IS RBI Next Move CRR Hike?

Repo Rate hike, has come at the most inappropriate time. Some observers were unperturbed as the hike was only marginal – 25 bps – and the market had foreseen this as coming. But, I feel, investors would take it negatively as there is no certainty that there would be no further monetary tightening. From whatever economic data we are getting, it is becoming clear there would be more monetary plugging to tame inflation.

RBI has surprised the market in the past. And, this makes it difficult to take a call on whether the next move would come in the form of a CRR hike or Repo Rate hike. In a nutshell, looking at the current scenario, the prospects are not very encouraging – at least in the near term.

RBI always likes to surprise

The Reserve Bank of India (RBI) has lent another blow by increasing the Repo Rate by 25 basis points (bps).

This will lead to further increase the interest rate which, in turn, will accentuate the industrial slump, more markedly in certain loan-dependent sectors like realty and automobile.

RBI traditionally likes to surprise, particularly with the timing of its rate changes, and the latest move is no exception. I thought it would tighten its policy this month, and it will perhaps link it with a particular growth or inflation release. But the hike in the Repo Rate has taken the market by a bit of surprise as it was anticipating an increase in the cash reserve ratio (CRR).

Indian Stock Market in Unenviable Position

The Indian stock market finds itself in an unenviable position, where nothing is going right – be it the heavy FII offloading, mounting oil prices, creeping inflation or the unmistakable signs of a growth slump.

As a result, the sensitive index is responding to every bit of unwelcome news, leaving investors and market watchers in a fix on when this uncertain phase would end and indices would resume a rational and a more predictable course. The groping market has sunk so much of late that it is now among the worst performers within the brackets of emerging markets.

Is optimism returning to Dalal Street?

Is optimism returning to Dalal Street? Last week the market had managed to remain in a positive territory. The Sensex witnessed a continuous upward movement for six trading sessions despite the fact that RBI had hiked the CRR by 50 basis points. So what does it indicate? Confidence among investors on the rise?

Though not very significant, people on the street sound more upbeat and the level of optimism is building up. However, sentiments remain cautious ahead of key results and RBI meeting on monetary policy.

Overall the feeling in the market is that the May series of futures may not be as bad and in the near-term we may witness a slightly higher level. The rollover of around 62 per cent suggests that there is a great deal of optimism in the market. Although this is comparatively lower than the average of last year when we witnessed a good rally. But it is much better than the 52 per cent rollover we had in the last month.

Will Market Sustain the Rally, After Good Past Week?

I think in the short term there are three things which will guide the market.

1. First, the inflation numbers and the monetary policy. One should now be prepared to face some monitory tightening. Although it was not on the cards two months ago, many analysts have discounted the same at present. Though RBI ups CRR by 50 BPS, but there is no consensus on market trading negatively due to CRR hike. Vallabh Bhansali, Chairman, Enam Financial Consultants, said the markets were not completely unaware of this. "It did not come as a complete shock. The hike was being mentioned in many circles, but the market will not like it all the same. The markets reaction to the CRR hike would be muted. The banks had a good run up in the last few sessions and this is a bit of a dampener. I see this as a continuous hawkish stance as it has come in between the policy. I am concerned about the force of inflation and the force with which the government and Reserve bank of India will both come down on it, so I would be cautious about the future." Therefore, I think that anything apart from a CRR hike may impact the market negatively.

2. Second, the actual earnings figures going ahead; so far we have not yet seen any disappointing figures.

3. Third, the monsoon forecast. The India Meteorological Department has stated that the rainfall all over the country would be 99 per cent of the long period average. This will not only help the market to revive its sentiments but will also help the government since a major chunk of the inflation has roots in the perceived shortage of farm output.

Overall, any bad news is not expected at least from the domestic front and this should keep the market in a positive territory. And if things are well-placed in the global markets too, the recent upward movement in the market may carry its momentum in the coming week too.

Closing Bell

Frontline stocks pared away gains but closed slightly higher Wednesday as investors booked profits ahead of inflation data to be released tomorrow.

Counters in BSE IT index continued upward journey while BSE Capital Goods Index stocks ended in the red.

Tier II and III stocks outperformed the benchmarks. BSE Midcap Index ended 1.43 per ent higher at 6699.10 and BSE Smallcap Index advanced 1.79 per cent to 8,351.

Bombay Stock Exchange's Sensex ended 0.56 per cent or 90.53 points higher at 16,244.19. The index swung between a range of 16,413.80 and 16,198.56.

National Stock Exchange's Nifty closed at 4888.80, up 0.19 per cent or 9 points. The index touched an intra-day high of 4951.40 and low of 4874.05.

