Put-Call Ratio

What is a Put-Call Ratio (PCR) ?A ratio of the trading volume of Put options to Call options is called Put-Call Ratio. It is used to gauge investor sentiment.
PCR, alias put-call ratio, simply put, is the ratio of trading volume of put options to call options. Changes in this ratio are indicative of the prevailing market sentiment. For instance, a higher PCR, which arises when put volumes are relatively higher than that of calls, signals a bearish sentiment.
As traders usually use put options to fix a sell price for their securities when they anticipate a fall in price, a rise in put volumes is usually an indicator of the bearish mood in the market. Put options are contracts that give the holder the right to sell a specific quantity of the stock at a specified price on or before the expiry of that contract.
On the contrary, increase in volumes of call options, by the virtue of its definition, can largely be assumed as an indicator of a build up in bullish sentiment. This is so because holders of call options have the right to buy a specific quantity of the stock at a specified price on or before the expiry of that contract.
While typically the trading volume is used to compute the Put-Call Ratio, it is sometimes calculated using open interest volume or total dollar value instead. Weekly or monthly figures can also be calculated and moving averages are often used to smooth out the short term daily figures.

How to Read it??
However, history suggests that options traders lose money most of the times. Their collective judgement of market direction is usually wrong. It is precisely for this reason that a high put call ratio usually precedes a rising market and a low ratio is followed by falling prices.
For instance, in January 2008, the volume-based put-call ratio for nifty options had fallen from over 1.5 in early January to under 0.7 by mid-week. However, the markets turned in the deep correction mode only by mid-January — a time when greed ruled high in the markets as captured by the relatively low PCR. To give another example, in July 2007, the PCR had risen to over 2; broad markets, on the contrary rose by over 4 per cent that month.

Markets in the short-term are driven more by emotions than fundamentals. Times of greed and fear in the market are reflected by the significantly low or high PCR. This makes PCR an effective contrarian speculation tool that assesses the general herd mentality in the markets. While, typically, PCR above one indicates a higher put volume vis-À-vis call volumes, for Indian stock markets we can peg the optimal level at 1.2 to 1.5. This is because in our markets puts are used more for hedging than speculation and, hence, PCR only above or below this level may be construed as an effective indicator of an overbought or oversold market.

However, PCR as an indicator has its own flaws. PCR levels in a highly volatile market can be misleading as, typically, during such times, traders tend to sell puts instead of buying calls. So, while on an overall basis, put call ratio can be used as a market indicator, it could prove costly you if time markets solely based on put-call ratio.

