginning of a Systemic financial crisis and this cyclone will strike with massive destruction.
11. To make up for their losses, the investors, Lending banks and institutions started selling their equity portfolio in the home market as well as across emerging markets. There was distress selling of equities across the world. The benchmark indices have slided down by more than 50% in all markets.
To summarise, sub prime loans is not the only root cause for the present financial debacle. The US government is equally responsible for its lax policy framework and poor governance. Why was CDS not regulated if its inherent nature was to provide insurance? Why were the statutory, exposure and prudential norms applicable to Hard core insurance companies not applicable to institutions undertaking CDS? Why did the auditors hide this fact in the balance sheets?
It is just the beginning. Just imagine when the 600 trillion $ + of CDS exposure will start coming on to the books of various institutions involved in the trap. A 700 bio$ bail out package is just a first aid treatment and not the solution. We would witness the biggest global financial meltdown ever in terms of value. It would take several years to recover from this attack.
Remark on this write up.....

Cheers,

Training8m, Australia...

From earlier part...

4. This was not an end. The lending Banks like CitiGroup, Wachovia, etc pooled the sub-prime assets and I-banks like Merill, Lehman, etc sold it to other investors as mortgaged back securities. In simple terms investors like Mutual funds, Banks, Corporate treasuries invested in units of these mortgaged back securities in order to earn a higher rate of return over treasury return. Thus the repayment made by sub prime borrowers was passed on to the MBS investors in form of repayment of principal and interest. By this strategy banks converted 50% of their home loan receivables into liquid money. Given the fact that institutions giving out the loan did not take the risk, their incentive was in just giving out the loan. Whether the individual taking the home loan had the capacity to repay the loan or not, wasn\`t their problem. With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The sub-prime loan market thus became a fast growing segment. Thus, proper due diligence to give out the home loan was not done and loans were extended to individuals who were more likely to default. These banks also insured the risk of credit default by entering into credit derivatives. Credit default Swap (CDS) was one of the credit derivatives entered into by these banks to seek protection for credit default. The big question here was whether the person selling protection was capitalised enough? This was a form of private insurance which was not regulated by Fed. I-Banks and monoline insurers (who insure only mortgaged bonds) started selling credit default protection beyond their net worth. These underwriters hedged part of their CDS exposure by entering into credit derivatives with other banks/institutions. In December 2007, the Bank for International Settlements reported derivative trades tallying in at $681 trillion - ten times the gross domestic product of all the countries in the world combined. Being banks of the first order Credit rating agencies did not hesitate in giving the best rating to these bonds/units. Higher Credit rating for these bonds coupled with default insurance was an open invitation for Asset Management Companies, banks, etc to invest in them as their investment policies allowed investment in investment graded securities.

Remark on this write up.....Global Copy Rights reserved with Training8m

Training8m, Australia...

We at Training8m feel, The recruitment portals have seen rise of 30-40% fresh resumes in last one month, that is in Monster, you have additional 5 Mn. Resumes which are fresh, now thats amazing and the situation on job front remains terrible. Venkat, Training8m, Queensland, Australia...

Hi, Our Aussie Clients and corporate bodies, have been selling since the market was trading between 20000- 21000 sensex, hence the markets has no reason to bounce back, till the investments come back,maybe if the sensex comes to 3000-3500 levels safe bet, what say.. Cheers, Venkat, Training8m, Australia...

Dear Mr. Udayan, Your views and outlook on markets the economic scenatio, is worth its weight in gold, Great !!!! Amazing to see such unique, powerful views !!! Cheers, I am Venkat from Training8m, Queensland, Australia...

bhel has a book value of 220 with outstanding orders of 85,000 cr. i think u do not deal in valuations otherwise the valuation of BHEL would come to over 600 without outstanding orders. i think it is grt stk to add to ur portfolio now....

Hey venkat_c Sorry to say this....I am in stock market for nearly 10 years and I have seen bear market atleast twice...... That`s the reason I never do short term trade as short term trade are always vulnerable to this volatality...... Even in this situation I firmly believe we can buy at present levels for long term gains say 3 years......Thanks and Rgds...

Hey venkat......As there is panic all around there is no suprise sensex going below 7000 eventhough my personal view is it won`t go to that kind of low levels...But the real problem is if it won`t rebound to 15000 levels is the real concern even after 2 years or so.....Regds...

No doubt market is looking weak in the near term and we will see this pain for quite sometime. However, let us not expect the market to go below 7000 sensex soon....

Dear venka_c, Good to see use of Aussie.. earlier you used to call Australian! :) How is your ever green Crisil doing? Are you working for that BS company crisil? You told everyone to buy crisil as if that will save everyone! :) btw did ya see Aussie index.. that is going for a Bigger TOSS now a days! Do not mix aussie index value with sensex values! :) :) Gud luk & happy investing!...

Oops so difficult to come by jobs in Australia now? Why then ur there.... you are comfortable with the situation?...

venkatc, Is it true that the Australian PM said this in his independent day speech? Can India say afford to speak for Hindus this way? Quoting Australian PM`s speech for you Quote `This culture has been developed over two centuries of struggles, trials and victories by millions of men and women who have sought freedom` `We speak mainly ENGLISH, not Spanish, Lebanese, Arabic, Chinese, Japanese, Russian, or any other language. Therefore, if you wish to become part of our society . Learn the language!` `Most Australians believe in God. This is not some Christian, right wing, political push, but a fact, because Christian men and women, on Christian principles, founded this nation, and this is clearly documented. It is certainly appropriate to display it on the walls of our schools. If God offends you, then I suggest you consider another part of the world as your new home, because God is part of our culture.` `We will accept your beliefs, and will not question why. All we ask is that you accept ours, and live in harmony and peaceful enjoyment with us.` `This is OUR COUNTRY, OUR LAND, and OUR LIFESTYLE, and we will allow you every opportunity to enjoy all this. But once you are done complaining, whining, and griping about Our Flag, Our Pledge, Our Christian beliefs, or Our Way of Life, I highly encourage you take advantage of one other great Australian freedom, `THE RIGHT TO LEAVE`.` `If you aren`t happy here then LEAVE. We didn`t force you to come here. You asked to be here. So accept the country YOU accepted.` Unquote ...