Is an upward breakout imminent?

16 JANUARY 2010

The explosive start this columnist was expecting at the start of the year may well happen in the coming week. The market has tried to break through, but has fallen back from, the level of 17,700, from whence it had declined in May 2008. Perhaps it may crack through this level in the coming week and rally sharply. This could happen on higher allocations by foreign institutional investors who invested nearly $1b. on Monday. The reason it has fallen back twice is because domestic mutual funds have been selling. The reason domestic mutual funds are selling is because public sector banks have been asked by RBI to reduce their exposure to equity markets and, following this, have sold Rs 1 lac crores (over $ 21b). In the wake of such selling, the market has held on is a sign of strength. Pity the PSU banks, though, as they would lose out on the spurt.

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Banks, though, have performed rather well in the Dec quarter (Q3). HDFC Bank?s net profits grew 32% year on year (yoy), Axis Bank 31%, IDBI Bank 29% and UCO Bank 43%, though both IDBI and UCO were from a lower base. TCS came out with strong results, with NP growing 34%, as did REC, which is to make a follow on offer shortly, with a 49% spurt in profits, being amongst the well managed financial institution. Corporate India is thus doing well and is expected to put up an even better Q4.

Last week the BSE-Sensex tested the 17700-800 level but fell back. It ended the week at 17554, for a weekly gain of 14. The NSE-Nifty ended at 5252, up 8 points.

The concern, of course, remains the debt levels of the developed world and what steps their Governments would take to unwind it. President Obama has imposed a levy on 50 of the top banks which would collect $90 b., although this is a drop in its debt ocean. The US needs to start withdrawing the monetary stimulus but cannot do so as unemployment is still too high at 10%. So the party may continue for sometime, postponing the hangover.

Another concern is that of China increasing interest rates to rein in liquidity, and curb inflation. It is China, followed by India and Brazil, which are the engines of economic growth.

Inflation concerns are also prevalent in India, with inflation hitting 7.3% and food inflation considerably higher. The Government may tackle this by increasing CRR in the next RBI policy, end January, and/or by phasing out the stimulus given. Excise duties had been cut 6% and this cut may be phased out, in the coming budget, end Feb, by 2 or 3%.

The bigger concern, however, is poor governance. The petroleum ministry has destroyed the balance sheets of the 3 oil marketing companies, IOCL, HPCL and BPCL, by making them bear a subsidy burden on petro products which, being its own decision, belongs to the budget and not to their balance sheets. Heaping insult on injury, the Government is now threatening to withhold salary increments and promotions for OMCs if they do not improve performance! Franz Kafka could not have found a better way to destroy wealth!

Now the Government wants to cap its liability to compensate OMCs for kerosene and LPG subsidies at Rs 12,000 crores, perhaps less than half the amount due them. It knows fully well that subsidised petrol/diesel encourages the use of cars at a time when the need to conserve oil, a globally depleting resource, is paramount. It knows fully well that subsidised kerosene finds its way as an adulterant in diesel, damaging the environment and human health through the pollution it causes. There is no earthly reason why petrol and diesel prices should continue to be subsidised; the only beneficiaries are the kerosene mafia and surely they cannot be the drivers of public policy, can they?

It is inexplicable that the ministry is unable to take a decision to hike petrol and diesel prices, which would help in tackling the subsidy problem for these products. The subsidy on LPG and kerosene would be tackled through better targeting to the truly deserving instead of to all. Once the KG gas is tapped for city gas distribution, this would be easier.

In contrast, the roads ministry is considering, thankfully, the use of concrete, instead of bitumen, for 18,000 kms of new highway. This would result in a saving of 15-20% in fuel costs and would be longer lasting. The reason cities have tarred roads, a nightmare to drive on for their potholes, is because the annual repair of the potholes provides municipalities with an annuity.

In corporate news of interest, Reliance Industries has raised $2b. through sale of treasury stock it held as a consequence of merger with RPL; it still has some more stock to sell. Together with the cash it has on hand, it has a comfortable war chest to make an all cash offer for Lloyendel, to acquire which it raised its offer 13% to $ 13.5b. Wipro is set to make a $1b. sponsored ADR issue (the proceeds of which go to shareholders, without diluting the company?s equity). Post similar sponsored ADRs by Infosys, its valuation went up, after stock became available in US markets to institutional investors, who were willing to pay a higher multiple for it in those markets.

The level of around 17,700 on the sensex is crucial. It is expected to be pierced in the coming weeks. Fasten your seatbelts.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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13 Responses to "Is an upward breakout imminent?"


Jan 27, 2010

I am really sorry that your forecast has been spooked. There is indeed a break down, but, to the south! And foreign investors came flocking in to sell in thousand crores in herds.

I wish we stop such forecasts and concentrate more on the increased NPAs of PSU Banks.


Mahesh Modi

Jan 18, 2010

Thank you for touching all the major events. Your explanation is very clear and straight to the point. some nice things like the concrete roads should be taken over by all states to preserve valuable oil. It seems difficult to remove subsidy on deiesel because all teh transportation costs will increase again incresing inflation. I thought they have changed the colour of kerosene now to prevent it from mixing it in diesel. Is it still mixed? Please continue writing this valuable column. Thanks.


Shantilal Chande

Jan 17, 2010

Sir, I congratulate you and thank you for giving such a good clarity about the current market scenario.



Jan 17, 2010

the govt has lined up psu on sale and the index will remain postive mode with short short correction irrespective of the particular share will get high valuation visa vis the psu industries on sale.


marc julius

Jan 17, 2010

Witholding salaries, perks, increments and promotions mean nothing to OMC, so long as they remain PSU's.




Jan 17, 2010

Yeah. Sensex will touch 18500 within couple of weeks.


Vinod Furtado

Jan 17, 2010

Why is the author so concerned about where the market is heading? Last article was about an explosive start to the new year 2010. This one is about markets breaking out next week. Before that there was a whole webinar on Sensex at 21000 in June. The author was proved wrong in the last article. The author could well be right this time but I fail to understand how it helps anyone. Most of the high quality stocks are currently expensive and it will require lots of patience to hold back.


Ch Jagadeshwer Rao

Jan 16, 2010

Withdrawals from debt mutual funds hardly have any bearing on the movements in the stock markets. And I can fully share the author's concerns on discontinuing the subsidies on kerosene, diesel and petrol. I only wish our political leaders get wiser.


Ca. Dinesh Kotecha

Jan 16, 2010

upward breakout may come or not. analyse and check that the two top groups - reliance and citi - both were big sellers in the market. NOT FOR NOTHING. They both have a large army of analysts of all types and are most probably been able to sneeze the big bad strom coming/about to come.
Taking the big guns prespective AND action into account,the upward breakout though imminent, even if it happens will not survive or gain strength., so be sensible to sell 10-15% at every 100 points sensex gains. let common sense prevail remembering the saying that ' no body was ever broke by taking a profit'.
All the best.



Jan 16, 2010

the reason why government will always subsidise petrol is because all govt vehicles together account for 70 % of petrol consumption, which means even bigger expenditure items, better to let the OMC s sink.

And to add insult to injury polticiians consume at least 10 % of all petrol so their expenses will go up,

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