Markets may fall further from current levels

Today March 14th 2008
Nifty closes at 4623.6
Sensex shaves off close to 770 points to close at 15357 points
India being a high beta market, any major fall in global indices gets magnified and exacerbated to a larger extent in our country. As they say when it rains, It pours, thats the exact description for the manner in which we are falling down like nine pins into a bottomless pit each day. All the stories of India having been decoupled from global cues have been thrown out of the window, all the more supported by the domestic institutions and sovereign wealth funds who are sitting on huge piles of cash and are unwilling to invest at current levels even if they see value and enough margin of safety(MOS) to their investments.

The fortunes for the week ahead look pretty bleak. Every relief rally that has happened ever since the lows of Jan 22nd have been pure short covering rather than any new buying emerging in the markets. Even as i stare at the F&O data for today fresh short positions have been initiated on the Nifty and the bellweather stock Reliance Industries which only indicate a further fall tommorrow whatever be the global cues. Even thought the Nasdaq and DOW seem to be hovering around a slightly positive territory at the moment, we can expect profit booking to emerge at every high on the Nifty. The technical trading levels for tomorrow are expected to be rangebound between 4690-4801 on the upside and 4527-4402 on the downside. The nifty needs to convincingly close above 4812 for a intermediary bullish trend to emerge on the cards.

An analysis of the present situation is provided below:
1. Markets are in a state of confusion over the earnings momentum going forward and are taking cognisance of the fact that there may be downgrades in a few sectors. Growth may slowdown in cement, banking, commodities and real estate. In case of the cement sector, incremental supply to the tune of 60 million tonnes is coming in as against an incremental demand of 35-40 million tonnes in 2009. This would definitely result in fall in pricing power for cement companies. The demand supply gap would get narrowed down completely by 2009. As for the real estate sector, though there has been tremendous supply of real estate over the past few years demand has toned down due to rising interest rates. We have already observed prices in the NCR (national capital region) fall by 15-20%. Banking stocks especially the PSU banks are a great buy at current levels provided we have enough clarity on the loan waiver scheme and the reimbursement of the same to the banks in the form of oil bonds. The positive side of this loan waiver is that the banks are cleansed of all their past NPA's in one go. However, whether this step by the finance minister will result in more defaults from multiple sectors is something only the future will decide. But all said and done at a price to book value of 1.1-1.3x banking scrips do look attractive. Steel as such is getting into a bearish mode with disappointing resultsfrom Corus. If we strip the consolidated results into standalone factions one would find that the numbers from Corus have been a clear thumbs down and if that’s the tone set going forward, it will definitely have a rub off effect on all other steel counters.

2. Global cues with crude oil touching $110 per barrel, over the top commodity prices and the collapse of Carlyle group due to losses in the fixed income market are not at all comforting signs.

3. The exposure of Indian corporates to the credit derivatives market, foreign currency and commodity hedging are still unclear and the cracks are beginning to show up with ICICI and L&T being the first casualties to these exotic derivatives.

4. Neither the Railway Budget nor the "Aam aadmi" Budget of PC had anything much for the corporate world to cheer about. Markets like reforms and there was no mention of it in the budget. When the economic survey document promised so much on privatisation/divestment and deregulation, not an iota of the same was discussed in the budget leaving us all exasperated enough to remind us that the latter shall always remain a non event as far as our country goes. On the contrary the Short term capital gains tax on share trading was hiked to 15% to bring it in line with DDT (Dividend Distribution tax). The objective of the same, though welcome, being investors should develop discipline and hold on to their investments for the longer term, the timing of the levy has been vicious that too when the markets are at an all time low. Some thought process could have gone into the same to bring about this provision after a level of sanity had returned to the markets. As a result of this provision, we expect more sell offs from HNI and other short term traders prior to March 31st as the provision comes into effect from April 1st onwards. The provisions on STT being now directly allowed as a deduction against income rather than against the tax liability as a rebate is also a negative for the markets as it forces the arbitrage players out of the market and will reduce volumes in the momentum counters.

