12th May 2012 Dear Friends, For BSE Bulls the following Levels are critical.

Level 1- 16850- 50 % Retracement of the Highs we Hit in February 2012 to the Lows we saw in December 2011. Level 2- 16013- 25% Retracement of the Highs we Hit in February 2012 to the Lows we saw in December 2011. Level 3- 15175- The Bottom Hit on December 2011. Level 4- 14500- 50% Retracement from the Long-term Highs we Hit in Oct-Nov 2010 to the Lows we Hit in March 2009. A couple of Quick Notes here For Long Only Investors, I see no reason to enter the BSE (and especially Large-Cap Benchmark stocks) today until we see a Successful Defense of these Critical Levels. Right now the market is still falling and we have already failed to Defend Level 1; lets see how many more critical Levels are broken /defended before Going Long the BSE. Remember this fundamental fact about the Markets; The Markets dont bottom when we want/feel that they should bottom. They Bottom when the Last Seller has sold whatever he/she wants to sell and we are clearly not yet at that stage. Since the beginning of April, the Sensex has already lost 6.4 %( and from The Top we are already 12% Down).This is definitely a Bearish trend. Personally, I dont see this correction ending anytime soon. I wont be surprised if Levels 2 and Levels 3 are both Hit as well in this Correction.

Between Today and the 1st of July there remain only 4 Players with the Financial Firepower to push the Indian Stock Markets decisively higher from here. They are the US Federal Reserve, The European Central Bank, The Peoples Bank of China and finally the RBI. It is no coincidence that they are all Central Banks. I will be outlining here the reasons why I believe that these Central Banks will severely disappoint the markets going ahead.

First and forememost-The US Federal Reserve-If these guys deliver with a Massive Easing Program ala QE3(USD 700 Billion Minimum)-That will stop the Bears in their tracks decisively. Unfortunately for all those who are hoping the Fed will step in here; there is only one obstacle- The Presidential Elections set for November. And the Number One Agenda there is the Economy and Jobs (or the lack of it). Inspite of public announcements to the contrary by the Federal Reserve they are not that stupid enough to believe their own Lies that their Quantitative Easing programs dont cause Commodity Markets to rise Globally (in particular Crude Oil prices).WTI Crude is today at $96/Barrel; Although this is 13% Down from the peaks hit in February-March this year; Gas Prices are still too High today (which most ordinary Americans see and appreciate much more closely than all the nonsense spewed out by the White House and the Federal Reserve in the name of Economic Data).Unless, WTI Crude Prices fall further to atleast $75/Barrel (the levels we hit last year in October 2011);the Federal Reserve will be not be able to deliver further Easing. And the Window for this Easing program is fast closing-If they dont deliver in June this year; they will be unable to deliver (by Law)until after the New President is seated in the White House by January next year. By then we will most probably also see Debates over the Debt Ceiling Breach and a Coming Fiscal Cliff and the resultant slowdown in America primarily because of an expiry of all Bush Tax cuts on 1st January 2013. Then we have the European Central Bank(ECB)-The Bundesbank for the longest time was strongly opposed to any further easing in the form of LTRO3(although that Opposition is now softening in Recent days)Inspite of constant demands for this from France,Spain,Italy,Ireland,Portugal and Greece. This today is the central Bank which has the highest probability of further easing today. Only Issue is that most ordinary Germans are strongly opposed to further Easing/Bailouts of the Lazy PIIGS.There is only so much Angela Merkel can do, after all German Inflation is steadily rising too.Lets not forget that Merkel has to win an Election too Even if the ECB do deliver LTRO (which most Politicians in Europe are demanding /hoping for); it wont be enough to save Risky Assets Globally. After all, this time around Europe will be going it alone (Only the BOJ is still easing; but they have been easing all through April-it has had no effect on the markets). The markets pretend as if they have priced in the Exit of Greece from the Eurozone by end of 2012(should have happened in 2010 by the way...); only problem is what if its not just Greece but one more country??? Today I am most worried about Spain-The Nationalization of Bankia is just the Tip of the Iceberg and this problem still has a long way to run!!! The Parallels with Bear Stearns (Greece) and Lehman Brothers (Spain/Ireland/France???) are becoming more and more obvious with each and every passing day. I still believe the ECB easing has the strongest possibility here [More than 60% Probability by End of July 2012].

