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Tuesday, June 19, 2007
Credit meltdown ahead
The subprime mortgage world has been reduced to rubble with no lasting impact on another, larger, credit market dancing on an equally fragile precipice: high-yield corporate debt. In this fast-growing arena of loans to business—these days, mostly, private equity deals—lending proceeds as if the subprime debacle were some minor skirmish in a little known, far away land.
How curious that so many in the financial community should remain blissfully oblivious to live grenades scattered around the high-yield playing field. Amid all the asset bubbles that we’ve seen in recent years—emerging markets in 1997, Internet and telecom stocks in 2000, perhaps emerging markets or commercial real estate again today—the current inflated pricing of high-yield loans will eventually earn quite an imposing tombstone in the graveyard of past manias.
Like past bubbles, the current ahistorical performance of high-yield markets has led seers and prognosticators to proclaim yet another new paradigm, one in which (to their thinking) the likelihood of bankruptcy has diminished so much that lenders need not demand the same added yield over the treasury or “risk-free” rate that they did in the past.
To be sure, the emergence in the past 20 years of more thoughtful policy making may well have sanded the edges off economic performance—what some economists call “the Great Moderation”—thereby reducing the volatility of financial markets and consequently the amount of extra interest that investors need to justify moving away from treasuries.
But to think that corporate recessions—and the attendant collateral damage of bankruptcies among overextended companies —have been outlawed would be... foolhardy.
And just as the unwinding of the subprime market occurred at a time of economic prosperity, the high-yield market could readily unravel before the next recession. With the balance sheets of many leveraged buyouts strung taut, a mild breeze could topple a few, causing the value of many leveraged loans to tumble as shaken lenders reconsider their folly.
The surge in junk loans has also been fuelled by a worldwide glut of liquidity that has descended more forcefully on lending than on equity investing. Curiously, investors seem quite content these days to receive de minimis compensation for financing edgy companies, while simultaneously fearing equity markets.
Assessing the likely consequences of a correction is more daunting than merely predicting its inevitability. The array of lenders with wounds to lick is likely to be far broader than we might imagine, a result of how widely our increasingly efficient capital markets have spread these loans. No one should be surprised to find his wallet lightened, whether out of retirement savings, an investment pool or even the earnings on their insurance policy.
The bigger—and harder—question is whether the correction will trigger the economic equivalent of a multi-car crash, in which the initial losses incur large enough damages to sufficiently slow spending enough to bring on recession, much like what happened during the telecom meltdown a half-dozen years ago.
But we have little choice but to sit back and watch this car accident happen. It would have been a mistake to dispatch the Federal Reserve to deflate the dot-com mania or the housing bubble. And it would be a mistake now for the Fed to rescue imprudent high-yield lenders. They have to learn the hard way. Hopefully, not too many innocent bystanders will share their pain.
Sensex settles just short of 14300
The market, which opened firm today, kept on advancing as time progressed. The rally gathered steam in mid-afternoon trading.
The BSE 30-share Sensex closed with a 215.36 point spurt or 1.53% gain at 14,295.50. It opened slightly higher at 14,088.58 and started declining till it touched a low of 14,058.79 at 10:49 IST. The benchmark index bounced back from that level as buying resumed, to strike a high of 14,315.18 at 15:24 IST.
The S&P CNX Nifty advanced 67.20 points or 1.62% at 4,214.30. The Nifty June 2007 futures were at 4,212.50, a marginal discount of 1.80 points compared to the spot closing.
Strong response to the follow-on public offer (FPO) of ICICI Bank, boosted the sentiment. Short covering extended the rally further towards the fag end of the day. Some market players had gone short on the market expecting a fall in share prices due to shift of funds by investors from secondary market to primary market to subscribe for the large sized Rs 8750 crore FPO of ICICI Bank. These short sellers rushed to cover their positions.
The sentiment was also boosted by reports that advance tax paid by companies and individuals were up 28.6% for the April-June 2007 period, from a year earlier, which in turn raised hopes of robust corporate earnings in the period.
Strong buying momentum was seen in select index pivotals including Reliance Industries (RIL), State Bank of India (SBI) and Oil & natural Gas Corporation (ONGC). However, IT stocks underperformed today, 19 June 2007, as the rupee strengthened against dollar.
