STRATEGY INPUTS FOR THE DAY

Don't CRRy over spilled milk

Things are seldom what they seem, skim milk masquerades as cream.

We won't debate on whether the actual headline should be spilled milk or split milk. In hindsight everything can be reversed. What one needs is insight, which is the transfer point between hindsight and foresight. And, in the midst of all this market drama, don't lose sight of your portfolio.

Coming to the market, the first reaction on a day after a big crash is that the market should bounce back. Global cues are positive, but they were also encouraging yesterday, and still the Indian market was perhaps the only one in the world that collapsed like a pack of cards. Its the sentiment that is key in our market. At the moment it is not particularly strong. It will take time for the market to settle down. How much time only time will tell. Our obvious advice is to be highly alert and just stay on the sidelines and wait for a clear trend.

One thing that could lift the spirits is the provisional figure on FII transactions for the cash segment. According to the NSE web site, foreign funds were net buyers of Rs3.34bn yesterday. In the derivative segment, they were net sellers to the tune of Rs13.84bn. On Friday, they pulled out Rs1.53bn from the cash segment. Mutual Funds were net buyers of Rs738.9mn on the same day.

All the euphoria of the past five months appeared to have vanished in a jiffy. It took just one day of sharp correction to push the bulls to the wall. On Friday morning, we had mentioned - Time to unwind. Last week's fall, especially on Friday gave some indications. In the past it has been seen that whenever the market falls sharply on Friday, there is every chance of it cracking on Monday. But, the bulls have failed to learn from their past mistakes, and bears have taken advantage of that folly. The non-stop advance since July coupled with the surge in open interest in the F&O segment and the slowdown in FII inflows were enough indications of things to come. Still, the bulls chose to ignore them.

In the overseas markets, US stocks were marginally up on Monday, as investors preferred to remain cautious ahead of the Federal Reserve's meeting on interest rates. The Dow Jones was up 20.99 at 12,328.48 while the broader S&P 500 gained 3.20 to 1,413.04, and the tech-fueled Nasdaq advanced 5.50 to 2,442.86. At one point in the session, the 30-share Dow briefly eclipsed its record closing high of 12,342.56, reached Nov. 17, before backing off.

Treasury prices rose, lowering the yield on the benchmark 10-year note to 4.52% from 4.55% late on Friday. The dollar fell against the euro but rose versus the yen. Gold prices climbed $3.80 to $634.80 an ounce.

Oil prices sank on strong inventory expectations. US light crude for January delivery fell 81 cents to settle at $61.22 a barrel on the New York Mercantile Exchange. The front-month contract was quoting 2 cents lower at $61.24 per barrel in extended trading in Asia.

Among the Indian ADRs, Patni shed 1.9%, VSNL has tumbled 5.2%, Infy has lost 1.1%, Wipro dropped 3%, Satyam gave up 2.1%, Tata Motors dived 1.9%, HDFC Bank slumped 2.5%, ICICI Bank slid 2.3% and MTNL was down 1.7%.

In the emerging markets, the Bovespa in Brazil was up 0.7% at 43,297 while the RTS index in Russia dropped 0.65% to 1838, and the IPC index of Mexico gained 0.3% at 25,828.

Asian stocks rose this morning, led by Sony and Toyota after the yen weakened against the dollar and the euro, boosting the value of exports. Samsung and Singapore Airlines gained after crude oil prices dropped the most in a week. Woodside Petroleum and Inpex Holdings led oil stocks down.

The Morgan Stanley Capital International Asia-Pacific Index advanced 0.7% to 137.27 as of 10:55 p.m. in Tokyo. Markets elsewhere rose, except in Taiwan and the Philippines. Singapore's benchmark was set for a record.

Japan's Nikkei 225 Stock Average added 151 points to 16,679, while the Hang Seng in Hong Kong fell 17 points to 18,906. South Korea's Kospi declined 6 points, while the Straits Times was up 10 points at 2898.

Shares of LG.Philips LCD fell after the company said that it was part of an industry investigation by antitrust officials.

Major Bulk Deals:
Bear Stearns has bought Crew BOS while Macquarie Bank has sold the stock; CLSA Mauritius has purchased Indiabulls from the promoters - Sameer Gehlaut and Rajiv Rattan; Blackstone Asia has picked up Indotech Transformers; Fidelity MF has bought Mcnally Bharat; Bear Stearns has purchased Paramount Communications; Merrill Lynch has picked up SpiceJet.

Insider Trades:
Surana Telecom Ltd: Devendra Surana, Director has purchased from open market 88020 equity shares of Surana Telecom Ltd from 25th November to 7th December, 2006.

