Bulls Ahead:Mario Draghi's 'Unlimited' Bond Buying

So, the ECB chief Mario Draghi has gone ahead with his earlier declaration of buying unlimited binds of the countries like Spain, Italy and others  which are maturing with in the next 3 years,  to ease the liquidity pressures in these countries. Draghi was facing pressure from the German banker Jens Weidmann of Bundesbank who was against such an easing. Draghi has used the word 'Sterilized' for the bond buying program, hinting that this would not be minting money in 'thin air' but rather an equal amount of money will be pulled out of the ECB and they would be very transparent about which country's bond they are buying. This essentially means a lot of bad assets on ECB's balancesheet.

Now, for how long that would remain there is a question in purists' mind. But for the markets- they have spelled their verdict as of now:

Dow Jones, S&P 500 &  Nasdaq have all reacted positively to the news. S&P 500 has touched its 4-year high at 1430 levels. The same scenario is expected to be reflected in our markets tomorrow.

The move is expected to bring down the interest rates on the government bonds of countries whose bonds would be purchased and thus making life easier for them for some more time.

More than that it’s an assurance to the investors that ECB and others will do whatever it takes to preserve the Euro. That, in turn, means a slow growth for few more years where the commodity prices would be high due to ECB's easy money in the system.

However, the term 'Easy Money' may not be appropriate this time as Draghi has hinted, time and again, that the troubled nations would be provided easing only under certain 'Conditions'. The conditions are pretty clear for everyone to see.

So, the whole story in a gist goes on like this:

A lot of debts which are going to get matured by 2015 have been scaring the markets, banks and certain countries. Spain, Italy etc. are unable to service their huge debt piles and hence would have defaulted. The event is certainly 3 years hence, but markets react much before the actual events. No support from the ECB and ilk would have made the investors wary and they would have started to sell the bonds they hold in these countries. This would have meant that the prices of the bonds would have crashed. Countries like Germany and France hold huge chunks of the papers in these countries through their banks. The crash in the bond market would mean huge losses to their own banks and for several banks the losses could be terminal. What is called as The Domino Effect would have followed from there on. The German and French banks would start to sell their stable bonds in other countries to make up for the losses. That would lead to a rise in the bond yields of those countries and they would find it tough to raise capital due to high borrowing costs. The liquidity crunch and the pressure on the banking system would be the other effects of such a huge bond sale. It would lead to bank runs in the 'now' stable countries and this is the biggest fear of the governments all over the world.

However, few people have different views and they argue that the fear is unwarranted. A systematic eurozone breakup could be the ultimate solution and it could be handled without ruining everything.

Well, now the ECB would be buying the risky bonds and providing the troubled countries much needed money in lieu of tighter fiscal goals (read austerity). Prolonged austerity would lead to slower growth in the coming years.

As has been seen in earlier easing, a large chunk of such liquidity rush finds its way to the emerging economies like India. The inflows would help to trim the Current Account Deficit (CAD) which is hovering at an uncomfortable level of 4.3%. So, in the coming days, we can see big rallies in our stock markets. A huge rally followed ECB's first bond-buying of 489 Billion Euros.
The sensex jumped from the levels of 15400 to 18500 in a matter of 2 months (21st Dec 2011 - 21st Feb 2012). 

However, the next round of bond buying didn't cheer the street much. But now, with US showing revival and sensex itself showing some signs of life, there is a fair likelihood that the highs of 2012 could be breached in this rally. The amount is, as per Draghi, unlimited. But since unlimited is also limited, an estimation among the experts pegs the quantum at around 750 Billion to 1.5 Trillion Euros. This is huge money and only a small chunk of it is enough to push us 1000-1500 points above the present levels.

So, what should be your likely bets? Banks and Financials! As any such proceeding impacts them before hitting on anything else. Look out for SBI, ICICI, HDFC, YES Bank. Axis Bank & PNB are still very weak on charts but the rally would not think about it for now. Next up will be rate sensitives  like Autos, Metals, Realty and Infra stocks. Look out for Maruti, Tata Motors, Hero Motocorp in Autos, Hindalco & Tata Steel (Horrible charts/fundamentals though) in metals, HDIL, Shobha Developers, DLF, Oberoi Realty in realty and the usual IVRCL, GMR Infra, Lanco Infra, RIIL in the infra space. The defensives should underperform now. There can be reversals in stocks like Lupin, HUL & ITC.

As Udayan Mukherjee Says, "It's time to get back to the stock markets" ;)