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Wednesday, December 06, 2006

STRATEGY INPUTS FOR THE DAY


Bumble bull, tumble bear!

According to classical aerodynamics, it is impossible for a bumblebee to fly.

Six months ago it was probably impossible for the bulls to recover and get the Sensex back to its previous high. Rewind back and you will realize that the nearly 60% rally in the Sensex has come in less than six months after hitting 8800 in the middle of June. Tuesday's subject line of " 14K, Fuel is efficiency" was taken up over enthusiastically by the bulls who managed to lift the Sensex past the milestone. And yes Reliance fueled the same by starting on top gear. Today, we expect another positive opening, buoyed by firm trend in global markets. Short term investors, don't wait for a correction to lighten your position. Instead, lighten your position and wait for a correction.

The sharp turnaround has been powered by almost non-stop inflow of money from the foreign funds. They have pumped in more than $5bn in the past five months, taking the total for the year to over $8bn. Stronger than expected strength in the Indian economy and robust corporate earnings are keeping the bulls in high spirits. Lower crude oil prices coupled with the halt to aggressive monetary tightening in key economies like the US and Japan have also played its part in fueling the advance. Also, emerging markets across the world have done well. In fact, quite a few of them such as China and Russia have done even better than India. Still, their market P/E is much lower vis-a-vis ours. Valuations is one of the main concerns right now.

Another worry is that though the key benchmarks have surged past new milestones the broader market has not kept pace with them. Even within the indexes, quite a few stocks have delivered negative returns since May 11. One needs to keep this in mind. The market is divided about the road ahead. Some say the bullish trend is here to stay while another school of thought (mostly foreign broking houses) are advocating caution. Who will emerge the winners only time will tell. We feel that as long as the liquidity factor is strong, the key indices will rise. Only a sudden slowdown in FII inflows can stop the bulls in their tracks. One may see some softening in overseas inflows due to the Christmas holidays. The anxiety over the budget may prompt FIIs to remain on the sidelines early next year. Results and the budget are going to be two major triggers for the market movement on either side.

FIIs were net buyers to the tune of Rs3.02bn (provisional) yesterday in the cash segment. In the F&O segment, they pumped in Rs1.67bn. On Monday, they pulled out Rs28.14bn from the cash segment. This includes the outflows towards the Infosys' sponsored ADS issue. Mutual Funds were net buyers of Rs431.5mn on the same day.

US stocks closed higher on Tuesday, with the S&P 500 index a fresh six-year high and the Dow Jones moving closer to a new record close. A surprising strength in the service industry, the biggest part of the US economy, signaled that companies are likely to deliver on their promised growth in earnings.

The S&P 500 added 5.64, or 0.4%, to 1414.76, the highest since November 2000. Coca-Cola paced a gain in the Dow Jones Industrial Average after Merrill Lynch raised its earnings forecast. The Dow increased 47.75, or 0.4%, to 12,331.60. The Nasdaq added 3.99, or 0.2%, to 2452.38, aided by advances in Applied Materials and other semiconductor-equipment makers after an industry group forecast higher sales.

The Institute for Supply Management's index of non- manufacturing businesses, which account for almost 90% of the US economy, climbed to 58.9 last month from 57.1 in October. A reading above 50 indicates expansion. The index was expected to decline to 55.5, according to average forecast by economists.

A separate government report showed that labor costs rose less than forecast, giving the Federal Reserve more elbow room to cut interest rates as the world's largest economy slows. Unit labor costs in a separate report on worker productivity rose 2.3% in the third quarter, down from the initial estimate of 3.8%. Costs were also lower compared to the projection of a gain of 3.2%.

US light crude oil prices for January delivery fell a penny to settle at $62.43 a barrel on the New York Mercantile Exchange in a volatile session. Prices rose in early trading then tumbled before midday, only to rebound in the afternoon. The front-month contract was quoting 3 cents higher at $62.46 per barrel in extended trading in Asia this morning.

Treasury prices slipped, raising the yield on the benchmark 10-year note to 4.44% from 4.42% late on Monday. In currency trading, the dollar gained versus the euro and trimmed losses versus the yen. COMEX gold fell $3 to settle at $647.90 an ounce.

Among the Indian ADRs, Patni was down 2.2%, VSNL gained 1.1%, Infy added 1.3%, Wipro advanced 1.6%, Satyam climbed 3.5%, Tata Motors added 0.8%, Dr. Reddy's lost marginally, HDFC Bank gained 0.4%, ICICI Bank was almost unchanged and MTNL jumped 1.5%.

