February 5th 2012 Dear Friends, I thought I would start with a Great chart which shows the actual

scale of the problem facing Europe's(& by extension the World's) financial system faces today. http://demonocracy.info/infographics/eu/debt_piigs/debt_piigs.html Unless we look clearly at charts like these and appreciate the scale of the Deleveraging required,we cannot get a real and accurate expectation of how things will turn out and finally work out.[So,the PIIGS together owe around USD 3.80 Billion ;In comparison, Indias Total stock market Capitalization is only around USD 1.2 Billion today...] Finally this past week, the German Government has accepted that Greece cannot be saved and its best to let them default now [There is no way; the Greeks will accept a loss of Fiscal Sovereignty to the ECB in return for a fresh bailout.] The fact that Greece will default now is clear(it was very clear in 2010 itself, just became crystal clear today.) Now the important question that arises is this- Would damage done by a Greece default to the European Financial System be reparable? Can these defaults be managed by all the excess liquidity doled out primarily by the ECB(through the LTRO) but also through the Central Banks of the US,Japan,Switzerland,the UK and China? And most importantly can the defaults be contained to just Greece? My answer to all these questions is in the Negative. Greece will be followed very shortly by Portugal (before 2012 is out)before the Market starts to attack the Big Two-Spain & Italy. At that time the entire Euro project will come apart at the seams. There is a way to prevent this but it depends on the 4 countries in Northern Europe(who are all AAA rated-Germany,Netherlands,Luxembourg and Finland ) taking the conscious, practical and realistic decision to exit the Eurozone together to create a New Euro/Deutsche Mark. This will ensure that the Euro falls very sharply in value maybe 100% from here (vs not just the New Euro but also other developed market currencies like the Dollar, The Yen ,The Pound and the Swiss Franc) allowing the countries in the Old Euro to export their way out their mess and letting them inflate their debts in an organized manner. Unfortunately this Simple and Practical solution is unlikely to happen,so we will have to watch this drama to the painful end with the Indebted Southern European countries getting crushed under their massive debt burdens (in the name of austerity) before eventually they finally revolt and exit the Eurozone. One of my contacts was in Greece last week, and he said that for all practical purposes the Greek Economy is dead. A significant number of Greeks have already abandoned the Biggest Cities to head

back towards the Countryside where they atleast don't have to worry about Food... (Yes, the Situation is that bad in most Greek cities today) The richest Greeks have already moved most of their assets overseas to Germany, Switzerland and the UK.The ordinary Middle-classes(who are still able to save & have a job) have started hoarding Gold, Silver and Dollars like there's no tomorrow. For those ordinary Skilled Greeks who are unemployed, Migrating to Australia and Germany are the most viable options today. Greek Banks are not lending as they also are prepared for the inevitable exit from the Eurozone. Its not just Greece today, even Italy is slowly but surely entering the same boat. http://www.bbc.co.uk/news/magazine-16871801 Some Great Macro perspective from John Hussman below. http://www.hussmanfunds.com/wmc/wmc120130.htm Coming around to the other big headline of the past week-The So-called Jobs "Surprise" in America. The Entire BLS numbers are based on totally fraudulent estimates (what more can one expect from an extremely desperate Obama Administration which is extremely desperate to cling onto power by any means possible???). Nobody in the Financial Media is willing to drill down the BLS Data and see that if it weren't for" BLS Adjustments" and basically kicking out about 1.18 million people out of the Labor force (YES, these people were kicked out as if they don't exist);Current Unemployment rate is actually well in excess of over 11% in America today with most New Jobs getting created are extremely low-paying and part-time in nature For a more realistic perspective of what the current Unemployment numbers are check out what Trim Tabs and Mish have to say here. http://trimtabs.com/blog/2012/02/03/bidermans-daily-edge-232012-is-bls-data-skewed/ http://globaleconomicanalysis.blogspot.com/2012/02/nonfarm-payroll-243000-unemployment.html Middle East Chaos and uncertainty-The current uncertainty around Syria, Egypt and Iran shows no signs of abating anytime soon, another reason to be cautious going ahead from here forwards towards the rest of 2012. Alright all this is part of whats coming for the rest of 2012.But what triggered the Monster Rally we saw in January this year? The BSE is up by 14% since the Beginning of the Year. Its simple-Quantitative Easing/Money Printing by the Central Banks of the US, Europe, Japan, Switzerland, the UK and China combined with a cut in CRR ratio back in India was enough to power the massive rally we have seen so far in 2012.This coupled with the so-called "positive" Jobs report out of the US and lack of defaults (yet) in the Eurozone were enough to see a massive USD 3.4 Billion enter India's Stock markets so far this year.

