Scam a Day - Sainik

The last two weeks were really unforgettable in more ways than one, what with one scam a day burning the pockets of hapless investors.

The frontline indices tanked nearly 10 percent, albeit in strange sort of way, the drop was par for the course. As detailed in my previous posts, the period in and around Diwali always produces a drop of 10 -12 percent, so it no big deal in the normal course of events. If it is just normal that is.

If we go by history, the period between now and mid -January is the most bullish period and the mainline indices at times have gone up by 15 percent too. This is the positive scenario.

Now for the not so positive scenario. Very rarely does "bad news" erupt during this period. Even when it erupts - like the Dubai problem last year - the markets take it in their stride and bounce back.

Even the rumblings of the Maytas - Satyam issue in December 2008 - was put on the back burner for a few weeks and the market only sold off only in early January 2009. The last such significantly negative news which did affect the markets was in 2001 - when in December, the Indian Parliament was attacked.

What is on the horizon this time around?

At the global level, the European crisis just refuses to go away and is increasing in intensity every passing day. At the time of writing this, I am getting news that Ireland has finally been bailed out. This makes it two bankrupt economies in the Euro zone. Will this have the domino effect on the other countries?

The markets have already moved on to the next potential targets: Portugal and Spain. While Portugal is a relatively small economy , the elephant in the room is Spain. Another new country added to the "sick" country list : Belgium.

The euro is very weak against the US dollar having broken through key supports just like a hot knife through butter. To think that the key to a bull case for the stock markets is a weak dollar.

Closer home , the CBI raid on LIC Housing Finance and other institutions has all the potential to bring out the can of worms.While the analysts are putting a brave face on the extent of the rot, it would be nice to look at it in the perspective of "There is never a single cockroach".

This can indeed be a "game changer" because of the battering of India's image and the consequent de-rating of PE multiples.

While history is in favor of the bulls, the current environment will make even the bravest bull cross his fingers.

Too Many Sweets can Cause Indigestion - Sainik

The week gone by was really very important considering the fluctuations in all asset markets not seen in the past 25 weeks. The volatility started in the precious metal markets and spread like wildfire to equity and bond markets, and by the end of the week, had affected the hitherto rock solid commodity markets.

To cap it all, possibility of sovereign default by Ireland roiled the currency markets. Over the weekend, Ireland will be in talks with EU to tide over its liquidity problems, and the next few weeks are likely to be very crucial for world markets across all asset classes.

As far as Indian markets are concerned, the expected correction did materialize, and is likely to continue for some more time. The period November 15–January 15 has traditionally been very profitable for indices and frontline stocks. Will history repeat itself? Only time will tell.

Even after the correction of last week, mainline indices were trading higher than they were at the beginning of the month. Thus it should not be worrying if weakness persists for some more time. Eyebrows should be raised only if Nifty starts trading below 5950.

The scrips, to watch would be SBI, Infosys, Tata Motors, ACC, L&T and TCS. These have been the leaders in this rally and they will give a clue to the market’s direction.

Today, Satyam unveils its quarterly results. While the institutions are bearish, insiders are bullish. Will be intriguing to watch who wins?

Whatever you do, hope it is profitable.

All-time Highs on Diwali - Sainik

Last week was truly historical. Both the Sensex and Nifty hit all-time highs, and that too on Diwali day. The Coal India listing has brought great cheer to everyone around. Hopefully the retail investor too will be happy.

On this auspicious day, everyone was concerned that the retail investor was the only one who had not joined the party yet. It is certainly a strange phenomenon that this is a rally where the domestic investors have been net sellers throughout the year. This has never happened before.

I wonder why. Nobody seems to have the answer, not only here, even in the US, the retail investor has been on the net selling side. The same goes with the corporate insiders too.

Well, the market teaches us new things all the time. Not looking back at the week gone by, the RBI raised the interest rates as expected but market reaction was muted. No selloff, no euphoria, at least on the day it was announced.

The most remarkable decision was that of the US Federal Reserve in which it justified that the rise in the US stock markets meant that their decisions were on the right track.

It is pertinent to point out that every one in authority, including former Fed chiefs–Greenspan and Volcker–have been very critical of the Fed's Quantitative Easing (QE).

Criticism has also come from countries as diverse as Germany to China and through a very subtle rebuke from our own RBI governor too. Yet, Bernanke went ahead and did what he wanted to do, and for the first time ever, he went to the press to justify why he had done so.

All the giants of the financial world are very scared of this decision. The immediate impact being higher asset prices, which would make everyone who owns the underlying assets very happy, however what about the long-term implications? Already there are a growing number of voices fearing the inevitable. Bernanke is supposed to be fighting deflation and in the process he might have created a new monster: Hyperinflation. Time will tell whether Bernanke is a hero or a villain.

Closer home, this week would be very interesting.

The strategy would be to buy into weakness during the latter part of the week and early part of next week. The period November-January has traditionally been very profitable for the Indian markets.

The areas which one may want to concentrate would be oil and gas and pharma. Of course, banks and autos could be bought but one should be very choosy. Small private sector banks should be a part of one’s portfolio.

In commodities, gold and silver look very attractive, probably more attractive than stocks at this point of time.

In currencies, Dollar has the best chance to strengthen this time around.

Whatever you do, hope it is profitable.

Diwali Means Volatility - Sainik

October has come and gone and was relatively uneventful as far as markets went, except for the last couple of days, when it was volatile. However, the week ahead is full of events which could determine the magnitude and direction of the market.

First off is the RBI policy scheduled for Tuesday and there are expectations now that the RBI would increase interest rates by 25 basis points, unforeseeable just a month ago. This could have some bearing on the automotive and banking sectors.