The FPO of ICICI Bank was fully subscribed by the first one hour of the opening of the issue today, 19 June 2007. The subcription to the FPO gathered further steam later. It was subscribed 2.70 times by 16:00 IST.
Today's rally in the market was in contrast to the trend witnessed over the past two days when despite opening stronger the Sensex had settled with losses on sell-off, despite strong global markets. Market men said the latest circular issued by the Central Board of Direct Taxes (CBDT) on Friday, 15 June 2007, failed to provide the much-needed clarity with regard to tax on profit/gain arising from sale of shares. CBDT issued the circular after trading hours on Friday, 15 June 2007.
The total turnover on BSE amounted to Rs 4326 crore while the NSE F&O turnover amounted to Rs 37415.18 crore.
The market breadth was positive on BSE with 1,397 shares advancing and 1,180 declining. 82 remained unchanged.
The BSE Mid-Cap Index rose 71 points or 1.2% to 6,244.04 while the BSE Small-Cap Index gained 41 points or 0.6% to 7,357.75.
Among the Sensex pack, 23 advanced while the rest declined
State-run banking major State Bank of India (SBI) surged 3.78% to Rs 1368.30, on 5.56 lakh shares. It was the top gainer from the Sensex pack. SBI is set to raise $225 million from the overseas market this year by issuing perpetual bonds. The overseas issue opened on Monday, 18 June 2007, and the bank is expected to price the bonds this week. The bank plans to raise a total of Rs 15,000 crore this year in the form of equity (tier-I) and debt (tier-II).
ICICI Bank advanced 2.69% to Rs 942.50. Before trading hours on Monday, 18 June 2007, ICICI Bank set the price band for its follow-on public issue. The price band for the issue has been fixed at Rs 885 to Rs 950 per equity share.
Retail bidders would be allotted shares at a discount of Rs 50 per share to the issue price determined by the book-building process. The public issue opens for subscription today, 19 June 2007. The issue size is Rs 8,750 crore. In addition, there is a green-shoe option under which the bank may allocate additional equity shares up to Rs 1,312.5 crore. The issue including the green-shoe option aggregates Rs 10,062.5 crore.
Led by SBI and ICICI Bank, the BSE Bankex surged 2.71% at 7,681.51. Other shares from the banking pack, Bank of India (up 6.65% to Rs 204), Bank of Baroda (up 1.86% to Rs 265.10), Kotak Mahindra Bank (up 4.75% to Rs 589.95), Canara Bank (up 5.57% to Rs 252) and HDFC Bank (up 1% to Rs 1098.70) gained.
Engineering & construction major L&T gained 3.52% to Rs 1995. The company’s joint venture won an order worth Rs 610 crore for a residential building project in Dubai. The project is to be completed in 660 days from the date of commencement.
Auto stocks extended early gains. The BSE Auto Index settled 1.4% higher at 4,697.47. Tata Motors (up 2.86% to Rs 663.80), Bajaj Auto (up 2.10% to Rs 2125), Maruti Udyog (up 1.10% to Rs 752) and Hero Honda Motors (up 2.05% to Rs 667.10) advanced after the minister for petroleum and natural gas Murli Deora said yesterday, 18 June 2007, that that the government has no plan to hike the price of petrol or petroleum products. Recently, a senior oil ministry official said the government was likely to review retail prices of petrol and diesel in mid-July 2007 to bring them in line with the recent rise in global oil prices.
Index heavyweight Reliance Industries (RIL) advanced 3.42% to Rs 1728.35, on 7.49 lakh shares. It rallied to a high of Rs 1731.90, in late trade. As per reports, global oil giants including Shell, Exxon and Chevron are eying a stake in Reliance Industries’ overseas oil & gas assets. RIL recently hived off these assets into a separate company, Reliance Exploration and Production DMCC.
State run oil exploration major Oil & Natural Gas Corporation (ONGC) advanced 2.53% to Rs 912. It plans to set up a 7.5 million tonne refinery as part of the proposed special economic zone at Kakinada, Andhra Pradesh state. The company unveils its Q4 March 2007 and FY 2007 results on 25 June 2007.
