Our Articles

1) Our article on Crude Oil was published in “Divya Bhaskar” – one of the leading daily newspaper in Gujarat, on 16^th June, 2008 when crude oil was trading at $140 and we predicted a crash in the prices. In this article, we recommended a SHORT position in Crude Oil at $140 with target of $110 and $70-$80 in short term with stop loss at $155. Interestingly, some of the global research firms were giving a target of $210+ for crude oil price at the same time when our article got published. Click here for reading our article on: “Continuous increase in Crude Oil Prices: Real boom or a Bubble?”

2) Another article published in “Divya Bhaskar” – one of the leading daily newspaper in Gujarat, on 13^th July, 2008 regarding “Will the USA and Global Equity Markets have a bull run again?” In this article, when Dow Jones Industrial Average (DJIA) was trading at 11200 (at the time of writing research article and analysis) and we had given target of 8550 (indicating a 23% fall projection) in Dow Jones by March, 2009. After 3 months in October 2008, Dow Jones (DJIA) touched our target of 8550. This is how our targets work in such kind of volatile bear markets too. Click here for reading the article.

The English version of this articles is as under: (Note: They are original articles which were shortened little for the article size for the newspaper)

Increasing Crude Oil Prices – Bubble or…

Date: 16^th June, 2008

Recently, crude oil prices have skyrocketed to an all-time high of $ 139.12 per barrel on 6^th June, 2008. On the other hand, mounting losses of oil companies forced the Indian government to raise prices of petrol, diesel and gas.

It was in August, 2007 when crude Oil price started its almost unstoppable up move and consolidated during December’07 and January’08 only to fuel the rally at faster rate in subsequent months. From a low of $ 90 per barrel in Feb’08, crude oil touched @ 139.12 per barrel in 1^st week of June’08 week showing rocket hike of 54.58% in last 5 months.

            The jump in crude oil prices was partially driven by trading & speculative reasons, while partially it was driven also by fundamental reasons. Fundamental reasons include decline in US oil inventories declared in June’08 and a decline in Russian oil production in May’08. In addition to this, projected decline in Mexico’s oil production over rest of the year 2008 that too at considerable level (Mexico contributed 4.4% of world oil production in 2007) added to the fire. To make the situation of rising crude oil prices even worse, OPEC has continuously denied increasing crude oil production in order to curb zooming crude oil prices. All these factors have led to the sudden jump in crude oil prices during last two months, pushing up the inflation rate.

Major reasons behind high oil prices

• Rising consumption in developing countries including China and India
• Trading in commodities futures have led to speculative spurt
• The reluctance of OPEC members not to increase crude oil production

Table – 1.0 Major Consumers of Crude Oil in the world: (for the year end 2007)

Source: Dhaval P Vyas Investment Research

            Doing the proper analysis of the Table 1.0, we can observe that declining consumption by major developed countries, while developing countries including China and India witnessed a positive change in their consumption in the year 2007 compared to the year 2006. Moreover, traders and hedging companies through-out the world is projecting a considerable rise in consumption by China and India. This has provided a solid background to support rising prices.

            However, reader note that the hike witnessed during last three months is over-priced as there is no surprising jump in crude oil consumption in last couple of years. Hence, oil prices inching $ 140 isn’t be justified.

What is in store for Indian Companies and Public

            At least for short-term, crude oil prices are expected to be higher. This will put huge burden on the Indian economy. Consequently, high oil prices will ruin the economic growth as it results into high production cost – which subsequently, results into low profit margins and fewer opportunities for companies to give a more salary hike.

On the other hand, high oil prices put upward pressure on inflation numbers, which makes the life of general public tougher especially for middle-class and below that class remains the major portion of India’s population. So, this makes their life hard as prices of essential commodities will rise dramatically as a result of high oil prices. Moreover, the possible low economic growth over next few months may put additional pressure of the decline in job opportunities – again causing economic problems for public.

Where the solution lies?

            Recently, the Government of India has increased petrol, diesel & gas prices, RBI too increased Repo rate by 0.25% last week. But, according to us, these steps wont be enough to fight against rising crude prices and ultimately, high inflation. We strongly believe that the Indian public has solution in their own hand rather than seeking government support and intervention of RBI’s monetary policy.