Next up is US mid-term elections where the Democrats are expected to lose quite heavily. This is likely to create market volatilty in the US markets which could get exported here. Then we have the Big Daddy of them all: The Fed Meeting on 3rd, which would dictate the trends of our markets on Thursday 4th.

The Fed meeting will take a decision on the amount of Quantitative Easing proposal. The quantum of this easing will have profound impact on all the asset markets over the next few months.

To round off the week , we have Diwali coming up, followed by the Obama visit. Traditionally, the Indian markets have been very volatile around Diwali. For instance last year the markets came down for 10 days beginning from Diwali day. However, the previous year, the markets had collapsed about 4 days before Diwali. Whatever may be the case, it has been seen in the Indian markets that eight out of 10 times, if one were to buy plus or minus one week to Diwali, it is profitable.

Let us keep a close watch on the markets . The time for buying may come next week .

Volatility Ahead - Sainik

The week gone by was characterized by huge bouts of volatility in all the markets, whether stocks, commodities or currencies. This is typical of markets that have run up too fast. What happens next will be interesting to watch.

Focusing on the Indian equity market, for the bulls, the months of November and December are months to look forward to, since the equity markets perform the best during this period. The bears can only wish, that since the markets have run up too fast and everyone seems to be on the bullish bandwagon, the markets may not favor the bulls.

If we observe the market movements in the past three weeks, the market seems to have been hovering around in a range with violent movements. Everyone seems worried about the liquidity being sucked out due to the Coal India IPO, but thankfully this has not happened.

Everyone now seems to be waiting with bated breath as to what will happen to the refunds of the IPO. Many in the media are speculating that a significant portion of the money would come trickling into the secondary market. It would be interesting to watch first week of November onward as to where the money would go.

The results season has produced many surprises for the analysts. While Infosys played to script, TCS really took off in terms of performance. As expected, Wipro reported less than stellar earnings.

The cement sector actually came with poor earnings, yet surprisingly the scrips shot up after the earnings. Perhaps the market had already factored in the poor results.

The strange bit of earnings to hit the markets was that of L&T. On the face of it, its earnings were better than expected and much higher than last year's comparable quarter. But, the devil was in the details. They had included the proceeds of the sale of Satyam Computer shares in their other income. Strip this one time gain, and then lo and behold, earnings were lower than last year, a point that has been missed.

This week, we will have a rash of earnings and it would be interesting to watch how they would pan out, and more interestingly, how the markets react to them. This week is also settlement week and one can expect volatility going forward. Point to note is that this is the first time in many months when the Nifty and Sensex are trading at the mid point of the monthly range.

The undertone of the market is very bullish, especially for the month of November, with the premium on November Nifty futures more than 60 points to the spot, which is a record since futures were introduced more than a decade ago.

Many respected market commentators and fund managers are all looking at targets of Nifty between 7000 and 7300 and Sensex of 25,000 to 28000 in the next few months and they are basing it on the projections of the earnings of Sensex stocks.

The consensus earnings for 2010-11 are 1050 /1080 and for 2011 -2012 is 1350/ 1400.

If we consider these estimates, then Sensex at 20,000 comes to around 17 times 2011 earnings and 14 times 2012 earnings. The only problem with these earning estimates is whether they are reasonable and backed by facts.

I am not tired of repeating that the Sensex earnings for 2009-10 were in the region of 820 and to get to 1080 for 2011, the earnings should grow at more than 30 percent year on year for two consecutive years.

On analyzing the results of the companies for the last 2 quarters, there are only a handful of companies, predominantly in the banking sector (which does not have a high weightage in the indices), that have come anywhere near the magic figure of 30 percent, year-on-year growth.

At such times, I am reminded of Bernard Baruch who said: “Every man has a right to be wrong in his opinions, but no man has right to be wrong in his facts.”

Fly Bye Dubai - Kevin Mendonca

As far as I remember I have been bearish about Dubai’s real estate market compared to most people from Dubai. Perhaps my bearishness was just relative, but I have always felt the bottom was going to be harsh and that it would take nothing short of a miracle to save Dubai.

Most of what Dubai did was copying the successes, and trying to avoid the failures, of the developed world, over the past 200 years. This is the same thing that many new developed countries have done, and what India and China are doing. Of course the larger countries have had to adopt western models more due to size. However they happened to fall for the one stupid piece of financial advice that has been repeated from asset bubble to asset bubble: “This time is different.”

Few things strike out when observing the Dubai scenario:

1. Abu Dhabi has not bailed out/bought Dubai;
2. The Dubai government has more debt than anyone knew (or cared to know);
3. Dubai has no oil.

While I totally agree with the real estate price pressures Dubai is facing, the theory that is Dubai descending in to oblivion is a bit too much for my taste. However, I think things are going to get tough—a sort of Japanese lost decade is more likely.

So, what went wrong with the El Dorado of the Middle East?

The biggest problem with Dubai is that they want to have the biggest “dick” in town. Resource allocation for the last seven years was always skewed in favor of an asset that contributes virtually nothing to long-term capital formation—real estate— yet had the debt baggage that stays around for a long time. The “sexiness” of having the largest tower, man-made islands, and God knows what else, meant that people took unnecessary risks. While these things do bring in tourists Dubai’s emphasis on tourist attractions was excessive.

Dubai instead should have focused on being more of an export economy. It has great infrastructure, zero taxes and availability of cheap labor; it could compete with China, but alas, manufacturing and textiles are not as attractive.

Another area of concern is the rules of living, which while being relatively liberal in comparison to the region, still had a trait of denigrating its expatriate work force. Such things work well when times are good, and people are willing to live with them, but when times are tough, the tolerance of discrimination changes. Dubai wants to be Singapore, but with its quasi-feudal system.