Market Volumes:
The turnover on NSE was up by 23.6% to Rs93.44bn. BSE Bank index was the major loser and lost 6.43%. BSE Metal index (down 4%), BSE PSU index (down 3.88%), BSE Consumer Durable index (down 3.18%) and BSE Auto index (down 2.76%) were among the other major losers.

Volume Toppers:
IVRCL Infrastructure, Indiabulls, Tata Steel, SAIL, Polaris, R Com, IDBI, Gujarat Ambuja, Reliance Industries, India Cements, ITC, Parsvnath Developers, HLL, Hindalco, Unitech, Ashok Leyland, Satyam Computer and Lanco Infratech.

Delivery Delight:
Bharat Electronics, Godrej Industries and Thermax.

Brokers Recommendations:
ABB – Overweight from JP Morgan
Reliance Industries – Out performer from ENAM
ICICI Bank - Outperform at Credit Suisse

Long Term Investment:
BHEL

Major News Headlines:
BRFL approves hike in FIIs limit upto 40%
Swiss Re to acquire 26% in TTK Healthcare Services
CCS Infotech wins orders worth Rs6mn from BSNL
CSN raises offer for Corus to 515 pence
Jet Airways to start flights to US, China next year
Tata Motors' ratings raised to BB+ by S&P
Hexaware ties up with Fluensee for RFID technology
Aurobindo Pharma bags MEB Netherlands nod for Simvastatin

NEWS ROUND UP

ICICI Bank Ltd’s Board has approved the merger of The Sangli Bank Ltd. with itself. Deloitte Haskins & Sells have recommended a share exchange ratio of 100 shares of ICICI Bank for 925 shares of Sangli Bank.

Infosys Technologies Ltd will be added to the NASDAQ-100 index, effective with the market opening on December 18. Infosys is the first Indian company to be added to the NASDAQ-100 index and is the only Indian company to be part of any of the major global indices.

The Tata group is reportedly planning to buy up to 10% in Delhi-based budget carrier SpiceJet in a deal worth about Rs 1bn, The Economic Times reports.

GMR DIAL has awarded Larsen & Toubro Ltd (L&T) the contract for Design and Construction of Terminal, Runway and Associated Works of Delhi Airport. The deal, valued at about Rs54bn will give shape to the Master Plan unveiled by GMR-DIAL recently.

Bank of India (BOI) would buy more than 50% stake in Indonesia's PT Bank Swadesi, Bank Indonesia's Deputy Governor Siti Chalimah Fadjriah said on Monday.

MindTree Consulting Ltd., the Bangalore-based IT services company has filed a Draft Red Herring Prospectus (DRHP) with the Securities & Exchange Board of India (SEBI) to enter the capital market with an Initial Public Offering (IPO) of equity shares.

Arcelor Mittal has successfully concluded the review of the mining development agreement, signed in 2005, with the Government of Liberia.

Indiainfoline - From Research Desk

Arihant Foundation and Housing Ltd. BUY CMP: Rs462

Chennai and its suburbs are fast turning into a hot spot for the IT/ITES sector. Skilled labour along with quality Grade A & B space is driving demand for real estate. Arihant Foundation and Housing Ltd (AFHL) with 2 IT Park projects and 15 residential projects in hand is well poised to benefit from the pick up in Chennai real estate demand. We expect the company to report 76% revenue and a 116% profit CAGR over F9/05-08 period respectively. We initiate coverage with a BUY rating and price target of
Rs602.

Most IT companies have started setting up shop in tier II cities due to the dwindling cost competitiveness in tier I cities. Chennai offers them with quality grade A & B real estate with abundant skilled manpower. We expect Chennai to fast grow into the next outsourcing destination in line with Hyderabad and Pune.

With 17 in hand projects, AFHL is well poised to benefit from the growth in the property boom in the Chennai market. 15 of the 17 projects are residential in and around the Central Business District (CBD) and Old Mahabalipuram road (OMR), while the remaining 2 are IT parks in the upcoming Ambattur and OMR
area.

The company is fast adding size and has planned two townships, one out of which is a 50:50 JV with a national developer. We view the company’s slow evolvement in bringing bigger projects in its fold as a positive sign towards revenue
sustainability. We estimate revenue CAGR of 76% over F9/05-F9/08.

Most old projects with low gross margins (GM) are expected to get completed in F9/06. New projects would improve GMs by 500bps in F6/07 to 37%, which is still 5-7% lower than current prevalent. This would aid a profit CAGR of 116% over F9/05-F9/08.

A major portion of the future revenues, 27% in F9/07 and 65% in F9/08 are expected to come from new projects, which are either recently commenced or would be launched in the next 8-12 months. Delays in launch and execution, could impact profitability and there by valuations.