Biggest Sensex gainers were Infosys Technologies (up 5.83%), Wipro (5.75%), Reliance Energy (3.87%), Hindalco Industries (1.87%), Reliance Industries (1.46%), Reliance Communications (1.33%) and ICICI Bank (1.1%).

BHEL (down 3.28%), Ambuja Cements (3.26%), Jaiprakash Associates (2.49%), NTPC (2.12%), Tata Motors (2.08%), Hindustan Unilever (1.77%) and Bharti Airtel (1.55%) were under pressure.

Market breadth showed 1866 advances and 813 declines on BSE.


Source: economictimes.com

India disproves Friedman on inflation

Inflation in India and other developing countries is not a monetary phenomenon and cannot be curbed by monetary policy.
For Complete Article Click Here

Bonus Declared in Past few Days

Source: Flash News Vol. 24 No - 02; Date April 14 2008

Split Declared in Past few Days

Source: Flash News Vol. 24 No - 02; Date April 14 2008

Dividends Declared in Past Few Days

Source: Flash News Vol. 24 No - 02; Date April 14 2008

Positive Stories in Agri Commodity Sectors

This is a micro theme market where one needs to discover niche ideas and ride on them for good gains. At the current level, long-term investors can take exposure to the rate insensitive sectors like FMCG, Pharma and Telecom for their defensive appeal. They are also not exposed to moderation in global growth. In addition to these sectors, there is some positive story building up in the agri commodities sector. Many enquiries have been made for the agri commodities companies by many foreign institutional investors and even domestic funds are expected to launch agri-based funds.

Are We Asking The Right Question?

Is the bull market over? Is this a bear market? When will the market bottom out? Is the India story intact? How severely will inflation and interest rates impact growth? How long will it take for the US to sort out its mess? The questions are many. And the effort is on to find answers to all of them. They are all good stuff for academic debates but hardly of any interest to a serious investor who perhaps have lost some of his investments in the ongoing market turmoil. The point is, are we asking the right questions.

Often many problems are solved by asking the right questions. To put it very bluntly, making money in the current market scenario has become difficult. It was easy and different earlier. We are no more in a situation where you pick up any stock which gives you returns. Today we live in difficult market environment where there are very limited ideas at the current level.

Market: Flat?

These days at Dalal Street, the nerve centre of Indian capitalism, there is hardly any exuberance. The mood among investors on the street is one of withdrawn. It is just 'flat'. When you observe the market these days, you find it up by certain points in one day, but on the very next day it is down by similar points. We have seen it happening day after day in the last couple of months. Call it a market devoid of any action worth its name and directionless. When will the market begin to rise consistently? That is the question that every investor wants an answer for.

Discussing the market mood I think volatility will remain and therefore, the prudent strategy would be to stay away from the market. The proposed strategy proved to be of some good although there has been some marginal upward movement in the Sensex. However, such a move could not offer a definite direction for the market. The extreme volatility levels have created confusion among investors. To say the least the market is jut boring. Because of the volumes being so low everyday you are under the illusion of a huge volatility of 400 points up or 400 points down in the Sensex. But essentially the market is doing nothing.

Prudent Strategy

Expect the market to remain dull for a few more day as no one would like to take exposure just ahead of the result season. In the past week, market has witnessed very low volumes and I feel the scenario to remain the same in coming week also. But in the coming week, investor-focus is likely to shift to the quarterly earning which will provide actual figures and could trigger the market positively. Hence, the prudent strategy for short term investors is to stay away from the market at the current level while long term investors can take exposure in a staggered manner to the rate insensitive sectors like FMCG, Pharma and Telecom for their defensive appeal. They are also not exposed to moderation in global growth. In addition to these sectors, there is some positive story building up in the agri commodities sector.

Good News!!! for IPO Subscribers

There is some good news for IPO subscribers as they may no longer have to wait for weeks for a refund if they fail to get an allotment in an IPO. As banks would block the full application amount for the total value of the shares applied for in the investor's account till the shares are allotted. The proposed move would come as a relief to investors who face liquidity crunch as their investment remains locked in till companies refund the amount.

Do Not Increase Exposure

The result season is around and companies are expected not only to announce the full-year results but they will also announce targets and estimates for the next year. Infosys Technologies, which sets the tone for other companies to set the estimates, will announce the results on April 15. So I believe that it will be better for short term investors not to increase their exposure to the market till next week.

Street Cautious on Growth Expectation

Although negative news keep flowing from the US, on the domestic front the street seems to be getting cautious on growth expectations of FY09E from the India Inc. Looking at the advance tax figures, estimates for the FY08E were revised up marginally by many analysts. But the problem is the same enthusiasm has not been retained for the growth rate in FY09. Consequently, street expectations for earnings growth for FY09 have been revised down to just 19 per cent from the earlier level of 23 per cent.