So how does Dubai extricate itself from the current imbroglio? Several factors can contribute its resuscitation:

• If Abu Dhabi takes over everything, then it could continue to make average economic decisions and still have loads of money.

• Dubai gets its act together and realizes that it cannot be the West without acting like the West. There is virtually no bankruptcy law and bouncing a check is a federal crime! Also, the lack of reputable statistical information is a serious concern.

Due to Dubai's political structure, the real role model will have to be Singapore. Singapore and South Korea were countries that started Authoritarian Capitalism, now emulated by the Middle-East, China, and I am sure, soon a bunch of African countries would follow. Authoritarian capitalism proves that anyone can have a great economy–all it takes is political will (authoritarian or democratic) and education to sustain it.

Whatever happens to Dubai, South Asians and poorer Arabs will continue to come because they can make more money here. Statistically, it makes economic sense for them, and at the end of the day people need a decent standard of living. This will stay relatively constant in Dubai and this is what matters to the majority of people.

As far as its position in world economy goes, Dubai is always going to be insignificant: the world’s largest economies come down to three things: market economics, education and population. Despite people talking about Dubai as if it was the new Rome, the maximum it can ever achieve is becoming a Singapore, or Monaco, or Luxembourg, or some other tax haven, playboy paradise, or mini financial center.

And no matter how much I love Dubai, considering I was born and grew up here, as I grow older, it will become harder to defend its backwardness, both economic and social.

Bearish Key Reversal in Equity Market - Sainik

There was plenty of good news all around the past fortnight, with the successful conducting of the Commonwealth Games, despite Don Quixote ( Kalmadi) and his cohort Sancho Panza (Bhanot).

The build-up to the Coal India IPO’s opening Monday was huge as was its size, at Rs 15,500 crore size, which made it the single largest IPO in India ever. The response is likely to be humongous, with an investor-friendly price band and retail discounts.

The flip side, however, is that it is that policymakers are getting nervous of the relentless flow of foreign capital. Last week saw even Singapore putting restrictions on foreign capital, thereby joining the bandwagon of countries, ranging from Brazil to Thailand, that are shunning foreign money. India seems to be the odd man out, considering we liberalized the rules for foreign capital inflows in to debt markets just a while back.

The Nifty and the Sensex created new highs, touching values not seen since January 2008 when the Great Indian Bubble burst. Interestingly, both the major indices closed in the red (week on week) for two consecutive weeks. This has not happened since end-April to early-May 2010.

Another point of concern is the major indices have made bearish key reversals on a weekly basis, for the first time since many years. The weekly key reversal is a very rare occurrence and it usually happens at major turning points..

Our definition of a bearish key reversal is when the index makes a new high over the previous time period, but closes below the close of the previous time period.

For instance, for the week ending October 8, the Nifty closed at 6103, after making a high of 6223 and low of 6067. During the week ending October 15, the Nifty made a new high of 6284 and a low of 6050 and closed at 6062. This is a classic key reversal.

More often than not, the effect of a key reversal is that the market continues in the direction of the prevailing short-term trend. In the case of Nifty, we should expect markets to continue to go lower, while the case of dollar, we should expect it to go higher. We should keep a close watch on what unfolds in the week to come by.

Both the bank and tech indices too had weak closings. In spite of good results from Infosys, the scrip tanked Friday with the highest volume seen in a very long time.

The result season will be in full flow in the next few days. Early indications suggest that the market is unforgiving and it goes down even if the results are good, so God help if the results are bad. Cement companies are likely to feel the heat, since they will uniformly come with not-so-good results.

Interesting times lie ahead.

While the fund flow from the FIIs continues unabated, Friday showed some slack, with FIIs being net sellers for the first time in eight weeks. With an imminent fund crunch upon us, especially, with the Coal India IPO, we have to closely monitor this area as markets are very vulnerable at this point of time. While we indulge in festivities, it is prudent to keep one eye firmly on the markets.

October Surprise? - Sainik

During the week gone by, it looked as if markets across all asset classes, across all geographies, were following the old adage: Bull markets peak out on euphoria and bear markets bottom out on despair.

Gold: Gold has had a relentless rise in the past three months. From a low of $1175 late July, it has literally had a golden run, peaking out last week at around $1390. It then turned around, to close the week at $1368. In the past three months gold has put on nearly 20 percent, with no significance increase in demand from the largest consumer: India.

The golden run has been characterized by “fear” of the collapse of currency systems of the world, and, of course, in anticipation of QE2 from Bernanke and the gang of merry bankers out to Bankers who are out to ruin the world's economies.

Gold has nearly 98 percent bulls in it, according to the latest investor sentiment survey. The significance of so many gold bulls at these levels portends to an imminent correction. It would not be surprising if gold violently shakes off the bulls that arrived late to the party, by sliding to around $1250 soon.

Dollar: If ever there was a gold medal to be won for the most hated currency in the world, then the US dollar would have won hands down, especially in the last three months. The dollar index which was ruling at 89 has slid all the way to 76.1, breaking its important support level of 80. As long as Bernanke and his gang of fools rule the roost at the Fed, the dollar is toast.

However, even the devil has to get his due at some time. With nearly everyone (97 percent) bearish on the dollar, it is ripe for a pullback. The movement Friday when the dollar index bounced off its lows and closed at around 77.1, with a bullish key reversal, indicates the dog is not dead as yet.

Watch out for strength in the dollar. The first target is 80, and if at that point of time, some other European country has some new financial problem, which is very likely, then we could see the dollar soar and target 85 at least.

Oil: This is indeed the joker in the pack. It has quietly climbed above $81 to a barrel and seems comfortable at this level. The October-December quarter is traditionally a strong season for this commodity and it could spoil the party of many struggling economies.

