Market wins

High volatility characterized today’s recovery on the bourses after a correction, which had shaved 114 points off the BSE Sensex, in the past two days. A newspaper report about billionaire investor George Soros visiting India for the first time on 15 December 2006, boosted market sentiment. Soros is to announce investments that will signal his long-term bet on a few sectors, the report suggests.

The market also shrugged off concerns over the fate of Indo-US relations after Democrats got control of the House of Representatives from President George W Bush's Republican Party in the Congressional elections. Reports suggest that despite the Democrats’ victory, the Indo-US nuclear bill may still see the light of day. A key Democratic senator on Wednesday said he was ready to have the US Senate act quickly to approve the landmark deal. The Sensex had lost 84 points in volatile trade on Wednesday following the Democrats’ victory in mid-term polls.

The market ended with modest gains today after a highly volatile trading session. The barometer index rose 64.98 points (0.5%), to settle at 13,137.49. The S&P CNX Nifty added 19.10 points (0.5%), to settle at 3,796.40.

The Sensex had surged over 100 points in opening trade, but shortly slipped into the red. It managed to recover almost instantly. In afternoon trade, the benchmark index gained over 100 points for the day atleast two times before paring gains after the surge. Between some of the vital intra-day bottoms and tops, the Sensex swung about 430 points. Between the day’s low of 13,069.85 and a high of 13,192.89, it fluctuated 123.04 points.

The market-breadth was strong. Against 1,473 shares rising on BSE, 1,033 declined. As many as 88 shares were unchanged. Gainers outpaced losers by a ratio of 1.4:1. Select small-cap and mid-cap shares surged. There has been a surge in small-cap and mid-cap stocks on a selective basis since the past few days. Market men say that small-cap and mid-cap stocks are catching up with the surge in blue-chips since the past few days.

The BSE clocked a turnover of Rs 4,088 crore compared to Wednesday's Rs 4,340 crore.

The market has been witnessing an uptrend since late-July 2006. Recently, strong Q2 results and a hefty FII-inflow aided the surge. The Sensex is up almost 40% in calendar 2006, so far.

FII-inflow in calendar 2006 has reached $7.14 billion. The inflows are strong, coming on the top of record annual inflow of $ 10.7 billion in 2005. The inflow totaled $6.59 billion 2003 and $8.5 billion in 2004.

The fund-flows into India are due to strong earnings growth of India Inc coupled with increasing recognition of India’s long-term growth prospects. India’s growth drivers are a favourable demography (large share of young population), robust domestic consumption and acceleration in infrastructure creation. Prime Minister Mahmohan Singh has promised a complete policy on infrastructure, including regulatory and institutional framework, to make it attractive for private participation in the near future.

Continued inflows from FIIs are notwithstanding apprehensions regarding stretched valuations of Indian equities.

In today’s trade, car major Maruti Udyog (MUL) lost nearly 3% to Rs 909.80. However, the stock came off the lower level after plunging as much as 3.7%, to a low of Rs 902 following reports that Nissan Motor Company has terminated talks with Japanese compact car maker Suzuki Motor Corp, for a project in which Suzuki was to build a Nissan model in India for sale in the local market. It may be recalled that following a recent tie-up between the two, MUL was to make cars in India at Manesar, in collaboration with Nissan Motor Company.

Hindalco Industries lost 3% to Rs 182.20, after the RBI said that foreign investors will not be allowed to buy shares in the firm without its permission, as foreign investment had touched the 22% limit.

Satyam Computer rose 3% to Rs 428, on reports that it has won a $71 million order for 7 years, from Australia's top airline Qantas Airways.

ICICI Bank gained 1.4% to Rs 794.90. The stock hit an all-time high of Rs 804 in late-trading. A block deal of 10 lakh shares was executed in ICICI Bank on BSE in the FII-segment, at Rs 801 per share. ICICI Bank expects interest rates to remain steady.

HDFC Bank gained 1.4% to Rs 1,017.