Issues of Corporate Governance - Institution of Independent Directors

The institution of independent directors has been one of the most global innovations in recent times. So much so that without independent directors corporate governance seems a lost cause. However, the institution of independent directors is under an existential threat from within and without.
The Securities & Exchange Board of India (SEBI) has mandated that all listed companies should have a certain number of independent drectors. The definition of an independent director brought in through the listing agreement with the stock exchanges is quite comprehensive. Unfortunately, the definition in the Companies Bill, 2008, cuts at the root of independence, which should be reviewed and corrected.
In practice, independent directors have largely remained independent only on paper. The recent Satyam fraud has created a fear psychosis in the minds of independent directors. This has been exacerbated by the Andhra Pradesh government's move to arrest former independent directors of Nagarjuna Finance for alleged default in repayment of public deposits.
The judicial response in the Nagarjuna Finance case has been anything but reassuring to independent directors.
Many independent directors have left and those who are continuing are not quite happy continuing. Unless the situation is remedied, there is a real danger of losing this nascent institution.
PROTECTION
The moot question here is whether independent directors should have a statutory protection against arrests except in most extraordinary circumstances by the Central Regulatory Agency. In a country like India where foisting of criminal cases is quite common in certain segments of society, such a trend would be suicidal if allowed to affect independent directors. Hence, it is desirable that independent directors are given a statutory protection as stated above.
In the prevailing era where the Indian economy is slowly but surely integrating with the global economy, the need for a global reach and size cannot be ignored by the first hundred companies in India. It is true that a few of these today are owned predominantly by families. It is not an exaggeration to say that such companies would have to grow at an exponential rate to acquire a global size and raech.
To realise this the capital requirements would be beyond the reach of the controlling families. Such companies would have to access necessarily domestic and global capital markets for their capital needds. This can be done well only if the governance standards are quite high with competent independent directors providing the much needed re-assurance of the same.
CORPORATE FRAUDS
Corporate frauds and scams greatly erode corporate wealth. Corporate India as a whole should have a vested interest in preventing and minimising corporate frauds and scams.
Independent directors on audit committees provide one of the best ways of reinforcing internal audit and annual statutory audit. Thus, independent directrs, who are truly independent, can be an effective bulwark against corporate frauds and scams. If corporate India is serious about raising the bar on governance standards, it should appoint competent independent directors after a thorough search.
APPOINTMENT
If a modicum of independence on teh part of independent directors is to be ensured, a total revamping of the process is called for. Only the nomination committee of the board consisting solely of independent directors should have the responsibility to propose the names of independent directors.
The principal promoter of the company should disclose to the nomination committee the nature of any relationship that he has with the person (s) proposed to be appointed as independent directors of the company.
The nomination committee could release an advertisement in national newspapers giving stringent eligibility criteria for appointment of independent directors and calling for applications.
To avoid frivolous and unnecessary applications, a good system of pre-registration and screening could be introduced by the regulator so that only a person who is registered with the regulator would be eligible to respond to the advertisement.
After a small number of the candidates is short listed, the nomination committee should have a transparent system of selection of the candidate and the process of such selection should be put on the company's website.
The actual appointment of an independent director should be only by postal ballot. All financial institutions, banks, mutual funds and foreign institutional invevstors, who are shareholders, should be encouraged by the Regulator to participate in such a postal ballot.
The nomination committee should give detailed reasons for nomination of a particular candidate in the explanatory statement to the resolution proposing the appointment.
The details of the votes cast for and against the proposal should be put on the website of the company.
Such an appointment based on the support of the broad spectrum of shareholders would give confidence to the candidate to be slightly independent of the overpowering influence of the principal promoter of teh company.
RETIREMENT
For ensuring better independence, both real and perceived, it would be appropriate that an independent director should not continue as such for more than two terms of three years each.
It is normally argued that such a move would not ensure proper experience in a particular industry, as the independent director has to move away after six years.
This argument would not always hold good if one were to look at independent directors as enlightened generalists who bring to bear upon everything that they do and think a certain freshness of approach without the bias of traditional experience and conventional thinking.
Furthermore, for industry experience, there are the executive directors on the board, to provide the necessary guidance to the independent directors on industry matters.
Hence, it would not be inappropriate to provide a ban on the continuance of the independent director on the same board beyond two terms
It is also important that an independent director should not be on more than five boards so as to allow sufficient time and focus to be an effective independent director on the existing boards. It is also desirable that the remuneration of the independent directors is reasonably attractive.
TRAINING
Continuing education for independent directors would be highly advisable. Premier management and professional institutes are already running development programmes for independent directors. However, attendance at such programmes is yet to catch up.
The corporate governance report should give details of management development programmes attended by the independent directors of the company.
It would not be a bad idea to set up a self-regulatory body called 'The Institute of Independent Directors'. It could be a top of the lilne institution to nurture, promote and regulate the profession of independent driectors.
Nurturing the profession of independent directors requires a great amount of restraint and imagination on the part of the regulators and the law enforcers so that eminent and honest people are not discouraged from being independent directors.
The future growth of India depends to a large extent on sustainable wealth creation by the corporate sector. Business leadership founded on a good corporate governance model can ensure such sustainable wealth creation to a large measure.
For this, independent directors are absolutely necessary.
Therefore, the task of nurturing the institution of independent directors as a national priority cannot be over-emphasised.

The HUBRIS Hypothesis

[hubris (hyoo-bris) noun. Overbearing pride or presumption, excessive pride or self-confidence]

The Hubris Hypothesis of Corporate Takeovers

The Hubris Hypothesis is advanced as an explanation of corporate takeovers. It suggests that there is a tendency for acquisitor companies to pay too much. Company managers are over optimistic about their ability to add value to a new company.
Hubris on the part of individual decision makers in bidding firms can explain why bids are made even when a valuation above the current market price is essentially a valuation error. Bidding firms are said to be infected by hubris simply tend to pay too much for their targets.
It is often argued by varoius experts that there really are no gains associated with corporate takeovers and even if there are, they are highly overestimated and the source of these small gains are basically 'elusive'.
The basic steps undertaken in a corporate takeover are -
a) The bidding firm identifies a potential target firm
b) A "valuation" of the equity of the target firm is undertaken. It may typically include any nonpublic information. Also, the valuation would incorporate any estimated economies due the synergy effect or the negatives like a weak management (that will cause a discount in the target's market price).
c) This 'value' is compared to the current market price of the target firm. If the value is below the price, the bid is abandoned. However, if the value is above the market price, a bid is made. (The bid typically would not be the previously determined 'value', since it should include provisions for rival bids, for future bargaining with the target and valuation errors)
So, the key element here is the "Valuation" of the target firm. The valuation of an asset that has an observable market price (a preexisting active market) must be distinguished from other bids for assets that trade infrequently. In takeover attempts, the current market price forms a lower bound, as the bidder knows for certain that the shareholder will not sell below that.

Now let us consider a case of no potential synergies or any other source of takeover gains but the bidding firms believe that such gains exist. This means that valuation can be considered a random variable whose mean is the target firm's current market price. Only when the random variable exceeds the mean, a bid offer is made. But when there aren't any sources of gains for the bidding firm, the takeover premium is a mistake made by the bidder.
But if there were no value at all in takeovers, why would firms make a bid in the first place? But such behaviour rests on the assumption that individual are rational beings. A typical individual bidder believes that the valuation is right and is convinced that the market does not reflect the full economic value of the combined firm. This is the underlying premise of the Hubris Hypothesis - When there are no actual aggregate gains in a takeover, the takeover can be explained by the overbearing presumption of bidders that their valuations are correct.

