Weekly Introspection
The bloodbath on the Wall Street continues. First it was the turn of financial giants like AIG, Lehman Brothers, Washington Mutual, Merrill Lynch and many more that either became nationalized or were taken over by another financial institution. Now, it is the turn of Automobile players like General Motors, Ford, and Chrysler who are now knocking the doors of the Government and the Federal Reserve to bail them out of bankruptcy.

Amidst such uncertainty, financial markets could continue to remain volatile. Hence, investors should remain vigil and prepare to remain invested for long term in case markets behave contrary.

The markets look oversold at the moment. Almost every trader has taken position on the short-side on account of threats prevalent in the world markets. Similarly, the long-term investors remain on the sidelines, anticipating more fall in the equities during the days ahead. The combination of both the factors is making the market vulnerable and weak. Thus, even a marginal selling pressure results in complete collapse of markets during various days.

This has been happening for last two months and taken the markets on the over-sold territory. Hence, we may see a sudden buying in the markets, in the form of short-covering by FIIs, as we have seen late Friday in our Indian stock markets.

Trading Strategy
It is vitally important that as a trader don’t take one side view of the markets, say experts. Try to build positions on both sides of the markets and wait for the one-side movement to take place. The international factors will keep the markets volatile. Any bad news on General Motors / Citibank side could lead to free fall in the markets. On the contrary, policies actions in US and India will keep giving the markets hope on the recovery side. Markets have already started factoring in RBI rate cut, which can now come any time. Inflation figures also look encouraging in the coming weeks. Similarly, US government may announce some concrete steps to step up the confidence level in the financial system, which is badly shaken due to sudden collapse in the US banking system.

If you are a trader who trade in Options, try to take a closer Call option and far Put Options for the current week. Chances of recovery are high in this week of expiry, after continuous downtrend seen in the week, passed by. One of the Options strategies that can be adopted is to buy Nifty 3000Call and 2300Put for December. 3000Call comes at the premium of about 100-110 Rs. 2300Put comes at the premium of about 80 Rs. Thus, the total outflow comes out to be Rs.200.

Now, let’s suppose bad news on Citibank comes during the week. In this scenario, markets may go down till 2300-2400 levels. In this scenario, 2300Put could trade at around 220-230 Rs. One can sell Put at that time and take Call premium as profit.

On the contrary, let’s suppose RBI announces rate cut. We have already seen short-covering coming into the markets. The combination of both these factors could take markets up to 3000-3100 levels. Under this scenario, 3000Call could give a premium of 220-250 Rs. One can sell Call and take Put premium as profit.

Investing Strategy
On the long-term play, there are many good stories that are available at take-away prices. The most attractive sector is “Power” sector. Stocks like Powergrid, Reliance Power, NTPC, and PTC are trading at attractive levels and can be bought by those who believe in India growth story. On the Infrastructure front, stocks like GMR Infra, IDFC (financial institution that lends to Infrastructure companies), IRB infra, and L&T look an attractive buy.

The base of future India growth story will be in the hands of Power and Infrastructure sectors. Without both of these, India can’t hope to become a developed nation in future and hence, we may see encouraging steps taken by coming government towards these sectors.

The third and fourth most attractive sectors are “Information Technology” and “Telecom”. IT companies have accumulated huge funds reserve in the past, thanks to robust demand for outsourcing. This will now help them roll over this rough patch and one may see many of them consolidating through various acquisitions.

Telecom sector is another sector which is based on India growth story. The telecom sector is going through the consolidation phase and is an ideal sector for long-term.

Wishing you a great week of investing!!!

Weekly Outlook for Indian Stock Markets - 24th to 28th November, 2008

The sub-prime crisis is no less than Tsunami. It has swept every country, every continent, every company that dared to touch, left alone those who attempt to ride it.

The early victims were the financial institutions who were directly involved in the mortgages business in US. Then came those financial institutions across Europe and Asia who bought boxes of exotic sub-prime mortgages, pasted with AAA credit ratings on them.

And now, this tsunami is taking its toll on almost every sector- linked directly or indirectly with it. It seems the next on the target is Auto Industry. GM bankruptcy news is getting louder with each passing day. Ford is feared to follow soon as well. If these two companies go bankrupt, it will be a huge setback for the US economy and for the world as well.

Amidst such gloomy atmosphere, there are some positive news as well. Warren Buffet, the world’s greatest investor, has shown his faith in US economy. His company, Berkshire Hathaway, has bought stakes in various companies. The ongoing financial crisis has brought together every economy across West and East together to tacke it. Also, there are talks about making stringent guidelines and regulations which will be common across all countries and hence, in the long term will build a road path for global free trade.

