Knockout blow for the markets

Coming on the heels of L&T's results, markets wednesday had to grapple with plenty of adverse news resulting in the benchmark indices tanking by 2%.. First about the killer. Nikkei started plunging and ended the day with loss of 7.3%. Then there were the results of heavyweights like BHEL, SBI and Tata Steel.

BHEL's results in my opinion was heartening. Though there has been a decrease in NP yoy of about 5.5% , qoq NP has seen a whopping increase from 1182 cr to 3237 cr. which is 2.7 times. Likewise EPS has also seen a phenomenal jump compared to the previous 3 quarters. Now why does this sound so nice. BHEL's price has been going down in relation to the numbers posted  by the company. This quarter's jump in NP should come as a surprise and the stock should see some  rerating.  The company has declared a final dividend of 164% for a total dividend of 270%. The company has been able to add morethan 5000 cr to ita reserves during the fiscal, boasting a reserve of more than 30000 cr. The only problem being faced by the company is on account of the receivables from the State Electricity Boards.. As and when the investment cycle picks up BHEL will give a very good investment return.

So far as Tata Steel is concerned it will continue to be bogged down by it's European operations affecting its consolidated numbers. Present numbers are dismal indeed, wherein it has taken a hit of around 7400 cr as "exceptional item". Subsequent quarter numbers should be more realistic. The company has declared a dividend of 80% demonstrating Managements faith in the company's strength. Technically daily charts show a falling wedge, which is a bullish pattern. Breakout point is around 310/312.

What has happened with the Nikkei today has to be viewed seriously and not just a circuit breaker giving way. Is it likely to affect the US markets ? I will follow up on these in subsequent posts.

Until my next

Happy investing

Basudev

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L&T share price tanks

Markets today didn't like L&T's  numbers the share price saw a fall of nearly 6%. It is likely to fall further. As it is, the stock had seen an almost  26% rise in about 1 1/2 months time and was getting unstable at the top for sometime.

So far as the results are concerned, there has been some margin compression  and also an increase in interest outgo. But the EPS YOY shows an increase of roughly 9.5%, from 76.1 to 84.1, which is heartening. It is to be kept in mind that the business of the company has to be seen in a slightly longer time frame as against an auto company for instance for which quarterly or even monthly figures  can easily show the trend. All in all for an investor there is nothing to be worried about. Besides, the company has increased its dividend payout.and more importantly has announced a bonus issue  of 1 share for every 2 held. A bonus issue points to the company's strength in terms of servicing the debt. As  I mentioned the stock price had gone up very much prior to the results. It will now see some correction. At some point it will be a very good investment opportunity for investors to get in..In a previous post I had disclosed that I sold off my entire holding in L&T. So I stand vindicated on my stand. I now intend to enter again after some more correction.

There was some nervousness recently on what Bernanke,s testimony on monetary policy is going to be like.. Whether  Bernanke will start reducing the stimulus.or not. Markets shed some gains and were pausing. But at the time of  writing this post it is learnt that Bernanke has hinted at not cutting on  the fiscal stimulus. American markets may therefore continue in it's  streak of creating records. More on that in following posts.

Until my next then,

Happy investing.

Basudev

Current account deficit comes in to haunt again

Trade data released today shows a deficit of  $17.8 bn as compared to $14 bn  last year. That is a 27% escalation. A major contritbutor has been a whopping 138% increase in Gold and Silver imports during the period. Imports at this rate will undoubtedly jeopardize Govt's attempts to contain Current Account Deficit. Any failure in that front is fraught with risks to the economy.

But it is abundantly clear that there is a rush to own physical gold. This doesn't augur well for the economy. Ironically the sudden  and massive drop in gold prices - which should be indicating a lowering of demand -has actually spurred a frantic rush for owning gold. As it appears, its a worldwide phenomenon with China also importing significantly. This has its own complications,  in the sense that it creates certain imbalances by way of quantity of gold that banks have with them at any point of time. Gold prices will then be subjected to unprecedented volatility. A comfortable reserve always makes any Govt breathe easy on its external liabilities. For India volatile gold prices could play havoc with its currency. The rest follows.

The rush for gold at least indicates a shift away  from equities to that extent. No wonder the trade deficit numbers caused the benchmark indices to record the largest single day fall in 14 months. If the correction continues it might be time to accumulate quality stocks once again.