The hubris hypothesis is consistent with strong form market efficiency. Financial markets are assumed to be efficient in the sense that a) no industrial reorganization can bring gains in an aggregate output at the same cost or reductions in aggregate costs with the same output and b) management talent is employed in its best alternative use.
Although perfect form market efficiency is unlikely, it does serve as an ideal benchmark against which other forms of efficiency are measured.

Persistence pays off..

THE SUCCESS DIFFERENTIATOR

(This article appeared in Hindustan Times 'Shine' Weekly paper)

"Persistence could communicate different meanings to different people, depending upon how it is interpreted, imaged and communicated - but by far it is the most singular differentiator and determinant for success in any endeavour. Just pick up any literature in goals and success - Brian Tracy, Robin Sharma, Tony Robbins or a Brian Mayne - and be sure that this is mentioned. And persistence is not about those huge and impossible tasks that we need to sweat it out to do. It is just having the mental strength and ability to 'persist' in doing that simple task that would lead to some accomplishment, set as a goal in one's life.

To be able to spend 30 minutes a day, consistently, in developing or nurturing a life skill, would lead to an achievement that would still be great and enough to make a life different. This could be hard exercising if one looks at a physical goal, writing 2 pages a day if it is a career and a passion goal or spending 30 minutes uninterrupted with spouse and son/daughter if it is a family goal. While it might appear to be a small thing at the outset, the key challenge here would be consistency - doing it everyday sans a break, and the same time, and most important, with a 'positive mental frame'.

Winning is a habig and outcome of persistence. And believe me, if one wants to win in life and all personal endeavours, being persistent will be the biggest differentiator.

Creating new habits is all about persistence. Just try to commit to a new habit - as trivial as waking up 30 minutes early every day - the mental challenge and the accompanying physical challenge will be immense. YOu will need the power of the mind and a diehard commitment - to ensure that this happens.

The easier side in this is that you need to stretch only for 21 days and then it becomes natural - a habit that stays with you for life - and most importantly facilities accomplishment in any area. I would suggest that everyone wanting to live life, read and commit themselves to The Monk Who Sold his Ferrari, the fable by Robin Sharma.

To make persistence a winning habit, I would urge - please, please strive to stretch your mind that extra bit to do something everyday. That something would be a key life skill or a winning quality in personal or professional life - anything you think is worth doing or trying.

Persist, create a winning habit and succeed. "

Outrage over AIG bonuses!!

The outcry over bonuses at AIG is complicating efforts to stabilise America’s financial system
Illustration by Peter Schrank
THIS crisis has brought a burst of creativity in the development of indicators of pain, from the subprime implode-o-meter to the downgrade-o-meter for structured securities. Perhaps it is time for the outrage-o-meter. Its needle would have jumped off the scale this week as America’s public, politicians and media huffed and puffed over the $165m in bonuses paid to members of the financial-products division that brought down American International Group (AIG). Troubles in that unit have forced the government to bail out the giant insurer, so far to the tune of $173 billion.
AIG’s wayward eggheads are not the only ones squirming. The affair is a test of the Obama administration’s handling of financial excess—and so far it has been ham-fisted. After flip-flopping over whether it had the authority to meddle with employment contracts, the Treasury eventually seized on a clause in the recently passed stimulus bill that may allow it to retrieve payments deemed contrary to the public interest. Tim Geithner, the treasury secretary, promised to recoup the money by deducting some of it from the next $30 billion tranche of aid for the company.

This is unlikely to assuage critics. The employees get to keep the bonuses while AIG is deprived of funds that were supposedly essential to keeping it afloat. The government’s back and forth has also damaged the credibility of the Federal Reserve, which has lent heavily to AIG and was aware of the bonuses several weeks ago.
Mr Geithner’s hand was forced by an increasingly hysterical Congress. Charles Grassley, a senior Republican, set the tone by suggesting that AIG executives apologise Japanese-style, first bowing and then perhaps committing suicide. The language was no less salty at a congressional hearing on AIG on March 18th, at which the firm’s chief executive, Edward Liddy, faced a rough ride despite being in the job only a few months and working for a salary of $1.
As the uproar grew, lawmakers began crafting bills that would impose taxes of up to 100% on the bonuses. Andrew Cuomo, New York’s hyperactive attorney-general, entered the fray, slapping subpoenas on the firm and muttering about possible fraud. His office stoked public ire by revealing that 73 employees had received over $1m, and that $57m of its “retention” payments were earmarked for staff it planned to lay off. At the hearing, Mr Liddy said he had asked all those who received more than $100,000 to give back at least half, and that some—no doubt motivated by death threats and the unwelcome attention of paparazzi—had offered to return the full amount. But he also worried that they would leave AIG, making it harder to manage the toxic financial-products business.
Shocking though the bonuses have been, they pale in comparison with the $49.5 billion of payments that AIG has made to counterparties in its disastrous foray into credit-default swaps—many of them foreign banks (see chart). This was no accident: it was precisely bailing out these trading partners that the government viewed as necessary to avoid a systemic meltdown. Still, the transfers—including almost $13 billion to Goldman Sachs, making it, as one newspaper put it, a “charity case”—are likely to receive more scrutiny as the bonus storm subsides.

