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Euro Region Leaders Statement on Resolving Crisis

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Thursday, October 27, 2011

The Eurozone summit that ended today was the fourteenth in 21 months and the markets feel that this time around the Euro leaders have found a solution and the global equity and credit markets are all rallying in unison.

The headlines were expected. Anything less than what was achieved would have been very disastrous.

As Angela Merkel put it “The world is watching Germany and Europe. They are looking to see if we are ready and able to assume our responsibilities during Europe’s worst crisis since the end of World War II,”  The announcement of the deal helped lift the euro, with investors reacting positively to the outlook for the region’s growth and single currency.

“The Eurozone has adopted a credible and ambitious response to the debt crisis,” a visibly tired French President Nicolas Sarkozy said at a news conference early in the morning in the Belgian capital.

Let us look at the achievements in the last 24 hours:

–           Europeans agreed to increase banks’ capital adequacy ratios — the amount of cash that banks must hold in reserve — up to 9 percent by June of 2012. The European Banking Authority said leading banks in 13 countries will need to come up with an additional €106.4 billion in so-called core Tier 1 capital by that date. The EBA said it based its evaluation on a sample of 70 banks across the continent. But how will the banks get all this money is a question?

–           Private-sector holders of Greek government debt will take a 50% write down on the value of their holdings. The official statement from IIF “The IIF agrees to work with Greece, euro-area authorities and the IMF to develop a concrete voluntary agreement on the firm basis of a nominal discount of 50% on notional Greek debt held by private investors” does not clarify how they are going to get it done.

–           The firepower of the European Financial Stability Facility will be increased by as much as five-fold or about €1 trillion. At present, the €440-billion fund has between €250 billion and €275 billion available after bailouts of Greece, Ireland and Portugal. The expanded EFSF may be used for credit enhancement for sovereign bonds or for setting up special purpose vehicles to finance operations. The question is where will the EUR 1 trillion in cash going to come from? The EFSF consists only of guarantees and is not a cash injection that can be used to buy the bonds. 

–           German parliament voted overwhelmingly to bar any further expansion of European bailout structures that might require a greater contribution by Germany even though they agreed to leverage the EFSF. The motion passed by German lawmakers states that the EFSF cannot be financed through the ECB and with a leveraged EFSF, the central bank will no longer need to buy bonds on the secondary market. So what happens if the EFSF cannot get the desired level of funding? Where is the backstop?

–           Signal from leaders that the European Central Bank will maintain bond purchases in the secondary market. This was really in contrast to what the Germans want. 

–           A commitment from Italy to do more to reduce its debt. Mr. Berlusconi has pledged to balance the country’s budget in 2013. But will Mr. Berlusconi be in power till then?

The question now is how will all these broad brush directions be actually implemented?

Will all the banks play ball? What about the credit-rating agencies. Can they interpret the position taken (now very public) the position taken by the European leaders really not voluntary?

How the decision was made: Euro-area leaders who called Dallara into a meeting at about midnight, forcing a break in their 10-hour summit, said that while the bond transaction will be voluntary, the decision resulted from an offer he couldn’t refuse. “It was the fiercely delivered wish by Merkel, Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of the total insolvency of Greece,” Luxembourg Prime Minister Jean-Claude Juncker told reporters. That “would have cost states a lot of money and would have ruined the banks.”

The next question is where will the EUR 1 trillion come from? The response at G20 meeting for a potential IMF solution was not encouraging. Opposing new funds for the IMF, finance ministers from the US, UK, Japan, Canada and Australia rejected the idea. Tim Geithner, US Treasury secretary said the Fund had “very substantial resources that are uncommitted”.  India, Russia and Brazil ruled out contributing to the Eurozone bailouts – though it has been reported that Chinese leaders were considering offering help. So now the European governments are trying to approach China as the main investor in the EUR 1 trillion funding.

What was very clear in the G20 meeting was that Europe needed to find their own solution to the crisis.

