Major market correction unlikely, good time to buy quality stocks

The domestic stock markets seem to be oblivious to the dire predictions surrounding them about double-dip recession, Hindenburg Omen, and other major predictions of doom. The decibel levels of these predictions increased last week, particularly after an unrelenting parade of bad news on the economy - notably on jobs and housing emanating from the US.

Globally, expectations of a sustained economic recovery are giving way to talk of a double-dip recession. This negative view is compounded due to the fact that the European Central Bank has proposed to postpone the exit from emergency lending measures to 2011, indicating that problems still persist in Europe. The emotional quotient of the market is one of disappointment, and that does lead to sensational headlines on the bearish side.

RBI's view

However, the Reserve Bank of India (RBI) seems to be undeterred by such negative news. Like the stock markets, the view of the central bank was benign as expressed in the annual report released last week The RBI is very optimistic about India's GDP growth being very resilient as has been demonstrated on various occasions like the global downturn of 2008-209 or the domestic agricultural shortfall of late 2009. They go on to say that even now the prospects for the financial year 2011 are extremely bright based on the corporate and consumer durables' sales numbers, and that private consumption demand has grown so much that it almost makes growth self-sustaining. The RBI just wants a good monsoon and better fiscal control for its prediction to come true.

Risks

What the RBI is really bothered about is inflation. Inflation here is a long-term problem. There are many challenges it faces in meeting the inflation targets, as the inflation problem is in the supply side. Hence, the monetary policy has a smaller role to play, while the bigger role falls on the government to mitigate supply constraints.

For supply side constraints to be solved, structural issues need to be addressed. For instance, food production has to be bolstered. Investments in food supply chains have to be made. More importantly, food wastage has to be significantly reduced.

It is reported that India loses $21 billion worth of farm produce after harvest every year because of wastage. Moreover, it has a storage capacity shortfall of 35 million tonnes. Addressing these issues could go a long way in bringing down inflation to lower and stable levels. Apart from inflation, the RBI perceives volatile capital flows as a meaningful risk to the economy.

Investment strategy

Given the two diametrically opposite views - one global and another local -investors are now faced with a dilemma. Should you stay invested in stocks or move your investments to safer avenues such as fixed deposits? There does not seem to be any reason to panic yet. A single Hindenburg Omen signal may be a warning that something is not quite right, but the signal has to be supported by other factors before one can act.

The US stock markets are in a correction mode already and have pretty much been in a correction mode throughout this year. It does not immediately indicate that emerging markets like India have to follow suit. This can be validated from the IMF roadmap alone, which says developing Asia will grow at 8.7 per cent next year as against 3.4 per cent for the advanced world. There is a good intrinsic growth in the Asian region, which will be reflected in the indices sooner or later.

Reff: Economic Times.

U.S. Treasury, Morgage-Lenders Seek to Keep Government Role in Housing Fix

The Obama administration, looking to overhaul the U.S. mortgage-finance system, gathered support from lenders and the real estate industry for reducing, without ending, the government’s role in insuring loans.

A limited government backstop “has a lot of traction,” saidMichael Berman, chairman-elect of the Mortgage Bankers Association, in a Bloomberg Television interview after a Treasury Department conference in Washington to discuss proposals. “At either of the extremes -- either a full nationalization or a full privatization -- we’re not in the mainstream.”

The Obama administration is seeking advice on how to rebuild a system at the center of the 2008 credit crisis. Some Republicans have sought to abolish Fannie Mae and Freddie Mac, the main sources of U.S. mortgage financing. Yesterday, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. should consider “full nationalization” of the system.

“To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” Gross said at the meeting. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”

Fannie Mae, based in Washington, and Freddie Mac of McLean, Virginia, have drawn almost $150 billion in Treasury aid since September 2008, when they were seized by the government amid soaring losses on mortgage investments. The U.S. has promised unlimited support for the two companies. Including Ginnie Mae, the government insured almost 97 percent of U.S. mortgages in 2009, according to Inside Mortgage Finance.

‘Carefully Designed Guarantee’

“There is a strong case to be made for a carefully designed guarantee in a reformed system,” aimed at providing access to mortgages, even during economic slumps, Treasury SecretaryTimothy Geithner said. “The challenge is to make sure that any government guarantee is priced to cover the risk of losses and structured to minimize taxpayer exposure.”

Some government involvement is needed to ensure that markets traditionally underserved by lenders have access to credit, mortgage lenders and housing advocates said. The Federal Housing Administration, created in 1934, insures loans to borrowers with little cash.

Private lenders provide “virtually no mortgage finance in lower income and communities of color,” said Ellen Seidman, an executive vice president at Chicago-based ShoreBank Corp. “We’ve got to pay better attention to access to credit.”

Congressional Overhaul

Representative Barney Frank, the Massachusetts Democrat who leads the House Financial Services Committee, has begun work on overhaul legislation and will hold hearings in September. Geithner has promised to deliver a “comprehensive” plan for the housing-finance system by January. Yesterday’s meeting was also hosted by the Department of Housing and Urban Development.

During debate over the financial-regulation overhaul signed by President Barack Obama last month, Republicans were rebuffed in efforts to abolish Fannie Mae and Freddie Mac. Led by Senator John McCain of Arizona and Representative Jeb Hensarling of Texas, Republicans say the firms were driven to ruin by their competing missions -- serving shareholders as publicly traded companies and promoting homeownership among lower-income borrowers as government-sponsored entities.

The question remains how a new guarantee would work. Ideas at the meeting included a government backstop of last resort for some mortgage-backed securities.

The challenge is to encourage private investment and contain taxpayer exposure, said Ingrid Gould Ellen, director of the Furman Center for Real Estate & Urban Policy at New York University, during a panel discussion.

“A government guarantee is critical,” she said. Still, “you want to limit the scope of the guarantee.”

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