Dead Presidents! - India Equity Research

Monday, December 22, 2008

US Market ends mixed on auto bailout news

Better guidance from Oracle and RIMM help Nasdaq end in the green

The US Market ended mixed for the week that ended on Friday, 19 December, 2008. The indices practically finished in the territory where it was since the start of the month. There was once again a spate of bad news but market digested them comfortably. The only sliver lining in the week was perhaps the decision that was reached regarding the bailout of the automobile companies. Auto bailout news, extremely low crude price and earnings cautions dominated the week which was fully in search of direction.

The Dow Jones Industrial Average lost 50.57 points (0.6%) for the week to end at 8,579.11. Tech - heavy Nasdaq gained 23.6 points (1.5%) to end at 1,564.32. S&P 500 gained 8.15 points (0.9%) to end at 887.88.

The week marked a big decision after the Federal Open Market Committee (FOMC) cut the fed funds target rate from 1.00% to a range of 0.00% to 0.25%. In addition, the FOMC directive implied the Fed stands ready to do any, and all, things possible to stimulate the credit market and the economy, including possibly buying a lot of long-term Treasury securities.

Among major earning reports for the week, Goldman Sachs reported its first loss since its inception as a publicly-traded company. Best Buy beat earnings estimates for its third quarter but observed that there has been a dramatic and potentially long-lasting change in consumer behavior.

Among economic reports for the week, industrial production declined 0.6% in November. Housing starts declined 18.9%, marking the largest decline since March 1984, building permits hit a record low, and weekly initial jobless claims held near a 26-year high.

In the US stock market on Friday, 19 December, stocks ended the day on a mixed note. On Wall Street, the Dow Jones industrial average ended down by 25.8 points at 8,579.11, the Nasdaq closed higher by 11.95 points at 1,564.32 and the S&P 500 closed higher by 2.7 points at 886.7.

Automakers got something to cheer on Friday after the news hit the wires that the White House is providing $13.4 billion in TARP funds to automakers as part of an effort to shore up their finances. An additional $4 billion will be available for GM in February. The loans are being made on the contingency that the automakers have a viable plan by March 31 to become profitable.

GM ended as one of the main winners on Friday after climbing up by more than 22%. Twenty four of thirty Dow stocks ended in the green. Citigroup ended as one of the major laggards.

The technology sector managed to outperform on Friday after Oracle and Research In Motion posted in-line earnings results for the latest quarter. Their strength helped the Nasdaq outperform. In other earnings news, Accenture made its way to a new December high after posting better-than-expected results for its latest quarter.

On Friday, crude-oil futures for light sweet crude for January delivery closed at $33.87/barrel (lower by $2.35 or 6.5%) on the New York Mercantile Exchange. Earlier in the day, prices touched a low of $32.4. Prices reached a high of $147 on 11 July but have dropped almost 76% since then. For the week, prices ended lower by almost $12.41 or 27%. For this year in 2008, crude prices have dropped 65%.

Friday marked the last trading day for the January contract. Oil for February delivery, now the most active contract, rose 69 cents to end at $42.36 a barrel on the New York Mercantile Exchange on Friday. The contract lost 14% during the week.

After a meeting in Oran, Algeria, the Organization of the Petroleum Exporting Countries agreed to cut 4.2 million barrels a day from its actual September production level of 29.045 million barrels a day on 17 December, 2008. The production cut is effective on 1 January, 2009. Excluding previously announced cuts, OPEC will actually cut its daily production by 2.2 million barrels from current levels. That constitutes its biggest production cut ever.

At the currency market on Friday, the dollar was up against most major counterparts Thursday, jumping against the euro after the European Central Bank cut its deposit rate and lifted lending rates in the wake of the U.S. Federal Reserve's easing earlier this week. The dollar index gained 3% in the past two sessions.

For the year, Dow, Nasdaq and S&P 500 are down by 35.3%, 41% and 39.5% respectively.

Precious metals turn dull for second straight day

Gold and silver prices end higher for the week

Bullion metal prices ended lower for second straight day on Friday, 19 December, 2008. Bullion metals fell due to the rising dollar. The dollar became a bit strong today after the European Central Bank cut its deposit rate and lifted lending rates in the wake of the U.S. Federal Reserve's easing earlier this week.. Generally, a stronger dollar pressures demand for dollar-denominated commodities, such as crude oil and gold, which become more expensive for holders of other currencies and also vice versa. The falling crude price also added to further weakness in the bullion metal prices.