Led by RIL and ONGC, the BSE Oil & Gas Index surged 2.9% to 7,645.59, and was the top performer among the sectoral indices on BSE.
IT pivotals were off-loaded today, 19 June 2007, as the Indian rupee climbed to a one-week high, with sentiment bolstered by a strong outlook for foreign investment flows, but suspected central bank intervention capped the rupee's gains. The BSE IT index slumped 1.61% to 4,861.28, and was the top loser among the sectoral indices on BSE.
Infosys lost 1.55% to Rs 1958.10 on 3.31 lakh shares. It was the top loser from Sensex pack.
Satyam Computers (down 1.50% to Rs 469.90), TCS (down 0.54% to Rs 1158.30) and Wipro (down 0.53% to Rs 520) were the other losers.
In early trade, the rupee was at 40.715/725 per dollar moving up from Monday (18 June 2007)'s close of 40.7725/7825. It hit a nine-year high of 40.28 in late May 2007, but has since been broadly trading in a 41-40.50 band.
Metal stocks caught up with the overall momentum. The BSE Metal Index rose 1.8% to 10,611.59. Tata Steel (up 3.40% to Rs 609), JSW Steel (up 3.72% to Rs 595.50) and Sail (up 2.93% to Rs 136.90), were the notable gainers.
Hindalco Industries lost 0.12% to Rs 161.90, after slipping to a low of Rs 159.15. It reduced aluminium prices for a fifth time this year to match global rates. Prices were cut by Rs 3,000 ($73), or 2.4%, to Rs 1,20,500 a metric tonne.
Decolight Ceramics settled at Rs 44.50 on BSE, a discount of 17.5% over IPO price of Rs 54. The scrip debuted at Rs 57, and had touched a high of Rs 65.90 in early trades and thereafter touched a low of Rs 43.50. The counter saw high volumes of 1.58 crore shares on BSE today.
HTMT Global Solutions (HGSL) settled at Rs 583, compared with a base price of Rs 800 on its debut today, 19 June 2007. The scrip resumed trading on BSE at Rs 790 (also its day’s high). It touched low of Rs 495 during the day. On BSE, 29.18 lakh shares were traded on the counter. As the stock is also included in the futures & options (F&0)segment on NSE, there is no daily price band for the scrip. The lot size of the stock in NSE's F&O market is 250. HGSL's debut on the bourses today follows a restructuring scheme of Hinduja TMT (HTMT).
Petron Engineering Construction surged 20% to Rs 227.15 after the company’s promoters agreed to sell their controlling stake in the company to Kazakhstan-based KazStroy Oil and Gas Construction Company. A newspaper report today estimated a sale price of Rs 150 crore for the entire promoter holding of 63.45% in Petron. KazStroy builds cross-country pipelines, offshore terminals, power plants, chemical plants and other process plants.
Sterlite Industries India rose 2.87% to Rs 560 on getting approval for listing of its initial public offering of 130.44 million equity shares in the form of American Depositary Shares (ADS) at $13.44 each. These equity shares (in the form of ADS) represent an approximately 18.9% interest in the company post offering. The company's ADS have been approved for listing on the New York Stock Exchange under the symbol SLT. After this offering, the company will have approximately 689 million equity shares outstanding. Each ADS represents the right to receive one underlying equity share in the company.
Jet Airways (India) rose 1.05% to Rs 793 after the company said its board will consider rights issue of equity shares to raise up to $400 million. The company's current equity is Rs 86.33 crore, with 8.63 crore outstanding shares of face value of Rs 10 each.
TRF rose 1.98% to Rs 710, after touching a high of Rs 727.70. It bagged $16.5-million order from Shadeed Iron & Steel Oman for supplying material-handling system for a new steel plant in Oman.
Dynamatic Technologies galloped 6% to Rs 1300 on acquiring the hydraulic business division of UK-based Sauer Danfoss for total consideration of $10 million. The buyout has been effected through the company's wholly owned subsidiary, Dynamatic UK. The acquired unit generates business worth $25 million annually, and is profitable.