The Big Winners on my BSE Dividend High-Yielders list were Financial Services Firms like IDFC,Reliance Capital,UCO Bank& Mining Giant Sesa Goa(All Up 40% or more since beginning of 2012). Not many losers with the Biggest Loser being RiddhiSiddhi Gluco Biols down 5%. Outside of this list, I am sure there are many more stocks which have appreciated by over 40% since beginning of 2012.But they don't pay any Dividends so amount to hugely speculative bets which whenever, the liquidity turns the other way will leave most stock market investors stranded with Heavy losses once again. If you exclude the Financial Services Firms most other stocks which out-performed the Sensex(returned more than 14%) came from the heavily over-sold category(on the Short-term charts). I recently tuned into some Indian Financial Channels and suddenly everyone is Bullish,(sure they say we are over-bought in the near-term, but 19000 still looks on the cards by June 2012 ) typical of the Media to suddenly turn Bullish after most of the Gains have already come... This quotation from a Stock salesman had me in massive splits the other day, Global Funds are flush with Cash and this is flowing to India because India is a safer bet for growth. People had overdone the pessimism last year and this has created an opportunity for smart investors." Just what a Salesman would say-Who is to explain to such deluded fools that the relationship between Economic Growth and Stock market returns is at best slightly negative!!![Best Example is China]. Remember this is the same India which a few months back had an extremely dysfunctional Government and was a victim of Policy Inaction [Irony of Ironies...] Getting back to the point-Looking ahead I highly recommend being cautious for this entire coming week (before making any fresh purchases) and then slowly allocating funds to the BSE Dividend High-Yielders list. No, I do not expect the BSE to hit 19000 by June or anytime in 2012.That would mean the BSE would appreciate by 22% from the beginning of 2012[45% Annualized returns with no QE3??? Not happening, people] fun numbers and a Brokerage companies dream. But its almost like no deleveraging will happen in the mean-time; which will most definitely not be the case. What these fake BLS numbers have done is pushed QE3 further down the road(most probably all the way to 2013 after the next Presidential elections in America). And the potential for an interest rate cut in India remains limited (atleast till Inflation eases back much below 6%);So where is fresh liquidity going to come from??? There remains one potential player which can pump in the required liquidity-Japan, as they desperately try to save what remains of their floundering economy, there remains a strong possibility that they will move to weaken the Yen substantially from where it is today. Will those moves be successful in the longrun? Only time will tell. In the mean-time, I repeat what I said earlier. Be extremely cautious with any new Equity purchases this month. There is no need to curse yourself if you missed the January rally. There will be corrections along the way which will let you buy-in to stocks at much more reasonable valuations to where the BSE is today. Just be patient.

And when the time comes, look first at the BSE High-Yielders(even today there are 19 stocks yielding 5% or more, while over 30 stocks which Yield 3% or more on my list). Another example of deleveraging in India comes from Sahara's walkout from Indian Cricket. http://economictimes.indiatimes.com/news/news-by-industry/et-cetera/question-mark-over-brand-iplpost-sahara-pullout/articleshow/11765796.cms Valuations across the board will have to correct to come to terms with the De-leveraging reality.I am also seeing that in Mumbai's Property Market today. Best Regards Ashish.Mehta P.S Pay close attention to Telecom stocks, all the major players are now talking about raising call tariffs which will undoubtedly increase profitability for all the Major Firms going ahead. -----------------------------------------------------------------------------------------------------------------------------------------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.