The furore over AIG is awkward for the new administration in several ways. First, it makes it harder to pin responsibility for botched financial rescues on the Bush team. The new lot could have nipped the bonus fiasco in the bud. It also leaves Mr Obama walking a fine line between convincing the public that he shares their sense of outrage while also possibly pressing for more rescue funds. The government’s best guess is that another $750 billion could be needed. Insurers are clamouring for funds too. But bail-out fatigue is growing. The hearing’s chairman, Paul Kanjorski, suggested that the AIG mess could force Congress to reconsider any future largesse.
It does not help that Mr Geithner’s star is falling. His failure to get ahead of the problems at AIG follows his botched unveiling of a bank-rescue plan. Regaining his credibility will depend on the success of two new schemes: one to boost consumer lending by reviving securitisation, and another to remove toxic assets from banks (details of which are expected any day). Here, too, the government faces a balancing act: it needs to make the terms attractive enough to bring in private buyers, but not so attractive that they invite more political fireworks.
Another risk is that restrictions placed on firms that receive public money backfire. Banks are responding to new executive-bonus limits by increasing salaries. This “flies in the face of making pay more performance-related,” says Pearl Meyer of Steven Hall & Partners, a consultancy. Chafing under restrictions on their activities, recipients of funds from the previous government’s Troubled Asset Relief Programme are scrambling to repay them early. This may cheer taxpayers, but the withdrawal of capital may also hurt lending.
No wonder Mr Obama is keen to move the debate on. The focus now, he said on March 18th, should be on giving the government the tools to prevent a repeat: resolution authority over non-banks, similar to the power the Federal Deposit Insurance Corporation has to shake up sick banks. Mr Liddy, meanwhile, will be urged to earn his dollar by disposing of AIG’s assets and cutting the group’s vast debt to the taxpayer. Such deals have so far proved elusive. This week’s brouhaha is unlikely to make the task easier.

SOURCE -: http://www.economist.com/finance/displayStory.cfm?story_id=13331285&source=hptextfeature

'Open Door Bailout' (Article by Thomas L. Friedman)

SOURCE - http://www.nytimes.com/2009/02/11/opinion/11friedman.html?partner=permalink&exprod=permalink

Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.

“All you need to do is grant visas to two million Indians, Chinese and Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper. “We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate — no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”

While his tongue was slightly in cheek, Gupta and many other Indian business people I spoke to this week were trying to make a point that sometimes non-Americans can make best: “Dear America, please remember how you got to be the wealthiest country in history. It wasn’t through protectionism, or state-owned banks or fearing free trade. No, the formula was very simple: build this really flexible, really open economy, tolerate creative destruction so dead capital is quickly redeployed to better ideas and companies, pour into it the most diverse, smart and energetic immigrants from every corner of the world and then stir and repeat, stir and repeat, stir and repeat, stir and repeat.”

While I think President Obama has been doing his best to keep the worst protectionist impulses in Congress out of his stimulus plan, the U.S. Senate unfortunately voted on Feb. 6 to restrict banks and other financial institutions that receive taxpayer bailout money from hiring high-skilled immigrants on temporary work permits known as H-1B visas.

Bad signal. In an age when attracting the first-round intellectual draft choices from around the world is the most important competitive advantage a knowledge economy can have, why would we add barriers against such brainpower — anywhere? That’s called “Old Europe.” That’s spelled: S-T-U-P-I-D.

“If you do this, it will be one of the best things for India and one of the worst for Americans, [because] Indians will be forced to innovate at home,” said Subhash B. Dhar, a member of the executive council that runs Infosys, the well-known Indian technology company that sends Indian workers to the U.S. to support a wide range of firms. “We protected our jobs for many years and look where it got us. Do you know that for an Indian company, it is still easier to do business with a company in the U.S. than it is to do business today with another Indian state?”

Each Indian state tries to protect its little economy with its own rules. America should not be trying to copy that. “Your attitude,” said Dhar, should be “ ‘whoever can make us competitive and dominant, let’s bring them in.’ ”

If there is one thing we know for absolute certain, it’s this: Protectionism did not cause the Great Depression, but it sure helped to make it “Great.” From 1929 to 1934, world trade plunged by more than 60 percent — and we were all worse off.

We live in a technological age where every study shows that the more knowledge you have as a worker and the more knowledge workers you have as an economy, the faster your incomes will rise. Therefore, the centerpiece of our stimulus, the core driving principle, should be to stimulate everything that makes us smarter and attracts more smart people to our shores. That is the best way to create good jobs.

According to research by Vivek Wadhwa, a senior research associate at the Labor and Worklife Program at Harvard Law School, more than half of Silicon Valley start-ups were founded by immigrants over the last decade. These immigrant-founded tech companies employed 450,000 workers and had sales of $52 billion in 2005, said Wadhwa in an essay published this week on BusinessWeek.com.

He also cited a recent study by William R. Kerr of Harvard Business School and William F. Lincoln of the University of Michigan that “found that in periods when H-1B visa numbers went down, so did patent applications filed by immigrants [in the U.S.]. And when H-1B visa numbers went up, patent applications followed suit.”

