Jobs, Stocks and Real estate - A tale of two Valley's

Many comments to my previous post pointed out to the worsening job market with layoffs and hiring freezes the order of the day in the US and India. Its no suprise then that stocks markets in both places have taken a beating anticipating a downturn and restricted credit availability due to lack of credit worthiness. Why will a bank lend 300k to someone whose job in on shaky ground ? Over the holidays I met few friends and we discussed this issues and I heard horror story after horry story on how Indian Hi-Tech engineers who have purchased housing over the past 3 years are well under 200k of their purchase price. Now many of the folks are getting laid of and it is not a pretty sight.

I met another friend of mine who is a manager in a top networking company. He said all across the company they are retrenching contractors and he has lost 50% of this contract staff over the last month. No guesses for figuring out the name of this offshoring company - Infosys. When we add up the loss of revenue for all the retrenched onsite Infosys employees who are billed at $115k but paid between 60-80k, the final number is pretty omnious. Add to that the loss of offshore resources which are retrenched who will swell the bench strength to levels not seen ever. It doesn't take a genius to figure out that the guidance from management going forward will be poor. Based on the drops in marigns I expect we can easily see a drop of 50% in the Infy stock price. Buying an April 09 put at $15.00 for 0.75 cents is probably a worthwhile risk taking play. If one is more risk averse maybe the 20$ put works better.

Its a nobrainer that the stock market in India will take a beating once these numbers are announced. All the suckers who have bought the market thinking the RBI stimulus will boost the economy will again get massacared.

The loss of jobs, leading to the decline of the stock market will logically lead to a drop in real estate. All the RBI rhetoric to lower rates will yield no effect if the job situation is dismal. We have to realise that the Indian bubble was fuelled on the legs of a strong job market and low credit rates. Now the market has lost one of its legs. As the author of the world is flat argued, A housewife in Japan is saving more then average and financing the housing boom in the US which in turn financed the tech industry which financed the offshoring contract shops. With the US housing turning on its back, there is an upheaveal to be felt by all the downstream interconnected companies which in turn has to effect jobs in India and subsequently housing.

All the decoupling morons have been proven wrong and this anecdote vindicates the simplicty with which markets can operate without all the bumbo jumbo math of CDO's

Thanks to anon for posting this video

Barons article on the Indian stock market. Says wait for 15 months. They definitely have a crystal ball

http://online.barrons.com/article_print/SB123094654808750783.html?mod=9_0031_b_this_weeks_magazine_main

Saturday, January 3, 2009

Why India Won’t Rebound Soon
By VEN RAM

India’s stock market may look attractive after its massive slide, but there’s probably more pain to come. A host of economic and political challenges could keep a new bull market at bay for more than a year.
FOR THOSE TEMPTED TO WADE INTO THE INDIAN STOCK MARKET with a view to making a quick killing after its massive slide, consider the advice that Punch magazine once gave a person who was about to marry: Don’t.

Although India’s benchmark Sensex has fallen about 55% from its peak a year ago, the market is still not attractive as a short-term investment. November’s terror attacks in Mumbai aren’t even the half of it: The Indian economy, valuation issues and broad political uncertainty all argue for real caution…

“Even as absolute valuations have corrected, India’s relative valuations remain rich,” says Ridham Desai, India Strategist at Morgan Stanley. The market’s price-to-earnings multiple, based on expected earnings for the next 12 months, is 60% higher than that of emerging markets as a group. And its price-to-book ratio is a whopping 72% higher.

India fares no better on the dividend-yield front. The roughly 2% dividend yield on the Sensex pales in comparison to what is available in some of the more advanced economies. The dividend yield for the Australian market, for example, is an eye-popping 6.5%, while most other regional markets offer yields well north of 5%.

Seshadri Sen, Associate Director, Research and India strategist at Macquarie Capital Securities, says that even though the Indian markets are trading at just nine times forward earnings, investors need to exercise caution in interpreting that multiple.

“With all the earnings cuts that we have seen from companies, what appears cheap may not be so,” he says. “We are seeing a fairly sharp slowdown in the economy, but it remains to be seen whether the markets have discounted all the bad news that is in store.”

…

The Bottom Line:

A new bull market in India may be at least 15 months away, thanks to a host of economic and political challenges.

Here is an article on a AAA rated housing loan which was sold at 10 cents on the dollar

The Mortgage Crisis, Explained

Michael Phillips of the Wall Street Journal tells the story of a shack in Arizona owned by a woman who hasn't worked in 13 years that was valued at $130,000 two years ago by a crooked appraiser and mortgaged by a broker who was paid $10,000 in fees and took no loan risk.

Then Phillips tracks the loan through Wells Fargo to HSBC, where it was packed into a mortgage-backed security, rated Triple-A by Moody's and S&P, and sold to, among others, the Oklahoma Teachers pension plan and PIMCO.