Until my next

Happy investing

Basudev

Soaring indices - Caution required

Sensex and the Nifty are above their psychological levels of 20000 and 6000. Foreign flows have been the driver of this rise. Our markets also have  been buoyed by continued rise in major global indices particulary that of the US markets. US markets are at record high.

As I have been maintaining, economic fundamentals in the US doesn't seem to be supporting stock market performance. Many doubt whether US is out of the woods. Unemployment data though encouraging on the face of it, leaves plenty of room for doubts on recovery .Many analysts are not happy comparing the extent of recovery this time with recovery rate in  previous recessions. Improved housing data appears to be investment driven rather than homeless American buying houses. Their numbers seems to be on the rise  as is the increase in the population on food stamp.

Leave aside the other  criteria such as Govt debt, budget deficit, trade deficit etc.. Doubts can be cast on the ability of the American Banks to withstand future stress, as leverage of the banks continues to be high .The culprit, as in 2008,  is the Derivative Exposure. Any disaster, if it happens, it will be over to 2008 and worse..With all that money the Fed is putting into the system,  inflation doesn't seem to be getting past 1%. A higher number would be desirable for recovery.

Besides there are reasons to believe the crisis in Europe is deeper  than what meets the eye. Its impact will also be felt in US and all over the globe. A contagion on a global scale. But in the meantime Dow can still continue to go up.

On the domestic front UPA is in real crisis, what with minister after minister resigning on gounds of corruption, graft etc. PM Manmohan Singh is under increased attack as the opposition doesn't seem to be relenting. With Supreme Court keeping up its reputation, it will be tough time for Mr Manmohan Singh to convince people that he is capable of delivering good governance. It will mean a declared innings and over to Election Commission.

IIP (index of industrial production) data shows an improvement in Apr. Capital goods index is showing a different story as also falling car sales data. These will have to look up for any joy.

In such a scenario it is necessary to be extremely cautious and not chase prices prices  as there could be double whammy in store. Liquidity flow could dry up and there can be early elections. Indices are 5% away from Double Top. Any break past a double top normally results in a strong upmove from thereon. That doesn't seem likely now.

Until my next then

Happy investing

Basudev

Bricks & bouquet and FII flows

Results so far has been a mixed bag. Overly leveraged companies continue to struggle to keep afloat. Tech stocks barring a few, took a beating post results. Midsize infrastructure companies in addition to their debt woes are also having to cope with lack of worthwhile investment in the sector. Autos have their own woes in a high inflation low growth scenario. Banking sector has done well, again barring a few which have not been aggressive enough.. Consumption story has given a real surprise this time. Most FMCG companies have posted decent enough results.

So, nonperformance has been punished by market while companies that met or exceeded  expectations have seen their stocks soar. This is normally the case and it should be  possible to take a call from here. But things don't seem to be easy this time around.. Indices have made a vertical run in the month of April.. Sensex rose by 8.6% while Nifty logged 9%. Technical charts are now stretching in the overbought territory. Dow and the S&P 500 have had a big run so far reaching all time highs. Can we remain behind? Looks like FIIs are in again.

There is reason too for the FII inflows. Anytime there is gush of liquidity in the US, it finds deployment in markets  around the globe and we too get our share of allocation. Also it appears Benanke is in no mood to let  go any time soon. He is determined to inject liquidity till American economy is truly out of the woods. But whether he will succeed is another matter. There are many who feel American economy will not recover any time soon and the present euphoria is a bubble waiting to bust. About this, I will write in a subsequent post..

So what is to be done now. As I mentioned earlier markets are overstretching. Inflation will take its own time to climb down. Particularly the food inflation. Banks have not and are in no mood to reduce interest rates , though RBI has reduced rates on several occassions. More so they want a further CRR cut, meaning more cash in the coffers.

In such a scenario it is a tall order for markets to gain further traction. Though Bulls will try to replicate Dow and S&P - lifetime highs for Sensex and Nifty  i.e.. May be FII flows could help them. And the flip side is that any deepening of the political uncertainty will dash all hopes of the bulls.

Best is to book profits and earn bank interest till markets correct. I have sold L&T lock stock and barrel..

More in my next including stock ideas.

Until then.  Happy investing.

Basudev



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