On Friday, Comex Gold for February delivery fell $23.2 (2.7%) to close at $837.4 an ounce on the New York Mercantile Exchange. For the week, gold gained 2.1%. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (19%) since then.

For the month of November, gold prices ended higher by 14%. Prior to this, for the month of October, gold had ended lower by 18%. It was the biggest percentage loss for gold since February, 1983.

This year, gold prices are flat till date. Futures have averaged $860 in 2008. The dollar index has gained 6% this year. For the third quarter ended September, 2008, gold prices ended lower by 5.1%. It was the first quarterly loss for the yellow metal since the second quarter in FY 2007. Prior to that, the yellow metal ended second quarter with a marginal gain of 0.7%. For first quarter prices gained 10.7%.

On Friday, Comex silver futures for March delivery fell 28 cents (2.4%) to $10.85 an ounce. For the week, silver gained 63 cents (6%). For the month of November, silver prices had gained 5%. Till date, silver has lost 28% this year.

For the month of October, silver had slipped by 20%. Silver had ended month and quarter of September 2008 with a loss of 10%. For the second quarter, it had gained a paltry 1.4%. Silver had gained 16% in Q1. The metal also had gained for seven straight years.

At the currency market on Friday, the dollar was up against most major counterparts Thursday, jumping against the euro after the European Central Bank cut its deposit rate and lifted lending rates in the wake of the U.S. Federal Reserve's easing earlier this week.

The Federal Reserve surprised market earlier this week to save the U.S. economy slashing interest rates to just above zero and promising to try an array of new economic measures to stimulate spending. The central bank's Federal Open Market Committee established a target range for the federal funds rate of zero to 0.25%, effectively cutting its key rate for overnight lending to banks by between 0.75% and 1%.

Earlier this year, the weakening dollar and higher global demand for raw materials had led to records this year for commodities including gold. Gold reached a record in March as a U.S. housing slump and credit crisis spurred the Federal Reserve to slash borrowing costs. In the latest move, the Federal Reserve has cuts its target bank lending rate to 0.25% from 5.25% in September, 2007. The Fed did it in nine steps.

Gold had witnessed the greatest annual gain in twenty eight years by gaining $200/ounce (31%) in FY 2007 as lower interest rates had sent the dollar tumbling, and crude-oil prices rose to a record. Silver had climbed 16% in FY 2007. In 2006, silver had jumped 46% while gold gained 23%.

Crude drops below $34

January contract futures drop drastically on the last day of trading

Crude prices continued to drop substantially even on Friday, 19 December, 2008. Prices fell due to a strong dollar, ongoing global economic crisis and gathering crude stockpiles due to lower energy demand.

On Friday, crude-oil futures for light sweet crude for January delivery closed at $33.87/barrel (lower by $2.35 or 6.5%) on the New York Mercantile Exchange. Earlier in the day, prices touched a low of $32.4. Prices reached a high of $147 on 11 July but have dropped almost 76% since then. For the week, prices ended lower by almost $12.41 or 27%. For this year in 2008, crude prices have dropped 65%.

Friday marked the last trading day for the January contract. Oil for February delivery, now the most active contract, rose 69 cents to end at $42.36 a barrel on the New York Mercantile Exchange on Friday. The contract lost 14% during the week

For the month of November, crude prices ended lower by 19.7%. Before this, for the month of October, 2008, crude prices had ended lower by 32.6%, the biggest monthly drop since 1983.

After a meeting in Oran, Algeria, the Organization of the Petroleum Exporting Countries agreed to cut 4.2 million barrels a day from its actual September production level of 29.045 million barrels a day on 17 December, 2008. The production cut is effective on 1 January, 2009. Excluding previously announced cuts, OPEC will actually cut its daily production by 2.2 million barrels from current levels. That constitutes its biggest production cut ever.

At the currency market on Friday, the dollar was up against most major counterparts Thursday, jumping against the euro after the European Central Bank cut its deposit rate and lifted lending rates in the wake of the U.S. Federal Reserve's easing earlier this week.

The Energy Information Administration reported earlier during the middle of the week that that U.S. crude supplies rose by 500,000 barrels to stand at 321.3 million barrels during the week ended 12 December, 2008. At 321.3 million barrels, total U.S. crude inventories were 17.5 million barrels above the five-year average and 24.4 million barrels above year-ago levels. The EIA also reported an increase of 1.3 million barrels in gasoline stocks and a rise of 2.9 million barrels in distillate stocks last week.