Market This Week

Source: Flash News Vol. 24 No - 02; Date April 14 2008

Mkts choppy: Cap goods, power up; realty down

12:30 pm: The markets have given most of its gains and are trading flat amid choppiness. Buying support is seen from capital goods, power, metal, oil and banking stocks. Midcaps and small caps are trading higher with a gain of over 1%. Realty, FMCG and auto stocks are under pressure. Market breadth is positive, nearly 3:1. On the global front, Asian markets were trading lower, Shangha is down 5%.

At 12.30 hrs IST, the Sensex is up 11.27 points or 0.07% at 15598.89, and the Nifty down 9.90 points or 0.21% at 4699.75.

About 1684 shares have advanced, 733 shares declined, and 655 shares are unchanged.

Top gainers on the bourses were L&T, BHEL, Tata Steel, Tata Power, Tata Communications and SAIL while losers - Grasim, Maruti, M&M, Unitech and Sterlite Industries.

Orchid Chemical, Reliance Capital, Reliance Industries and Reliance Power were most active shares.

Capital goods stocks are witnessing buying interest after hitting in the last few sessions. The BSE Capital Goods Index was up 1.6% due to buying in L&T, BHEL and Thermax.

Power stocks have charged up today. The BSE Power Index jumped 1.4% on the back of support from Tata Power, Reliance Energy, Reliance Power and NTPC.

Metal stocks are also on buying radar; SAIL and Tata Steel gained. The BSE Metal Index was up 1.16%.

source: http://moneycontrol.com/india/news/local-markets/mkts-choppy-cap-goods-power-up-realty-down/13/00/333493

Sensex ends 1% lower; L&T worst hit

Tracking overseas losses, Indian equities ended on a negative note Tuesday after a sharp run-up in the previous session. Capital goods and metals sagged the most while banking shares managed to end in the positive zone.

Bombay Stock Exchange's Sensex settled 1.23 per cent or 194 points lower at 15,563.04 from the low of 15,479.42. The high was 15,770.40.

National Stock Exchange's Nifty slipped 1.23 per cent or 59 points to 4702.45. The index touched an intra-day low of 4677.80 from a high of 4769.55.

Second rung shares outperformed benchmarks with BSE Midcap and Smallcap Index rising 0.51 per cent and 0.48 per cent respectively.

BHEL (up 4.32%), Bharti Airtel (1.66%), Ambuja Cements (0.34%), ICICI Bank (0.33%) and HDFC (0.29 %) were the only gainers on the 30-share index.

Larsen & Toubro (down 5.27%) took the sharpest knock, followed by Wipro (4.8%), Jaiprakash Associates (4.76%), Tata Steel (3.29%), Grasim Industries (2.95%) and Ranbaxy Laboratories (2.66%).

Market breadth, however, remained positive on BSE with 1,384 advances against 1,217 declines.
Source: http://economictimes.indiatimes.com/Sensex_ends_1_lower_LT_worst_hit/articleshow/2935152.cms

Pricing may be key to IPO revival

India's capital market intermediaries and issuers needed to get the pricing of financial instruments right and take their own lead, capital market players said at an industry conference on Tuesday.

"The market has lost the ability to price anything with confidence," R Ravimohan, MD & regional head, South Asia, of rating agency Standard & Poor's said at a seminar.

Pricing of a financial instrument was at the crux of today's problem, he added. "Today in the equity markets, the only metrics by which a company's performance and fundamentals are measured is by price."

Commenting on the stock market's fall and deferring of share sales by some companies, C B Bhave, chairman of market regulator Securities and Exchange Board of India, asked if it was a bad time for IPOs or "is it really the price we are talking about."
Source: http://economictimes.indiatimes.com/Pricing_may_be_key_to_IPO_revival_Analysts/articleshow/2935400.cms

Equities Close Higher in Pullback Rally

Benchmark indices closed higher on Monday in a pullback rally, supported by firm global cues. Banking and FMCG stocks were the major gainers.


Bombay Stock Exchange’s Sensex closed at 15,781.99, up 2.86 per cent or 439 points from Friday’s close. It touched a high of 15,851.88 and low of 15,321.56 intraday.


National Stock Exchange’s Nifty advanced 121.05 points or 2.60 per cent to end at 4768.05. It touched an intra-day high of 4798.55 and low of 4628.80.

BSE Midcap Index and BSE Smallcap Index underperformed the benchmarks, closing 1.38 per cent and 0.92 per cent higher respectively.


Biggest index gainers were ICICI Bank (up 6.32%), Ranbaxy Laboratories (5.75%), Hindustan Unilever (5.26%), Jaiprakash Associates (5.08%) and ITC (4.71%).