UPDATE: The ECB has now shown willingness to re-negotiate (again) Greeces Debt load in light of the real threat to default on its Debt by the Anti-Austerity Party Syriza in Greece as of 12 th May 2012.This move (along with the Chinese Cut in Bank Reserve Requirements) is sufficient to provide a nice upward bounce to Indian Stock-markets .What remains to be seen is how far this is sustained. Please Note these moves are just temporary band-aids and wont have much lasting impact. Then we have the Peoples Bank of China (PBOC)-If the Bo Xilai Affair and the consequent delaying of the Communist Party Succession plans(originally scheduled for October-November this year) have made anything perfectly clear it is this-The Communist Party is today very, very scared of losing Political Credibility and Legitimacy in the eyes of the Chinese People. They will do whatever it takes to preserve stability and that means putting a massive foot down on Food Inflation (which ordinary Chinese see and experience every single day). Think about it; when it comes to preserving your own Political Power or protecting Stock markets globally-Which has Higher Priority for Any Politician??? Its a No-Brainer really. The Chinese are too busy putting out their own Fires (Especially the problem of excessively Debt laden State Enterprises- The SOEs and how to roll over their Debts) plus Wage Inflation is a massive problem that cant be discounted too. The chances of any further Easing (either Interest rate cuts or Cuts in Bank Reserve Requirements) is a Non-Starter today. UPDATE: The PBOC has just cut Bank Reserve Requirements by 0.25% on 12 th May 2012.This is a Positive Move (atleast temporarily) for Global Stock markets. Expect this move to lead to a nice upward spike in the BSE when we re-open on Monday. Only problem is this-The fact that they actually had to increase Liquidity clearly shows how bad (and drastic) the Growth Slowdown is in China. Once the Markets figure this out(In a couple of trading days or so); Expect the Bears to re-assert themselves. And Finally we have the RBI-If the RBI moves to decisively cut Interest Rates by 1%(100 basis points minimum)[And/or supplements that by further cuts in an already Rock Bottom CRR] between today and end of June, the BSE will get a massive boost to the Upside. Only problem, The Sinking Stock market is the least of the RBIs concerns today. India is already dealing with a Massive Bout of Double Digit Inflation today. See HERE http://www.scribd.com/doc/87695628/Double-Digit-Inflation-is-Back-APRIL-2012 Since I first started tracking Price rises on the 2nd of April 2012, I have made 18(YES YOU HEARD IT RIGHT-EIGHTEEN ) Revisions to the existing document between then and today. Not a Day passes by when the Price of some essential item or the other isnt raised by Double Digit rates in Urban India today.

The major reason is the Sinking Rupee and a Lameduck Central Government which is unable to do anything positive for the Indian Economy. Consequently, the Rupee is at Lifetime Lows today (vs the US Dollar and Gold). If you think a Rupee at 53.7 vs the US Dollar sounds disastrous (down 22% in a Year); what are you going to say about a Rupee at 60 or even 75 to the US Dollar??? This is what will happen if the RBI cuts Interest rates by 1% between today and end of June 2012(The Market has already penciled in a 0.25% Rate-cut in that time-frame; especially if Brent Crude Priced in Dollars falls sharply from here). A Currency Crisis is a much-much scarier proposition and is much higher on the priority list for the RBI. How about a Bank Run to add to the Drama??? Resident Indians are already very suspicious about Bank Fixed Deposits(they have failed to keep pace with Inflation for the last Three years straight) and any further cuts in Fixed Deposit Interest rates will see the trickle out of Bank accounts(and into Gold, Silver and Real Estate) turn into a Tidal Wave. The current Budget rollback by a Lameduck Central Government (on Non-Branded Jewellery and TDS on Property Sales) just adds to this move out of Bank Deposits. Further worsening the current fall in the Indian Rupee. To top things up how about a Balance Of Payments crisis ala 1991??? To Summarize, the chances of Major Easing actions out of India are also very-very slim before 1st July 2012[Less than 25% Probability today].

I hope you look at these issues in Totality and understand the Risks (& Opportunities) the BSE faces today. Caution is most definitely the operative word today. Best Regards, Ashish.Ulhas.Mehta Email-technoconsulting4smbs@gmail.com P.S THOUGHTS ON GAAR Investors should not forget that India is a Net Energy and Net Capital Importer. India needs access to foreign Capital to Grow at 7%+ rates. So any move to scare Foreign Inflows away from India needs to be strictly avoided. This is precisely what GAAR is doing today. This is why GAAR needs to be shelved immediately.

If the Govt was serious about plugging the Revenue Deficit then there would have been no Rollback of either TDS Tax on Property or Taxes on Unbranded Jewellery or on Railway Fare Hikes and of course they would have De-regulated Diesel prices too(atleast for Transportation);the Govt can always provide separate cash Grants to Indian Farmers to buy expensive Diesel immediately. This is just a (relatively) Low friction way to Generate More revenue; only problem is this-Foreign Investors don't need India as badly as we need them. We Indians have a choice-Either we pay for Govt Spending in the form of Higher Taxes or through Inflation caused primarily by a sharply falling Rupee. Any proposals to cut Govt spending today are Non-Starters. In the absence of Robust Foreign Capital Flows from overseas India will struggle to grow at anything more than 6% over the Next Fiscal Year. This is my baseline Assumption for Indian Growth. And this downgrading of Prospective Growth rates obviously also downgrades Prospective Valuations for the Sensex. Think about it practically-Where is Indian Growth Going to come from today? 1) Manufacturing-Sinking. 2) Capital Investments-Sinking. 3) Infrastructure-Sinking and Tied up with Tons and Tons of Red tape. 4) Agriculture-Sinking Big-time

5) Construction and Real Estate-Sinking because Real Estate is unaffordable for most Urban Indians today and the Delays in Execution of New Projects is mind-boggling.
6) Government Spending-Yes, this is holding up but not exactly the foundation of robust Economic Growth And Finally 7)The Great Indian Consumer-If the Latest Auto Sales and Same Store Sales Growth(Down 22%) from Jubilant Foodworks demonstrates anything its this-Urban Indians having seen Three successive Years of Double Digit Inflation dramatically crush Disposable Income. After all, not everybody in Urban India works for either the Government or Companies like Wipro and TCS which can raise Salaries for all employees. Some in fact are either Firing (HSBC,SKS Microfinance) or cutting Salaries(Infosys,etc)

DISCLAIMER: I do not work for any of the following organizations A Mutual Fund, Investment Bank, Bank, Analyst Firm, Brokerage House, Any Government or any other related firm with links to the Financial Services Industry. I am a retail investor and I write because I Love writing about Finance and Economics. Please do your own due-diligence before investing anywhere. ORIGINAL DOCUMENT CAN BE FOUND HERE http://www.scribd.com/doc/93325498/BSE-Notes-May-2012