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There`s a bullish bear in the ring


Vinod K Sharma  |  New Delhi 

The relationship between crude and the markets has never been so clear. A 20 per cent slide in crude has propped up our Sensex by 23 per cent. Never in our history have we seen this. The slippage in crude has made most of the bears retract their claws.

But the fundamental weakness the world over has put investors in a dilemma, not allowing them to grow bullish horns. We have a typical case of bear with a bullish bent of mind.

The rally in our markets began from May 2003 and ended in December 2007, if you were to take monthly closing levels. The Sensex rose 560 per cent. This came on the back of a 272 per cent rise. For 52 months, crude and the markets went hand-in-hand.

From $25 in April 2003 to $95 in December 2007, things were hunky dory. But the moment crude crossed $100, the bull started seeing red. Their ways parted. Crude has now made a low of $117.25 after seeing a high of $146.65. The markets rose on the back of this slide. They’ll perhaps rise till crude goes back to $110 or to below the psychological $100 a barrel mark.

After that, any further slide in crude will cease to whip the markets higher. Crude then will probably be discussed in the commodity markets alone and will only find an occasional mention in the equity markets.

Another argument that these neo-bulls need to carefully listen to is that crude is not falling on an increased supply, rather on the perceived notion that demand is falling. This means that the world economy is slowing down. Then, why are we happy about it?

Geo-political developments or accidents anywhere like the fire on Wednesday in the 1,768-km Eurasian pipeline connecting the Caspian and Mediterranean seas could lead to a smart recovery in the commodity.

The pipeline transports about 8,50,000 barrels a day of oil and condensates. The repairs could take 2-5 weeks. About 30 million barrels of oil won’t reach the European markets if the pipeline was closed down for five weeks.

Inflation officially crossed the 12 per cent mark and is now at a 13-year high. There is no doubt that there is more tightening in store as long as Dr Reddy is at the helm.

The bank Nifty has meanwhile appreciated 45 per cent from its low. That calls for some correction in the sector, which seems to have run ahead of fundamentals.

Things, meanwhile, continue to deteriorate in the US. Chinks are now beginning to show, of all places, in the prime mortgages. A study by the Federal Deposit Insurance Corporation (FDIC) shows that mortgages issued in 2007 are defaulting at three times the rate of 2006.

AIG has posted massive losses and does not yet have a strategy in place. Meanwhile, Citi and Merrill have had to buy back $17 billion worth of auction-rate securities between themselves to avoid a legal showdown with regulators.

Coming back to our markets, the Sensex has appreciated by 23 per cent. Does this signal an onset of a new bull market? While we’ll only know for sure in hindsight, history is replete with examples where we had stronger rallies.

Since 1992, we’ve had six bear market rallies that have been stronger than the current one. Between May and July 2000, the Sensex rallied 32 per cent. From January to April 1998, the benchmark rallied 36 per cent and from August to September 1992, a rally of 37 per cent.

Even the Nasdaq posted three 30 per cent-plus rallies from 2000 to 2002, on the way to an 80 per cent collapse. But if the regulators revisit the PN curbs which they put in place on October 2007 and loosen some of them, money could be soon flowing and propping up the markets.

The net outflow of Rs 26,257 crore that we have seen from our markets since the curbs could soon give way to a reverse osmosis.

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First Published: Sat, August 09 2008. 00:00 IST