We don’t want to come out of this crisis with just inflation, a mountain of debt and more shovel-ready jobs. We want to — we have to — come out of it with a new Intel, Google, Microsoft and Apple. I would have loved to have seen the stimulus package include a government-funded venture capital bank to help finance all the start-ups that are clearly not starting up today — in the clean-energy space they’re dying like flies — because of a lack of liquidity from traditional lending sources.

Newsweek had an essay this week that began: “Could Silicon Valley become another Detroit?” Well, yes, it could. When the best brains in the world are on sale, you don’t shut them out. You open your doors wider. We need to attack this financial crisis with green cards not just greenbacks, and with start-ups not just bailouts. One Detroit is enough.

Global Economic Forecast for 2009: Will Demand for Good News Outpace Supply? (Published in IndiaKnowledge@Wharton)

After a year of financial shock and sharp economic loss, 2009 is likely to be extremely difficult for the global economy, with investors, business leaders and policymakers struggling to find signs of recovery, according to Wharton faculty and academic partners around the world.
"It's all pretty negative," says Wharton finance professor Franklin Allen. "The economy is going into a recession and my own view is that it will be deep and quite long-lasting. There doesn't seem to be anything on the horizon that is a bright spot."
In the wake of crumbling stock markets, mounting bad debt and rising unemployment, policymakers are scrambling to devise strategies to restore stability and lay the groundwork for new growth. "There's no country in the world that's doing well," Allen continues. "Everybody is doing badly, with large amounts of debt and heading toward deflation," plus "unemployment and a rush by companies to fire people."
India's Diminished Expectations
Around the world, emerging markets are still growing, but at lower rates -- exposing some underlying problems in their economies. For now, the official line is "cautious optimism" in India. In December, the government reported that economic growth in the first half of the current fiscal year (April-September 2008) was 7.8%, a strong showing in a global economic slump. The government projects full-year growth at 7%, but expects to fall short of fiscal and revenue deficit targets this year mainly because of stimulus measures that could total up to 2% of the nation's $1.2 trillion GDP. The fiscal deficit may jump to 5% of GDP compared to the targeted 3%, according to the government. Overall, however, officials say the economy should not be hard hit because services and agriculture account for 55% and 18.5% of GDP respectively, and these sectors are less affected by cyclical downturns.
The official optimism is not fully echoed in other circles. Japan-based Nomura Securities puts India's current growth at 6.8% and predicts a decline to 5.3% for 2009-2010. Rajiv Kumar, director and chief executive of Delhi-based think tank Indian Council for Research on International Economic Relations (ICRIER), sees it going as low as 3.9% -- or even lower -- in the first half of the fiscal year.
Other indicators also point to hard times for India, where in recent years the economy was soaring. Industrial output fell 0.4% in October, marking the first decline in 15 years, and exports were down 12%, the first decline since 2003. Excise duty collections plunged 15% in November.
The bright spot in the Indian economy is inflation, which dropped to nine-month lows of about 6.6% in December. HDFC Bank chief economist Abheek Barua expects inflation to drop sharply to below 2% by March due to the declines in prices for manufactured goods and commodities. A. Vinay Kumar, a professor of finance at the Indian Institute of Management in Lucknow (IIML), says the easing of inflation is "the most heartening story of all."
Hari Rajagopalachari, executive director at PricewaterhouseCoopers, has a different view. "Inflation is going to be high because of the injection of huge amounts of cash into the economy through monetary policies," he says. "India is largely a supply-constrained economy. Putting more demand into the economy does not necessarily mean that there will be an equal supply of products or services."
Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB), expects Indian corporate performance to suffer. "The government stimulus will help the situation a bit, but it is unavoidable that profits will fall and margins will decline. At the same time we should not expect large losses for most of the major companies. They will maintain profitability though it will not be as good as in the past."
Exports -- where much damage has already taken place -- will continue to suffer. "Nothing is going to improve before 2010-11 because the whole global situation is going to remain depressed all through 2009," says Chakrabarti. Adds Kumar: "The export sector is not in good shape because of the volatility in the exchange rate. The rupee depreciation is a respite, but greater volatility is a matter of concern."
The rupee depreciation is unlikely to be India's saving grace much longer; experts expect its value to return to around 40 to the dollar, down from more than 50 in recent months. Kumar predicts the rupee will be around 40 or 42 to the dollar in 2009.
Chakrabarti says the dollar has appreciated against almost every currency in the world as worried investors seek safety in U.S. Treasury bonds. "Once people think that the crisis is over, there will be a reversal. This may bring down the dollar a little bit and the rupee may appreciate to around 45 or so. I don't see the rupee falling much further than where it is now."
The Sensex -- the Bombay Stock Exchange Sensitive Index -- may increase slightly in the coming year. "The market is expected to be flat, between 9,500 and 10,500, and could even come down below the 9,000 mark before the general elections" due in the next few months, says Kumar. Chakrabarti predicts the market will move sideways. "While the Sensex may go up slightly, I don't see any sustained rise. If we manage to reach 12,000 by December 2009, it means we are doing wonderfully well."
Painful Months Ahead for the U.S.