The solution lies in the efficient use of electricity, petrol, diesel, gas, water and food. For example, many times, only single person is being seen in a four-wheeler – which can be a luxury to him, but is totally the waste of natural resources. In such cases, government should come-out with the strict notification of minimum number of passenger in a car for driving it or the minimum kms. limit to drive a petrol car or petrol scooter/bike, only electric bike should be allowed in driving less than 5 kms. By applying such rules, we can just come-out with a pollution-free economy and that too less-dependent on oil suppliers. Public should be given more encouragement/incentives to use of solar-energy in cooking, use of hybrid cars and electronic bikes/vehicle.

Notably, as per our economic research, in 20 years down the line, any country to make her see as ‘Super-power’ will have to have full access to essential commodities especially water and oil in the sufficient manner.

Will crude-oil price increase further?

Of course, there are also some basic fundamentals reasons behind rising oil prices as mentioned earlier, but overall the spurt is more of a technical bullishness. It is the fear in minds of crude-oil traders regarding the uncertainty over crude oil production, rising consumption of developing countries and lack of dependable & sufficient alternative energy sources. All these have resulted in the skyrocketing oil prices, which is fuelled by the ongoing credit crisis in recent times. Ultimately, the imbalance in the global economic cycle has considerably pushed up oil prices and central bankers all over the world may have to fight very hard against rising inflation especially due to high oil prices.

Should Corporate India build hedging at present level?

Some of the estimates from few of the reputed firms report estimation of $ 200 for crude oil price, but we see these estimates biased rather than emphasizing the current consumption pattern and expected growth over years. Therefore, we advice companies not to take long positions in crude oil at current levels for hedging purpose, instead they can wait for lower levels to be hit and can buy futures contract later in order to avoid risk of high oil prices. The strategy is not to build aggressive long positions in crude oil at current levels as a minor-to-moderate correction to the tune of 10% to 20% may be on the cards.

At current price of $ 138- $ 140, traders can use the present level to short crude oil with downside targets of $ 110 - $ 125. On the other side, chances of crude oil crossing $ 155 seem slim at least in the short-run. However, in medium to long-run, unless, the price of crude oil doesn’t break $ 110 on downside, we expect the present bullishness in price to continue. On the other hand, if crude oil prices go below $ 110, then oil prices would consolidate for some time to stabilize around $ 70 to $ 80.

It is to be noted if oil prices remain at such higher levels in the coming months, then definitely, this will put considerable downward pressure on the economic growth of developing countries including China and India. This in turn can result in decreasing consumption by developing countries as economic slowdown will occur there due to high inflation as high interest rates policy will get implemented. This in turn will put downward pressure on oil prices as those countries facing slow economic growth will reduce their oil demand. So, one possibility of cooling down oil prices is can’t be denied after the slow global economic growth results into low demand.

Bubble building “Crude Oil” price

Our research on international commodities market says that the current rise in crude oil prices is more of a speculation-driven rather than supply-driven. This crude oil price should be rather seen as a bubble building and not a genuine rise as we see speculative interests taking over the price discovery of oil prices. In the year 2004, we had warned similar kind of Real Estate bubble building in the USA – which has already started bursting from 2007 onwards severely affecting many of the giant companies there. Thus, we view the current high oil prices as a “Bubble Building” and not driven by fundamental reasons.

~ Written by Dhaval P. Vyas, CFA, MS (Finance), Founder & Chief Market Analyst, www.dhavalpvyas.com

Will USA & Global markets turn bullish?

Date: 13^th July, 2008

After Dow Jones Industrial Average (DJIA) touching a low of 7397.31 in March, 2003 – the bull run begun in the USA and started moving upward for subsequent years. With a dream run of four and half years, the DJIA made an all-time high of 14198.10 on 11^th October, 2007, showing an increase of 91.94%. At that time, positive news of increasing consumption, high investment, benefits of globalization and robust financial developments including M&A activities especially by Asian companies had pushed up the world equity markets at new highs.