The agreement fell well short of offering a comprehensive solution to the financial problems facing Europe. What is very clear is that Europe, even though for its bold statements, have really not applied its resources to solve the route of the problems. There is little desire to take the steps necessary to save the structures of modern Europe. Europe needs about EUR 1.5 to 2 trillion of resources to ensure that it can withstand all risks and can help turn Europe around over time. And there are only two credible parties which can provide that degree of support in unison – ECB and Germany. But the Germans have very clearly stated in the Wednesday parliamentary vote that they will not provide any more support and using the ECB to buy the bonds is not an option. The only thing Europe has for sure is EUR 440 Million of guarantees, half of which has already been utilized.

So really .. Do we have a solution!!!! All that Europe has managed to achieve through great showmanship is as usual postpone, the pain hoping for some magic solution. As 2012 rolls in, the European sovereigns and banks have to roll over their debts who will buy their papers and at what price? The current statements only give the markets a hope which will keep the RISK – ON trade alive for a while till the markets realize that the solution is very far from the promise.

Stratfor summarizes the situation very well … “Despite failing to articulate the specifics of any credible financial resolution to Europe’s debt crisis, this was about as good of a political response as Europe could hope for given the circumstances. By alluding to — but not mandating — a restructuring, no crushing pressure has been put on the banks, yet. By not announcing the details of how the European Financial Stability Facility will be expanded, European leaders have denied critics for now the opportunity to proclaim failure. That Germany, the one country whose participation is required in any solution for Europe, is pursuing its own interests in such a brash manner does not bode well for Europe’s future.”

Written by Sayanta Basu

October 31, 2011 at 5:05 pm

Market trends & terrorist attacks

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DP-BLOG-GRAPH-1Market trends & terrorist attacks

(This presentation is simply an observation on how Indian markets behave post terrorist activities. It is not a call for market top or bottom but just a correlation between events and price behavior. )

Past market data points to an unusual, coincident between market trends vis-à-vis terror strikes in India. It has been noted that, such strikes have occurred while the market sentiments were either too poor or when it was in the midst of an intermediate pause (time based correction). Coincidentally, when frequent flow of grim news- Economic or political (Lokpal Bill and low market in this case) have bombarded our social life, and overall sentiment is cautious, terrorist attacks have occurred during the same phase. This is, kind of an indication that the market is flooded by extreme bad news and is likely to reverse.

 Most of the terrorist activities have occurred at the beginning of a new market trend or after a prolonged correction when the market was already at the bottom or close to the bottom. Recent example is 2008 bottom, when the market had already corrected significantly and was consolidating at that time. Such triggers act as a prior indicator of a bull rally or end of correction.

Currently Market has already corrected nearly 22% (at extremes) and 13.5% below recent top. The present position is actually time-based correction. Last bear market lasted for 15 months (where market made bottom within 10 months time frame) and we are in corrective phase since last 9 months.

 Combining the price formation along with the news flow, it has been observed that, events such as these have taken place mostly near the trend-line, with a particular interval almost maintaining the Fibonacci relationship.

(In interest with timeliness this documents has not been edited)

Written by Dwaipayan Poddar

July 14, 2011 at 2:29 pm

Posted in Uncategorized

Range bound with positive bias

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Range bound with positive bias

Market saw another bearish day yesterday in the aftermath of Infosys result & poor IIP numbers. The drag of 12th -July has retraced almost the 40% rise that we had seen from 5195 on 20th June to 5740 on 8th July. Now indices are very near to its strong support zone between 5450 & 5500. Looking to the daily chart structure, the very short-term outlook can now become positive only if Nifty futures manage to cross 5600 otherwise the downtrend will continue. On a longer-term perspective, the chart suggests that we are once again stuck in a band above 5450 & below 5750 with a positive bias. However, this bias can turn negative once Nifty closes below 5450.
Today after a gap up opening markets have attempted to cross the resistance level of 5600 but, failed & is currently trading at 5585. Looking to the advance decline ratio, which seems encouraging (2:1) at this point of time, gives a sense that indices are finding good buying interest at lower levels. In the coming days, the market is likely to become choppy with stock specific activity increasing as result season has begun.