Tata Steel rose 2% to Rs 504. As per reports some of the major shareholders of Corus Group have sold their shares in the company, raising doubts about a counter offensive to Tata Steel’s $8 billion bid for the Anglo-Dutch steel maker.

Software major Infosys rose 0.8% to Rs 2,144. The scrip gained for the third day in a row today, after shareholders approved a sponsored ADR issue, on Tuesday.

Index heavyweight Reliance Industries (RIL) advanced 0.6% to Rs 1,260.

Recently listed Development Credit Bank jumped 5% to Rs 51.10. The stock rose on a heavy volume of 67.7 lakh shares on BSE.

Mahindra & Mahindra gained 6.6% to Rs 832 after Renault said on Thursday it was expanding its existing joint venture with Mahindra & Mahindra to manufacture more models for the Indian market.

Indo Tech Transformers jumped nearly 14% to Rs 218.55, after the company fixed a board meeting on 20 November 2006, to consider the recommendations of the project monitoring committee to review the progress of various projects and consider the modification/enhancement of capacity at the large power transformer plant near Kancheepuram.

Petron Engineering Construction gained 5% to Rs 177.10. On Thursday, it garnered a contract worth Rs 50 crore from Grasim Industries for civil and mechanical work on the refractories at Grasim's cement project in Rajasthan.

Glenmark Pharma jumped nearly 6% to Rs 460. The stock has risen 54.6% in a short while from Rs 297.35 on 5 October 2006.

Financial Technologies jumped 7% to Rs 1,924.85. As per reports, the company plans to raise $200 million through equity, or other instruments, to fund its expansion. In October, the company's board had approved raising $500 million in tranches.

Infrastructure Development Finance Company gained nearly 5% to Rs 79.05. Bank of India and Union Bank of India have joined hands with Infrastructure Development Finance Company for loan syndication. The alliance expects to handle 16 projects worth Rs 11,500 crore over the next five months and 60 proposals worth Rs 45,000 crore over the following 12 months.

Riding On Hope & Prayer - By Sanjeev Pandiya

It isn't really about whether land has suddenly become an 'el dorado' for investors. It is about understanding the difference between “store of value” investments (that are secondary derivatives of economic activity) and those investments that create value by generating economic activity, like equities and debt.

Let me explain. Land, or gold, for that matter, do not create wealth. They are only worth what someone else (perhaps a bigger fool) will pay for them. They do not generate value. And they actually are sometimes cash-negative. The cost of maintaining a store of gold (security, transportation, insurance, etc) is to be deducted from the capital gains earned from gold. And in case gold prices are stagnant or declining (1981- 2001), investors suffer losses even in nominal terms. In case of land, you might get rent, but after deducting costs, the effective yield is marginal. Mostly, land is held for the capital gains it yields.

In parts of Delhi/ Gurgaon, where the rental yield (i.e. the annual rent divided by the market value of the property) is down to 1-2%, there is nothing left for the landlord investor after maintenance, repairs, security, municipal charges, insurance, rates and taxes. The net cashflow from holding a property in Delhi may actually be negative. Investors find it worthwhile to hold land only because of the capital appreciation that accrues from selling it to the bigger fool. Theoretically, economists would argue that normal returns would accrue to investors in the long run. In Gurgaon, for example, the landlord investor who chooses to hold on to his property at these rates, is giving up the option of selling his property and parking his funds in the bank at 8%, or getting a post-tax return of 6.5% from mutual funds. He is expecting a capital appreciation of at least 7%, otherwise this is not a rational choice.

There are other factors at play, however. For example, the flow of black money into real estate ensures that the "opportunity cost" of the capital flowing in has to be adjusted downward. Black money carries a storage cost, security risk (of being found out by the CBI, I-T dept etc). This drives down the return expectation from real estate, ensuring that even after the above obvious calculation, there is no capital flight from this sector.

