Weekly Newsletter

The Communist Party of India (Marxist) or CPM reiterated its strong opposition to the Indo-US nuclear deal and called upon the Government not to take any further step to operationalise the landmark pact. "It is incumbent on the Government, which commands a majority in Parliament only with the support of the Left parties, to heed the voices of opposition," CPM General Secretary Prakash Karat said at a news conference in New Delhi, on Aug. 23.

However, Karat added that the CPM or the Left front did not want to destabilise the Government, provided the latter does not proceed with the recently concluded 123 agreement with the US. The Central Committee of CPM has decided to take the issue of the Indo-US strategic relations, of which the nuclear agreement is a part, to the people through a mass campaign alongwith the Left parties, Karat said. The CPM and the Left parties will conduct this joint campaign from 4-8 September all over the country.

Later replying to questions fielded by reporters, Karat said that though the CPM and the Left front doesn't want the Government to fall, the responsibility of the future of the current regime lies fully with the Government. The CPM wants the Government to pause, and heed the voices of opposition to the deal, he said, adding that the Centre should examine the wider fallout of the agreement and allay apprehensions with regard to the Hyde Act.

The communist parties are vehemently opposing the Indo-US nuclear deal, terming it as a 'sellout' to the US. They claim the agreement will hurt India's sovereignty and undermine its independent foreign policy. At the same time, Prime Minister Dr. Manmohan Singh has refused to bow to the pressure from the Left parties. Congress chief Sonia Gandhi and UPA allies have expressed their full support to the PM. However, none of them want mid-term polls now.

The onus is now surely on the Government to make the next move. Given their belligerent stance, the Left parties are unlikely to blink first. So, it will have to be the Government, who will have to take a step back. The spotlight is now on Sonia Gandhi, who is slated to hold talks with CPM. Its a really precarious situation for her, as she is the one who made Dr. Singh the PM. Now to ask him to eat a humble pie will be difficult for her.

What can happen is that the Government may defer any further steps to operationalise the nuke deal and buy some more time with the Left. Another possibility is no change in current position, which will lead surely to mid-term polls some time next year. What is certain though is that the Left will not relent. So, if anybody has to give up it has to be the PM. Having said that, since relations between the Government and the Left are at an all-time low, continuing with the same regime just for the heck of it also doesn't make much sense. So, the net result would most likely be general elections in 2008 instead of 2009.

Global markets bounce back

After several weeks of turbulence, global markets were relatively calm this week, thanks largely to last week's rate cut by the Federal Reserve. Assurance from the American central bank that it was ready to take any step to avoid further turmoil in the financial markets also went down well with the global investors. Traders also bet that the current credit crunch may force the Fed to cut its more widely followed benchmark fed funds rate next month. To increase confidence in the system for discount loans, the Fed encouraged several of America's biggest banks, including Citi and JPMorgan, to tap into them. Moreover, Countrywide Financial, America's biggest private mortgage-lender which has been teetering on the brink of collapse in the current market turmoil, received a boost when Bank of America bought a US$2bn stake in it. The strength in the global equity markets helped investors resume the so-called carry trades with money borrowed in Japanese yen, which fell against the dollar. Though widely expected, the decision by the Japanese Central Bank to hold rates steady also aided the rally.

Still, the bad news on the US subprime mortgages and the credit market kept pouring in. Lehman Brothers said it is shutting its subprime mortgage lending unit, which will result in 1,200 layoffs and a US$25mn charge. HSBC said it is closing its Indiana mortgage unit, which will result in it cutting 600 jobs. Accredited Home Lenders said it won't take any more loan applications and that it will cut 1,600 jobs, due to the problems in the subprime mortgage lending market. Toll Brothers reported slumping earnings and warned about its outlook. However, the luxury homebuilder's earnings were nonetheless stronger than expected. Thornburg Mortgage said it sold over 35% of its assets and reduced its borrowing to lower its risk. Capital One Financial said it was closing its troubled GreenPoint mortgage unit, that it will cut 1900 jobs and shutter 31 offices by the end of the year.