Some Great links do read... http://www.rediff.com/business/slide-show/slide-show-1-pm-paints-a-sad-picture-of-indiaseconomy/20120203.htm http://www.rediff.com/business/slide-show/slide-show-1-interview-india-can-power-growth-if-itboosts-electricity-supply/20120130.htm Another example of Typical Government waste[Charging a 6% Management fee to buy Indian Govt Treasuries!!! I am not making this much,people] http://www.rediff.com/business/slide-show/slide-show-1-column-should-the-government-cover-upepfos-inefficiency/20120131.htm The Trustees have consistently declined the opportunity to invest a reasonable percentage of the corpus in equities, saying the organisation lacked the infrastructure to do so, and demanding a sovereign guarantee if it did venture into this risky territory. As a result, it continues to invest in government paper offering a modest if safe return (such as 8 per cent). Given this, it is unreasonable to expect a higher payout. But this does not account for the costs of inefficiency. Last fiscal, the EPFO discovered a surplus of Rs 1,732 crore (Rs 17.32 billion) in the interest suspense account -- which was pending updation for 25 years or more -- and on that basis it paid interest of 9.5 per cent for that year. Subsequent auditing revealed that the surplus was actually Rs 1,200 crore (Rs 12 billion). Clearly, statements of the EPFO Board of Trustees cannot be considered watertight The inefficiency is much more deep-rooted than that. A little known fact is that part of its administrative costs is, in fact, by covered by contributing companies. Employers currently have to pay 1.6 per cent of the contribution (employer + employee) to the EPFO as administrative charges. In effect, this is a management charge of 6.7 per cent, which would be viewed as a scandal in the private sector. Meanwhile, the EPFO remains inefficiently administered, unable to pay retiring subscribers on time, and frequently unable to provide up-to-date details of subscriber accounts. http://www.rediff.com/business/slide-show/slide-show-1-column-what-is-holding-back-indias-growthstory/20120131.htm http://www.rediff.com/business/slide-show/slide-show-1-mumbai-big-ticket-property-marketsluggish/20120130.htm Experts say slowing property sales and tight liquidity conditions of many developers do have an impact on big-ticket property sales. "During the NTC or other auctions in the past, there used to be a rush of developers. In current land sales, the number of bidders is far lower and the profile is also different. Only financially sound

developers are now participating in the auctions," said Sanjay Dutt, chief executive of property consultant Jones Lang LaSalle. Russia starts to flex its muscles again... http://finance.yahoo.com/news/russia-admits-brief-cut-gas-141236241.html Bill Gross,blasts the US Federal Reserve openly. http://www.pimco.com/EN/Insights/Pages/Life-and-Death-Proposition.aspx Sometimes it pays to be Pessimistic as well... http://www.economist.com/node/21543552 -----------------------------------------------------------------------------------------------------------------------------------------Have you heard of getting your debts reduced by over 50% even though you got a Job? Its happening in Greece today, People. In Landmark Case, Greek Court Writes Off Employed Bank Customer's Debt Think filing for bankruptcy is the only way to get debt discharge? Think again, at least in Greece. While previously we have reported that Greek courts had written off "untenable" debts of unemployed Greeks owed to local banks, Kathimerini describes a landmark case which may have profound implications for the indebted country, in which a fully employed woman has had the bulk of her debt written off. From Kathimerini: "In what could turn out to be a significant ruling for Greeks suffering from the economic crisis, a court in Hania, Crete, has become the first in the country to order that the majority of the debt owed to banks by someone still in full employment be wiped out. Sundays Kathimerini understands that the Justice of the Peace Court in Hania based its decision on a 2010 law that allows judges to give protection to people struggling to meet their financial commitments. Until now, the legislation has only been used to give debt relief to unemployed people or those with no substantial income." This means that virtually every indebted person in Greece, regardless of employment status will rush into court rooms, demanding equitable treatment and a similar debt write down. It also means that the Greek bank sector, already hopelessly insolvent, is about to see its assets, aka loans issued to consumers, about to be written off entirely. And since the ultimate backstopper of the entire Greek financial system is the ECB, the creeping impairments will have no choice but to impact, very soon, the mark-to-market used by both the ECB and the various national banks. Finally, how long before other courts in Europe express solidarity with their own citizens and proceeds with similar resolutions? On the specifics of the write off: in the Hania case, the court ruled in favor of a full-time civil servant. The divorced woman, who has three children, asked to be given protection after her banks refused to offer her new terms for combined loans of 112,000 euros. The unnamed woman explained that she did not have any assets she could sell to pay off her debt. In its ruling, the court deemed that the woman, who has moved in with her parents, needs 350 euros a month to cover her own costs but that the rest of her earnings could be distributed equally among the three banks she owes money to. The judge deemed that this process should last for four years, meaning the woman would pay back some 30,000 euros and the remaining 82,000 would be written off.