Isn’t “Bright Day come after a Dark Night??”

Inflation close to RBI comfort levels
RBI, in its Aug Monetary policy, had talked about 5-6% inflation by March-end. The current financial crisis has helped RBI in this regard. The global slowdown, which pulled down the crude prices, has helped in cooling off the inflation. Good Kharif crop has also helped in taming the food product prices across country.

The provisional figures for Inflation for the first week of November came at 8.98%, down by almost 2% from the preceding week. This will now encourage RBI to shift its priority to growth. It is now expected to cut both CRR and Reverse Repo rates in the coming weeks to stimulate the growth.

But consistent FII outflows are a concern ...
The FIIs have been consistently pulling out money from the equities. After the October mayhem which saw indices tumbling more than 40%, November has so far sober. The selling continues but intensity is much less. Nonetheless, it remains a concern, since FIIs are still net sellers for this month as well. Thus, markets are expected to remain range-bound this month as well. At every rise, we may see FIIs selling to take cash out from equities.

And that will put pressure on Re ...
Rupee has been under severe pressure for last few months due to consistent FII outflows from the markets. RBI, at its end, is trying its best to stem the Re depreciation. It has cut the CRR rates by 250 bps, cut reverse repo rates, reduce SLR to 24%, which has released more than 1 lakh crores rupees into the financial system, yet the pressure on Re remains intact.

Long-term story is still buoyant
India’s concerns are largely external. The problems in global economy have restricted the tremendous inflows which it was enjoying until last year. Fiscal Deficit, which rose for the first two quarters on account of high crude prices, are now expected to reduce for the remaining quarters since crude has fallen down considerably since then.

The concern regarding high growth will remain, till the time global economic conditions revive. Yet, our economy is expected to grow by 5-6%, as compared to negative growth rates expected in Europe and US.

Stocks at attractive valuations...
The price-earnings ratio for Sensex companies has reached single-digits, which makes them a compelling buy for long-term. IT companies like Infosys, TCS, Wipro, Mphasis are at long-term buying levels.

Another sector that can be bought is the telecom sector. Telecom companies like Bharti, Idea, RCOM have high cash reserves ratios, which enables them continue with high CAPEX plans. Also, the sector is continue to enjoy favor among consumers as they move into rural pockets of India, which is seeing a bit of revival on the back of good monsoons and loan waiver this year.

But the coming week may see another meltdown...
The coming week is expected to see another meltdown, on account of concerns regarding GM bankruptcy. Another negative trigger could be lack of strong steps taken during G-20 nation summit, called upon in Washington to discuss the ongoing financial crisis.

If no concrete decisions come this week, then we might see another round of selling coming into the markets worldwide.

And providing opportunities to buy quality stocks...
As discussed above, IT stocks like Infosys, Wipro, Mphasis can be bought at every correction. Similarly, telecom stocks like Bharti, RCOM, Idea can also be accumulated. A mid-cap stock, worth mentioning, is Karuturi Networks. The stock has fallen down to Rs. 7 from Rs. 23 in September. Yet the stock has seen FII shareholding increased to 37% from 34% a quarter back.

An interesting trading strategy is to buy 2500 Put and 3000 Calls. The accumulated premium will be around 150 and has the potential to give you more, once it takes a definite turn.

Wishing you a great week of investing!!!

Remote-controlled Indian markets
For last few weeks or months rather, we have seen a great deal of uncertainty and unexpectedness coming into the Indian stock markets. During the days, when markets across the world collapse, we usually see Indian markets outperforming. On the contrary though, during the good days in global markets, we see muted response from Indian stock markets.

The last week trading carried both the instances. Monday morning has seen markets across the globe collapsing one after another on account of recessionary fears. Asian markets, including India, were down by more than 10% at one point before we see a strong buying support coming into Indian markets at lower levels and markets finally closed down by just 2% down, while the peers closed down by more than 10%.

On the flip side, the Indian markets gave a muted response on Wednesday, when Asia made a strong recovery on the back of tremendous rally in US markets overnight. The Indian markets closed down just a percentage up, while the other Asian markets were up by more than 8%.

What are the reasons behind such behavior? Is our markets totally governed by few institutions, who at will, can change the direction at any given day or we have started to run ahead of the curve?

The former has a strong case, since FIIs have been ruling our markets for last few years. If they sell, the markets fall. During the days, they don’t sell or do cherry picking, the markets go up. Currently, our Domestic Institutions and Life Insurance companies are not strong enough to compete with Foreign Institutions. Hence, a long term policy must be envisaged by the government to promote the equity route through Mutual Funds route and life insurances. Also, the young generation which doesn’t have any financial cushion in the form of pension, can be encouraged to save for longer term through equity route, since the best returns that any mode of investments can provide is the equity, provided it is done with knowledge and with a long term horizon.