Just like you fill up a balloon only when you pump in air at a pressure higher than the atmospheric pressure prevailing outside, a bubble (in asset markets) blows up only when the cost of capital (i.e. the return expectation) drops below the levels prevailing in the outside economy. This can happen for structural reasons (like the flow of black money, Japanese funds flowing in stock and bond markets, etc) or for sentimental reasons (like the mindless manner in which people bought IT shares in 2000), or even for technical reasons (like farmers in Punjab not knowing where to put their cash surpluses, leading to a steep hike in the prices of agricultural land). Sometimes, regulations can create such bubbles (like capital convertibility restrictions in forex markets). The drivers may be different, but the fundamental phenomenon is the same: the cost of capital drops.

To understand what happens next, let us go back to the balloon example. To hold up the balloon's shape, you need to close off the vent. If you leave a small hole, the balloon starts to deflate. The bigger the hole, the steeper the rate of deflation, till at one tipping point, it can be called a full-scale collapse. But in every case, the pattern is the same……different words are used to describe different rates of deflation.

Now let us look at what it takes to hold up the balloon. There is a certain amount of air which needs to be pumped in, without which the bubble would move from inflationary mode to deflationary mode. This certain amount of air would be directly dependent on the size of the balloon/ bubble and the size of the vent. A small balloon with a small vent can be held up by a child's mouth.

But a large (hot-air) balloon with a big vent needs a pump machine to hold up the balloon (like those gas balloons we see on buildings). The bigger the balloon, the bigger the vent…the bigger the incremental flow of air needed to keep up the balloon/ bubble from inflating.

Now let's get back to financial market bubbles/ balloons. The incremental flow of funds that is needed to hold up an ever larger bubble will keep growing. When Gurgaon was just a village outside Delhi, prices could be kept up by the small amounts of funds (including black money) that flowed from real estate speculators. As it grew bigger, the number of segments that needed to join in, also increased. First, the BPO segments, then the affluent middle class from Delhi, then the NRIs and finally, the big housing finance banks with their mortgage finance. In short, you needed ever larger amounts of 'incremental flows' to hold up the bubble.

Momentum ensures that the number of segments that follows quickly on the heels of its predecessors is an ever-proliferating phenomena. The Gurgaon bubble has created interest in the big real estate companies, who were pre-May favourites on the stock markets (Unitech, DLF, Ansals, et al) and would have raised large sums on the stock markets, effectively involving the man in the street finally. Lastly, the big overseas flows would have started, creating a full-fledged 'hot-air' balloon.

Now the balloon would have got unstable. If even one segment withdrew (like the RBI-mandated exit of the banks from realty sector lending), it would have led to slow deflation. Thereafter, the build-up of momentum of would depend on the interplay between two factors: the continuous, steady inflow of black money and increased savings (from all wage inflation that Sudhendu Bali talks about in his article) would trade off against the downward pressure exerted by all the the earlier segments wanting to make a slow exit. Any sudden change in the balance of power (the interplay referred to above) would create a disorderly exit, leading to a sharp dip in prices.

Have I explained the sequence of events? To repeat myself, let me give you my famous Jaipur example again. The city has no industry, lives on just three businesses: tourism, gemstones and garments. Why do people buy real estate there? Because outsiders (Jaipur supplies Indian industry with its entrepreneurs and senior managers, who send back their savings to the city, buying their post-retirement real estate) keep buying real estate, which is funded with equity, not debt. These properties never come on the market, even if vacancy levels exceed 50%. That explains why Jaipur has a perpetual real estate bubble for the last 30 years. As the city has got larger, newer segments have had to come in. BPO players and the banks have bought real estate in Jaipur, then the big industrial houses moved in. Now this size of bubble cannot be held up with the flows coming from Jaipur's traditional sources: their domestic industry (tourism, gemstones and garments) and its diaspora.

The short point: anybody who puts his money behind such a phenomenon is not really investing. He is putting his money onto a momentum-driven rally hoping to find a bigger fool. The supply of bigger fools does not seem like drying up any time soon. But this can hardly be called investing. Is there any sensible way you can beat the market in a steady, non-random fashion? Can you really hold on to your gains? You keep rolling over your gains, till you reach one steep, Japan-style deflation in asset values that will take away the wealth accumulated by generations. What did you say? It hasn't happened in India?……….in inflation-adjusted terms, look at real estate in Kolkata over the period 1971-1990.