And the implications: Thousands of people have already appealed to the courts for protection under the 2010 law but legal experts believe the decision in Hania may lead to a new wave of appeals by Greeks who still have jobs but are unable to repay their loans. Needless to say, this simply means that as locals realize that a domino effect in which bank assets are written down will necessitate a collapse of bank balance sheets, and the asset side of the ledge will be unable to support deposits held by local banks. Which is unfortunate as December saw the first modest signs of a rebound in Greek deposits, which rose modestly from 173 billion to 174 billion following years of consecutive declines -----------------------------------------------------------------------------------------------------------------------------------------The Great Utopia By Hayek There can be no doubt that most of those in the democracies who demand a central direction of all economic activity still believe that socialism and individual freedom can be combined. Yet socialism was early recognized by many thinkers as the gravest threat to freedom. It is rarely remembered now that socialism in its beginnings was frankly authoritarian. It began quite openly as a reaction against the liberalism of the French Revolution. The French writers who laid its foundation had no doubt that their ideas could be put into practice only by a strong dictatorial government. The first of modern planners, Saint-Simon, predicted that those who did not obey his proposed planning boards would be "treated as cattle." Nobody saw more clearly than the great political thinker de Tocqueville that democracy stands in an irreconcilable conflict with socialism: "Democracy extends the sphere of individual freedom," he said. "Democracy attaches all possible value to each man," he said in 1848, "while socialism makes each man a mere agent, a mere number. Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks eq uality in restraint and servitude." To allay these suspicions and to harness to its cart the strongest of all political motivesthe craving for freedom socialists began increasingly to make use of the promise of a "new freedom." Socialism was to bring "economic freedom," without which political freedom was "not worth having." To make this argument sound plausible, the word "freedom" was subjected to a subtle change in meaning. The word had formerly meant freedom from coercion, from the arbitrary power of other men. Now it was made to mean freedom from necessity, release from the compulsion of the circumstances which inevitably limit the range of choice of all of us. Freedom in this sense is, of course, merely another name for power or wealth. The demand for the new freedom was thus only another name for the old demand for a redistribution of wealth. The claim that a planned economy would produce a substantially larger output than the competitive system is being progressively abandoned by most students of the problem. Yet it is this false hope as much as anything which drives us along the road to planning. Although our modern socialists' promise of greater freedom is genuine and sincere, in recent years observer after observer has been impressed by the unforeseen consequences of socialism, the

