Farewell to India

Indiabulls Financial Services went public last September at
19 rupees a share. Today – one year later – shares of
Indiabulls closed at 225 rupees, up nearly twelve-fold.
That’s not even a new high. Five weeks ago the shares hit
271!

What’s so great about Indiabulls that makes it worth 12
times what it was worth one year ago? The answer is
NOTHING… except that Indiabulls just happens to trade on
India’s stock exchange. Indiabulls is primarily a brokerage
firm. It makes its money selling Indian stocks. The Indian
stock market is hot, which makes Indiabulls look good.

That’s one reason for the run-up in the share price.

Not content with the stock market bubble in India,
Indiabulls has been taking its profits and buying up Indian
real estate, which is also red hot. Indiabulls recently
purchased an 8-acre former textile mill – for an astounding
$101 million dollars. And this is the second one of these
it has bought in just a few months.

With stocks like Indiabulls as an example, the stock market
in India couldn’t be hotter. And therein lies the
problem…When a financial market can’t get any hotter, it
can only cool down.

$8 billion dollars in foreign money has poured into Indian
stocks in 2005 alone – and $2 billion of it arrived last
month! Of course, the Indian market could go higher from
here. But I feel like I’ve seen this movie many times in my
career before: A mountain of foreign money flies in on
extreme optimism… and then that mountain of foreign money
– or what’s left of it – leaves in disappointment and
disgust.

A key point is that I’m not knocking the India story. It’s
just… the chances of foreigners making money in the stock
market there over the next few years is close to zero.
The hot money will get washed out, as it always does.

THE ULTIMATE CONTRARIAN INDICATOR

I was stuck in an airport last week, so I wandered into the
newsstand. And there it was… the ultimate contrarian
indicator… laid out on a silver platter for us.
Not one, but two major magazines carried the exact same
cover story… "CHINA & INDIA: THE BEST WAYS TO INVEST IN
THE WORLD’S FASTEST GROWING ECONOMIES." It’s BusinessWeek’s
August 29, 2005 issue and Worth Magazine’s September 2005
issue. Take a look:

I can’t make this stuff up. The trusty old rule is,
whenever a hot investment topic is on the cover of a
handful of major magazines, it’s a pretty good signal we’re
close to the time to bet against that hot investment.
BusinessWeek from a quarter century ago provides the
perfect example. Back then BusinessWeek wrote in a cover
story: "The death of equities looks like an almost
permanent condition."

It seemed logical at the time, as U.S. stocks had fallen
from 1966 to 1979 (especially after factoring in the
devastating effects of inflation over that timeframe).
However, if you had listened to BusinessWeek back then,
you’d have missed out on the greatest stock market boom in
all recorded history. On the other hand, if you’d done the
opposite of what BusinessWeek said, you’d be a very rich
individual today.

Instead of predicting the great bull market of the 1980s
and 1990s, BusinessWeek predicted the exact opposite back
then. The magazine went as far as to say: "Even if the
economic climate could be made right again for equity
investment, it would take another massive promotional
campaign to bring people back into the market."

Apparently BusinessWeek thought stocks were for old people
who didn’t understand that stocks were oh-so unfashionable:
"Younger investors, in particular, are avoiding stocks.
Only the elderly who have not understood the changes in the
nation’s financial markets, or who are unable to adjust to
them, are sticking with stocks."

You get the idea. Today, instead of predicting the Death of
Equities, BusinessWeek and Worth magazine are showing you
how to get rich in China and India. To me, it’s as close as
we get to a bell ringing to signal the top.

So now you have the chance to go against BusinessWeek once
again, by cashing out your red-hot Indian stocks. You might
also make some money by selling short selected Indian
stocks, as I am advising the subscribers of Sjuggerud
Confidential.

While I fully agree that these countries will be extremely
important in the coming decades, I think their stock
markets – India’s in particular – could be in trouble in
the coming years.

You won’t believe just how far these stock markets can fall
when they get into trouble…

90% FALLS ARE NOT UNCOMMON IN EMERGING MARKETS

China, Thailand, Russia, Indonesia, and Argentina… What
do these stock markets all have in common? At some point in
the last few years, they’ve all lost over four-fifths of
their July 1997 values in terms of U.S. dollars (based on
MSCI’s indexes).

Yes, they’ve all fallen by over 80%. Indonesia was hit the
worst, losing well over 90% of its value. Ouch! Let me
stress, these losses weren’t even that long ago…
Argentina lost 90% of its value between 2000 and 2002.

Sure, the long-term promise of emerging markets can be
alluring. But my point is, promise or not, the stock
markets in emerging market countries can really get
obliterated. The obliteration comes when there’s something
that spooks the hot money. The hot money will leave India
too, just like it left all the others. It always does.

Did You Notice…?
By Eric J. Fry

On April 2, 1997, your editor nervously took the podium of
the Grant’s Spring Investment Conference to present an
argument for BUYING Indian stocks. The audience of
professional investors seemed more amused than interested,
which piqued my contrarian instincts all the more.

To make the case for buying Indian, I delivered a 40-minute
speech entitled, "Intel vs. India – The Quest for Value."
After issuing a few tongue-in-cheek comparisons between the
two – "One makes D-RAMs; the other makes ashrams." – your
editor proceeded to offer a series of more substantive
comparisons and contrasts.

For starters, your editor remarked, "One is expensive and
widely adored; the other is inexpensive and routinely
ignored." He then identified key aspects of the bullish
case for Indian stocks and predicted, "The long-tem
investor will fare much better by selling the popular tech
stock and buying out-of-favor Indian stocks."

Over the ensuing four years, the beloved Intel easily
outdistanced India Fund. India Fund’s slow and steady gains
were no match for the tech-stock mania of the late 1990s.
By January of 2000, every investor on earth, it seemed,
wanted to own Intel, Cisco and thestreet.com. Few bothered
to examine Indian investments.

But today, eight years after your editor dared to admire
Indian stocks in public, we see that the India Fund has
delivered a gain of 400% since April 1997, compared to a
gain of only 50% for Intel. In other words, the India Fund
delivered a whopping 22% annualized return over the last
eight-years-and counting, compared to Intel’s paltry 5%
annualized return.

Although we still trust the Indian stock market to excel
over the long-term, we’d rather buy Indian stocks when the
readers of Business Week and Worth are SELLING them.

Patience works miracles in the financial markets.

And the Markets…