Other Commodities: The CRB Commodities Index is on a tear, suggesting that hot money continues to flow in to the underlying commodities despite the global economies showing tepid recoveries. How else can you explain the price of cotton, an important constituent of this index, and a very widely used commodity, whose price touched a high just last week at nearly $1.20 per pound?

Just check this out: “It was the highest level for cotton since cash prices paid to farmers during the Civil War when blockades prevented shipments from leaving the South,” said Sharon Johnson, a senior cotton analyst at Penson/FCG. The American Civil War happened during the time of Abraham Lincoln in 1860's.

It's Deja Vous

What's common to all these opinions?

• Citigroup continues to be bullish on the Indian market and has set a BSE Sensex target of 23,950 to 25,000.

• Jigar Shah, Investment Advisor, KR Choksey Securities, Mumbai, says "The recent bullish trend of the market is a result of the unprecedented rise in global economic growth, longer boom cycle, lower interest rates, lower inflation and huge liquidity. In particular, emerging markets like India and China with their huge populations are growing very fast in double digits. Moreover, foreign companies are now looking at safer havens for investing their finances and funds, with India and China topping the list. Above all, the nine per cent growth of the Indian economy is encouraging an automatic inflow from FIIs, leading to the sudden upsurge in the stock market."

• Bhavesh Shah , VP (Research), Asit C Mehta Securities, Mumbai, says"India’s economic growth is projected to be in a higher trajectory (8-9 per cent) in the next three years. Infrastructure spending, domestic consumption and investment will continue to drive economic growth. And growth will attract increased capital flows, be they long-term or short-term in nature. Looking at the overall picture, I expect the BSE Sensex to be around 23,000 at the end of year.
• Gagan Banga, Indiabulls CEO is bullish on Indian economy and is expecting a Sensex target of 24000-250000 for the Sensex in next 12 months. His bullishness stems from the fact that the Indian economy is on based on sound fundamentals and none can effect the same, including US recession, for next 12 months.

These statements/opinions are to be expected after the Indian Sensex crossed 20,000 recently. Right ?

Wrong!

These statements were made in early 2008.

This is not an attempt to deride any of the above institutions or individuals. This is only to demonstrate that every time the markets go up much more than the fundamentals justify, the market makers use of the India growth story as a "fundamental factor" to justify the level.

In my humble opinion , the fundamental outlook for the markets, both local and global, is poorer than what it was in early 2008. The markets are being driven by pure liquidity. We should know it, accept it and participate in the market with this knowledge. This knowledge and acceptance alone, will keep us on guard when the markets turn down, which they will do eventually.

The question is When and not If. Be prepared.

Until then enjoy the Commonwealth Games.

When Do Markets Top Out? - Sainik

Now that the markets are approaching all-time highs,people have begun to debate as to how high they can go. Most experts interviewed in the media are of the opinion that there is still a lot of distance left and targets of 27,000 considered reasonable for end of year.

Most also agree that this market is likely to top out and reverse on some "unexpected" bad news, like global factors, or terrorist activity, or any other geopolitical disaster or financial scandals etc.

Are these assumptions right? Lets examine of a few of the significant market tops:

1992 : Harshad Mehta scam - The Sensex topped out in the first week of April at around. Harshad got arrested only in the last week of that month. There was no sign of "bad news" in the first week of April and since it was the beginning of a new financial year, there was lot of enthusiasm and all-round good news.

2000: The Sensex topped out on Valentine's Day (14th February) , when tech stocks topped out in mid-March, just before Bill Clinton visited India. Again, there was no sign of any bad news and lot of happy anticipation that the President of the US was visiting India after nearly a quarter of century (the last Presidential visit was in 1978 when Jimmy Carter vistied India during PM Morarji Desai's time).

2004 : The markets topped out during the first week of January. This was the day when Jaswant Singh announced a special package for the industry with hordes of concessions. Infosys had come out with blockbuster results and corporate performance was the best ever in a decade. PM Vajpayee had just returned from a successful trip to Pakistan and there was a huge buzz in the air that elections would be called later in the year and the NDA government would be returned to power since India was shining.

2006: After a relentless run during March and April, the Indian markets went on to top out on May 13 , the day Reliance Petroleum was listed at a huge premium and there was enthusiasm all around.

2008: The markets topped out just before Pongal, on the day Reliance Power successfully closed its issue, having been subscribed many times.

So is the case with global markets too. The US markets reached highs April-end when there was no specific "new or unexpected bad news". It is true that once the markets top out , the bad news starts trickling in with reasons for every subsequent fall.

However, it is clear that market have never topped out on bad news. The markets top out, as well as bottom out stealthily, when least expected to.

Just consider the bottom of all markets during March 2009, when there was no news and quietly the markets bottomed out to start a multi-month rally across all asset classes around the world. Hence, we should closely examine the behavior of the markets on the days we get a plethora of good news.

Back to our markets, Satyam announced results for the last 2 years and was promptly met with derision by the global funds who dumped the stock . On Friday it made a low of around Rs 88 and closed marginally in the green. Our analysis shows that it still remains a good long-term bet with low downside.

The capital goods sector showed good appreciation with Bhel leading the pack. There seems to be some more steam in this sector.

The tech sector got a fresh lease of life with the US senate not passing the Outsourcing Tax Bill which otherwise would have had a detrimental effect on the fortunes of the sector. Metals perked up Friday, quite inexplicably, but this is the nature of the bull market.

Banks continue to do well . One can look at private sector banks like City Union Bank, South Indian Bank and Dhanalakshmi Bank.

There was a lot of selling in Pipavav Shipyard since private equity players as lock-in period expired and private equity players exited the stock. It looks interesting as a portfolio candidate when the selling subsides.

The results season will start in right earnest now onwards and the markets are likely to display the typical volatility associated with it. Trade carefully as we enter uncharted territory.