But, as every Bull Run has sustained bear run or subsequent sell-off, the USA market has also witnessed selling pressure on the back of various reasons. Sub-prime mortgage crisis, housing market bubble, increase in unemployment rate to 5.5%, slow GDP rate and high inflation rates have severely impacted investment sentiment across the USA. This has resulted in the fall of 18.1% in the DJIA from Nov’07 to Mar’08. All these resulted into bearish sentiments across the globe and brought down the world equity markets at considerable rate. All these are reflected in falling equity markets and rising credit crisis. The USA runs the risk of major/most severe economic slowdown of its past 30-40 years which should be seen as a sign of warning by investors.

Ups and Downs of International Equity Markets (2007-08)

Source: Dhaval P Vyas Investment Research

Notably, some of the over-valued markets have cool down and have taken a hit in last 6-9 months. For example, the Shanghai Index had zoomed from 998 in Jun’05 to 5955 levels in Oct’07 in almost two and half years showing a massive increase of 496.7% over mid-2005 levels. As the bubble of over-valued stock valuations got burst from Nov’07, the Shanghai market has lost 52.8% to make a low of 2812 in June’08. However, the rest of the world markets haven’t tumbled liked the Chinese equity market, but of course they have felt the heat in the same period. This can be seen in the above mentioned table.

Is economic downturn of USA visible?

            As far as the economic downturn is in the USA is concerned, several indicators have suggested a weakening economy. But, no signs of financial unrest in a big way have been seen yet in the USA. Recently, the US unemployment rate jumped to 5.5% from 5% which is expected to go as high as 6.5%.

In fact, Finance and Housing sectors of the USA are in real mess as sub-prime mortgages & wholesale finance has suffered a significant setback. In USA, the Finance sector employs almost 6% of workers – however, one must note that only a small portion of these are employed in the much affected section – sub-prime & wholesale finance. So, effect would be limited on the same section. On the other hand, the Housing sector of USA accounts for three and half per cent of GDP from a high of six and half per cent before two years. All these have resulted in the severe housing market & credit market crisis in the USA.

What the recent Financial Crisis mean to the USA economy?

The continuing financial crisis in the USA has impacted considerably which can be seen in the mounting pressure on capital of banks, higher credit risks, liquidity shortages, falling prices of structured products especially mortgage-related securities, decline in stock/equity prices. Moreover, the financial crisis may put a break on consumer spending in the USA, which can lead to low corporate profits and thus, lower employment. Moreover, on the Fed’s try to lower inflation by slashing interest rates may not reap the fruits as expected the back of the rising costs of energy prices including crude oil and natural gas,.

Possible options for the Federal Reserve

Presently, the Federal Reserve has two options on hand 1) Lower/unchanged interest rate, 2) Increase in interest rates. First option of keeping interest rates unchanged or lower may not help to bring down the consumption and thus, inflation may not come under comfortable zone. On the other hand, if the Fed decides to increase interest rates, the already slowing USA economy may face severe consequences in the form of lower corporate profits, low credit growth, low employment opportunities. Therefore, it is a very crucial juncture for the USA and for the world’s major economies as much of the economy change in USA can affect the financial markets worldwide.

Technical Perspective

Technically speaking, for short-term, the DJIA has very good support at 11700 and 11400 levels, while resistance for the market is at 12650 & 13000. Unless the DJIA doesn’t close above 13000, the sustained Bull Run may not be witnessed from short to medium-term perspective. Notably, if the DJIA closes below 11100, the major bear market may be established which may bring down the DJIA to 10600. The worst scenario probability of the DJIA touching 8550 can’t be denied by mid-2009 can’t be denied. Overall, the DJIA is expected to consolidate during January’09 & Aug’08 before starting to see robust recovery.

What will happen to USA in 2008 and 2009?

As per our international economic research, the USA will continue to see slowdown in economy through-out 2008 and has the slight probability of recovering in the last part of 2008. Rather in the 1Q’09, the USA economy may start recovering from the financial setback felt during 2007-08. Therefore, the considerable upward change in interest rates will be seen in the 2008 year end and early part of 2009 as some of the indicators like decline in the unemployment rate and improved GDP growth rate are visible. So, don’t expect a quick turn-around in the financial market of USA & worldwide in near future and also note that value buying in selected stocks across the globe will continue to exist as equity markets always outperform all available investment vehicles over long-period.

~ Written by Dhaval P. Vyas, CFA, MS (Finance), Founder & Chief Market Analyst, www.dhavalpvyas.com