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Wednesday, January 30, 2008

Momentum, where art thou?


If your position is everywhere, your momentum is zero.

The momentum that the bulls enjoyed for quite a long time has gone missing. Time and again we remind to get out of stocks where you will find it difficult to exit. The tragedy for some was when the large caps fell, the smaller stocks were frozen at lower circuit. Leveraged players were forced to sell their prime stocks and remain stuck with dud stocks, which still provide no exit. But these are lessons most market participants forget. That’s why history repeats itself.

Back to today’s action, or lack of it, we expect a cautious to higher opening as US shares closed up overnight ahead of the FOMC's announcement on interest rates on Wednesday. But the trend will remain volatile, as very few have the courage and money to take undue risks before the Fed announcement. There are no clear signals from the Asian markets which are trading pretty mixed to flat this morning. We also have an F&O expiry tomorrow.

The results’ season is coming to an end. Investor confidence has been shaken by last week's crash, not by the corporate numbers. But a crash is a crash, no matter what the reasons. Volume is down sharply, both in cash as well as derivative market. IPO subscription has been hit, so are other forms of fund raising plans. Market sentiment has taken a beating and will take time to rebound. On the bright side (if you have cash), the correction also provides good opportunities for medium to long-term investors.

As (we) expected, RBI Governor Dr. Y.V. Reddy has chosen to tread a different path vis-a-vis his US counterpart, Mr. Ben S. Bernanke. The maverick central bank head has resisted pressure from markets and India Inc. by not cutting rates or CRR. He has cited potential threats from inflation and a liquidity overhang as the main reasons behind his move. In doing so, the RBI Governor has also sent out a clear signal to banks to reduce lending as well as deposit rates. Whether or not the banks oblige Mr. Reddy only time will tell. The central bank also believes that the move will not have any adverse effect on growth, which it expects to be 8.5% this year. In a nutshell, the RBI has adopted a 'wait and watch' approach and could lower rates in the next six months depending on local and global compulsions.

Wall Street is betting on another cut from the Fed, in order to give a fillip to the sagging US economy. The Fed announced an emergency rate cut last week, lowering the fed funds rate by 75 bps to 3.5 %, amid mounting fears of a global slowdown. It was the biggest cut since 1984 and helped global stock markets stabilise, along with the Bush government's fiscal stimulus plan. But, Wall Street wants more. Indications are that the FOMC may announce another cut of up to 50 bps. Global markets will sell off yet again if there is no rate cut from the Fed or the size is smaller than expectations.

US stocks ended up for the second session in a row on Tuesday as investors welcomed a strong report on durable-goods orders and some upbeat earnings, on the first day of the FOMC's two-day policy meeting.

Banks and telecom companies led the advance on better-than-expected durable goods orders and speculation that the nation's largest bond insurers will keep their credit ratings.

JPMorgan Chase and Bank of America led financial shares higher after New York's insurance regulator said it hopes to complete a bailout of bond guarantors before they lose their AAA ratings.

Sprint Nextel gained the most in almost four years on a report it may enter a joint venture with wireless Internet company Clearwire Corp.

The S&P 500 index added 8 points, or 0.6%, to 1,362.3. The broader index is still down 7.6% in 2008 on concern that the US economy will contract. The Dow Jones Industrial Average rose 96 points, or 0.8%, to 12,480.3. The Nasdaq Composite rose 8 points, or 0.4%, to 2,358.06.

Market breadth was positive. On the NYSE, winners beat losers by nearly 2 to 1 on volume of 1.56bn shares. On the Nasdaq, advancers topped decliners 4 to 3 on volume of 2.19bn shares.

After the close, Yahoo reported higher earnings that topped estimates on higher revenue that met estimates. The search engine behemoth also said it faces headwinds in 2008, that revenue could miss the high end of analysts' current forecasts and that it will announce layoffs by mid-February. Shares plunged 10% in extended-hours trading.

Earnings are due before the bell on Wednesday from Dow components Altria, Boeing and Merck. Ahead of the Fed decision, the ADP survey of private sector employment in January is due. The fourth-quarter GDP growth report is also on tap before the start of trade. The weekly oil inventory report is due in mid-morning.

Durable goods orders to factories jumped 5.2% in December, the government reported, more than doubling analysts' forecasts. The January consumer confidence index fell less than expected, slipping to 87.9 against forecasts for a reading of 87. The confidence index stood at a revised 90.6 in the previous month.

A separate government report showed the biggest annual drop in home ownership in four decades. And in other housing market news, foreclosures surged 75% in 2007, according to an industry report.

Treasury prices slumped, raising the yield on the 10-year note to 3.67% from 3.58% late on Monday. In currency trading, the dollar inched higher versus the yen and the euro.

US light crude oil for March delivery rose 65 cents to settle at $91.64 a barrel on the New York Mercantile Exchange. COMEX gold for April delivery fell $2 to settle at $930.80 an ounce, after touching an all-time trading high of $933.50.