The collapse in the United States is different than in other industrialized countries around the world because the problems began in the financial sector and spread out into the broader economy, says Wharton management professor Mauro Guillén. In the rest of the world, problems in the real economy -- created largely by trouble in the United States -- led to weakness in financial markets. "In the United States, the key in 2009 is, 'Can we clear up the mess in the financial sector?' Unfortunately, I'm not very optimistic," says Guillén.
Wharton finance professor Richard Marston says he is shocked by the impact of the crisis on U.S. financial firms and markets. "To see Wachovia, Wash Mutual, Citi all gravely wounded. It's extraordinary." Marston contends that while the banks have been shored up, they are unlikely to lend for a long time. On top of that, he adds, the inability to securitize will constrain credit more than if banks alone had cut back on lending.
Looking ahead, other shocks -- bankruptcies, bond defaults and additional job losses -- will buffet the economy, according to Marston. While markets have probably priced these events in, people will be shaken up when they actually occur, adding further jolts to confidence. He notes that during the 2001 recession -- which was not as serious as today's -- the economy turned upward in November, but large job losses continued through 2002. Worse, he says, demand remains depressed around the world. "This is our first world-wide recession in a long time. And the engine of past recoveries -- the American consumer -- is in the repair shop for an overhaul."
Businesses will hold back from investing until there is a revival of demand, he continues. "Where will demand come from?" asks Marston, who sees no obvious answer. "So I think the consensus in the press that recovery will start 'sometime in 2009' may be wishful thinking. We shall see."
John Percival, Wharton adjunct professor of finance, says the nation is still facing a mortgage crisis that will hamper recovery. He points out that while foreclosure rates are already high, many mortgages are due to reset in the coming years. Those mortgages may not be as shaky as subprime debt, but many are still likely to become problem loans. Further, he says, the commercial mortgage market is likely to start falling into default, and financial institutions will face problems with consumer credit.
"It's easy to say that this, too, shall pass. People are talking about 2009 being tough and things will turn around in 2010," says Percival. "I'm not so sure. It could be longer than that."
Allen predicts that unemployment will continue to rise and the economy will remain weak as consumers and businesses refrain from new spending until they are confident asset prices are no longer falling. "We need things to stabilize," says Allen. "The problem at the moment is that people don't know what their wealth is." Americans have no idea what their investment portfolios or real estate holdings are really worth and, as a result, are afraid to spend or make additional investments. "I think everybody is frozen with fear of losing their jobs and the rest of their wealth. There's huge uncertainty. Until that starts going away, until things stop getting worse, we'll keep going down."
Percival says the rate of consumption in recent years, fueled by easy credit and excess borrowing, was too much of a good thing for the U.S. economy. Ultimately, though, consumers will return to the malls, auto showrooms and the real estate market. "The consumer will be chastened for a while, but I can't see any dramatic change in the long run."
He notes that the emergence of bargain prices for stock in world-class companies is one positive note in the gloomy economic picture. "The prices you can buy these companies for are ludicrous. If you have some liquidity and a little bit of patience and a little bit of courage, there certainly are some wonderful buying opportunities out there."
According to Allen, the early weeks of 2009 will be marked by a wave of bad economic news as the incoming administration attempts to lay the political groundwork for a massive stimulus package. "They need to get everything out as soon as possible," he says. "It will be a very negative January and February and then hopefully things will start to stabilize. I think we have some painful months in front of us."
While the Obama administration will be pressed to take action to address the financial problems, adds Percival, it runs the risk of creating additional problems, primarily rising government debt and inflation. Meanwhile, he says, the global economy continues to remain vulnerable to oil price shocks. Finally, given the severity of the current economic crisis, politicians will find it next to impossible to stand up and take decisive action on the funding gaps in Medicare and Medicaid. "This will be put on the back burner, but the longer we wait to solve these problems, the bigger they are going to be," warns Percival.
Marston says the Obama administration's fiscal stimulus plan could result in an economic "spring thaw" that may only be temporary. "The fiscal stimulus is desperately needed to make sure things don't get worse. But I am pessimistic about the long-term impact of all of the spending. The pump priming may not really get things flowing. We need another source of demand -- consumers, exports, investment?"
Meanwhile, an auto industry bailout may only postpone for a time major restructuring that will erode the financial security of workers and retirees, particularly in Michigan, suggests Allen. "I don't think they can avoid it being like a Great Depression."
U.S interest rates are hitting historic lows and a flood of liquidity is coming into financial markets through Treasury bonds, he adds, noting that low interest rates did not do much to speed recovery in Japan in the 1990s and he does not expect them to help much in the United States now.
Europe: Hit Hard -- and Early
The new year will also be difficult in Europe, in part because the recession started there about six months later than in the United States, says Guillén, who is also director of Wharton's Joseph H. Lauder Institute of Management & International Studies. He adds that European economies are less flexible than the U.S. system and will take longer to adjust to the changing economic climate, prolonging the downturn. "The outlook for 2009 in Europe is not great. It's going to be a difficult year."
The global economic slump threatens to stall Eastern Europe's promising economic growth. "For the last 10 years, all these countries have been trying to make the transition to a market economy, and the financial systems are kind of shaky," he says. "I think they're going to have some hard times."