Reports said Countrywide Financial has started laying off employees, in an effort to cut costs amid its ongoing credit. Meanwhile, its CEO Angelo Mozilo said the housing slump may slow consumer spending and lead to an economic contraction. Outstanding US commercial paper fell 4.2% last week, the biggest decline in at least seven years. Commercial paper backed by assets led the fall as buyers fled debt linked to subprime mortgages. Bank of China had its biggest drop since going public last year after the China's second-biggest bank said it holds almost US$9.7bn of securities backed by US subprime loans, the most of any Asian company. But, not all news was bad, as French bank BNP Paribas said it will re-open three suspended investment funds that invest in pools of mortgage debt after developing a new way to price their assets. And, investment guru Warren Buffett was quoted as saying that "worsening credit and housing markets may provide some real investment opportunities."

The outlook is not good though. Not only do subprime delinquencies continue to rise, but defaults on prime and good to middle quality loans have started to climb too. Figures released this week in the US showed foreclosures in July up by 9% compared with June, and by 93% over the year before. Traders see a 56% chance the Fed will cut its target for overnight bank lending by a quarter percentage point to 5% at its next meeting on Sept. 18 compared with 36% a week ago, based on futures contracts. Some think the Fed may act sooner. But the it may still remain a pipe dream. "Financial-market volatility, in and of itself, does not require a change in the target federal funds rate," said a Fed member this week. Even if the Fed succeeds in cooling the markets, the appetite for risky assets is un likely to be the same again. And, even if stability returns, the repricing of risk is likely to continue.

Sudden crashes and swift recoveries were the order of the week. However, the bulls weren't complaining, as they closed the week with some gains, especially after being slaughtered for the past few weeks. Large-caps led the recovery this time around, with BHEL, Bhartil Airtel, Tata Steel and Gujarat Ambuaj Cements among the major gainers. Political uncertainty had the better of bulls on the Indian bourses and for a change the market players seemed to have forgotten about the crisis in the US subprime mortgage market and the turmoil in the global credit markets. Rumours of LEFT pulling out from the Government dominated the headlines on Dalal Street over the week. However, Friday’s rally came on expectations that the Congress Party will reach an agreement with Communist parties over the Indo-US nuclear energy.


After a volatile week, the sentiments turned around on Friday. The CPM clarified that they did not want to destabilise the Government. This was one of the biggest fear on Dalal Street. Auto, Capital Good, Metals, Cement and FMCG stocks were among the major gainers driving the Sensex higher by 283 points or 2% to close the week at 14,425. NSE Nifty added 2% or 82 points to close at 4,190.

ecovery in metal prices on the LME boosted the metal stocks on Dalal Street. The BSE Metal Index gained nearly 5% during the week. Tata Steel led from front as the scrip surged by over 7% to Rs582. Sterlite Industries rallied by over 11.5% to Rs576, SAIL spurred by over 6% to Rs145 and Bhushan Steel advanced 4.5% to Rs656.

Value buying boosted Capital Goods stocks led by BHEL and L&T. Strong order book and good sets of numbers by most players in the industry continues to propel the Capital Goods Index higher after being on the sidelines in last few weeks. L&T surged by 6% to Rs2443 and BHEL advanced by over 12% to Rs1750. Siemens added 1% to Rs1199 as its German parent announced plans to double the size of Indian operations in the next three years.

With a host of issues to contend with the bulls and bears are set for regular confrontation in the coming week. While many players view the current political situation as a ceasefire time, wagging tongues and complicated interpretations could add to the confusion in the minds of investors. Besides, we also have the F&O expiry on Thursday.

If global cues hold well, another firm opening on Monday morning is on the cards. But that's where the predictions end. The flow of liquidity is drying with FIIs selling heavily for the past few weeks. They are unlikely to resume their big buying spree given the standoff between UPA and the Left.

Among the positives, the concerns of interest rates appear to have cooled off in recent days. Speculation is rife regarding a rate cut by the Fed. For that we may have to wait a couple of weeks. Inflation remains under control. India's inflation, based on the Wholesale Price Index (WPI), rose to 4.1% for the week ended August 11, recording a 10th consecutive week in which inflation held below the Reserve Bank of India's (RBI) FY08 target.

Hold on to your fundamentally sound counters. Avoid the temptation of averaging in mid-cap or small cap counters. Keep a close look on the breadth and volumes. A couple of spurts may just be short covering. Avoiding falling into any bear trap.