ABG Shipyard fell 3.6% to Rs 400 after its net profit rose by a marginal 6.69% to Rs 32.99 crore in Q4 March 2007 (Rs 30.92 crore). Sales rose 0.15% to Rs 193.07 crore in Q4 March 2007 (Rs 192.78 crore). Meanwhile, as per media reports, the shipping firm plans to enter oil-rig construction with an investment of Rs 600 crore to tap replacement opportunities in the offshore energy sector.
Japanese shares were trading slightly lower today on overnight cues from Wall Street, with banking shares such as Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group slipping, but exporters such as Canon Inc. and Sony Corp. gained as the yen continued to weaken against the US dollar. Japan's Nikkei was up 0.08% to 18,163.61.
Other Asian markets were steady. South Korea's Seoul Composite was up 0.05% to 1,807.85 whereas Singapore's Straits Times index was up 0.04% to 3,625.28.
Hang Seng (up 2.69% to 21,582.89) and Shanghai Composite (up 0.38% to 4,269.52) also edged higher.
European markets which had opened higher, pared gains.
Wall Street edged lower on Monday, 18 June 2007, after three consecutive days of solid gains as investors watched Treasury bond yields fluctuate amid lingering questions about inflation. The Dow Jones fell 26.50 points, or 0.19%, to 13,612.98. Broader stock indicators were also slightly lower. The Standard & Poor's 500 index fell 1.86 points, or 0.12%, to 1,531.05, and the Nasdaq Composite index slipped marginally by 0.11 point, or less than 0.01%, to 2,626.60.
Crude oil was little changed in New York after rising to a nine-month high on 18 June 2007, as attacks on pumping stations in Nigeria raised concern output from Africa's biggest oil producer may extend declines. Crude oil for July delivery was at $68.95 a barrel, down 14 cents, in after-hours electronic trading on the New York Mercantile Exchange in Singapore today, 18 June 2007.
Sebi unearths manipulations in F&O trading
The Securities and Exchange Board of India (Sebi) today unearthed manipulations in the futures & options (F&O) segment - the first time in derivatives trading - by 10 entities and 14 brokerages including Indiabulls Securities, Angel Capital, SMC Global Capital and Khandwala Financial Services, and warned them to "desist and cease" from such operations.
The 40-page order by G Anantharaman, its whole-time member, said this is not a final order as further investigations are on.
The F&O segment has been attracting huge volumes in recent months with the average daily turnover in the range of over Rs 40,000 crore on the National Stock Exchange.
All the 24 entities were found to have created artificial volumes in the F&O segment during January to March this year by buying and selling equal quantities of contracts within the same day, at a price which was significantly above or below the price at which the first transaction was executed, though there were no significant variations in the traded price of the underlying.
The manipulation, commonly referred as `reversal of trade', implies that for a buy transaction initially entered into by a broker for a particular client for a specific quantity, there is a corresponding sale transaction which takes place during the day for the same quantity between the same set of broker/clients and vice-versa.
"It was observed that the transactions were in the nature of fictitious transactions, resulting in creation of a misleading appearance of trading in these options. It also resulted in unusual profit and loss for these entities," the order said.
The 10 entities warned in F&O manipulation are Rakhi Trading, Kasam Holding, Tungarli Tradeplace, Manu Vyapar, Raj Corporation, TLB Securities, Amar Mukeshbhai Shah, Shah Chirag Kirtikumar, Amit Business and Suresh Bharrat have been directed to cease and desist from indulging till further orders.
The other brokerages named in the Sebi investigation are Kumar Share Brokers, CPR Capital Services, Shilpa Stock Brokers, Vibrant Securities, Systematix Shares & Stk (India), Steel City Securities, Ashika Stock Broking, Prashant Jayantilal Patel, PSJ Securities, Pratibhuti Vinihit and Manu Stock Broking.
SEBI ostracises 15 brokers for deals 'not done'
India's stock market regulator on Tuesday said it had found synchronised deals by brokers in the derivatives segment on the National Stock Exchange's which were false and misleading.
Following the revelation of some "non-genuine" transactions, the regulator has asked 15 brokers and 10 other entities not to indulge in distortion of the derivatives market.
"The entities/brokers have indulged in non-genuine transactions to create false and misleading appearance of trading," SEBI said in an order.
Indiabulls Securities Ltd., Khandwala Int. Fin. Ser. Pvt. Ltd. and Angel Capital & Debt Market Ltd. were among the fifteen brokers named in the order. SEBI said it had analysed transactions for the period between January to March 2007.