Maruti Suzuki, Ambuja Cements and Reliance Energy (all down less than 1%) were the only losers in the 30-share index.


European shares rose 1 per cent Monday, building on the previous session's gains, as acquisition talk returned to boost markets and miners got a lift from a bullish note from Goldman Sachs.

source: http://economictimes.indiatimes.com/Equities_close_higher_in_pullback_rally/articleshow/2932810.cms

Inflation Inflated: Brace up for Tough Fiscal Measures

Inflation has hit a 3-year high and stands at 7% versus 6.68% for the week ended March 22. The market had estimated it at 6.52%.

The vegetable prices are up 4.9% for the week-ended March 22; while the primary articles WPI (Wholesale Price Index) is 1.8% for the same week end. The minerals WPI is up 38.2%, while the metallic minerals WPI is up 42.8% for the week-ended March 22.

The figures have come as surprise as most experts were looking at 6.25-6.75%. Most analysts had predicted that the headline inflation numbers could come off by almost 25 bps on account of a high base effect.

The markets have taken a knock back approach after inflation numbers announcement with capital goods, technology, auto, banking, power and telecom stocks taking a beating.

On the monetary policy front, there is a high probability of some or moderate amount of monetary policy riding in the April policy as most experts see no respite for inflation for next 3 months.

Bankers feel that RBI action should work in terms of easing supply constrains and pull down inflation by 50-60 bps.

Markets plunge: With Inflation touching 3-yr High

The markets have taken a knock back approach after inflation numbers announcement, which are high by quite a percentage points as against earlier numbers of 6.68%.

Today it touched a 7% mark, which is ahead of market expectations of 6.52%. Capital Goods, technology, auto, banking, power and telecom stocks have hit hard. Market breadth is negative with ratio of 1:3 as 318 shares have advanced while 900 shares declined.

Markets Spook by CRR Hike Fears

Negative news flow of rising inflation and due to which, experts expecting the monetary tightening by increasing CRR further have weighed heavily on markets, which slipped further; Sensex was down over 450 points and the Nifty down over 120 points. Capital Goods and banking stocks have hit badly. Market breadth is negative - 1:4 as 245 shares have advanced while 964 shares declined. On the global front, Asia ended lower. European markets are trading higher.

At 13.03 hrs IST, the Sensex was down 437.30 points or 2.76% at 15395.25, and the Nifty down 117.00 points or 2.45% at 4654.60. About 1018 shares have advanced, 1973 shares declined, and 80 shares are unchanged.

All BSE Indices are in the red; BSE Capital Goods Index own over 4%, Bankex down 3.4%. BSE IT, Power, TEck, Realty and Auto indices fell over 2.5%. BSE Midcap and Small Cap indices were down more than 1.5% each.

L&T, BHEL, ICICI Bank and Nalco were amongst the top losing counters.

Inflation has continued its rise for this week as well, rose to 7% as against 6.68% in previous week. Experts believe that RBI may look at monetary tightening.

Source: http://moneycontrol.com/india/news/local-markets/mkts-trade-weak-cap-goods-power-stks-tumble/15/10/332856

14,700 Is Key Support

The BSE Sensitive Index has moved on expected lines, has collapsed again to stage a smart recovery but needless to say that this hesitant recovery this time around has been on slightly better volume while the negative bias refuses to go away obviously influenced by weak US markets.

The Sensex has received significant amount of support in the proximity of 14600 – 14700 to recover again and close above the psychologically important level of 16000 on a week on- week basis (the week is not yet over) Needless to say that the 14700 level which was until now not an obviously tried and tested valid support level but the importance of which has just been underlined due to the recent market action while this aforesaid level is going to provide significant support on the downside.

The near-term outlook which had come under severe amount of pressure, has once again turned stable and it is now once again looking positive while the next few weeks could be rather important for the fortunes of the Sensex. On the flip side though, the Sensex is expected to run into a host of strong support resistance levels while it will have to overcome (from a weekly point of view) in due course of time - 16341, 16623, 16951, 17292, 17452, 17711, 17983, 18336, 18567 & 18845 if it has to make significant gains.

The Sensex continues to remain above its medium-term support levels of 16142, 15956, 15800, 15300 & 14700 and seems to be in a position to attempt to post a higher top/higher bottom scenario on the daily chart in the extreme near-term. The Sensex has also declined to close below the 55-day exponential average. In the meantime, the Sensex has sustained above its bullish gap on the daily chart 13421.05 - 13479.49, another bullish gap has been formed 14455.49 - 14581.35 – these uncovered gaps are also expected to provide the necessary support in the event of a future decline.