European shares ended with gains. The UK-based FTSE 100 ended up 0.6% at 6,086.40. The French CAC-40 finished 1.2% higher at 5,359.69 and Germany's DAX Xetra 30 to end 1.2% higher at 6,372.80. The pan-European Dow Jones Stoxx 600 index ended the day up 0.7% at 354.13.

Emerging markets too closed sharply higher. The Bovespa in Brazil was up 1.2% at 43,157 while the IPC index in Mexico climbed 1.5% to 25,593 and the RTS index in Russia was up 1.7% at 1821. Markets were also up in Chile and Peru.

Asian stocks rose to a more than six-month high on Wednesday, led by BHP Billiton and Jiangxi Copper, after copper, nickel and aluminum climbed.

The Morgan Stanley Capital International Asia-Pacific Index gained 0.6 percent to 137.53 at 11:15 a.m. in Tokyo, set for the highest since May 15. Stock indexes also rose in Hong Kong, Taiwan, Australia, China and Malaysia. They fell elsewhere.

Japan's Nikkei 225 Stock Average added 44 points to 16,309 while the Hang Seng in Hong Kong advanced 120 points to 19,064. The Straits Times in Singapore lost 4 points to 2897.

The Kospi in Seoul was down 11 points to 1408. Samsung Electronics and Hyundai Heavy Industries led the decline on concern that the won's climb to a nine-year high against the dollar will lower the value of exporters' overseas sales.

Major Bulk Deals:
Citigroup has picked up Asian Electronics; Birla Sunlife MF has picked up Bharat Bijli from Kotak; Blackstone Asia and Morgan Stanley have purchased Eastern Silk; Federal Bank has bought Lakshmi Vilas Bank; HSBC Financial has picked up Lok Housing.

Insider Trades:
Century Textiles & Industries Ltd: a) Reliance Vision Fund - Scheme of Reliance Mutual Fund, (b) Reliance Tax Saver Fund (ELSS) - Scheme of Reliance Mutual Fund has sold in open market 234000 equity shares of Century Textiles & Industries Ltd on 28th November, 2006.

Elecon Engineering Co Ltd: HDFC Mutual Fund - HDFC Prudence Fund has purchased from open market 100000 equity shares of HDFC Asset Management Company Limited on 4th December, 2006.

Market Volumes:
The turnover on NSE was down by 0.6% to Rs87.99bn.BSE Metal index was the major gainer and gained 2.01%. BSE Technology index (1.09%), BSE Oil & Gas index (1.02%), BSE Capital Good index (0.80%) and BSE FMCG index (up 0.26%) were among the other major gainers. However, BSE Bank index lost 0.87%.

Volume Toppers:
Parsvnath Developers, Balrampur Chini, ITC, R Com, SAIL, Voltas, Tata Steel, Indiabulls, Reliance Industries, GTL Infrastructure, Hindustan Construction, Essar Oil, Action Construction, Satyam Computer, GMR Infrastructure and Hindalco.

Delivery Delight:
Ashok Leyland, Bharti Airtel, Century Textiles, Colgate, Federal Bank, Gateway Distriparks, GNFC, HCL Technologies, HCC, I-Flex Solutions, IOC, ITC, Jet Airways, L&T, MTNL, Maharashtra Seamless, Mysore Cements, Polaris Software, Reliance Communications, Reliance Industries, SAIL and VSNL

Upper Circuit Filters:
Ansal Infrastructures, Ambalal Sarabhai, Flex Industries, LMW, Orient Paper, NRC, Sical Logistics, Nirlon Ltd, Lyka Labs and UB Engineering.

Brokers Recommendations:
Voltamp Transformers - Buy from Batlivala & Karani
Reliance Industries – Outperform from CLSA

Long Term Investment:
BHEL

Major News Headlines:

L&T and Tata Power seek special status to bid for defence contracts
RIL wins 2 exploration blocks in Yemen: Reports
Greenply signs Carbon Emission Purchase agreement with private fund
ICICI Bank opens offices in Thailand, Indonesia & Malaysia
Gujarat Ambuja Cement’s Nov shipment up 9% yoy at 1.31mn tons
MSK Projects wins orders worth Rs212mn
Eicher Motors CV sales rose 38% to 2,201 units
Era Construction bags Rs3bn order from NHAI