Whatever you are up to , hope its profitable.

Are the Markets Overvalued? - Sainik

The markets were in a reasonably tight range during most part of the week. The Nifty opened at around 5950 and saw a high of 6050, closing around 6020 for the week. The action was in midcaps and there seemed to be heavy selling by local institutions through the week.

However, FIIs came back with renewed vigor and there seems to be no let-up in their appetite. So long as the FII money is coming, the direction of the market is up.

There were a few voices in the wilderness regarding caution. The question is: Are the Indian Markets overvalued?

One of my close friends sent me comparative numbers of the Sensex in 2008 and its current level. This had been sourced by a friend from one of the largest retail brokerage houses in the country.




Based on this comparison, the brokerage house is indicating a Sensex target of 27,000.

Whether the Sensex would reach the target above would entirely depend on the global liquidity patterns. As of now, global liquidity is strong and will get stronger should the Fed begin its QE2.

Over the weekend there was an interview with a famous hedge fund manager on CNBC (US), in which the manager predicted that the stock markets in the US are ready to go much higher. The Friday rally in the US markets was attributed to this man.

Closer home, CLSA is is of view that the US markets are the cheapest since 1957. It is predicting a renewed bull run in the S&P 500 toward 1400 by the end of the year.

Currently the S&P trades at around 1150. In the local markets, the FMCG stocks seem to have become the darlings of the market. The banks and tech stocks are seeing continous purchase.

Your strategy should also be the same. Buy on all declines. The Nifty has strong short-term support at 5950 and resistance at 6150.

Mahindra-Satyam seems to have had a volatile run from Rs 95 to Rs 113 - it closed at Rs 100. It is still a buy with support at Rs 90.

Punj Lloyd seems to be on the verge of a breakout. CUB, IDBI Bank, VIP Industries, Reliance Industries look interesting and should be bought whenever the sentiment is negative.

It is a good idea to lighten up on cement and technology stocks ahead of the results season.

Whatever you do, hope it is profitable.

Inflation, Deflation, Both? - Sainik

aka Alice in Wonderland...

True to script, the Indian markets vaulted over 5500 levels to close at around 5915, which is just 8 percent below the previous all-time highs of 6340 attained in January 2008. If this level is crossed, India would become a part of a handful of countries trading at all-time highs-the Indonesian and Malaysian markets are already trading at all-time highs.

Clearly, the surge has been led, predictably, by FIIs, whose appetite for Indian equity never seems to end. Local institutions have been heavy sellers, but to no avail.

Banks and tech stocks were the leaders in this rally. It is surprising that tech stocks are hitting new highs despite negative vibes coming out of the US and the growing fear that Europe is a disaster waiting to happen, and the rupee strengthening against the US dollar. Sounds illogical? The RBI has come out with a very hawkish economic policy which should have affected banking stocks but this was just brushed aside by the relentless optimism. Well this is the stuff that runaway bull markets are made of!

While we are on a tear, there seems to be confusion in other markets. Just consider this: the US and Europe markets are going nowhere because consumers are just not biting; hence the talk is about possible deflation. With the Bond market rallying a while ago, and yields hitting new lows, the case for deflation is justified. However, a look at the Gold market which presents a different picture-the precious metal hit a new life-time high last week, and looks set to cross $1300 per ounce in the near future. Traditionally, a rally in gold means that inflation is around the corner.

So what's it then? Inflation or Deflation? Some more head-scratching to do if you observe the currency markets. Japan intervened in the currency markets for the first time since 2004 and bought dollars to weaken the yen, so as to help its exporters. On the other side, the US is asking China to strengthen its currency and threatening to label China as a currency manipulator.

What does one make of the Japanese action? Manipulation? While this going on in broad daylight it has been ignored by everyone. The whole scenario resembles something straight out of Lewis Caroll's 'Alice in Wonderland'.

The US equity markets are totally devoid of volumes and large swings can materialise without any rhyme or reason. The markets to watch are the US bond market, gold and the dollar index. These are large markets with huge number of players and cannot be manipulated by any one entity, including the Government, for an extended period of time. The direction of these markets will determine the fate of the underlying economies.

Right now, the markets are indicating that all is not well, at least in the developed economies, whatever Obama, Bernanke and other political leaders of various countries want us to believe.

Coming back to our own markets, while all the analysts are unanimous in their opinion of the indices hitting new highs and the markets continuing to flare up higher and higher, we would like to play the contrarian card and issue a short-term Sell on all rallies during this week. We would recommend lightening up on at least 50percent of the holdings, if not the entire portfolio.

Very rarely would one like to issue a Sell call, because if it goes wrong, all one hears are curses. But we are ready to be cursed. Do note though that I am not advising shorting the markets as yet, since it is very risky in markets which are irrational such as these.

If one were to sell in a calibrated manner over the next few days on all rallies, we believe one would get some good bargains in end October, just before Diwali.

The sectors which look ripe for profit booking are the banking, technology and cement. One would be able to buy ITC, Satyam, Maruti, Bhel, L&T, and TVS Motors, on a decline of 5 percent from current prices whenever it happens.

Whatever, you choose to do, hope it is profitable.

All Hopes for a Blowout Rally

The indices last week have broken out of the trading range of 5350-5550 conclusively, and even 5600 held comfortably, on Thursday, ahead of a long weekend.

The announcement of blowout IIP numbers over the weekend, and stable global markets, should add fuel to the fire of the impending rally in the week ahead.

Big players are all expecting a huge rally of around 10-15 percent in the next few months. Hence the mad rush by the FIIs to woo India.

This was the Buying Panic which a few commentators were expecting some time ago.
The standout performing sectors were the Financials and Cement. It is a known fact that cement companies are struggling to make profits in the past 4-6 months mainly due to a lack of demand.