The Sensex has also sustained to close below (for the tenth week in a row) the 55-day exponential average. Volume has declined again (has depreciated a bit compared to the previous week) to maintain above the 5781 crore mark while the market breadth has turned in a market performance with the BSE Mid-cap Index (has closed below the 55-week EMA) showing a market performance in a choppy market to come off its low and has closed in a positive territory at 6174.49 while the BSE Small-cap Index has (has closed below the 55-week EMA) almost done the same to end in a positive territory at 7284.64 on the weekly chart.

Incidentally, the Sensex has sustained below the 55-day EMA (17295.16) on 25.03.08, above the 200-day EMA (17068.09) and below the 55-week EMA, which comes in at 16511.92 indicating a weak medium-term bias for the Sensex.

The BSE Sectoral Indices have mirrored the Sensex's sentiment while this time around there hasn't been a single pocket of disparity - all sectoral indices have ended in a positive territory week on week.

The great Indian bull run continues to flounder with a clear negative direction (a decisive close below the 14700 level could be disastrous) while the near-term outlook seems to have improved a bit, it's the medium-term which remains shaky while the long-term trend still remains bullish.
Source: Dalal Street Journal; P 16; Vol XXIII No. 8; Date: 13 April 2008

More Agonies And No Ecstasies

The reality continues to be grim for the market and for the economy. The flow of unfavorable news kept the BSE sensitive index volatile through the week.

As soon as the market discounts one bad news and makes a recovery, there comes another one almost wiping off the little gain that the market managed to achieve. This has made investors lose confidence in the market and their desperate search for market stability just continues. While everyone thought that the frequent shocks from the US market were almost over and hoped for a market recovery, the news from the domestic front about higher rate of inflation dampened the mood on the street once again. In fact, inflation paused some threat to the market but it became all the more dangerous when the annual rate of inflation was higher than what was expected.

The annual rate of inflation, stood at 6.68 per cent for the week ended March 15, 2008 as compared to 5.92 per cent for the previous week ended March 8, 2008. The rate of inflation was expected to be on the higher side but according to a survey there was a consensus among analysts that it would be at 5.95 per cent.

As soon the figures were released, up went the alarm bells and the government at the centre swung to action to curb the rate of inflation.

The government has to make sure that the prices of essential commodities are maintained at an acceptable level otherwise it could become political and the opposition could make it an election issue especially when the general election is imminent. However, it becomes difficult for the government to finely balance the growth rate and keep inflation under control.

As a quick-fix measure to control the rate of inflation the government banned exports of many food items and even reduced the excise duty on some products. The government has also asked steel manufacturers to cut down the price by 15-20 per cent or face resentment. Steel companies are already under pressure on account of higher raw material prices and therefore any reduction in price will directly impact their bottom-line. The measures adopted by the government are all short-term in nature and will hardly show any result in the long-term. The problems are on the supply side and they are to be addressed and something needs to be done on the supply side.

What will be the impact of high rate of inflation? Primarily the rate of interest has remained high and it has not shown any indication of cooling off. As a result it has impacted the overall credit-off take.

The RBI is meeting on April 29 to decide on the interest rate issue, but there is a strong feel that the RBI will not attempt to lower interest rates but will take steps to tighten liquidity. If there is no tightening, it is seen as a sign that the RBI is putting growth before inflation, but we see it as a remote possibility as RBI Governor Y V Reddy has recently stated: "Inflation is unacceptably high and the Reserve Bank of India is ready to take steps to contain it".

With higher rate of interest even growth is expected to slow down. This is a view even the finance minister P Chidambaram holds. A recent report by Asian Development Bank also suggests a slowdown in the Indian economy. Asian Development Outlook 2008 (ADO), forecasts that following a slowdown in 2007, the economic growth will moderate to eight per cent in fiscal year (FY) 2008.

The grim scenario is not just for India, the concern is really global. IMF in its recent report has stated that the global GDP growth is expected to slow down in 2008.

As for the market, expect volatility to continue and it is still wise to stay away from the market. More bad news is expected to come from the write-offs made by US financial giants. UBS recently writing- off of about USD 19 billion was much more than what the market had expected. Many more such with write-offs are expected.

Add to this the public acknowledgement of Ben Bernanke, the chairman of the Federal Reserve, saying that the economic outlook has weakened significantly in recent months. In a testimony before the Joint Economic Committee, the Fed chairman said that the economy "Will not grow much, if at all, over the first half of 2008," he said, and "could even contract slightly."

Therefore, the road ahead is tough for the market both from the domestic and global fronts.

Once again it is the season for corporate results. Companies will declare results starting next week. Once again expect the market to behave erratic in response to corporate numbers. The preview published by many analysts about the Sensex-based companies suggests that there is a risk to earnings in most of the sectors given the uncertain global conditions and weaker than expected growth in India's GDP.

