The lights are switched on.
The audience, captivated by the magicians and accustomed to the darkness of the dimly lit hall, rub their eyes to the new reality of the bright lights.
And so it is with stock markets.
Moved by Magic, levitated by myths, they must eventually face the reality of earnings.
After two years of waving magic wands and spinning promises, the lights are now turned on.
The Bull is stark naked.
The central bankers of the world gave the illusion that they knew exactly what was happening and all their actions were data driven.
The governments of countries ranging from Brazil to China to Russia - the part of the legendary fearsome foursome that comprised BRIC - lost control of their economies long before they announced their surrender.
India - the shining light in BRIC and, supposedly, in the world - has to face month after month of disappointing economic data in an increasingly difficult world. Our one blessing is that the price of oil has collapsed. Beyond that one hard comforting fact, one can clutch to straws of hope and justify why India is a star and can defy gravity like the Indian Rope Trick.
Smoking is dangerous for your health
Cheered on by the Modi Brigade, the research analysts envisaged a new India.
The famous Arnab interview made it obvious that Rahul Gandhi was a non-starter for the post of Prime Minister and that the Modi juggernaut was on its way to victory. Quick to follow up on the social media chatter, the research analysts inputted their fictional data points of the 'Gujarat Model' into their 'Excel models' and came up with a surge in earnings.
There was no concrete fact to support that action.
Instead, there was a blurring of reality, prayer, hope, cheerleading and desperation.
The crowd loved the magicians and their trick of upping the earnings estimates.
The magicians loved the crowd for cheering them on.
Pretty soon it became unclear who was leading the dandiya twirl: but no one cared.
The music was hypnotizing.
The beat was mesmerizing.
The finance companies were raking it in with real commissions and real revenues.
The investors dreamt of a great future from their paper wealth.
But soon the analysts ran out of whatever they were smoking and whatever it was that they were drinking. Given their elevated status, it may not have been legal.
The Modi administration has had to face the reality of dealing with a diverse country with many difficulties and challenges: Gujarat has Gujaratis but India has Indians with different needs and demands.
Magicians cannot solve these problems.
Slogans cannot solve the varied issues that are required to 'Fix India'.
The analysts had to modify their Excel Sheets to face the reality of reported earnings.
The global environment has made life a lot more difficult what with the complication of a weak currency, the need for foreign flows to support stretched asset prices, and companies with debt in foreign currency.
With no surge in earnings to support the surge in share prices, the Indian stock markets were always vulnerable.
A reality check was long overdue.
Every bull market must come to an end.
This one never had any earnings power behind it.
It had hope, it had prayers, and it had a lot of research analysts smoking something that may not have been tobacco as they peered into the future.
Now that the haze of the smoke has cleared and the lights have been switched on, it is time to face the reality.
The mid-cap and small-cap indices still have a long way to fall to better reflect their underlying earnings power. When it happens, it will be ugly.
Indian stock markets are a great place to invest in a sensible, deliberate, and calibrated manner - but recklessly inhaling whatever the financial services industry conjures up for you is injurious to your wealth!
The above is from the mail "The Honest Truth" written by Ajit Dayal, which I receive from Equitymaster.