For the third quarter of the year crude prices ended lower by 28%. This was the biggest quarterly drop since 1991. Before that, crude prices had gained 38% in the second quarter of this year. It was the biggest quarterly increase in nine years. For the month of September, prices registered drop of 13%.

Against this background, January reformulated gasoline gained 1 cent to end at 97 cents a gallon and January heating oil rose 2 cents to $1.39 a gallon.

January natural-gas futures fell 22 cents to end at $5.33 per million British thermal units.

Sunday, December 21, 2008

Weekly Stock Ideas - Dec 21 2008

Buy Aban Offshore

Buy Adlabs

Buy Bombay Dyeing

Buy Tata Steel

Buy Reliance Infra

Weekly Newsletter - Dec 21 2008

The bulls will hope to Jingle all the way in this Christmas-shortened week. We wonder! US President George Bush’s bailout plan (or may be an orderly bankruptcy) for the auto majors is expected to bring some Joy to the World. Having said that, the euphoria may prove to be short lived and the markets could turn lower again on concerns about a weakening global economic outlook. In the Indian market, we have the F&O expiry which could well show gains for the month. The Government may drop more hints on its next round of stimulus package, which is also likely to include more rate reductions. One must keep an eye on global markets as well as FII inflows to make some sense of what the mood on the markets will be in the near term. Like every year, despite disappointments, expectations continue for a miracle on Dhirubai Ambani’s birthday which falls next Sunday (Dec 28). With year-end considerations also in play, expect wild swings before we leave behind 2008 – a year best forgotten

Chanda Kochhar to be new ICICI CEO

Chanda Kochhar, ICICI Bank’s joint MD is to take over as the bank's CEO and MD from May 2009. KV Kamath would take over as non-executive chairman in place of N Vaghul, who would retire from the Board on completion of his current term on April 30, 2009. The change is subject to the approval of the Reserve Bank of India (RBI) and the shareholders. Kamath will be non-executive chairman of the ICICI Bank Board for five years effective May 1, 2009. "We currently have 1400 branches and has received licences from the RBI to set up 600 more branches. By March 2009, we are planning for a growth rate of 5-10%," Kochhar said. "I see interest rate correction in 2009. As interest rate softens, there is more opportunities for banking industry," she added. Lending rate will come down to single digits in a year and predicted attractive opportunities in treasury operations in the soft interest rate regime, Kamath said. "Single digit lending rate and double-digit growth is what we should look forward to one year from now," Kamath said.

Growth slump is major worry: RBI

The economic downturn is a major policy concern but India should return to its high growth trajectory once global conditions return to normal, the Reserve Bank of India (RBI) said in its annual report on the banking sector for the year ended June 2008. The RBI said that an industrial sector slowdown could adversely affect the profitability of the corporate sector and credit risk. "The overall long-term macroeconomic outlook continues to be favourable with moderation of growth being the current policy concern," the central bank said. There were downside risks from India's increasing global integration, such as a sustained outflow of capital, financial contagion and slowing world growth, the central bank said in the report. Active liquidity management was key to the current policy stance and the use of a combination of instruments to absorb excessive pressures had helped cushion the impact of the global crisis on local markets, the RBI said. To reduce the probability of future crisis, the RBI and the Government should continue to adopt global best practices for prudential supervision and regulation. "Consequently, the role of fiscal space in promoting financial stability has once again come into prominence," the central bank said.

Rupee climbs as stocks extend gains

The Indian rupee rallied amid expectations that global investors will pour more money into high-yielding assets like emerging market equity after US interest rates fell as low as zero. The sharper than expected drop in inflation fueled speculation that the RBI will cut rates further to revive economic growth. The partially convertible Indian rupee closed the week at 47.26 per dollar, rising 2.8% during the week, the best performance since the week through Nov. 7. It touched a weekly high of 46.85 and a low of 48.17. The currency rose for a third successive week as global stocks have rallied on hope that rate cuts and stimulus packages will bolster the global economy. The rupee is up nearly 7% from a record low of 50.6150 touched on Dec. 2. The currency’s 16.5% loss this year is still the biggest since 1991.

The Indian currency extended gains this week after the Federal Reserve cut its benchmark interest rate to as little as zero this week and said it will use all available tools to help resume growth in the world’s biggest economy. The Fed said it will target a federal funds rate of between zero and 0.25%. The benchmark BSE Sensex gained 4.2% this week, adding to last week’s 8.1% advance. Offshore non-deliverable forward contracts showed traders scaled back bets for how far the currency will fall in a month. The contracts indicate the rupee will trade at 47.65 a dollar in a month, compared with expectations for a decline to 51.26 at the end of November.