Considering all these factors, the sense we get is volatility will be part of the market in the week ahead with the market moving with a negative bias. Most companies are expected to announce guidance for next year and it is likely that the market may take a cue from it. Hence, it will be a prudent strategy to stay away from the market for a while.

Source: Flash News, Vol. 24-No.1; Dated April 7, 2008

Present Rally Might Not Sustain for Long

Most of the markets have look to be in extremely oversold zone. I think at present a small infusion of liquidity can raise the market, but somehow market will find it difficult to sustain gains. Present rally may fade by April but in the second half of 2008 it will be more durable.

The only reason with US to take some breath is strong exports due to dollar devaluation.US Consumer Confidence is down sharply and will remain subdued for the next few months. The housing market is in a bad shape. The default rate may go up to 20%. However, most of the US sub-prime write downs have already been accounted for. But anyhow, the uptick in the off shoring market turns out to be a positive for India.

Though food and energy prices are driving inflation and core inflation is not as high, but then also inflation over 7% will be bad and market may not be prepared for that Moreover, the impact of earnings season will also be key market sentiment driver.

So on whole growth has moderated but that has happened from very high levels. However, growth divergence will persist and will continue to bring FII money into India. In Asian Markets downside risk is limited but in shorter we can see this rally fading away soon.

Scrips for Week Ahead

For 31.02.2008 - 04.02.2008


1. JK Cements.

2. Nagarjuna Construction Company.

3. Venkys India.

4. Abott India.

5. MSK Projects.

Some Relief: Brings Reason to Smile & Opportunity for All

After a long time there is some relief and investors have a reason to smile as the market moved upwards for four continuous trading sessions in the last week. On Tuesday (March 25, 2008) the market even witnessed 900 point plus gains-its second highest single day upward movement-largely because of the positive US market triggers. Significantly the recent rally has been more broad-based where even mid-caps and small-caps moved up. In addition, on Wednesday (March 26, 2008) while the Sensex was down by 130 points, the broader market was quite resilient. BSE-500, CNX Mid-cap, Nifty Junior and BSE Small-cap indices closed either flat or even higher. Do these developments indicate that the worst is over for the market? Are we being too optimistic to call it the end of the bear run?

Many of the reasons that caused indices to plunge are yet to show up in actual numbers. Barring the sub-prime losses that continue to singe banks and securities firms, other concerns have not yet demonstrated its impact in actual numbers. The US slowdown is still in the works and corporate earning outlook in the US continues to be mixed.

What are the other concerns? Rise in global commodities' price and inflation are becoming bigger worries worldwide. The price rise in commodities is putting pressure on inflation and at the same time, reduction in interest rates is very essential for consistent growth.

Even India's WPI-based inflation is now nearing six per cent and things are going to worsen as the Sixth Pay Commission may result in higher inflationary pressures. Therefore, this rules out any reduction in interest rates, which is crucial to maintain high growth rates. Even finance minister P Chidambaram concurs the fact that global slowdown may impact the growth of Indian economy. On the domestic front, advance tax collections have been strong even while industrial production seems to have slowed down and some brokerages have lowered the GDP growth estimates for the next fiscal to less than eight percent. So this does not show a clear picture at least in the near-term. But as stock markets are always ahead of the real economy, probably much of the bad news is already priced in.

But everything is not grim for the market and the economy. There has been a great deal of FII buying in the last three days. FIIs have been net buyers to the tune of Rs 2206.60 crore. Although earlier FIIs were net sellers in the Indian market, it was not because the high valuations but it was because of the urgent need for liquidity to bail out their parent companies suffering from the sub-prime losses in the US. A section of the analyst community also believes that as the price of crude has gone up substantially even the petro-dollar will provide the desired liquidity to global financial markets.

Even mutual funds have considerable cash and this could be around 7-8 per cent of their total asset under management. Along with this, expect large inflows in tax saving mutual fund schemes and insurance related savings by the end of March as the financial year is coming to an end. All these funds are expected to come into the market and could provide considerable liquidity and help the Indian market to surge.

As usual predicting market is difficult and it is tough to pin-point the level at which the market will find its bottom. True, we can predict a range. It maybe reasonable to assume markets have substantially discounted the ill effects of the US financial meltdown. Still the near-term direction of the market depends on global cues and events. I believe that the market unlikely to go below the 14000 level but any bad news on global and domestic funds will further push the market to the 11500 level.

At the current level investors can look at investing systematically with an investment time frame of about two to three years. Given the extent of sell off, the market may take some time to consolidate, unlike in the earlier pull backs where the recovery was quick.

