Are you trying to predict the mkts' next move?

Feb 3, 2010

In this issue:
» Is market weakness a sign of things to come?
» SEBI frowns on leveraged derivatives
» Banks keen on small-town India
» Companies having second thoughts on IPO plans
» ...and more!!

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Markets have a way of surprising when people least expect it. Last year, they bounced back at a time when everyone seemed to have given up on stocks. Now that everyone was slowly getting used to the upward march of stock prices, January has been marked with setbacks. Investors are left wondering as to what happened to all the talk of economic recovery in the developed nations. As per Mohamed El-Erian, the CEO of Pacific Investment Management Co., the world's largest debt fund manager, investors simply expected too much. An orderly withdrawal of stimulus measures and a coordinated government policy to push growth is easier said than done. This means the expectations inherent in the rally last year would not be fulfilled. Hence, Mr. Erian feels it is likely that the weakness of the last few days will last for much of 2010.

In our view, it is extremely difficult to accurately predict stock market movements. The system is too complex and the interactions too unpredictable for anyone to gaze into the crystal ball and prophesize the future. An unexpected move like China hiking bank reserve requirements or Obama curbing the risk taking at banks cannot be foreseen. What investors can do, is to study companies for the value they are getting. Then they can compare it with the price the market is asking them to pay. They should avoid an expensive deal, even if there are rosy projections. When we look around for companies on a case to case basis, we do not like most of the deals being offered.

 Chart of the day
Recently the US presented its budget and in a few days it will be our turn. In the time of financial stimulus, the number most sharply in focus is the fiscal deficit. It measures by how much government expenditure exceeds its revenues. Today's chart of the day shows India's fiscal deficit over the years. Over the last several years, India's fiscal deficit improved with the enactment of the Fiscal Responsibility and Budget Management Act in FY04. However, we slipped in FY09 due to high oil prices, the sixth pay commission, loan waiver and NREGA. In the current fiscal, the stimulus package in the form of tax breaks in many products is likely to take a heavy toll.

*FY10 budget estimate
Source: Economic outlook for FY10, Economic Advisory Council

Borrowing Rs 10 for every rupee invested may be easy for a large firm. But recovering Rs 11 instead of a rupee when the investment goes bust is a crisis in itself. The collapse of institutions like Lehman and Bear Sterns may have not discouraged some 'financial innovators' in India. But SEBI has come down heavily on the so called structured products. These products heavily rely on leveraged bets. Citing the greed and downside attached to such products, the regulator has warned against the risks. Not willing to allow the high risk financial products without adequate study, the SEBI has shown its preference for financial stability over growth.

We mentioned in yesterday's issue how former US Fed chief Paul Volker wants to reform the US financial system. Now here's something he sees as the biggest issue with the US banking system. It is the inherent conflicts banks have between managing their own interests and managing those of their clients. This probably helps to explain why Volcker is dead-set on prohibiting commercial banks from proprietary trading, or trading for themselves rather than their clients.

As he says, "When the bank itself is a 'customer', i.e., it is trading for its own account, it will almost inevitably find itself, consciously or inadvertently, acting at cross purposes to the interests of an unrelated commercial customer of a bank."

So how does he think this conflict of interest can be eliminated? By preventing commercial banks backed by US government deposit insurance from taking undue risks.

Small towns are increasingly witnessing an influx of banking services and foreign banks are looking to cash in on this trend. Not just that, there has been a shift in the way these smaller towns perceive foreign banks and now seem to be warming up to them slowly. It may be noted that banks in India are not allowed to open branches without a license from the RBI. Foreign banks, particularly, are at a disadvantage compared to their Indian private and public sector counterparts when it comes to reach. This is because the RBI is not obliged to give permission to more than 12 branches a year to the group as a whole.

However, a recent move by the RBI has provided a welcome opportunity to foreign banks. With the idea of encouraging banks to open branches in under-banked areas, RBI recently allowed domestic banks to open branches in Tier-III to Tier-VI cities without prior approval. What's more, foreign banks are also being encouraged to open shop in under-banked areas. It however, remains to be seen, how these banks scale up. After all, these areas are underdeveloped with few opportunities for corporate banking and much of the population having small incomes.

There seem to be quite a few companies lined up to hit the IPO market in the coming months. As per reports, 19 corporate have received SEBI approval to raise a combined Rs 115 bn. Further, while 45 companies have sought SEBI approval to raise around Rs 490 bn, another 700 odd companies have announced IPO plans, but are yet to seek permission. Add to this the government's PSU divestment plans. One would need quite a strong secondary market if such a large dose of IPO has to be accepted successfully. No wonder then that the recent weakness in the markets is forcing some companies to have a relook at their IPO plans. They are also introspecting on the pricing of the offers, some reportedly conceding that they will now have to dilute more equity than they had planned for earlier. Whether this will be enough or not, only time will tell.

One of India's requirements for sustainable long term economic growth is an extensive road network. In fact, India needs to build 20 km of highway everyday for the next few years to ensure that the target of 17,000 km of expressway is completed on time. Recently, Mr. Kamal Nath, minister of commerce confirmed that a consortium of 20 leading British firms is likely to sign agreements to facilitate building of roads. These agreements will include areas like construction, investment, road safety, training, licensing and inspections. Moreover, the minster expects US$ 3 bn of the required US$ 10 bn annual funding for infrastructure from UK's financial markets. While the funding plans seem to be ambitious, we believe that land acquisition will prove to be biggest hurdle to the success of the project.

Meanwhile, the Indian stock market made a strong comeback today and remained in an upbeat mood during the day. At the time of writing, India's benchmark index, BSE-Sensex was trading up by about 375 points on account of persistent buying across all sectors, led by metal, realty and consumer durables. The other key Asian markets closed in the green, while Europe is trading a mixed bag.

 Today's investing mantra
"The price of a stock can be influenced by a 'herd' on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person." - Warren Buffett

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8 Responses to "Are you trying to predict the mkts' next move?"

K G Rao

Feb 4, 2010

Surely Mr. Kamal nath is not, as u hv called him, Minister of Commerce?



Feb 3, 2010

pl reply me the future of Adhunik Metaliks


Onil N.Parekh

Feb 3, 2010

It is intresting. Very fine analysis. Advances increased at very low rate & inflation is on high side.
It may turn in to "MANDI".



Feb 3, 2010

Until the market exhibits a sustained upward momentum and retains the gains for 4-5 days, profit booking will continue resulting in oscillation of indices. This means 300-350 points gain in the sensex could be wiped out fully or partrially, the next trading day. Small investors also have become wiser by booking profit, wherever they find it, without waiting for higher profits.



Feb 3, 2010

My observatiojn is that there is a strong correlation between sensex and crude price in international market.
Will you please confirm this by giving a graphical movement of the ratio of sensex / market price of crude per barrel in Rupees over the last 8 years?
The findings may be quite enlightening.


Prasad VSK

Feb 3, 2010

Thanks for such wonderful advise. Now I realise I am getting correct investment advise, unlike all the recommendations floating around. How fortunate I am for having subscribed to Hidden Treasure.


Mahesh Dodeja

Feb 3, 2010

Well the market needs to rise a little bit if it crosses 5000 by tommorow with higher volumes then we can say that the market will rise till 5095 the if the market does cross 5100 then a further move can be predicted. Since a lot of IPO's are under way we need to be careful of the bubble that might be build up....


Bhavin Gusani

Feb 3, 2010

I think that the market may be goes down by tomorrow

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