extraordinary similarity in many respects of the conditions under "communism" and "fascism." As the writer Peter Drucker expressed it in 1939, "the complete collapse of the belief in the attainability of freedom and equality through Marxism has forced Russia to travel the same road toward a totalitarian society of un-freedom and inequality which Germany has been following. Not that communism and fascism are essentially the same. Fascism is the stage reached after communism has proved an illusion, and it has proved as much an illusion in Russia as in pre-Hitler Germany." No less significant is the intellectual outlook of the rank and file in the communist and fascist movements in Germany before 1933. The relative ease with which a young communist could be converted into a Nazi or vice versa was well known, best of all to the propagandists of the two parties. The communists and Nazis clashed more frequently with each other than with other parties simply because they competed for the same type of mind and reserved for each other the hatred of the heretic. Their practice showed how closely they are related. To both, the real enemy, the man with whom they had nothing in common, was the liberal of the old type. While to the Nazi the communist and to the communist the Nazi, and to both the socialist, are potential recruits made of the right timber, they both know that there can be no compromise between them and those who really believe in individual freedom. What is promised to us as the Road to Freedom is in fact the Highroad to Servitude. For it is not difficult to see what must be the consequences when democracy embarks upon a course of planning. The goal of the planning will be described by some such vague term as "the general welfare." There will be no real agreement as to the ends to be attained, and the effect of the people's agreeing that there must be central planning, without agreeing on the ends, will be rather as if a group of people were to commit themselves to take a journey together without agreeing where they want to go: with the result that they may all have to make a journey which most of them do not want at all. Democratic assemblies cannot function as planning agencies. They cannot produce agreement on everything the whole direction of the resources of the nation-for the number of possible courses of action will be legion. Even if a congress could, by proceeding step by step and compromising at each point, agree on some scheme, it would certainly in the end satisfy nobody. To draw up an economic plan in this fashion is even less possible than, for instance, successfully to plan a military campaign by democratic procedure. As in strategy it would become inevitable to delegate the task to experts. And even if, by this expedient, a democracy should succeed in planning every sector of economic activity, it would still have to face the problem of integrating these separate plans into a unitary whole. There will be a stronger and stronger demand that some board or some single individual should be given power to act on their own responsibility. The cry for an economic dictator is a characteristic stage in the movement toward planning. Thus the legislative body will be reduced to choosing the persons who are to have practically absolute power. The whole system will tend toward that kind of dictatorship in which the head of the government is position by popular vote, but where he has all the powers at his command to make certain that the vote will go in the direction he desires. Planning leads to dictatorship because dictatorship is the most effective instrument of coercion and, as such, essential if central planning on a large scale is to be possible. There is no justification for the widespread belief that, so long as power is conferred by democratic procedure, it cannot be arbitrary; it is not the source of power which prevents it from being arbitrary; to be free from dictatorial qualities, the power must also be limited. A true "dictatorship of the proletariat," even if democratic in form, if it

undertook centrally to direct the economic system, would probably destroy personal freedom as completely as any autocracy has ever done. Individual freedom cannot be reconciled with the supremacy of one single purpose to which the whole of society is permanently subordinated. To a limited extent we ourselves experience this fact in wartime, when subordination of almost everything to the immediate and pressing need is the price at which we preserve our freedom in the long run. The fashionable phrases about doing for the purposes of peace what we have learned.to do for the purposes of war are completely misleading, for it is sensible temporarily to sacrifice freedom in order to make it more secure in the future, but it is quite a different thing to sacrifice liberty permanently in the interests of a planned economy. To those who have watched the transition from socialism to fascism at close quarters, the connection between the two systems is obvious. The realization of the socialist program means the destruction of freedom. Democratic socialism, the great utopia of the last few generations, is simply not achievable. -----------------------------------------------------------------------------------------------------------------------------------------Richard Russell is the greatest living financial writer. He is almost 90 years old now and has been writing about finance longer than most of the people reading this message have been alive. Here's what he says about the importance of "compounding" your income that is, reinvesting the income you receive from your investments Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortuna tely, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time. In a period of great financial uncertainty, dividends offer investors both shelter from the storm and solid total returns. We are bullish on top dividend-paying stocks because we believe more and more investors are going to buy these stocks in the future adding significantly to their total returns. This trend is already happening. In 2011, the 50 highest-paying stocks in the S&P 500 returned more than 8%, trouncing the S&P 500's total return (which was essentially flat). In a period of great financial uncertainty, dividends offer investors both shelter from the storm and solid total returns. We are bullish on top dividend-paying stocks because we believe more and more investors are going to buy these stocks in the future adding significantly to their total returns. This trend is already happening. In 2011, the 50 highest-paying stocks in the S&P 500 returned more than 8%, trouncing the S&P 500's total return (which was essentially flat). Here's my challenge to you Always make sure at least half the money you have invested in stocks is tied up in companies that pay large dividends and have a long track record of increasing their annual payouts. (If you really want to do well, you'll keep 90% of your stock allocation in these names) You'll find these stocks across our recommended portfolios. And pay attention to the big tech names this year that don't pay dividends (or only pay tiny ones) stocks like Google, eBay, Dell, Oracle, Apple, and Cisco. I believe all these companies will announce new dividends or major increases this year. When they do, buy them. Over time, around 40% of the total