Written by Rakesh Gandhi

July 13, 2011 at 3:55 pm

Posted in Uncategorized

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Silver: Solving the mystery of this rally

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Getting to the point , Look at the chart below and it gives a compelling chart observation, something which is frightening and something which at first sight is just unbelievable.

Just check the Mirror line, and the subsequent points such as (A,a) : (B,b) : (C,c) : (D,d?)

The steep rally we are seeing currently is similar to the ones we saw in late 70’s and early 80’s.

Another observation indicates that the chart has a tendency to be extremely volatile, with almost a V-shaped price trends of strong rallies and subsequent thrashing of prices.

Chart below shows the 4 trend lines which are almost parallel in nature, and joining the key points for Silver, comparing its current phase/points with the historical data points.

Quick Fundamentals on Silver:

In 1900 there were 12 billion oz of silver in the world. By 1990, estimates say that figure had been reduced to around 2.2 billion ounces of silver. Today, that figure has fallen to less than 1 billion ounces in above ground refined silver. It is estimated more than 90% of all the silver that has ever been mined has been consumed by the global photography, technology, medical, defence and electronic industries.

On current supply/demand trends, the amount of above ground refined silver is projected to shrink to even lower levels in the coming years. Industrial demand has been outstripping mining supply for most of the last 20 years, driving above ground supply to historically low levels. Few in the investment world are aware of this important fact.

Silver production has been flat in recent years while demand has been increasing. This hasn’t resulted in significantly higher prices yet because the world has been able to fill the gap from inventories and official government stockpiles.

However, today the U.S. government’s stockpile is all but gone, and sales from other official sources, such as China, Russia and India, are declining, too. The decline in refined silver stocks, from around 2.2 billion ounces in 1990 to around 300 million ounces today means that silver stocks are near an all time low.

Silver is unusual as its supply is inelastic.

This means that silver production will not ramp up significantly if the silver price goes up.  Supply didn’t increase significantly in the 1970’s when silver rose more than 35 fold in price – from $1.40/oz in 1971 to a high of nearly $50/oz in 1980. Importantly, silver is a byproduct metal and some 80% of mined silver is a byproduct of base metals. Higher prices for silver will not cause copper, nickel, zinc, lead or other base metal miners to increase their production. In the event of a global stagflationary or deflationary slowdown, demand for base metals would likely fall thus further decreasing the supply of mined silver.

Written by Kunal Bothra

April 18, 2011 at 12:18 pm

SWIM or SINK in this choppy market

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Hello Everyone,

In the last article I had specifically mentioned the kind of extreme volatility we are likely to see, and that is what we have been observing in the market. Intraday the movement on Nifty is close to 100 points, which is a staggering number for a benchmark index.

You pick a stock and it is down close to 10-30% from their October highs. Everyone who could not enter the markets at 6300 levels and waited patiently for 5800 -5850 levels are still not ready to buy at 5700 levels on Nifty.

That is how the markets are… It will make you buy at extreme highs and exit at market lows.

In such times of market sliding, we talk of risk management and stuff, i think the best risk management comes by buying the optimum quantity at any point of time, based on the volatility and beta of the stock, and your risk appetite.

If the stock is highly volatile and has a high beta(beta signifies the correlation with the benchmark index,such as Nifty), then ideally the quantity traded in such stocks should ideally be less. This will optimise your portfolio allocation and avoid huge MTM swings as seen in high beta stocks(which generally have a tendency to react more when the index falls).

My experience in the market tells that it is just a rare quality to pick the perfect bottoms/tops, but what is more important is to understand whether we are close to one. Human/Investor pschology plays the perfect indicator in such critical points.

When the going goes tough, it is always much better to step out of the arena, for some time. Become the audience, enjoy the show and enter on the side where you think the real strength lies. Wait for panic signals to enter the long side of the market.

, will help you SWIM through these volatile times and avoid you from Sinking.

Happy Trading..!

– Kunal Bothra

Written by Kunal Bothra

December 26, 2010 at 9:02 am

Posted in Uncategorized