On the corporate front, Tata Group has again signed a land-mark deal. Group Company Tata Motors has entered into a MoU with Ford to purchase iconic brands Jaguar and Land Rover (JLR) for $2.3 billion. The response to the deal has been mixed from the analyst community. While some of them have put a buy recommendation on Tata Motors, some others find the deal negative for Tata Motors at a first glance. Whatever may be the impact in the near-term; the deal is surely going to benefit the company in the long-term.

Regarding the market those who are already invested, remain invested at the current level. Those who have not participated in the market or are under-invested; this is the time to participate in a systematic manner, thereby eliminating the need to time the market. For the short-term traders I still advise them to take every rally as a selling opportunity.

Source: Flash News Vol 23-No.48

Indices Drifted to Settle Lower

Key indices drifted in and out of the positive terrain today to settle lower. The frontline indices ended in red but the broader markets continued to outperform closing in green.

Sector wise, metals posted modest gains whereas the banking pack was a laggard. Selling Pressure was also seen in power and oil stocks. Select realty and metal stocks were attracting buying interest.

Asian markets paused today after some good sessions of trade, and ended mixed.The Sensex closed down 130.66 points or 0.81% at 16086.83, and the Nifty down 48.65 points or 1.00% at 4828.85.

Biggest index losers were ICICI Bank (down 4.54%), Hindustan Unilever (4.37%), Bharti Airtel (4.24%), BHEL (3.51%) and Jaiprakash Associates (3.47%). Major gainers comprised Tata Steel (up 3.79%), HDFC (3.48%), ITC (2.09%), Infosys Technologies (0.49%) and Satyam Computer (0.47%). Across BSE, around 1837 shares advanced against 1,159 declines, while on NSE, there were 804 gainers and 430 losers.


Market Snapshot

• Sensex, Nifty end in the red amid volatile day of trade

• Small-cap Index outperforms all other major indices

• Sensex ends down 131 pts at 16087; Nifty down 48 pts at 4829

• CNX Midcap Index up 0.745, BSE Small-cap Index up 2.12%

• Index Gainers; Tata Steel up 3.4%, Idea up 3.3%, HDFC up 2.9%

• Index Losers; Nalco down 5.5%, HUL, ICICI Bank down 4%, Bharti down 3.6%

• Realty & IT stocks gain the most

• Realty stocks: Purvanakara up 22%, Orbit up 20%, IBREL up 10%

• Midcap IT: KPIT Cummins up 22%, Mastek up 14.5%, Firstsource up 10.5%

• Other gainers; Guj NRE Coke up 10.8%, Yes Bank up 13%, GHCL up 13%, India Infoline up 9.2%

• NSE Advance Decline at 2:1

Has The Time to Get Back arrived?

Markets rallied yesterday showing absolute strength. Experts attribute this rally to the positive news flow from the US and from FIIs.

This is also because some regain in investors and traders confidence on market. Markets were at bottom with 14,500 to 15,000 levels and 4,500 for the Nifty.

If the positive path continues and markets show stability over the next few weeks, more strength will come in. As post the March cleans up of balance sheets, April will see more money being pumped into markets.

Where to Invest and Where to NOT?

But despite the good news, it is a tricky call to buy in this market. This is because, markets have seen very erratic movements and depending upon the news flow; market could react even negatively to anything that comes by from the overseas market. But on an overall basis, I think that the first hint of positive news flow will bring back the liquidity waiting at corner, because most people are waiting for some stability and financial year end. So overall we are positive, but then also some negative news can bring negative energy with it in market.

There is strong visibility of earnings in sectors like capital goods, telecoms, FMCG but for people who are interested in investing for the longer term. With the short term perspective people could go for select pharma stocks. One can also look at some IT stocks and the metal space where stocks have taken a beating over the last few trading sessions. Any how one should refrain from investing in Banks and Real State stocks.

Cues From Global Peers: Let Sensex Breach Sweet 16

... Sensex registers Second Biggest Gain in Its History


The pull-back in Indian equities strengthened on Tuesday, with the Sensex registering its second biggest gain in absolute terms in a day, breaching some important psychological levels.

Sensex has breached 16,000 mark while the Nifty closed above 4850 levels. Both, Sensex and Nifty were up 6% each. Heavy buying was seen in scrips across sectors, Realty, banks and IT stocks were amongst the major gainers.

Bombay Stock Exchange’s Sensex closed 959 points or 6.27 per cent higher at 16,248.10. The index rose to a high of 16,255.03 intraday. National Stock Exchange’s Nifty finished, 285 points or 6.17 per cent higher at 4894.30, near its intraday high of 4896.80.

The broader markets also followed the suit, the midcap index closed with a bump of 6.7% at 6,198.65 and BSE Small cap Index ended 5.28 per cent up at 7,317.34.

