Wednesday, January 6, 2010

Overview of the market...

Well, i certainly don’t see a market leader and more than that the issue that concerns me the most is that govt’s fiscal deficit is raising too high for comfort. The fiscal deficit is about 6 to 7 % of GDP and the govt’s debt to GDP ratio is about 77%. Just flip across the history of different countries that had high debt to GDP ratio and you will find that those countries have eventually defaulted in their debt obligations. It happened to Argentina, France, Germany and many other countries that had high debt-GDP ratio.

• To make matters worse, govt. has raised the tax slab which would reduce its revenue from income tax

• The fiscal stimulus provided by the govt. is also of a very high order of about Rs. 1860 billion crore.

The result is that Govt. will run out of options, it will stop funding all the development projects which will have an adverse impact on the economy, it might start printing money to pay off the debt which result in a very high inflationary situation, all this combined with other interlinked factors could have a cascading effect on the economy.

>> On the other hand, there are a few positives as well, the govt is thinking of disinvesting its holdings in PSU’s, which could raise substantial amount of cash for the govt.

>> 3G spectrum allocation is another positive for the govt. which again would raise about 350 billion for the govt.

>> Fiscal stimulus packages might start to have a positive impact once the money permeates through the different sections of the economy.

Now, weighing the pros and cons, there still isn’t a definite direction for the market and the market is currently at 17,600 levels, about 84% of its all time high, which is a touch on the higher side for a market that’s on consolidation stage.

At present levels it would be prudent to invest for a short term in the range of 3 to 4 weeks.

Trade with strict stop losses as the markets at current scenario are more sensitive to negative news than positive news.

Happy Trading!!!

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