Market Close: Pull back rally !
Global cues led to positive start for markets. Profit booking crept in as a result indices slept into red. Session was extremely choppy. However later in the day buying activity intensified across major sectoral indices along with small and mid caps. Buying activity was witnessed on Auto, Banking, Cement and Engineering counters. Strong rupee continues to impact the technology counter. European indices were trading in red after starting in green.
ICICI Bank's FPO offer worth Rs.8,750 cr witnessed an overwhelming response for the investors. The FPO got fully subscribed within minutes after the issue opened. The FPO was over subscribed by 2.6 times by the end of the first day of opening. HTMT Global which got relisted at Rs.650 ended lower in discount. Decolight Ceramics which got listed today in premium also ended in discount. Educomp was the star of the day with gains of 14.5%. Kotak put out a positive view. We have a note on this one..do read it.
Sensex closed higher by 215 points at 14295.5. It was helped up by gains in SBI (1372.4,+4 percent), L & T (1995.7,+4 percent), TISCO (608.85,+3 percent), RIL (1727.15,+3 percent) and RCVL (503.6,+3 percent). Restricting the gains were Satyam (468.45,-2 percent), Infosys (1956.85,-2 percent), TCS (1160.6,-1 percent), Cipla (207.45,0 percent) and Wipro (521.25,0 percent).
Zicom ended 2% lower. The company announced a strategic tie-up with Future Media for retailing its products from exclusive Zicom retail counters placed in 100 outlets of Future Group's select retails formats. These formats include Big Bazaar, Brand Factory, Collection I, Central, E Zone, Electronic Bazaar, Food Bazaar, Furniture Bazaar, M Port, WSC, etc. The Company has entered the retailing domain with 'Zicom Consumer Service Group' in order to provide complete security solutions to homes, offices, residential and more. Popular among them are Burglar Alarm Systems and Video Door phones for homes, CCTV Surveillance Systems for SME's, shops, Multi Apart Video Door Phones for Buildings and Finger print locks. All of them are easy to operate and secure one's premises at the click of a button. Bennet and Colemen had recently acquired a stake in the company. Company is aggressively trying to market the security solutions.
Financial Technologies ended a percent lower. There was news of income tax department raids across 16 establishments of the commodity traders across the country. The raid was conducted by the IT officials as a part of search & survey operation at 14 locations in Mumbai and 2 locations in Gujarat. MCX officials later informed that it was a routine inspection by the regulatory authorities. According to MCX officials the purpose of the raid was to find out more details regarding how the business is conducted. We are convinced by the business idea of the company. We would recommend the company as an investment option from the long term point of view. Do read our note on the company for more details.
Technically Speaking : Indices remained choppy through out the day, between an intra day high of 14,315 and low of 14,059. Breadth was in favor of advances as there were 1,397 advances against 1,180 declines. Volume for the day stood at Rs.4,326 cr. As expected, we are having a pull back rally and which is likely to face major resistance at 14360--14380. If sensex breaks below 14200 again, we might move lower upto 13880.
Soon after the market hour news of 15 Brokers being banned from F&O struck the market. Charges against the brokers are 'involved in Synchronised trading'. Really, something like this should have not much impact but it may well be the excuse for some weakness tomorrow.
IT officials raid MCX
The Income Tax Department is conducting raids on the Multi-Commodity Exchange and its "associates" in Mumbai on Tuesday, but there were no searches on stock brokers.
Though an official statement issued in this regard did not name MCX, sources said raids were conducted on the premises of MCX and one of its Ahmedabad-based official.
"The Income Tax Department is conducting searches on a commodity exchange and its associates in Mumbai," the statement said.
Surveys are also being conducted on the exchange branches in Ahmedabad, Bangalore, Chennai, Delhi and Kolkata, the statement added.
However, there is no raid on any share broker connected with a stock exchange, the statement said.
The action by IT officials came days after the Financial Technologies-promoted MCX sought details from its members about their Mumbai-based clients whose trade on the exchanges exceeded more than Rs one lakh in the January-March quarter.