While the transition will slow growth, Guillén does not believe governments in these emerging markets will backslide into protectionism or reject other free-market characteristics of their economies, although they may postpone additional reforms. "The countries that have become members of the European Union realize how important that is for them and they don't want to do anything that will jeopardize their standing," Guillén notes.
Meanwhile, Russia is suffering from a sharp decline in oil prices, and is a key factor in what will happen in the European economy in 2009.
According to Guillén, Russia's manufacturing sector is not competitive globally and the country has essentially become dependent on commodities which fluctuate wildly in value. Despite a well-educated population with strong capabilities in engineering and science, Russia's commodity booms have crowded out investment in other parts of the economy, undermining global competitiveness.
Allen points out that Europe is experiencing a deep recession, especially in the United Kingdom. Germany, Spain and Ireland have also been hit hard, although France is holding up a little better because greater state involvement in the economy is somewhat cushioning citizens from the downturn. Italy, despite long-term structural problems in the economy, is also faring relatively well at the moment because of low levels of debt.
Europe, he adds, is likely to experience deflation, but will keep interest rates at 1.5% or 2%, while the United Kingdom will be more aggressive and may let rates fall to zero percent or 0.25%. Low rates have advantages and disadvantages, he says: While they help soften the impact of recession, they can delay recovery.
Latin America: Economic Highs and Lows
Latin America, which is typically a casualty in global financial crises, has managed to keep itself afloat this time. According to Juan Carlos Martínez Lázaro, professor at the IE Business School, Latin America finished 2008 with a growth rate of more than 4%. The first part of the year was very strong as a result of record-high prices for raw materials, making up for the sharp declines during the second half of the year.
However, 2009 is going to be hard for Latin America, which will not be able to totally escape the global economic problems, says Martínez Lázaro. He predicts that the region will suffer the impact of the global downturn in several areas: manufacturing exports, remittances from workers living abroad, investments and financing. Some countries will suffer more than others.
Exports of raw materials will be affected by dropping prices amid declining global demand. Exporters of petroleum, including Venezuela, Mexico, Peru and Ecuador, will suffer the most. Chile, one of the world's largest exporters of copper and molybdenum, will see a drop in its export revenues and lower investment in new projects because of declining tax revenues, says Juan Carlos Guajardo, executive director of CESCO, Chile's center for research on copper and mining. Central American and Caribbean countries will be net importers of raw materials.
Latin American manufacturing exports are also expected to decline, following lower demand from U.S. consumers. Remittances to Latin America will also drop, which will have a strong impact on Latin American countries that have a lot of immigrants working abroad, such as Mexico and Ecuador. In addition, Martínez Lázaro forecasts a drop in foreign direct investment in 2008 and 2009. "Fewer and fewer companies are committing themselves to new projects, and this will be felt in such countries as Brazil and Mexico, which attract the most investment in the region. However, it will also be felt in such countries as Peru and Chile," he notes.
Financing throughout the region is increasingly difficult and expensive. In Brazil, for example, Anita Kon, a professor at the Pontifical Catholic University in S?o Paulo, notes that "credit is increasingly scarce, interest rates continue to be very high and inflation will accelerate, given global conditions in which the supply of certain food products and other commodities doesn't meet demand. Brazil does not have enough savings of its own to finance the development and modernization of its infrastructure and manufacturing structure. It depends a great deal on externally financed loans and foreign direct investment."
Large-scale public sector investments in infrastructure have already slowed and will do so even more in 2009, especially since tax rates are already very high and are in no condition to increase, Kon explains. Although Brazil has foreign exchange reserves that exceed $200 billion, she says financing currently depends on short-term capital speculating against Brazil's currency, the real, which will lead to a dramatic rise in the price of the dollar. "Brazil continues to be vulnerable, because it strongly depends on short-term speculative capital to balance its external accounts."
Meanwhile, Chile's financial system is relatively strong and its fiscal accounts are in good shape, according to CESCO's Guajardo. "Chile took advantage of the period of high prices [in raw materials] to reduce its debt to low levels, and to accumulate [foreign exchange] reserves of more than $20 billion, which will enable it to sustain an expansionary budget in the coming year."
As for the populist sentiment stirring in the region, Martínez Lázaro quotes Ricardo Lagos, former president of Chile, "who once said, 'It is easy to be a populist when your wallet is full.' We'll find out if it is so easy now to be a populist or become a demagogue." In his view, leaders such as Hugo Chávez in Venezuela and Evo Morales, in Bolivia are going to feel the impact of the crisis a great deal. Any possible deterioration in social conditions in other countries could also lead to more populism.
Generally, Latin America was well prepared for this crisis. "During boom times, they did their [macroeconomic] homework, so 2009 is not going to be dramatic," states Martínez Lázaro, adding that the entire region is going to grow more slowly, at about 2.5%. While growth will slow, he says, the region should not drop its guard. Latin America "can pursue a very stable macroeconomic policy and [also] reduce [social and economic] inequality. It would be a shame if [Latin America] loses its way moving down that road."
China: How to Support Future Growth