RBI Rate Cut
Let’s come back to the stock markets. RBI has announced three major policy decisions on Saturday which will bring cheers to the banks and the stock markets. First, it has reduced the CRR ratio by 100 bps to 6%. Thus, it has provided around additional liquidity of 40000 crores Rs into the financial system. Secondly, it has decreased the repo rate by 50 bps. This step would ensure that banks can now borrow from RBI at lower rates, hence relieving them from desperate liquidity crunch.

Third step is the reduction of SLR (Statutory Liquidity Ratio) by 100 bps to 24%. SLR is the percentage of total funds that banks need to keep in the form of liquid instruments like Cash, Government bonds, and other safe mode of investments. It is said that the high SLR ratio in Indian Banking System saved the domestic banks from the sub-prime mess, since they never left with enough funds to invest in exotic overseas instruments after fulfilling the domestic needs. Now, RBI has reduced the SLR ratio to help banks tide over the extra-ordinary liquidity crunch, which was evident from the fact that Call Money rates shot to 22% in Inter-bank lending on Friday.

Strengthened Global Markets
The bulls worldwide have shown tremendous come back during the last week. The Dow Jones and Nasdaq have seen the biggest weekly gains since 1974 during the last week bull run. This also helped the Indian markets making a recovery of more than 14% during last week, despite some disappointing quarterly numbers.

For Indian stock markets, this would come as a big relief, since the fear of global recession and redemption pressure on hedge funds were putting the selling pressure on stocks. The stronger global markets will help in rebuilding the investors’ faith in equities and one might see less selling pressure on the equities than before.

US Recession
The fear of US recession is now clear in sight. Earlier, there were only reports of forthcoming recession but now the data about jobs, consumer spending, Inflation has clearly suggested that recession has finally arrived on US shores.

And it seems like a long path of consolidation for US before it can really stand up and start spending. First, the US people need to clear their outstanding debts on credit cards, homes, personal loans, before they can again storm the markets and hence for spending, hence boosting the other economies. Thus, it would be good that US exporting economies must now learn to live in an era of lower growth and lower inflation as well.

Economies Delinking
Till now, USA was driving the economies worldwide through exhaustive consumer spending and almost every ship moved towards US shores. But housing bubble burst has put brakes on the relentless, rather reckless spending. This may now force emerging economies like India, China or Brazil to look out for alternative grounds to sustain their growth rate. The first target could be Europe, which will now see more attention in the Sales and marketing Division of big corporate residing in Asia.

Another scenario which is emerging out is the bilateral trade agreements between countries. Every country exports things that it carries and imports things that it lacks. For instance, India has IT expertise that no other country has. Similarly, India doesn’t have sufficient Oil. Now, India may try signing bilateral agreements with Middle-East countries to push their IT into their regions and in return, buy Oil from these countries. This will help both the economies to grow together. If this indeed happens, would end the US monopoly in global trade and will ensure, more sustainable and long term growth for various countries.

Nervous Stock Markets
The stock markets, though, have been trying to revive, may continue to remain nervous due to various uncertain factors like US recession, sub-prime impact, increased raw materials cost, etc. Hence, one may continue to see the volatility prevalent in the market for some more time.

In Indian stock markets, the sector that may outperform in the longer term is the Information Technology sector. The sector was among the early ones to get the beating due to rich valuations that the companies had been enjoying. But things have changed now and IT stocks look attractive now.

The biggest advantage with IT companies have been the strong business model, they carry. The companies like Infosys or TCS may face some quarters of slowdown but are most likely to recover from it. These companies are sitting rich on cash and also they have the required capability and the expertise to survive this slowdown.

Also, we have seen many IT companies diversifying themselves across regions as well as domains. The US is no longer an attractive destination to work with. Similarly, BFSI domain (Banking and Finance) is not the only domain to serve with. Undoubtly, it will take some time to diversify, but once it happens, we will see rich valuations coming back again into this sector.

Book Profits at regular Intervals
It is said that “Markets behave irrational before it becomes rational again. The only problem is that they remain irrational for days more than you can remain solvent”.

Hence, one is advised to book profits and losses at regular intervals. Do not try to emulate Warren Buffet or George Soros. These guys have ample money to remain sleepy for longer time duration that I or you can remain. Hence, if you bought something a week back when Nifty was at 2200, the time to book partial profits is today.