Inflation hits 9-month low on falling fuel prices

India's inflation, based on the wholesale price index (WPI), fell sharply in the first week of this month after the Government cut fuel prices for the first time since Feb 2007 in the wake of the steep fall in crude oil prices from a record US$147 a barrel in July. The annual, point-to-point inflation stood at 6.84% in the week ended Dec. 6 as against 8% in the previous week, the Commerce & Industry Ministry said. Inflation was expected to decline to around 7.5%, according to economists. It had touched a 16-year peak of nearly 12.91% on Aug. 2 and was at 3.84% in the comparable period last year. The WPI for "All Commodities" declined by 1.1% to 231.1 in the first week of December. The index for Primary Articles dropped 0.4% to 249 while the index for Manufactured Products declined by 0.3% to 202.4. The index for Fuel & Power was slid 3.7% to 332.1 due to a steep decline in the prices of naphtha (23%), furnace oil (15%), bitumen (11%), petrol (10%), aviation turbine fuel (7%), high speed diesel oil (6%), light diesel oil (5%) and lubricants (4%). The rate of inflation, based on average monthly WPI, which was 10.97% for the month of October has eased by 2.31% to 8.66% in November, the Commerce Ministry said. The annual rate of inflation for Food Articles group stood at 10.19% for the week ended Dec. 6 compared to 10.52% in the previous week. It was 2.51% as on Dec. 8, 2007. Meanwhile, the Government revised the inflation rate for the week ended Oct. 11, to 11.30% from the provisional estimate of 11.07%, while the WPI for the same period stood revised at 239.3 versus 238.8 forecast earlier.

Home, sweet home!...PSBs unveil special loan package

Just a few days after unveiling the fiscal stimulus package and fresh round of rate cuts, the Government went a step further and launched a special housing loan package for budget homes. Nationalised banks brought cheer to small home loan borrowers by cutting rates under a new package. Loans up to Rs20 lakh will now be available at 8.5-9.25% a year for tenures up to 20 years. The margin has been reduced to 15%. The offer will be valid only for new loans up to June 30, 2009. Currently, the interest rate on these loans average around 10% for most PSU banks.

Under the scheme, the interest rate on home loans up to Rs5 lakh, for a maximum period of 20 years, will not exceed 8.5% for the first five years. The margin for this segment has been reduced to 10%, from the current 20-25%. A borrower can get a home loan of up to 90% of the value of the property.

During the first five years, if any bank introduces a home loan product at a lower rate, then the borrowers will be offered that rate. After the first five years the interest rate will be reset from the date of the first drawal and borrowers have the option to go for fixed or floating rates. The package does not apply to existing home loan borrowers and cannot be swapped with an existing loan. The move could put some pressure on private and foreign banks to cut home loan rates.

Public sector banks also announced a package for the 40-lakh strong small and micro units which are reeling under the impact of high interest costs and economic slowdown. The interest rates for all existing and new loans for micro industries will be brought down by 100 basis points. In the case of small and medium enterprises where banks have fund based exposures up to Rs100mn, the interest rate will be cut by 50 basis points.

However, realty players cried foul, saying that the package announced by the state-run banks will not help in reviving the crisis for the Indian realty sector, which is facing the worst downturn in the last 10 years, because of high interest rates. Meanwhile, some media reports said that the Government may increase the upper end of the home loan package from Rs20 lakh to Rs30 lakh in the next round of stimulus program.

Self-promoters...Satyam stoops, investors conquer

Satyam Computer found itself in the eye of a storm after the IT major announced a plan to buy two companies promoted by the promoter's son for around US$1.6bn. The rationale: the move will provide a much-needed cushion amid uncertain business environment for the core IT and BPO businesses. The management also claimed that the diversification will pay rich dividends in future. However, enraged investors forced the company to do an about-turn on the ill-conceived acquisitions, citing blatant violation of corporate governance. The Hyderabad-based company dropped the plan to acquire 100% of Maytas Properties and 51% in Maytas Infra. But, despite the move, the shares of both Satyam and Maytas Infra took a beating, prompting the company to announce plans for a share buyback. The board will meet on Dec. 29 to consider the buyback. But, the move is unlikely to restore investor confidence in Satyam management, who has lost much of its credibility for flouting all ethical norms of corporate governance. Meanwhile, the Government is believed to have ordered a probe into Satyam's decision to buy two promoter group companies and then scrap the deal in the wake of investor backlash.