Hence, real estate investment returns are the mere product of liquidity and savings flows, not their fundamental cashflow generation capability. Investors can be good at predicting the latter, but there is simply no way of predicting accurately the former. If you really want to get rich in a sustainable, non-random fashion, equities are better.

Sharekhan Commodities Buzz

Of the three options we discussed yesterday, the first option played out last night when the democrats got a clear mandate in the US mid-term elections, thereby taking both gold and silver down. Expect bullions to trade lower for a few more days and medium term investors should accumulate the precious metals at current levels.

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Breaking Premium News - Moser Baer - Margins Improve

Digital disc maker Moser Baer India Ltd. expects core earnings to move towards the 35-45 percent range by the fourth quarter of the year to March 2007, as prices improve and input costs fall, a top official said.

Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) stood at 26.5 percent in the July-September quarter, showing a rise of 7 percentage points from the preceding quarter, Executive Director Ratul Puri told Reuters on Thursday.

"We will continue to see firm pricing environment, continue to see stable or weak polycarbornate (raw material) prices and see improvement in overall efficiency," Puri said.

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Breaking Premium News - Petron Engineering Construction Ltd.

Petron Engineering Construction Ltd. said on Thursday it received the Letter of Intent for a contract worth 500 million rupees from Grasim Industries Ltd. .

The contract involved civil and mechanical work for refractories at Grasim's cement project in the north-western state of Rajasthan, Petron said in a statement

Breaking Premium News - TCS, Satyam Deal

India's top software exporter, Tata Consultancy Services Ltd. , and number four Satyam Computer Services Ltd. said on Thursday a new order from Qantas Airways Ltd. was worth about US$145 million.

The contracts to outsource IT support services, which were announced last month, are both for seven years.

TCS said its part of the order was worth A$120 million, or US$90 million, while Satyam said its portion of the contract was worth A$71 million (US$55 million).

TCS and Satyam said they would provide a range of IT application development, transformation and maintenance services to Australia's top airline.

Indian software services firms have been thriving on an outsourcing boom as companies worldwide look to cut costs at home to stay competitive.

A large English-speaking engineering workforce and wages at nearly one-fifth of western salaries have helped Indian companies attract outsourcing deals over the past decade.

At 0610 GMT shares in Satyam, whose customers include General Electric , were up 3.32 percent at 429 rupees, while TCS was 0.24 percent higher at 1,064.80 rupees in a firm Mumbai market.

Breaking Premium News - Renault, Mahindra to form new production tie-source

French car maker Renault SA and Indian partner Mahindra & Mahindra Ltd. are set to announce a new manufacturing tie-up in India, an industry source said on Thursday.

Renault's Japanese alliance partner Nissan Motor Co. <7201.T> may join the project, the source said.

Nissan previously had been discussing a joint manufacturing project in India with Japanese compact car maker Suzuki Motor Corp.

Premium NEWS - Hindustan Zinc increases prices

India's top zinc producer Hindustan Zinc Ltd. said on Thursday it had raised zinc prices to 233,600 rupees per tonne, up 4.8 percent, effective immediately.

The company also raised lead prices by 4.1 percent to 88,800 rupees a tonne.

Tech View - Pullback Expected

Sensex closed in Negative Territory on the 2nd consecutive day, down by 84 points with volume of Rs4037Cr.

Choppy session continued for the 3rd consecutive day as Sensex opened with upside gap and slipped towards important support level and bounced back almost 100 points. But this pullback rally failed to sustain the important 13260 levels which lead sensex down by 250 points from the days top.

As per our previous notes what we were looking for is C wave of correction which targeted 12920 level. As of now Sensex has corrected upto 12951 level, very close to the target. If it is part of the flat pattern then it must hold above 12920 level otherwise it could be a part of a triangle and 12860 or more lower level could be expected as a leg of the triangle.