However, the market buzz is that cement prices would be increased by around 20-25 percent during the festival season. Interestingly there are good scrips still available at reasonable prices, even at these lofty index levels.

Just check out my favorite, Satyam Computers, which is hovering around Rs 90 and it has just started hiring from the campuses, after a layoff of nearly two years.

Even Reliance Industries and Bhel look reasonably priced versus the index. ITC is another blue chip which can be bought on all declines. TVS Motors and Maruti should do well going forward. Among dark horses, sugar stocks are looking good.

Watch out for Punj Lloyd. It seems to be stabilizing at around Rs 110 level, similar to Suzlon which is forming a nice base at around Rs 50.

The only risk to all these recommendations is that if the blowout rally does not happen, the we know what should our stoploss be: Nifty 5350.

Whatever you are up to, hope it is profitable.

Laborious Markets - Sainik

September 6 is celebrated as Labor Day in the USA. In a strange sort of way the Indian markets also seem to be celebrating it, in spirit, for the past so many weeks, with the Nifty being rangebound between 5350 and 5550.

Every time the Nifty appears near either of the numbers, the excitement is palpable; everyone in the market who is technically inclined is left wondering whether it will break the shackles this time at least.

The Nifty, like a cruel mistress flatters to deceive, again and again. Last week it happened at the lower end of the band, when the Nifty briefly went below 5350, and then bounced back, to close the week out at a respectable 5480 levels.

September was quite a bullish month last year, and a very bearish month during 2008. Which way will this September be?. Will it be another heartbreakingly slow month like this August was. Only time will tell.

There is a well-observed phenomena in the US markets leading to Labor Day: The markets are bullish and then become bearish after the day. This year, the first part of the phenomena has remained true. Will the second part too fulfill the observation? Only time will tell.

As a reader of the article, it is justifiable to expect that the writer would stick his neck out and make some prediction-any prediction-but as our late PM, Narasimha Rao demonstrated very well: No decision itself is in itself a decision. Hence, no prediction itself is in itself a prediction.

However, looking at the market internals, here are some interesting tidbits:

1. FIIs have been selling of late and their purchases have reduced in quantum.

2. The advance-decline lines have been in favour of declines.

3. The mid-cap index looks a little more vulnerable than the frontline.

4. There seems to be a "rotation" of scrips which are leaders in volumes (This has bearish implications).

The pick of the week was Satyam Computers which seemed to have risen from the Ashes, literally. If this week the strength continues, it would certainly be a very good candidate to accumulate at all levels. While Rs 94 is a strong resistance, watch it, and buy it anywhere close to Rs 85. If the results get announced as per schedule then we may see some interesting times for this scrip.

BHEL and Punj Lloyd also look interesting.

Reliance Industries is ready for a short term pop till Rs 980.

ITC will continue to remain an evergreen favorite below Rs 160.

The tech stocks look ripe for a significant correction.

Sugar could be the dark horse going forward for the festival season. Watch Renuka for a quick spurt some time soon.

Patient investors can wait and keep their powder dry since the "best prices" are yet to come and there could be many "Diwali bargains". Until next week then, whatever you do, hope it's profitable.

Yours, friendly neighbourhood analyst...

The Emperor Has No Clothes - Sainik

Watching TV nowadays, especially the business channels makes me wonder whether the talking heads, have become followers of Joseph Goebbels, the propaganda secretary of Hitler, who believed the dictum: A lie told a thousand times becomes the truth.

Well, strong words you may say. But, lets check the facts:

1. Inflation is under Control.

"Inflation would be around 5 percent by the end of the financial year" - RBI Governor Subbarao. "Inflation to drop to 5 percent by the year-end" - Montek Singh Ahluwalia.

Both gentleman made these comments in August 2009 confident of achieving this by March 2010. We saw inflation crossing double digits in March for the first time in nearly two years. However, Ahluwalia, unfazed by the Inflation Monster, further predicted in March 2010: "Inflation to drop in two-three months". We all know what's happening on the inflation front.

2. India is Decoupled from the rest of the world.

Based on the relative strength of the Indian markets, every talking head is convinced that we are in our own orbit and nothing in the world would affect us negatively.

Three years ago, China's stock market peaked out in August 2007. The US market peaked out in October of that year and Europe followed soon thereafter. November was the turn of Hong Kong. The Indian markets ignored this till January of 2008. We all know what happened to the Indian markets in 2008.

3. There is money waiting on the sidelines.

Everyone seems to be convinced of this argument. However, a cursory glance at the cash held by the Indian Mutual Funds across the board reveals that most funds hold ONLY 3-7 percent of their assets in cash. (source: National Stock Exchange )

This is similar to that of the situation in Dec-2007/Jan-2008 and April-May 2006. We all know what happened thereafter.

4. The market will trade sideways.

Analysing the Sensex range for the past 10 years shows that there is an average swing of 50 percent between the highs and lows of the year.Only once in the last decade has the Sensex has swung in a range of 37 percent. This year the difference between the highs and lows is just 18 percent.

With so much uncertainty around, and looking at the historical swings of the Sensex, it requires a brave person to predict that the Sensex will swing within this narrow range.

5. The Retail Investor is missing.

It is a general belief that the retail investor comes in at the Top of The Market. Therefore, the argument seems to be the retail investor has not yet appeared, the market still has some more distance to go.

The retail investor is still nursing his wounds since most of the retail stocks bought in the frenzied days of the last bull run are still trading at steep discounts to the prices prevailing at that point of time. Remember the frenzy in DLF, Unitech, Suzlon, GMR Infra, Punj Lloyd, Aban Lloyd , RNRL, Reliance Power, Reliance Infrastructure, etc.