Wishing you a great period of investing!!!
Sayonara

Weekly Outlook for The Indian Stock Markets - 21st September to 26th September

Volatile last week
The last week had been a phenomenal for the stocks markets worldwide including India. It would have been terrible, had not emergency steps taken by US government given a new lease of life to the stock markets. Otherwise, the remaining week saw just one side movement and that is downwards.

Though Indian markets looked resilient at times. Nifty which went down almost to 3799 on Thursday came back strongly to close the day at 4050 and then went up by another 200 points on Friday to close at 4250 mark.

But again the concerns for the markets are real and grave. Where would markets be drifting to in the future? Will US survive the financial turmoil created by its own? Will Indian economy, which has been otherwise quite resilient will be affected greatly by the global financial mess. And amidst such hazy atmosphere, what should investors like you and me do???

Come; let us review the events that have shaken the global financial space and its possible impact on the markets. Also, let’s look at the steps taken by the governments to overcome those events.

Collapse of Wall Street Giants
The fear of Lehman bankruptcy started surfacing after Bear Sterns collapse. But somehow everyone was silent about it on the street. And hence, when it happens, the fear changed to panic all across the Wall Street. Within hours of Lehman collapse, we have seen some of the quickest reactions by the companies on the Wall Street to prevent themselves of becoming the next victim– Merrill Lynch merger with Bank of America, AIG 88 Billion US$ bailout by the Fed, Morgan Stanley hectic searching for the soul mate to get itself merged.

The immediate impact of Lehman Brothers was felt on those stocks where it has direct and indirect investments. For instance, it has invested extensively in the projects of real-estate companies like DLF, Unitech, etc. The shares of both these companies have almost collapsed in last one week. Though, there has been no indication of any liquidation in investments by Merrill Lynch. But Morgan Stanley has sold the stake of around 3000 crore in last one week to other financial institutions, mostly to Deutsche Securities and Goldman Sachs.

The impact of this event could be felt on growth, since these companies have been the easy source of funds for many who are looking to expand themselves. Also, the boost in equities came due to extensive buying and selling by the Wall Street giants. After the collapse of many, merger by some and survival of few, the equities will continue to suffer in the near future, till the time new companies take over their place.

The party seems over on the Wall Street.

Liquidity Crunch
Aftermath of Lehman collapse, the banks refused to lend and borrow in the money market, fearing that who will collapse next. This led to severe dearth of funds and overnight bank rates increased exponentially. During these times, the central banks across the world had to intervene and open their treasuries to provide the liquidity that many banks have been craving for.

Few months back, every small and medium financial institution was looking to expand, hoping to become a financial giant in a few years. But the times have now changed and many of these financial institutions are exploring the options to merge themselves.

One can see several mergers and acquisitions happening in the near future. Morgan Stanley has few days left only. Washington Mutual is another institution that will be acquired soon. Federal Reserve will remain busy for some more months trying to broker several deals to prevent another chain of panic reactions on the Wall Street.

Its impact on the equities will be sizeable since equities have always deemed as high risk-high gain investments. Now with weaker balance sheets, the financial majors will be averse investing in equities and rather move to safer havens like Govt Bills, Gold, etc.

Oil and Inflation remains a threat
The Oil has subdued in the recent past due to slowdown in the US. Also China which heavily bought Oil at the time of Olympics has also slowed down now. Hence, Oil seemed like cool-off. But it is still not out of danger.

Any new threat of war in the Gulf will propel the Oil again. The developing economies like India, which import more than 50% of Oil from international markets, will suffer in the backdrop of High il prices. Also, High Oil prices will have an impact on the Inflation as well, which is already in 2-digits.

The future-tense
The future for the equities doesn’t look good. All the factors that were behind the great equity boom are now over. The interest rates have increased, thus making equities less attractive. The Financial Institutions, who were behind the boom, have either collapsed or merged with a bank. Oil is at all-time high, which is fuelling the inflation too and subduing the growth rate.

Amidst such tough times, who will invest in equities? Will you take a risk at times when you have money only for food, cloth and shelter? Similarly, the financial institutions who have weak balance sheets will not be investing in equities, for sure.

Coming Relief rally
The coming week could see some relief rally in the Indian markets. Also, announcements by the Reliance Industries on Sunday regarding the Oil discovery in Godavari basin will be a positive trigger for the battered Indian markets.

Hence, one can be geared to book some profits in the stocks during the week. The stocks that one may buy are the power stocks like NTPC, Ppower Grid, and Reliance Power. The signing of nuclear deal during Manmohan US visit could boost these stocks. Reliance Industries will also be a good stock to buy at the current levels. It is the only firm that looks rock solid in the aftermath of financial distress.

It is advised to keep booking profits. Do not anticipate the great boom so soon. Let the things start rolling out before taking a long-term call.

Wishing you a great week of investing!!!