How Market Fared

Bulls bleed, Bears party

The Bears made their presence felt on Dalal Street as the markets plunged deep into red with benchmark Sensex losing 400 points and NSE Nifty falling 112 points. RBI hiked CRR by 50 basis points, which was among the major triggers that dragged the key indices lower. ICICI Bank, SBI were the major losers among the 30-share Sensex after RBI raised the amount of cash they must set aside to cover deposits in an attempt to curb inflation. The benchmark Sensex after slipping 173 points on Friday last week, today further lost ground by 400 points altogether losing 573 points in last two trading session.

Mid-Cap and the small Cap indexes also fell sharply The BSE Mid-Cap index fell 2.51% and small cap index was down 2.71%. SBI, Zee Telefilms and ICICI Bank were the top losers among the 50-scrips of NSE Nifty. Finally, the BSE benchmark Sensex lost 400 points to close at 13399. NSE Nifty slipped 112 points to close at 3849.

Infosys pared its intra-day gains on back of selling pressure, the scrip edged lower by 0.7% to Rs2179 as the company would be added to the NASDAQ-100 index, effective with the market opening on December 18, 2006. The scrip touched an intra-day high of Rs2235 and a low of Rs2167 and recorded volumes of over 14,00,000 shares on NSE.

Spice Jet surged higher over 8.5% to Rs58 as Tata Group is reportedly eyeing a stake in the company. The scrip touched an intra-day high of Rs64 and a low of Rs53 and recorded volumes of over 49,00,000 shares on NSE.

UTV Software lost 5.1% to Rs251. The company entered into an arrangement with Indiagames Ltd for acquisition of controlling equity stake in the Mumbai based mobile and online gaming company for Rs680mn. UTV would also be acquiring majority stake in Ignition Entertainment Ltd, a UK based company involved in developing console games for Rs600mn. The scrip touched an intra-day high of Rs267 and a low of Rs246 and recorded volumes of over 5,00,000 shares on NSE.

GAIL dipped by over 3.3% to Rs253. Singapore based Silver Wave Energy and Myanmar Oil and Gas Enterprise have reportedly signed an agreement to explore off-shore oil and gas in Block A-7 off the southernmost coast of Rakhine state in Myanmar. The companies have signed a contract to share exploration, drilling and production of oil and gas in Block A-7. The scrip touched an intra-day high of Rs263 and a low of Rs251 and recorded volumes of over 9,00,000 shares on NSE.

RBI’s decision to raise Cash Reserve limit by 50 basis points dragged the Banking stocks down. Index heavy weights like SBI plunged by over 8.8% to Rs1235, ICICI Bank dropped over 7.5% to Rs814 and HDFC Bank slipped 4.8% to Rs1032. Among the Mid-Cap stocks Bank of India plunged 10.1% to Rs184, Bank of Baroda slipped 8.9% to Rs238 and PNB lost 8.4% to Rs507 were among the major losers.

Pharma stocks were in bad health. Ranbaxy dropped 3.1% to Rs375, Sun Pharma slipped 3.2% to Rs962, Dr Reddy’s Lab was down 1.3% to Rs763 and Cipla lost 1.7% to Rs242.

Auto stocks were in reverse gear. Tata Motor lost 3.2% to Rs839, Hero Honda slipped 2% to Rs730, M&M was down 3.6% to Rs801 and TVS Motor dropped 5.3% to Rs88.

Power stocks ended lower. Tata Power, Suzlon Energy and Reliance Energy were among the major losers.

Cement stocks were also on a southward journey. ACC plunged 6.2% to Rs1036, Gujarat Ambuja dropped 2.6% to Rs137, Grasim fallen 2.8% to Rs2682 and Mangalam Cement lost 4.2% to Rs197.

Telecom stocks were down on back of selling pressure. Index heavy weights Bharti Airtel dipped 4.3% to Rs603, Reliance Communication dropped 4% to Rs429, VSNL was down 5.6% to Rs401 and MTNL fell 3.1% to Rs130.

Further correction expected

A further correction is likely with data showing heavy FII sales in the derivatives markets for the second day in a row on Monday (11 December). FIIs were net sellers to the tune of Rs 1250 crore in index based futures on 11 December, the day when Sensex had plunged 400 points. Data showing FII sales of Rs Rs 1,087 crore in index based futures on 8 December and fears of rise in interest rates following RBI’s surprise 50 basis point hike in cash reserve ratio had rattled the bourses on 11 December.

As per provisional data, FIIs were net buyers to the tune of Rs 334 crore in the cash segment on 11 December, the day when Sensex had lost 400 points. They were net sellers to the tune of Rs 152.60 crore on 8 December, the day when Sensex had lost 173 points.