Even in 2009-10, "retail favourites" from the sugar sector, such as Renuka, Balrampur Chini etc. and the from education sector-Educomp, Edserve etc.-have failed them.

Huge volume and a run-up was seen even in the Tech sector stocks, just a couple of months ago, which now are slowly drifting down. So, in one way, the retail investor has already done his duty: bought at peaks. To expect retail to perennially come and get slaughtered may be asking for too much.

6. The Indian corporate sector is performing well.

It is a well-documented fact that first-quarter results disappointed the market. The earnings expectation for Sensex companies in 2010-11, was around 1060-1070, which is nearly 30 percent higher than 825 achieved last year.

In the first quarter, the topline of Sensex companies was robust but the bottomline was up by around just 10 percent. So, to achieve expected growth rates, the corporate sector has to show a profit growth not seen in the past ever.

7. The Direct Tax Code Bill is good for companies.

The Direct Tax Code Bill will be introduced in the Parliament this session and barring any unexpected delays would become applicable for the year 2011 onward. While this has many welcome features, it will hurt corporate profitably for sure. The tax rate is being brought down to 30 percent, which is laudable, but currently the effective tax rate for the corporation is in fact lower, at 22 percent.

In the direct tax code regime, even IT companies would be in the tax net. This is because these companies currently use the standard deductions which will not be available with the new Direct Tax Code. Reliance Industries currently pays an effective rate of around 15 percent.

So, to achieve higher growth rates in profits , corporations would have to work that much harder and they cannot oppose the Direct Tax Code so easily, since they are the ones that asked for it in the first place.

Gentlemen Prefer Bonds? - Sainik

Tim Geithner, the US Treasury secretary is reported to have said, “If I am reborn, I would like to be the bond market.” What he was implying was that the US bond market is the most powerful force in the world.

The bond market is supposed to indicate the direction of the economy, and as of now it is on a tear. Everyone seems to be loving bonds: gentlemen and ordinary folks too.

The bond market is indicating that there is deflation ahead, and the flight to safety has begun. While the Fed would like yields to be low because of the high amount of debt being issued – yields move inversely to the prices – there is a tipping point when the strategy becomes counterproductive.

When there is a stampede in the bond market, there is risk of a bubble forming and when the direction reverses, there is an equally mad scramble for the exits.

Data over the weekend reveals that fund flows in to bonds over the three month period is more than three times that of the fund flow into equity during the dotcom craze. So shouldn’t you worry? Granted the bond market is far bigger than the equity markets and the demand for bonds may still outstrip the supply in the near term, but we need to keep this information in the back of our minds when we look at the equity markets.

Coming to the equity markets, the Indian markets continue to defy gravity for yet one more week. While globally the markets all fell, we made highs that were last seen in February 2008. This is a remarkable feat, considering factors like high inflation, indifferent monsoons, and lacklustre corporate results are here to stay.

The continuing rise is led by consistent foreign buying, around Rs 400- Rs 600 crore on a daily basis. DIIs have been selling an almost equal amount but the last couple of days have seen DIIs cooling off their sales a bit; hence the strong rise witnessed on Wednesday and Thursday.

I had indicated a range of 5350 -5550 for the Nifty which was almost reached almost Friday. While the mainline indices are hitting higher peaks, the Bank Nifty has remained the stronger of the two.

There is a huge appetite for banks of all kinds and shapes. Even laggards like cement and real estate have joined the party. The big guns of the market are all targeting 6000 by Diwali. While it’s quite possible that the Indian markets may hit these levels on sheer FII buying, it would be prudent to note that we are the most expensive market in the world today and we are getting more expensive each passing day.

If an investor were to sell all of his holdings he could be disappointed to see the market trading stubbornly higher in the foreseeable future. Therefore the investor has two choices: either sell on all rallies or prepare to sell all his holdings if 5350 is cut on huge volumes.

I remember in 2007 October when the Nifty hit 6000, I asked one of my clients to sell ALL his holdings because I felt the market was becoming expensive. The client listened to me –a very rare occurrence –and acted promptly. Then the Nifty went on to trade above 6000 for the next three months. During this time I had had a very difficult time facing the client. It’s a different matter altogether that the Nifty came down as low as 2300 by October 2008.

At this time, no fresh recommendations; whatever you do in the next one week, let it be profitable.

The Vulture is a Patient Bird - Sainik

It's that time of the year when everyone expects things to happen; it does not happen, and then the frustration sets in. Will this time be any different? Up until now it's playing perfectly to the script.

The last of the results of the Sensex have come in. Tata Motors and SBI stole the show, Bharti and Tata Steel were average. Twenty six of the 30 companies have reported their results and they have shown a growth in operating profit of less than 10 percent.

Analysts have been quick to downgrade sensex 2011 earnings, by around 10-15 percent, but are the estimates still too high? This quarter will be most crucial for the economy as the cumulative effects of large base effect, inflation, tight money conditions, skewing of the monsoons (Large parts of East and North-East are suffering from drought) will all come in to play.

This will be contrasted with the still positive money flow from the FIIs, making it a heady cocktail for high volatility.

The NSE Vix, which is a gauge for volatilty, has hit a new low last week. This means that the market men are very complacent about the direction of the market. Most market watchers are still sticking by the 5350-5550 range.

Usually the market proves the consensus opinion wrong. Something has got to give. Which way?

The answer may come from overseas, the movement of the US dollar could be a give away. There is some correlation between the movement of the dollar and fund flows to risky assets, i.e. stocks.

For the past eight weeks the US dollar index was relentlessly coming down from a high of 89 to a low of 80. Then last week there was a quick rebound and now it stands at 82.5 levels.

My personal take is that the US dollar index will scale the previous highs of 89 in a matter of time. Watch the widening of spreads in the bond markets of Italy and Greece last week.

