Wednesday, October 24, 2007

A Case for Profit Booking

We are all aware of the huge stock market run up globally from 2003 . All major stock indices are almost at an all time high. The Indian stock market briefly touched 19000 points this month. Everyone you meet and know is talking about the stock market boom and is chasing stocks. In my experience in a scenario like this an individual must book profits at least partly or fully. There is no better thing as cash and there is a big difference between $s that grow on paper and good old cash.

  1. The sub prime crisis has begun to affect the US economy and is threatening to slow down spending. Even today the 300 million US households are a big factor in driving growth. Today these consumers are seeing their house values fall and many of them are just being exposed to the resetting of the ARMs translating to hire mortgage payments. It is expected that discretionary spending capacity of these customers is expected to decrease in the near term.
  2. Profit warnings from major retailers like Walmart and Amazon are suggesting that they are anticipating a slowdown in sales. The retailers generally know their customers and these warnings must be taken into consideration.
  3. Technology stocks have been moving away from the broader market suggesting a bubble. Remember earnings today reflect past performance and may not be indicative of future growth.
  4. The weakening of the dollar suggesting that the Federal Reserve is moving away from a strong US dollar policy and is making efforts to drive growth in the manufacturing industry.
  5. Stronger Asian currencies will hamper their export growth to the US. It is no secret now that low cost Chinese goods have helped keep the inflation rate low. As the yuan is pegged to the dollar the yuan is depreciating along with the dollar. There is increased pressure on the Chinese Government to freely float its currency. If that happens this may result in higher inflation in the US forcing the Feds to increase interest rates. A further increase of interest rates is going to further aggravate the sub prime crisis.
  6. A stronger rupee ion India is hurting the earnings of tech companies like Infosys, Wipro and TCS. These companies have been one of the biggest drivers of growth of the Indian economy and have contributed to the growth of the middle class.
  7. Wage growth in the US has been low but prices of homes have increased drastically.
  8. Of course the War in Iraq , tensions with Iran , Instability in Pakistan all are posing grave threats to the global economy.

Citing all the reasons above, if you have made some good returns over the last couple of years, it may be time to book some profits.

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