The promise of $700 billion (Rs32.8 trillion) failed to elicit any enthusiasm from the US market. As the chart shows, the S&P 500 index closed at 1,099.23 last Friday, even lower than Monday’s close, after the first disastrous attempt at passing the

Also See A Very Damp Package (Graphic)

Perhaps traders bought on the rumour and sold on the news, but the fact that the index closed below the Monday level does cast a long shadow over the Paulson plan. The yield on three-month US treasury bills was at 0.47% on Friday, even lower than what it was a day earlier, indicating that investors continued to flock to the safety of T-bills and saw no reason to come out of hiding.

The only silver lining is that many experts are saying that conditions are extremely oversold and the US market could have a snapback bear market rally soon.

Is the worst priced in for Tata Motors Ltd’s shares?

Shares of Tata Motors Ltd have more than halved in five months, giving the impression the worst has been priced in by the markets.

The company’s announcement late last week that it will shift production of the Nano to another location is the latest in the spate of bad news in recent months. Sales of the mainstay commercial vehicles business is expected to be lacklustre for some time to come thanks to high interest rates and the expected slowdown in the economy. But what has rattled investor confidence the most is the large-sized acquisition of Jaguar-Land Rover around the peak of the equity market’s bull run. Tata Motors has had to dilute its equity substantially to fund the acquisition, and no one expects earnings of the acquired firm to be large enough to offset the dilution anytime soon.

Also See Losing Ground (Graphic)

But is the worst priced in? It’s likely that further disappointment awaits investors, especially in relation to the domestic business. The company hasn’t yet spelt out how much it stands to lose by relocating the Nano plant. Needless to say, the amount will be big, and coupled with the capital costs at the new location, large expenses in the form of depreciation and amortization will flow into the profit and loss account in the near future. Since it’ll be a while before the Nano’s sales cover operation costs, there is likely to be a huge dent in profit next year. Thankfully for the company, it has kept a tight leash on capital costs and working capital management related to its existing commercial vehicle and passenger vehicle businesses, unlike the late 1990s, when the company had drifted into losses.

It remains to be seen whether the company runs into losses this time as well, but even a drop in profit will disappoint, especially given the bearish sentiment on the street. There is an optimistic view that draws parallels with the last time the company did a rights issue in 2001, when its stock price was at a nadir. Tata Motors’ shares had outperformed substantially since. But there is a stark difference. Back then, the worst was behind the company, its losses were reducing and within two quarters after the rights issue it was back to profits. The difference now is that financial performance is on the verge of getting worse. It’s imprudent, then, to expect the stock’s performance to be similar this time around.

IMF outlook: get ready for a long downturn in stocks

The International Monetary Fund’s (IMF) October 2008 World Economic Outlook has several interesting charts placing the current episode of financial stress in the US and in Europe in historical context. They show the build-up in asset prices, bank credit and output before and after the start of previous financial stress episodes and compare them with how these variables are behaving in the current crisis.

Also See The Long Grind Downwards (Graphic)

We reproduce part of a chart here showing how median stock prices deviated from the trend across financial stress episodes followed by recessions and how stock prices in the US and the euro area have been behaving during the current crisis. Zero on the X axis is the start of the financial stress episode and the numbers -1,-2,-3, etc., denote the number of quarters before the start of the crisis. Similarly, the positive numbers 1,2,3, etc., on the X axis denote number of quarters after the start of the crisis. The Y axis measures the per cent deviation from trend.

Notice that the run-up in stock prices before the current crisis struck was quite muted for the US, but the fall has been sharper than in previous ones. Unfortunately, the charts don’t tell us what date the IMF takes as the beginning of the current crisis. Nevertheless, the striking fact about financial stress episodes followed by recessions (and there’s now little doubt the current crisis is also going to be followed by a recession) is that stock prices remained well below the trend even 12 quarters after the start of the crisis.