So what do we do now? Adopt the same strategy of the last week? Be alert, if the nifty starts trading below 5350 with high volumes.

The smallcap and midcap index has outperformed the main index the last few weeks. Time to definitely book profits in the scrips which have had a runaway rally.

Wait patiently for the prices to come down. The Vulture is a patient Bird. Whatever you do, hope it's profitable.

When Good News is Bad News - Sainik

The global scenario is getting murkier by the day. The economic data coming out regularly, especially out of the US, is dismal to say the least, yet the US markets are bucking the trend by having sharp intraday reversals to the upside.

Yesterday's movement in the US markets was a case in point. The June employment data was worse than expected and the markets promptly tanked in the first hour, with the Dow down by nearly 160 points at one time. But the slide was reversed by late intraday gains and finally the Dow managed to close only 20 points lower.

Are markets being resilient to bad news? Or is it something else?

Astute market observers have been detailing these sharp intraday swings on machine-based trading. It is believed that more than 70 percent of trading on US exchanges is taking place through complex algorithms (computer programs) and models designed by "nerds" where the computers trade against each other. Here price, velocity and volatilty etc. are the variables. News and fundamentals are not captured in this scenario.

Alogrithmic trading was said to be the principal reason for the "Flash Crash" which occurred May 6, this year, when the Dow lost nearly 1000 points intraday. It is surmised that we will have many more flash-crash kind of days in the future, except that we could see flash-rallies too,when, for no explicable reason, the Dow could spurt 1000 points intraday.

So, be prepared.

On another front, the currency markets are presenting a very interesting picture. The US dollar has become a dog, with everyone shunning it versus all other currencies. Just last month the Euro fetched $1.18, now it buys 1.33 dollars. At the start of the European crisis, everyone expected the Euro to achieve parity with the dollar. How a few weeks can change the perceptions of analysts?

I was watching TV where analyst after analyst was saying they were disappointed with the quarterly earnings of companies in India. I was wondering whether it was the companies which disappointed or the analysts who got it all wrong.

Some brokerage houses have reduced their Sensex earnings for this year to around 1015-1025 from earlier 1060-1080. This translates in to more than 20 percent year-on-year (YOY) growth. However, going by the first quarter results, even this number looks unattainable, since the base effect will begin to kick in for the next three quarters and inflation remains at stubbornly high levels.

So to labor the point, the Indian markets are fully valued at these levels of 18,000 going by historical standards. The next rally, if and when it comes, will place us squarely in bubble territory. It is not improbable if we are already in bubble territory considering the relentless buying by FIIs as witnessed through the week.

Now it begs the question as to who are these guys were, buying so aggressively at these levels? It was intriguing to hear the viewpoints of a couple of well-respected market commentators as well as FIIs who were themselves surprised, since the old India hands (FIIs who have been here for a long time) were not getting any inflows.

We are unlikely to know the "mystery" buyer. Be that it may, we can look forward to a very interesting week.

The Fed meeting is on August 10 and global markets, including ours, are likely to react to the Fed's meeting. After a very long time, this meeting of the Fed assumes significance to asset markets as some market-moving announcements are likely to be made. The next big one is likely to come on August 17 from the US government, regarding its strategy on the Housing issue.

On the Indian corporate front, we have yet to hear of results from the Tata biggies, Tata Motors and Tata Steel. The markets range on the Nifty is still 5350-5550. As oulined last week, it may be prudent to book profits in the investment portfolio as the Nifty is trading above 5425 levels. Short-term traders could be going long on all declines keeping 5350 as the stoploss.

Among the heavyweights ITC, Gujarat Ambuja and TCS look interesting.

The capital goods sector: LT and BHEL look weak.

Bharti, ICICI Bank, Infosys and Tata Motors look ripe for a significant correction. IFCI lost heavily on Friday. It would look attractive below Rs 55.

Buying on declines looks attractive in Punj Lloyd, SBI, Reliance Industries, City Union Bank, Dhanalakshmi Bank and IOB.

Whatever you do, have a successful week ahead.

Stress Tests Stress Out Traders - Sainik

The last few days of markets worldwide have been dominated by talk of the European Stress Tests, the results of which were released after the close of the markets on Friday.

While it was a foregone conclusion that the tests were unlikely to reveal any "skeletons" in the cupboards of the banks, yet the minds of the marketmen were dominated by this event.

Now that the event has come and gone by; so what next? Technically, all markets are in an uptrend. The Nifty has hit a 100-week high on Friday, though it closed almost flat.

Analysis of past data indicates that barring just one month, i.e. April 2004, whenever the Nifty has closed near the month's high, the settlement closing has always been near the highs of the month.

So, if you look at history, we should expect a bullish closing on the settlement day as far as the index is concerned. In terms of sectors, the data presents a mixed picture.

While banking , telecom and capital goods sector are strong, technology and oil and gas sector are on the weaker side. Reliance group of companies, both from Mukesh and Anil stables, are exhibiting lackluster trends.

While there could be some roadblocks, in the form of the RBI policy scheduled on Tuesday, the market seems poised for new monthly highs, during the course of the next week. The supports for the Nifty are 5420/5380 and 5350. Below 5350, the intermediate trend becomes weak.

The resistances for Nifty are 5478/5500/5555. The bullish stocks among heavy weights are Larsen & Toubro, SBI, Tata Motors and ITC.

The bearish stocks are Infosys, ACC, ONGC, HPCL.

Maruti may react negatively as its results are poor. This is the first time in eight quarters they have shown a "de-growth".

Among the mid-caps, Mahindra Satyam, Karnataka Bank, Dhanalakshmi Bank, Idea, TVS-Suzuki and Glenmark Pharma look interesting.

Have a profitable week.