Weekly Close: Flight to safety or just a correction?

Extremely choppy and volatile week for the market. Though the start was good but was really difficult to sustain the momentum and long list of reason for this correction. The vicious inflation once again seems to have spread its wing globally and thats not good news for equities. Fed Chairman indicated of growth to be fine but inflation was the worry which offset the hopes of rate cut. India's efforts to tighten liquidity continue..C Rangarajan, Chairman of PM's Economic Advisory Council, called for to control certain kinds of capital inflows. We think the hint is towards P Notes. This probably was the reason for the sell off in the market as P Notes have been in debate for some time and the guess is that there is a lot of politician money which comes in through this as the final beneficiaries are not disclosed. This worry of P-Notes dented the sentiment and of course there was bad news in the form of slowing off take.

Major IPO's are in queue to enter the market and this is said to be one of the reason for liquidity crunch. The month of June will see the issues of DLF Ltd, ICICI Bank Ltd and Central Bank of India Ltd raise roughly Rs21,000 crore from domestic investors, making it the highest mobilisation in one month in the history of the Indian capital market. DLF's estimated Rs 9,625 crore and ICICI Bank's estimated Rs12,000 crore. Issues will open by the end of June. Central Bank's Rs1,000 crore offering could hit the market anytime between these two issues. And this is not all. This is what we have been talking about since last two weeks. However, we believe that this money will be small in the overall scheme of things. But the thing to worry will be the flow of FII money into these issues and how those Dollars will be neutralised. Is there a CRR hike by end June.

Sensex and Nifty lost 3.5% for the weak. Auto was totally on reverse gear. Tata Motor (-12.4%), Maruti (-9.6%), M&M (-5.2), Bajaj (-5.6), Ashok Leyland (-6.5%), Escorts (-11.9%). Crude was up on back of cyclone in Oman leading to weak in Oil and Gas counters.. HPCL -11%, BPCL -8%, ONGC -4% and Reliance -5%. Metal too lost might.. SAIL -10%, TISCO 8.1%. Hindalco was the only exception up by 12%. Cement counters too slipped like ACC -10.6%, Grasim -5%, Guj Amb -4.8%, India Cem -6% Ultratech -2.4% JP -8%. HLL -6%, ITC -6% and Tata Tea -13%. IT bounced back..Infy, TCS, Satyam and Wipro gained marginally for the week

Telco witnessed 17% fall in sales in May. Reasons given are lesser cargo offerings from agriculture and manufacturing sectors, excessive overloading, shortage of trained drivers and an increase in the auto finance interest rates during the last six months. But there were also news that Tata Motors and Leyland have cut the tyre orders from trye manufacturers and they also plan to cut production. High interest rate is really seen as reason behind this. Hero Honda, Bajaj Auto and TVS Motor Co also announced cut in production in the face of slower demand. Interest rate hikes have begun to bite auto. Short term scenario doesn't seems to be in favour of auto..for now avoid this one.

Hindalco was the only winner in metal counter. Market expects that Sterlite along with Alcan intends to buy Hindalco. The A V Birla Group holds only 27% stake in Hindalco which would go to 35% after the preferential issue for Novellis acquisition. However, steel stocks were down on reports that Sail had cut prices. The very next day papers reported that they are planning a price hike. However, logic tells us that with China Olympics construction almost on its end.. the likelihood of steel prices coming off are high.

Selective mid caps continued to be in action. Some morning daily reported that Educomp Solutions is set to acquire another education technology company headquartered in Singapore called 'Ask n Learn'., This will be through an SPV. The total acquisition price is SGD 5.98 million in cash in addition to options worth SGD 1.05 million. This means about Rs 19 cr in total. Not a big price. 'ASK n Learn' provides internet-based e-learning solutions, content and services to over 120 institutions in Singapore, China, Thailand, the Philippines, Japan, Brunei, Vietnam and Kuwait. Its Customers include the National University of Singapore, Republic Polytechnic, SIM, MINDEF, over 100 Singapore schools, school clusters and zones, top regional universities, MOE Singapore, MOE Brunei, MOE Indonesia, and international schools. Educomp has been finding ways and means to leverage on its content and teaching methodology where it has competitive advantage. Valuations are a bit high.. but given the projections and if the company delivers, they would be well justified.

SKF announced another investment of Rs 270 crore to build a greenfield factory in India for manufacturing large size bearings. However, the big negative is that this investment will be through its 100% subsidiary. That's a big negative. It hits the India story badly. The factory is expected to start production in 2008 and will, when fully utilised, employ 300 persons. The investment is in response to the strong global demand for large size bearings in sectors of wind energy, mining, steel and off-road applications. This could have well come under the existing listed company. We have covered this stock since it was Rs 265 with a positive view and the stock was been a major performer. The annual report showed that profits for the previous here were muted by a large cost of SAP implementation which is now over. Over and above all this is lost in the confusion as to the further growth plans may appear stymied. Look for downsides here.

Financial Technology was another Hi-Tech gainer. It has lived up to our expectations. The stock rallied over 40% since our positive view. Papers report that The RBI will issue guidelines for allowing foreign investors to pick up stake in the country's commodity exchanges soon. There are many eyeing this and players like the New York Mercantile Stock Exchange will be allowed to buy up to 49 per cent stake in the bourses such as Multi Commodity Exchange and NCDEX. MCX is waiting for the RBI guidelines before launching its IPO, though the exchange earlier sold its 9 per cent stake to Fidelity International. New York Mercantile Exchange (Nymex) is keen to buy stake in both NCDEX and MCX. Financial Technologies has a 64 per cent stake in MCX. The reason for the run up as indicated earlier was that Dubai Gold and Commodities exchange started trading rupee Futures. FT owns about 49% stake here as well. The Forex trading platform, the agri spot exchange are other initiatives we believe will bring in the long term. We remain positive here as well.

Techically Speaking; Sensex has closed near our support level of 14000--14030. A break below this will take us to 13815 which is another key support level. On the upper side 14350 and 14445 are Resistance levels. Markets are still in Bull mode and longs to be avoided below 13800. The Turnover was decent for the day at Rs 4592 Cr with Declines outnumbering Advances in the ratio 1.5:1.