But steady to firm trend in Key Asian markets would cap further downside on the domestic bourses. Japan’s Nikkei was up nearly 1% and Hong Kong’s Hang Seng was up 0.14%. In the near term, US Federal Reserve’s decision on US interest rates remains a principal trigger for domestic bourses. US Fed meeting is due later today and expectations of interest rates staying unchanged run high. Analysts will closely watch the Fed’s accompanying statement for cues of future rate moves. Investors are waiting to see if the Fed will tone down its hawkish stance in its statement accompanying the decision.

US stocks edged higher on Monday. The Dow Jones industrial average rose 20.99 points, or 0.17 percent, to close at 12,328.48. The Standard & Poor's 500 Index ended up 3.20 points, or 0.23 percent, to finish at 1,413.04. The Nasdaq Composite Index gained 5.50 points, or 0.23 percent, to end at 2,442.86.

US crude oil for January delivery fell 81 cents, or 1.3 percent, to settle at $61.22 a barrel, while London Brent crude fell 36 cents to $61.84 a barrel.

A major near term trigger for the domestic bourses is Q3 December 2006 results. It is expected to be another quarter of strong performance from corporate India.

Meanwhile, good FII allocations are expected for India in the new calendar year 2007.

The response to the IPO of Cairn India was strong on day one of opening of the IPO on 11 December notwithstanding the sharp fall on the bourses on that day. The IPO received bids for 43.01 crore shares compared to issue size of 32.87 crore. Most of the bidding on the first day was from FIIs. They bid for 42.85 crore shares against 19.72 crore shares reserved for this category in the IPO.

Fear, Uncertainty and Doubt - Dhirendra Kumar

What do you think is the dominant emotion in the minds of Indian fund managers right now? With the markets at an all-time high (and how routine that phrase sounds nowadays) and their funds having given investors fantastic returns, you would expect the investment managers of Indian mutual funds to be in the highest possible spirits right now.

So why are they not going around with smiles on their lips and songs in their hearts? As far as I can see, the dominant emotions among fund managers are fear, uncertainty and doubt. Last week, I met a number of the leading fund managers of the country to get a sense of what they felt about the markets and the investment climate. While there were many differences between their views at the level of individual industries, I was struck by the common thread of apprehension about the direction that the markets are taking.

And this fear is amply reflected in the portfolios of most equity funds in the country. Uninvested cash is on the rise in almost every equity fund. In some of the best funds in the country, the cash component could be as high as 30 per cent. This is almost the level of cash at which a fund should actually be called a hybrid fund, not an equity one.

Why are cash levels so high? Because while investors have given fund managers the money to invest, but the managers can't find enough stocks that they think are investment-worthy at the current price levels.

Even in the stocks that funds are holding, many managers are configured in a heavily defensive position. I know that sounds like something out of football, but in investment management, a defensive position means investing in stocks which you think will fall relatively less if the markets start falling. What all this means is that if one goes by actions of fund managers, then the markets could be expected to start falling at any point now.

Could they be right? No one knows, and at this point no one can possibly know. If one looks back at past trends then many stocks' levels are definitely too high to be sustained. It is true that corporate profits are booming and there are many, many positives that were never there earlier. need for long time should be invested in stocks.

However, it is just as true that at the level of many individual companies and the market as a whole, people have started believing only the good news and are mentally ignoring the possible bad news. Effectively, this is now a market based heavily on sentiment (whether foreign or Indian) and such a market is inherently unpredictable. This could go on for months or even years. Or, something could happen this morning that will change the mood and end it all.

What should an investor do? It is important that investors should not leave any short-term money in the stock market. If you think you have some definite financial need to fulfill which will need cash over the next two to three years, you should gradually start offloading your shares now. Clearly, from this point onwards, only money that you definitely won't need for long time should be invested in stocks.

That, and any 'fun money' that you would otherwise have taken to Las Vegas or some place like that.

IDBI Capital - Morning Alert

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Edelweiss - Panama Petrochem

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IL&FS - Gujarat NRE Coke

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ISEC - India Update

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Sharekhan's top equity fund picks: Sharekhan Mutual Funds Report dated December 11, 2006

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Sharekhan Eagle Eye (equities) & Derivatives Info Kit for December 12, 2006

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FII: Positive +334 cr (provisional)

11-Dec-2006 FII (Provisional) Gr Pur Rs 2403.16 - Gr Sales Rs 2068.95 = +Rs 334.21cr..

With such strong buying; its extremely confusing to see a 500 point fall. Certainly something is amiss.. Watch this space as we try to unravel that