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Monday, March 12, 2007

STRATEGY INPUTS FOR THE DAY


Learn from past week

Your best teacher is your last mistake.

A positive opening may make us forget the volatility last week. And the next time we remember it may be when the same thing happens again, which could take place this week. Though the bulls managed a bounce back last week, we are not out of the woods yet as there are plenty of worries encircling the market. Brace yourself for some more pain in the near term before the market regains its winning ways. Any rally should be used as an exit route for the short term. One can re-enter at much more attractive levels. Only those with deep pockets, lots of patience and steely nerves to ignore the daily swings should stay invested for long term benefits.

Things have changed pretty swiftly though the warning signs have been there for quite some time. Global liquidity, which was powering the equity markets across the world for the past 2-3 years, has suddenly taken an ugly turn down. The so-called "yen carry trade" is slowly unwinding, throwing emerging as well as developed markets, out of gear. There are also worries about the health of the US economy, especially the fragile housing sector.

Locally, interest rates have shot up in a fairly short span of time, as inflation has crossed the uncomfortable 6% mark. As a result, we have a panicky Government and central bank trying to get themselves, out of the hole they apparently dug, by letting the money loose for far too long. The market hasn't taken the revival of Government intervention too kindly. What's worse, we aren't not finished yet as there will be more such developments in future.

The dangerous combination of local and global elements won't let the market settle for a while. Interest rates are expected to go up further. Inflation may take time to cool off. The Government will continue with its "market unfriendly" steps to reign in prices. FIIs are pulling money out of the emerging markets. In the first week of March they offloaded close to $9bn from emerging market funds. The trend has to reverse for the resurgence of the global equity markets.

If you think we are cautioning some Monday morning blues, be rest assured the opening looks set for some positive mood. We expect a higher opening thanks to firm Asian markets. Japan is leading the regional markets higher after the world's second-largest economy grew at the fastest pace in three years. Friday's better than expected jobs report in the US has also soothed some concerns about the state of the world's largest economy. Still, one should not get carried away as in the short term, there are more chances of the market falling below these levels than rising with confidence.

FIIs were net buyers of Rs4.12bn (provisional) in the cash segment on Friday when the Sensex fell by over 160 points. In the F&O segment they offloaded stocks worth Rs2.98bn. On Thursday, foreign funds pumped in Rs1.16bn in the cash segment. On the other hand, Mutual Funds were net sellers at Rs397.6mn.

Reliance will surely attract a lot of attention following the approval of the IPCL merger. The swap ratio of 1 share of Reliance for 5 shares of IPCL is in line with expectations. Both the companies have also announced big dividends. Reliance is also in the news for a possible mega global acquisition.

IFCI may continue to hog the limelight as local debt rating agency ICRA is to formally launch its IPO today. Northgate Technology is likely to gain as the RBI has hiked the investment limit for FIIs up to 49%. Bharti Airtel could advance as the company plans to invest $8bn by 2010 on expansion.

The Dow Jones Industrial Average gained 0.1% on Friday, rounding out a 1.3% advance for the week. It was up 15.62 points to 12,276.32. The broader S&P 500 was flat at 1,402.85, while the tech-heavy Nasdaq too finished nearly unchanged at 2,387.55.

A government report showed that the US jobless rate fell to 4.5% last month, approaching a five-year low, from January's 4.6%. US companies added 97,000 jobs, while average weekly earnings rose.

A separate government report showed the trade deficit narrowed in January. Data two weeks ago on new home sales and durable-goods orders had fueled concerns growth in the world's largest economy is slowing.

The string of economic readings sent Treasury prices tumbling, as bond investors lowered expectations for the Fed to cut interest rates anytime soon. The decline raised the yield on the 10-year note to 4.58 percent from 4.51 percent late on Thursday.

In currency trading, the dollar rallied versus the yen and the euro. COMEX gold for April delivery fell $3.50 to $652 an ounce.

US light crude oil for April delivery fell $1.59 to settle at $60.05 a barrel on the New York Mercantile Exchange. The front-month contract was quoting 68 cents lower at $59.37 a barrel in extended trading in Asia.

Most Asian markets, barring China are trading higher this morning. The Nikkei is up 135 points at 17,299 while the Hang Seng in Hong Kong rose 140 points to 19,275 and the Kospi in Seoul added 15 points to 1439. The Straits Times in Singapore gained 26 points at 3170.

The Morgan Stanley Capital International Asia-Pacific Index gained 0.7% to 143.61 at 11:09 a.m. in Tokyo.

Japanese exporters rose after the yen weakened 1% to 118.32 against the dollar in New York on Friday, its biggest drop since July 12. Against the euro, the yen lost 0.8 percent to 155.18. Japan's currency recently changed hands at 118.24 a dollar and 155.01 per euro.

All the emerging markets ended sharply higher on Friday. The Bovespa in Brazil was up 1.5% to 44,133 while the IPC index in Mexico advanced 1.2% to 27,106 and the RTS index in Russia surged 2.35% to 1808.