European shares scored their third rise in six sessions. The pan-European Dow Jones Stoxx 600 index closed with gains of 1.6% to stand at 323.93, behind strong gains for miners and banks.

Of national indexes, the French CAC-40 finished up 1.9% to 4,941.45, while the German DAX 30 ended the day up 1.1% to 6,892.96 and the UK's FTSE 100 advanced 1.7% to 5,885.20.

In the emerging markets, the Bovespa in Brazil rose 1.6% to 59,529 while the IPC index in Mexico gained 1.8% to 28,263. The RTS index in Russia rose 1.6% to 2009 while the ISE National-30 index in Turkey advanced 2.2% to 56,175.

Volatility to continue

After an extremely volatile session, India's benchmark stock index closed marginally in the red. Investors turned cautious following a fairly strong start as the Reserve Bank of India (RBI) kept all policy rates, and the CRR unchanged, citing inflationary and demand side risks. This, despite a firm closing in Asian markets and higher opening in European markets.

Banking shares led the retreat from the top after the RBI left investors disappointed. Real estate shares also took a beating amid concerns that high interest rates will hurt demand for new homes. But, IT and FMCG shares caught the fancy of investors and ended sharply higher.

Banking shares were clearly the biggest drag on the market after the RBI left all policy rates and CRR unchanged. The market was expecting a small reduction in either the repo rate or the CRR, but most experts were of the view that RBI Governor Y.V. Reddy may maintain status quo. The BSE Bankex was down almost 3.5%. ICICI Bank, HDFC Bank and SBI were down by anywhere between 3-4%. Among the other top losers in the banks were Canara Bank, BOI, OBC, Indian Overseas Bank and Federal Bank.

The benchmark BSE Sensex lost 61 points or 0.3% to end at 18,091 after touching a high of 18,491 and a low of 17,927 after opening at 18,346. On the other hand, the NSE Nifty shut shop at 5,280, up 0.1% after being as high as 5,391 and as low as 5,225.

Now that the RBI's policy decision is out of the way, all eyes will be on tomorrow's FOMC announcement. Markets are expecting the Fed to lower rates again after making an emergency cut last week. It remains to be seen as to what the Fed finally delivers and says about the state of the US economy. A lot of stock-centric action will continue based on the type of news - negative or positive. Also, the intra-day volatility will escalate ahead of Thursday’s F&O expiry.

News Snippets:

TCS cuts variable pay linked to company performance by 1.5% per employee. (ET)

Unitech plans to sell 10-50% stake in its telecom operation to a foreign company. (BS)

Ranbaxy, Dr Reddy’s and Lupin are in fray to acquire 53% stake in Romanian pharma company, Antibiotice. (ET)

ONGC and RIL make fresh appeal to Petroleum Ministry for implementation of rig holiday. (FE)

Essar Oil has decided to consolidate its upstream E&P operations with itself. (ET)

LIC offloads 2% stake in VSNL for about Rs3.4bn. (BS)

IOC to enter into natural gas business. (DNA)

RINL and SAIL sign MoU to acquire high-grade limestone block in Oman. (ET)

Dr Reddy’s eyes acquisition in specialty business and customs pharma services segment. (BL)

Usha Martin to spend Rs8.5bn on capacity expansion over the next 30 months. (DNA)

CPCL to expand capacity of its Chennai refinery at a cost of Rs50bn. (FE)

Big Bazaar targets Rs80bn turnover by next financial year. (BL)

GHCL plans to acquire soda ash companies in US and China. It is also exploring expansion and greenfield projects in India. (BL)

Chettinad Cement announces 1:6 rights issue to raise up to Rs2.5bn to fund expansion plans. (BL)

Simplex Concrete Piles India gets Mumbai Metro’s Phase I civil works contract worth Rs4.5bn. (FE)

Simplex Infra plans to recruit people in Sri Lanka, Bangladesh and Philippines. (DNA)

Siemens signs a MoU with Maharashtra Government to support company’s expansion plans. (FE)

VF Arvind Brands, a 60:40 JV between the US- based VF Corp. and Arvind Mills plans to unveil large format outlets this year. (ET)

Indoco Remedies to take 100% equity stake in Shree Herbal Technologies for Rs25mn. (FE)

Economy News

The GoM on aviation disapproves the proposal of allowing overseas flights without completion of five years of mandatory domestic service. (ET)

I&B Ministry has approached TRAI for recommendations on restructuring of FDI cap in all segments of the media sector. (ET)

TRAI is studying whether the current cap of 25 different tariff plans per service provider per circle should be further tightened. (ET)

The Government is examining a proposal of providing tax benefits to companies using clean technology and generating carbon credits. (ET)

FDI in industrial parks to get a waiver from 3-year lock-in and minimum capitalization conditions. (ET)

Steel demand to grow by 8-9% in 2008 as per Fitch Ratings. (FE)

Navi Mumbai airport to be ready by 2012. (BS)

Orissa signs three MoUs to set up new steel units. (FE)