China, another once-hot emerging market, is also likely to face setbacks this year. Just a year ago, China's central government cited inflation as its biggest economic concern and announced it would shift monetary policy to prevent the economy from overheating. Now, the hope that China would continue to be a rising economic star is fading and the resilience of China's economy will be tested.
A December report released by People's University of China in Beijing found that the current downward cycle signals the collapse of the nation's growth model based on U.S. consumption along with Chinese savings and other exports. While China is widely expected to grow at 8% next year, the People's University report predicted the economy will suffer from declining global demand and less ability to drive the economy forward with investment. Meanwhile, China's inelastic demand and supply structure will make it hard for the nation to react to economic change.
Even before the Wall Street financial crisis hit, China's export-oriented economy was under pressure. The international community was pressing China to raise the value of its currency. In addition, thousands of factories in south China were shutting down due to tighter regulation of product quality and labor and environmental standards, signaling that deep change in the economy is coming.
Andy Xie, an independent economist, says the government's massive stimulus package of RMB 4 trillion ($586 billion) announced in November will bring some improvement to the economy in the second half of 2009. However, the plan does not address a key issue: The Chinese people cannot afford to buy the goods they produce. Xie suggests an effective approach to improve the economy would be to subsidize consumption and home purchases.
"It's very possible that China will expand policies in this regard and the economy will be better in the second half of 2009," he says. "The stock market might have a rebound by then, but it will only be a rebound, not a real bull market. The key issue is, what shall we rely on to support our future growth?"
At a December central government meeting on the economy in Beijing, China's top leaders placed a priority on changing the nation's growth engine. Wu Jing Lian, a prominent economist and member of the State Council's Research Center, told journalists after the meeting that China's existing growth model leads it to suffer when the U.S. economy runs into trouble. "It makes us believe that ... we have to focus on the structural adjustment and growth model reform, which will be the only way for us to survive."
In his column in Cai Jing magazine, Huang Yi Ping, chief economist for Citigroup Asia Pacific, writes that "the sky will not fall even if growth is lower than 8%." He assured readers that China's government is determined to keep growth above that level and is capable of making that goal.
However, he questions why the government's stimulus package does not focus on consumption. "We can't expect to solve trouble by investing in infrastructure every time. Ten years ago, China needed a lot of infrastructure, but today our infrastructure is even better than many developed countries. The focus should be on people's lives, the quality of growth and [ways] to make ordinary people richer."
Some scholars have offered detailed suggestions on how to boost the Chinese people's disposable income. Chen ZhiWu, a finance professor at the Yale School of Management and a visiting scholar at Chang Kong Business School in Beijing, said the government should give tax drawbacks to subsidize the low- and middle-income households, individuals and farmers; increase China's investment on healthcare, education and social security with the goal of making people more secure and willing to release savings; facilitate a trading market of rural land use rights; and take bold actions to cut taxes on enterprises and individuals.
Toyota Underscores Japan's Woes
As the rest of the world comes to grips with the global financial crisis, Japan, the world's second-largest national economy, is suffering too. Wharton's Allen says Toyota's first money-losing quarter underscores the severity of Japan's economic problems. Not only are Toyota and other Japanese companies facing a slowdown in demand from China and the U.S., but investors are seeking safe haven in the yen. As the yen rises in value, Japanese exporters suffer even more in the global economy.
In addition, Japan faces political uncertainty. Its third prime minister in three years is already facing a lack of confidence in the polls. "The last three prime ministers have been disasters," says Percival. "The few actions they took have been strange and bizarre. And it looks like the prime minister will change again, which makes Japan's ability to deal with the situation more complicated."
Allen says Japan's economic future is troubled. "But on the positive side they have been dealing with these problems for 20 years and they have come through it without huge damage. So this society is resilient and the economy is resilient. It will be difficult for them, but not terrible."
In a way, Japan is especially relevant in today's global economic crisis because of its experience with a sharp economic decline and struggle to revive in the 1990s -- often referred to Japan's "lost decade." Its policy makers tried a variety of fiscal and monetary stimuli that may provide clues to how today's global economic leaders should approach the current problems.
Wharton management lecturer Adrian Tschoegl worked for six years as a macroeconomist at a Tokyo investment bank during that country's economic rise and fall. "That's when I realized that most forecasts of complex political and economic events are valueless," says Tschoegl. He says he made some good calls and some bad calls when he was working in Japan, but came to believe that in today's complex, interrelated global economic system, it is nearly impossible to predict the true impact of one policy action or another.
"We can come up with some ideas and a range of forecasts and some information about the risk of what is out there," he says, "but the reality is that all sorts of things can come out of nowhere and suddenly hit you."
When governments attempt to enact policies to respond to economic problems, it is hard to tell what will happen one or two steps forward as policies and market forces begin to interact, he adds.
"The problem is that very often the best thing to do is to simply not do anything," says Tschoegl. "But no politicians can bring themselves to stand up here and say, 'We don't have the faintest idea of what to do, and right now we're not going to do a damn thing.'"

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