The cues from global peers were encouraging as most of the Asian markets ended in green, as US market picked up another triple-digit gain yesterday with the Dow gaining 187 points.

Jaiprakash Associates (up 17.47%), DLF (14.86%), Reliance Energy (12.09%), HDFC (9.9%) and Wipro (9.59%) were the biggest index gainers.

Falling Stocks Increase the Debt Burden - INDIA

$4.7 bn worth of bonds yet to be cashed in have a conversion price 40% higher than the current stock price

Indian companies that raised money through Foreign Currency Convertible Bonds (FCCBs), a quasi-equity instrument, could well be staring a huge debt burden in the face because their stocks have fallen well below the level at which this debt would have been converted into equity.

An analysis of Bloomberg data reveals that the outstanding amount on all Indian FCCB issues—bonds that haven’t already been convert-ed into equity—is to the tune of $17.7 billion (Rs71,685 crore). Of this, $4.7 billion worth of bonds have a conversion price that is at least 40% higher than the current traded price of the stock.

If these bonds actually end up as debt, it would come as a rude shock for the firms. They have to pay interest on the bonds and may even have to resort to fresh borrowings in order to repay bond holders. It will also affect their debt-equity ratio and leveraging power.

It is still early to gauge the extent of impact; most bonds mature after 2011 and market situation can change. However, it is too early to gauge the extent of impact on Indian firms’ balance sheets as in most cases

MeltDown in Indian Market pulls Current Prices below Conversion Prices

The meltdown in the Indian stock market this year, induced by global bearishness following the subprime crisis in the US, has resulted in pulling down the current market price of the shares of some Indian FCCB issuers way below the bonds’ conversion price.

FCCBs are debt instruments, issued normally in dollars, with an option to convert them to equity at a pre-determined price. The convertible bonds, which help companies raise foreign currency funds at attractive rates, have largely been zero-coupon bonds, where the interest payment is due on the maturity of the bonds. As a result, there is no cash outflow from the issuing company either towards interest payments or for repayment of principal.

FCCBs are usually priced at a premium of 30-70% over the prevailing market price of the share and the option holder converts the bonds to equity if the stock price exceeds the conversion price. If the market price of the stock does not exceed the option price, the holders will not opt for equity conversion and the issuer will have to redeem the debt.

Although these instruments are treated as debt on the balance sheet, the assumption at the time of issue is clearly that the bonds will get converted into equity and no payments need be made by the issuer towards redemption. In fact, corporations usually do not even show the pro-rata interest charge on account of FCCBs in their profit and loss statement. FCCB holders normally convert their holdings when a company’s shares are trading at a hefty premium to the conversion price. Else, they prefer to hold on to the bonds till maturity and earn interest income, which would be about 35% of the original investment for a bond with a 6% yield and a five-year tenure. It’s only when they are assured that the return on the shares will be much higher than the interest earned on the bonds, that they convert FCCBs into equity.

Some of these issuers could be in a difficult situation as they may not be capable of raising additional debt to repay FCCB holders (if the bonds are not converted). Some companies, then, could even collapse under the weight of their outstanding debt.

Harshad Shaped Indian Market... ?

In 1992, a man drove to State Bank of India headquarters in his glistening new Toyota Lexus, which had just been launched in the international market. Obviously, the owner had paid a fortune to import the car. A few days later, the news media reported that around Rs 6 billion (149.418 million USD)* worth of government securities were missing from SBI.

Investigating agencies, pressed into service to uncover the facts behind the missing securities, discovered that the unaccounted securities were just the tip of an iceberg. Deeper investigations revealed that the shortfall in securities was not only in SBI but in other national and foreign banks and financial institutions as well. It became apparent the securities scam ran into more than Rs 35 billion (871.605 million USD)*. The man behind the news that shook the market’s financial foundations was Harshad Mehta.

This huge suck-off almost took the wind out of the financial reforms introduced only a year ago.

In fallout of this massive con game, the stock market crashed 40 per cent and wiped off more than Rs 1 lakh crore in two months. This unexampled securities swindle exposed the underlying loopholes in monitoring, banking and capital market processes and the vulnerability of the country’s economic structure. A slew of plug-in measures were initiated.

Market regulatory bodies National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) were set up; badla was banned; and online trading was started.

Thanks to the scam, the Indian capital market today stands completely revamped and is now among the world’s best regulated markets. Another redeeming feature of the scam was that a lot of investors joined the stock market. In fact, Harshad Mehta can take pride that several new investors to exposure in the market, egged on by the man who for them had emerged as cult figure.

DS

* 1 USD = 40.1558045 INR

Source: Dalal Street Investment Journal, Vol XXIII No. 7; p105