Weekly Updates-08.12.08- Who will be stimulated by the Fiscal stimulus of G.O.I ?

Dear Friends,
The alternative to the classical theory proposed way back in 1936 by the British economist John Maynard Keynes in his book.” The General theory of Employment, Interest and Money." After the Great depression Keynes proposed a new way to analyze the economy, which he presented as an alternative to classical theory. He proposed that low aggregate demand is responsible for the low income and high unemployment that characterize economic downturns, the one I am seeing in current situation.

The relevance of the above post is prominent in the current situation. What most of the Federal governments and the Third world countries are doing is trying to expand aggregate demand by the help of rate cuts and fiscal stimulus packages. A combination of monetary and fiscal policy seems to be the only viable option that the policy makers can opt for in current situation. Rbi has reduced repo and reverse repo rates by 100 bps. There are more rate cuts coming in the near future then ever before. The million-dollar question remains unanswered will it create demand in a recessionary environment. Do remember as per Keynesian theory the aggregate demand needs to expand for the economy to keep growing.

The IIP numbers which will be announced ahead in the week might be negative to marginally positive in nature. Traders should note that the stimulus package might simply disappoint if the value of the same is insignificant in nature. It might be a cosmetic setup to make people believe that enough is being done to stimulate the Industry in the backdrop of the IIP numbers.

Crude oil prices have fallen more then 70% from its all time highs. Is crude heading the way it did in the 1970,s. I have no idea but the charts suggest the same. Will it head the way Jute industry moved in past. The government of India to generate employment now supports the Indian Jute industry. I have no idea on the same but a good number of oil fields are now operating below their marginal cost of production. Shorts to watch out will be in large cap stocks. There is a report on The Economic Times Edition of 6th December that Reliance industry is seeing negative margins in some of its products. Classically the demand supply theory will help in price adjustment over the Long term.

The Fiscal stimulus package by the Government of India has not been announced as of now. I believe that one should see the minute details of the same. Is the government trying to increase the aggregate demand or is it trying to simply stimulate the economy using a cosmetic setup of excise duty cuts and export incentives.
In Nifty we are simply seeing a consolidation since three weeks. With consolidation there is a converging triangle visible in the same. Downward Breakdown signal for the same will be received if 2570 is broken, Further break of 2500 will confirm the same. At 2570 one should exit longs and a closing below 2500 will indicate fresh shorts. At the same time a closing above 2835 will indicate is broken Upward. A move beyond 2940 will confirm the same. Election results on 8th of December will be one more indicator mentioned in previous week.