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.