Sucheta Dalal :Farewell to India
Sucheta Dalal

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Farewell to India  

September 14, 2005

Although the government is not worried, not everybody is sanguine about Indian stock prices. Read this piece by the reputed analyst and commentator Steve Sjuggerud, published by The Daily Reckoning.

 

By Steve Sjuggerud

 

Indiabulls Financial Services went public last September at 19 rupees a share. Today - one year later - shares of Indiabulls closed at 225 rupees, up nearly twelve-fold. That's not even a new high. Five weeks ago the shares hit 271!

 

What's so great about Indiabulls that makes it worth 12 times what it was worth one year ago? The answer is NOTHING... except that Indiabulls just happens to trade on India's stock exchange. Indiabulls is primarily a brokerage firm. It makes its money selling Indian stocks. The Indian stock market is hot, which makes Indiabulls look good.

 

That's one reason for the run-up in the share price.

 

Not content with the stock market bubble in India, Indiabulls has been taking its profits and buying up Indian real estate, which is also red hot. Indiabulls recently purchased an 8-acre former textile mill - for an astounding $101 million dollars. And this is the second one of these it has bought in just a few months.

 

With stocks like Indiabulls as an example, the stock market in India couldn't be hotter. And therein lies the problem...When a financial market can't get any hotter, it can only cool down.

 

$8 billion dollars in foreign money has poured into Indian stocks in 2005 alone - and $2 billion of it arrived last month! Of course, the Indian market could go higher from here. But I feel like I've seen this movie many times in my career before: A mountain of foreign money flies in on extreme optimism... and then that mountain of foreign money – or what's left of it - leaves in disappointment and disgust.

 

A key point is that I'm not knocking the India story. It's just... the chances of foreigners making money in the stock market there over the next few years is close to zero. The hot money will get washed out, as it always does.

 

THE ULTIMATE CONTRARIAN INDICATOR

 

I was stuck in an airport last week, so I wandered into the newsstand. And there it was... the ultimate contrarian indicator... laid out on a silver platter for us.

 

Not one, but two major magazines carried the exact same cover story... "CHINA & INDIA: THE BEST WAYS TO INVEST IN THE WORLD'S FASTEST GROWING ECONOMIES." It's BusinessWeek's August 29, 2005 issue and Worth Magazine's September 2005 issue. Take a look:

 

I can't make this stuff up. The trusty old rule is, whenever a hot investment topic is on the cover of a handful of major magazines, it's a pretty good signal we're close to the time to bet against that hot investment. BusinessWeek from a quarter century ago provides the perfect example. Back then BusinessWeek wrote in a cover story: "The death of equities looks like an almost permanent condition."

 

It seemed logical at the time, as U.S. stocks had fallen from 1966 to 1979 (especially after factoring in the devastating effects of inflation over that timeframe). However, if you had listened to BusinessWeek back then, you'd have missed out on the greatest stock market boom in all recorded history. On the other hand, if you'd done the opposite of what BusinessWeek said, you'd be a very rich individual today.

 

Instead of predicting the great bull market of the 1980s and 1990s, BusinessWeek predicted the exact opposite back then. The magazine went as far as to say: "Even if the economic climate could be made right again for equity investment, it would take another massive promotional campaign to bring people back into the market."

 

Apparently BusinessWeek thought stocks were for old people who didn't understand that stocks were oh-so unfashionable:"Younger investors, in particular, are avoiding stocks. Only the elderly who have not understood the changes in the nation's financial markets, or who are unable to adjust to them, are sticking with stocks."

 

You get the idea. Today, instead of predicting the Death of Equities, BusinessWeek and Worth magazine are showing you how to get rich in China and India. To me, it's as close as we get to a bell ringing to signal the top.

 

So now you have the chance to go against BusinessWeek once again, by cashing out your red-hot Indian stocks. You might also make some money by selling short selected Indian stocks, as I am advising the subscribers of Sjuggerud Confidential.

 

While I fully agree that these countries will be extremely important in the coming decades, I think their stock markets - India's in particular - could be in trouble in the coming years.

 

You won't believe just how far these stock markets can fall when they get into trouble...

 

90% FALLS ARE NOT UNCOMMON IN EMERGING MARKETS

 

China, Thailand, Russia, Indonesia, and Argentina... What do these stock markets all have in common? At some point in the last few years, they've all lost over four-fifths of their July 1997 values in terms of U.S. dollars (based on MSCI's indexes).

 

Yes, they've all fallen by over 80%. Indonesia was hit the worst, losing well over 90% of its value. Ouch! Let me stress, these losses weren't even that long ago... Argentina lost 90% of its value between 2000 and 2002.Sure, the long-term promise of emerging markets can be alluring. But my point is, promise or not, the stock markets in emerging market countries can really get obliterated. The obliteration comes when there's something that spooks the hot money. The hot money will leave India too, just like it left all the others. It always does.

 

[Ed. Note: O.K., O.K...So stories flogged by the mainstream media are already pumped dry. Where to look for the uncovered riches then? Steve has found a little gem that could see you in the profits BIG time. BusinessWeek subscribers need not click here:

 

www.agora-inc.com/reports/SCF/WSCFF902

 

 

 

 

 


-- Sucheta Dalal



 



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