Sensex has formed a Bearish candle with lower shadow pattern which indicates a weakness in the trend which will remain the same. To Nullify the bearishness,
Sensex must hold above 13130 level which is more than 50 % of previous candle. If it does then 13700 level could be possible otherwise 12860 or more lower level can be seen.


Daily Strategy: - If Index opens downside and hold above 13000 level then buy for the target of 13180 levels with a stoploss of 12980 levels for the first half.
( A pullback rally is expected )

Support 1) 13030 2) 12990 3) 12950 4) 12920
Resistance 1) 13180 2) 13260 3) 13340

Market may witness pull-back

Overnight gains in the US markets and rise in several Asian indices in the ongoing trading session may help the domestic indices rebound from lower levels. However, lack of clarity in the market and higher volatility may make the market edgy. Among the indices, the Nifty in the short term could test 3840 on the upside and has a support in the 3737-3720 range. The Sensex has a likely support at 12950 and may face resistance at 13158.

In the US markets, the broader Dow Jones scaled up by 20 points at 12177 following the resignation of U.S. Secretary of Defense Donald Rumsfeld, as the Democrats regained control of the U.S. House, fueling hopes for a change in Iraq policy & less government spending, while the tech-heavy Nasdaq added nine points to close at 2385.

Indian ADRs were mostly up on the US bourses. VSNL led the gainers pack and surged above 2%. ICICI Bank, Satyam, Wipro and Patni Computers jumped over 1% each while HDFC Bank registered steady gains. However, Dr Reddy's, Tata Motors lost ground and were down by 1% each while MTNL eased marginally.

Crude oil prices moved slightly up, with the Nymex Light Crude oil for December delivery adding $0.90 to close at $59.83 a barrel, while the London Brent crude falling by $1.27 to close at $58.48 per barrel. In the Commodity space, the Comex gold for December series declined $9.40 to settle at $618.30 an ounce.

On Nov 7 2006, FIIs were net buyers of stocks to the tune of Rs335.50 crore (purchases worth Rs2,099.70 crore and sales of Rs1,764.20 crore) while domestic mutual funds were net sellers of stocks to the tune of Rs14.98 crore (purchases worth Rs521.41 crore and sales of Rs536.39 crore).

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Investment Strategy

One of our readers, Rajit writes ...

Ive just started working and was browsing through some blogs, looking for somethnig related to investments n other stuff.... I found your blog to be very informative and this happens to be a very smart way of investing!....i m really overwhelmed by the way you showcased how we can make money keeping our initial investment intact... Would definitely read the rest...thanks a lot for this...and btw will u suggest a proper investment policy for someone like me who has started working only about 2 months ago....i can invest upto 6K every month....but intend to take a break from work for about 2 years to finish my masters... Trying to help dad in financing his dream home is another objective...which would call for a loan of about 5-8 Lacs and is hence a purely ambitious one considering the present scenario.... Hope you'd have u have the time to help me out with this...but irrespective of whether you help out with this or not, i found your blog very interesting and thanks again for this wonderful idea! Keep it up.


Rajit - you could probably start off by investing through SIPs in mutual funds. Invest about Rs.1000 in each of the funds

My recommendations for investment would be tax saving funds - which accomplishes 2 things

1. Tax saving under 80ccc
2. These fund have a lock-in period for 3 years which gives enough time appreciation

You could consider the following funds

1. HDFC Taxsaver
2. Magnum Taxgain
3. HDFC Longterm Advantage

If you are looking for equity funds (non taxsaving)

1. Reliance Vision
2. Reliance Growth
3. HDFC Equity
4. Magnum Contra

You could probably go through some of the investment queries & answers at

http://valueresearchonline.com/story/askvroarchive.asp


I would like to congratulate you on thinking about investments so early in your career - the best strategy is to start early. Wish I were like you then :)

I am not the right person to advise you on the loan query.

Maybe our visitors can help you out.

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Thanks Vishesh