return you will make in stocks will come from dividends. The higher your dividends, the higher your total return. And if you will compound those dividends, your total returns will become vastly larger. Here's a final point to make This approach only works if you're rigorous, disciplined, and patient. (That's probably why it works Few people display these emotional qualities when it comes to money.) You have to be willing to allocate capital to these kinds of companies when they're cheap. That means when other folks don't want to buy them like over the past five years with Wal-Mart, for example. You have to be able and willing to hold them for relatively long periods of time like a decade or more. To make sure you don't stop out of these high-quality companies, adjust your trailing stop losses for the income you've received. Doing so is pretty easy. It just takes a bit of accounting homework. All you have to do is subtract your stop price from the amount of income you've gotten. For example, if your stop loss would take you out of a stock at $10 and you've booked $3 in dividends, your stop loss becomes $7. I use one other rule of thumb for very stable companies. Once the dividend has increased so that the stock pays more than 10% a year (based on my purchase price), I simply hold the stock without a stop loss. My thinking is simple. If I'm making 10% a year on the stock via dividends, I'm not going to sell it. I don't really care what the market thinks about the shares. But be careful with this rule. It only applies to companies that are truly battleships. Make sure you're capable of understanding whether or not a given stock qualifies. Be especially leery of viewing any technology company this way Even the biggest and best tech companies are frequently wiped out by small innovations. Now if I'm right about my audience, lots of people reading this will think, "Yes, that's what I should have done years ago. But now, it's too late." Nope. That's just not true. It does take about a decade for the big benefits of compounding to kick in. But given the uncertainties in the world's markets, this approach is likely to beat the market right from the get-go. Besides if you've been making the wrong choices with money for decades, why not simply stop making those choices? You don't have to continue to be wrong. You can start being smart and doing the right thing today. All you have to do is make a few simple decisions make a plan. And then follow it. What does Richard Russell say about the folks who ignore this simple advice? Well, he knows most average investors won't follow a plan like this. It takes too much discipline But what about the little guy? This fellow always feels pressured to "make money." And in return he's always pressuring the market to "do something" for him. But sadly, the market isn't interested And because the little guy is trying to force the market to do something for him, he's a guaranteed loser. The little guy doesn't understand values so he constantly overpays. He doesn't comprehend the power of compounding, and he doesn't understand money. He's never heard the adage, "He who understands interest earns it. He who doesn't understand interest pays it." The little guy is the typical American, and he's deeply in debt. The little guy is in hock up to his ears. As a result, he's always sweating sweating to make payments on his house, his refrigerator, his car or his lawnmower. He's impatient, and he feels perpetually put upon. He tells himself that he has to make money fast. And he dreams of those "big, juicy mega-bucks."

In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this "money-nerd" spends his life dashing up the financial downescalator. But here's the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he'd have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser. ------------------------------------------------------------------------------------------------------------------------------------------