Although the exchange termed the circular as a 'routine' affair, saying the same is being issued every quarter, sources said it was based on the Income Tax Department Directive.
The notification said: "All the members shall submit the details of their clients (a) who executed transactions of value exceeding Rs 1 lakh and (b) who are located in Mumbai and Navi Mumbai."
MCX members felt that exchange should not provide the details to any other authority except the market regulator Forward Markets Commission (FMC) unless income tax authority asks details of any particular transaction or a trader.
"Only FMC has the power to know the details about the transactions, which are anyway known to the commodity exchanges," MCX member Sushil Pawa said.
FMC Chairman B C Khatua said other authorities (apart from FMC) can ask for details if they require certain specific information related to a transaction or a trader.
Oil prices dip below $69 a barrel after overnight climb
Oil prices edged lower on 19 June after U.S. crude futures closed at a nine-month high above $69 (Rs2,813) a barrel in the previous session, but unrest in Nigeria continued to pressure the market.
Light, sweet crude for July delivery lost 12 cents to $68.97 a barrel in electronic trading on the New York Mercantile Exchange, midday in Europe.
The contract had risen $1.09 on 18 June to $69.09 a barrel after Nigerian oil unions called a strike for this week amid continuing unrest and violence in the country’s oil producing regions.
A Nymex front-month contract last closed above $69 on 1September.
Brent crude fell 10 cents to $72.08 a barrel on the ICE Futures exchange in London. Analysts said the news out of Nigeria on 18 June prompted large funds to buy energy futures, driving prices higher.
“I think it’s just profit taking,” said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo, speaking of Tuesday’s drop. The overnight jump in oil prices is not reflective of the demand-supply picture, he said.
“It’s quite difficult to understand why oil prices rise so high when crude oil supplies are still enough,” Emori said. Others, however, said any disruption, no matter how small, could boost prices.
“In a bullish market, every thimble full of oil counts,” said Peter Beutel, president of U.S. energy risk management firm Cameron Hanover. “Every little bullish feature will loom large.”
Attacks by villagers and gunmen that cut supply on two Nigerian oil facilities helped drive the price increase on 18 June.
Hundreds of angry villagers chased workers away from a Chevron Corp. oil-transfer facility on 18 June in southern Nigeria and occupied the premises to try to get money they say is owed by the oil industry.
Gunmen also seized some two dozen Nigerian workers and security forces at a flow station operated by Italian energy giant Eni SpA’s subsidiary Agip.
Nigerian oil unions called a general nationwide strike to begin on 20 June in protest of a government price hike on automobile fuel, but there are signs the strike could be called off as union leaders are studying a government counteroffer.
The government offered to halve its increase on automobile fuel and repeal a hike on the value-added tax, both of which have already gone into effect.
Emori said the market had already taken into account the supply risks posed by the general unrest in Nigeria, Africa’s biggest oil producer and one of the top overseas suppliers to the United States.
“We have to understand that the world’s oil production capacity is at a historic high,” Emori said. “That means that (producers) can quickly produce crude if there is a big drop” in global supply, he said.
Spice fixes IPO price band at Rs 41-46
Cellular operator Spice Communications Ltd said on 19 June it has fixed the price band of its proposed public issue between Rs41 and Rs46 an equity share of Rs10 each.
“We have recently concluded a pre-IPO placement of 24,837,889 shares at Rs45 per share, thereby raising about Rs112 crore. A clutch of investors led by Lehman Brothers and Sinnaker Investments have picked up a small stake in Spice Telecom,” company chairman and managing director Dilip Modi told reporters at a press conference here.
Following the IPO, the stakes of the both the promoters, B K Modi and Telekom Malaysia, would come down by 10% each.
At present, B K Modi holds 51% and Telekom Malaysia, the remaining 49%.
Post-IPO, Modi will hold 41% while Telekom Malaysia, 39%, with the public holding the remaining 20%.
“We are the second largest operator in Punjab with 1.91 million subscribers and the fifth largest operator in Karnataka, with 0.82 million subscribers,” Modi said.
The company intends to consolidate and boost its presence in both the markets by expanding its coverage with a view to increase its marketshare, he said.
“We also plan to work with our roaming partners to improve and expand our coverage and to provide consistent products and services to our subscribers,” he added.
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