Gentlemen Prefer Bonds? - Sainik

Tim Geithner, the US Treasury secretary is reported to have said, “If I am reborn, I would like to be the bond market.” What he was implying was that the US bond market is the most powerful force in the world.

The bond market is supposed to indicate the direction of the economy, and as of now it is on a tear. Everyone seems to be loving bonds: gentlemen and ordinary folks too.

The bond market is indicating that there is deflation ahead, and the flight to safety has begun. While the Fed would like yields to be low because of the high amount of debt being issued – yields move inversely to the prices – there is a tipping point when the strategy becomes counterproductive.

When there is a stampede in the bond market, there is risk of a bubble forming and when the direction reverses, there is an equally mad scramble for the exits.

Data over the weekend reveals that fund flows in to bonds over the three month period is more than three times that of the fund flow into equity during the dotcom craze. So shouldn’t you worry? Granted the bond market is far bigger than the equity markets and the demand for bonds may still outstrip the supply in the near term, but we need to keep this information in the back of our minds when we look at the equity markets.

Coming to the equity markets, the Indian markets continue to defy gravity for yet one more week. While globally the markets all fell, we made highs that were last seen in February 2008. This is a remarkable feat, considering factors like high inflation, indifferent monsoons, and lacklustre corporate results are here to stay.

The continuing rise is led by consistent foreign buying, around Rs 400- Rs 600 crore on a daily basis. DIIs have been selling an almost equal amount but the last couple of days have seen DIIs cooling off their sales a bit; hence the strong rise witnessed on Wednesday and Thursday.

I had indicated a range of 5350 -5550 for the Nifty which was almost reached almost Friday. While the mainline indices are hitting higher peaks, the Bank Nifty has remained the stronger of the two.

There is a huge appetite for banks of all kinds and shapes. Even laggards like cement and real estate have joined the party. The big guns of the market are all targeting 6000 by Diwali. While it’s quite possible that the Indian markets may hit these levels on sheer FII buying, it would be prudent to note that we are the most expensive market in the world today and we are getting more expensive each passing day.

If an investor were to sell all of his holdings he could be disappointed to see the market trading stubbornly higher in the foreseeable future. Therefore the investor has two choices: either sell on all rallies or prepare to sell all his holdings if 5350 is cut on huge volumes.

I remember in 2007 October when the Nifty hit 6000, I asked one of my clients to sell ALL his holdings because I felt the market was becoming expensive. The client listened to me –a very rare occurrence –and acted promptly. Then the Nifty went on to trade above 6000 for the next three months. During this time I had had a very difficult time facing the client. It’s a different matter altogether that the Nifty came down as low as 2300 by October 2008.

At this time, no fresh recommendations; whatever you do in the next one week, let it be profitable.