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.