5. IIP (Index of Industrial production) numbers have been dismal at 5.3% as against anestimated 7.7%. This clearly points to a Q3 slowdown if the IIP nos have to be believed. The poor show on the manufacturing and capital goods front has put immense pressure on the markets. Investors are being scared away from pumping fresh money into the markets.

6. GDP estimates are also getting lowered down to 7%. Though the structural growth story continues in India, it has been hampered by cyclical pressures and with both the government and RBI focussing on giving top priority to inflation management rather than maintaining or improving growth, its difficult indeed to achieve a 10% growth as aimed by this UPA government.

7. Though most of the capital goods companies have maintained a positive stance on theirorder book position, their capex plans will definitely get affected going forward with credit spreads having widened all across the globe. Debt doesn’t come cheap anymore and this will hamper most of the expansion plans of Indian companies. Even M&A deals may get affected what with most PE firms and investment bankers having burnt their fingers in the subprime crisis. Loan syndication is a difficult task henceforth. The primary market in India too has not been supportive with the dismal response to two heavyweight IPO's like Emaar MGF and Wockhardt hospitals forcing them to withdraw their offers.

8. The impact cost of trading has become so high that even a small short position created by an FII triggers or accentuates a bigger fall in the markets. The trading is so lacklustre at the moment that dealers are busy enjoying their favourite past time during trading hours. I for one saw my broker watching a Rajnikanth movie on Sun TV today....Can anyone imagine such a scenario prior to Jan 21st. The situation is pathetic to say the least.

As far as the markets are concerned with all the negatives crowding around, the only saviour can be a good show on the advance tax numbers by Corporate India that would be released next week, a little bit of help from FED in cutting interest rates further and a stellar outperformance in Q3 results from the core sectors which however seems highly unlikely.

Most of us belong to the "sunrise" investing generation which has not seen long periods of market volatility or a bearish phase of the likes of 1992-2002. Having seen a continuos secular bull run from 2002 to 2007 , we lack the patience and conviction that a rakesh jhunjhunwala or a ramesh damani posessed to emerge out as "Dhandho investors".

Rupee appreciation to stop here!!

1. Broadly because the exports and services sector have already been hit badly by the onslaught of rupee appreciating close to 12-13% year on year.
2.This year is an election year with the polls looming large prior to Nov 2008 and the government cannot afford to have interest rates at high levels which might alienate middle and lower class vote banks
3. Inspite of the Interest Rate Differentials between US And India we havent seen significant inflows from FII's even after a number of fed rate cuts
4. Yen has started to appreciate against Dollar and all other major currencies of the globe and this is going to result in major Yen carry trade unwinding which will only put pressure on the rupee to decline

India's parallel economy is at 40% of its GDP

Take that!! all you economists and analysts, who keep debating over endless hours on prime time television as to what the finance minister might deliver this friday. "Black money" the other proxy term for "parallel economy" is at its rampant best over the last few years. We have allowed the menace to multiply to such levels that today it forms more than 40% of our GDP and the FM still keeps talking about teething woes on the fiscal deficit front and the need to widen the tax net further to maintain bouyancy in the government coffers. Money can be differentiated as either 'black' or 'white' based on whether the incidence of taxation falls on it. Money is said to have been acquired through legal channels or is termed 'white' once its within the ambit of taxation. Having said that black money isnt illegal per se. A sizeable section of the population acquires money through hard work, moral and legitimate means and consequently conceals a portion of the same. Even if we take the case of agriculture, it will do good to term the entire money sloshing around there as 'black' as the sector as such falls outside the tax net. We have cases of the wealthiest of farmers in India forming a core group of the proud 10 million HNI's (High Net Worth Individuals) in our country. But what the FM should worry about is money acquired and concealed through illegitimate means and those currencies that flush around the suitcases, bedrooms and bathrooms of the elite including that of his own political kinsmen, who in my opinion are the biggest repository of black money and who refuse to be reined in by any judicial or regulatory force or authority. These political babus are the most intransigent group in our country who sniff out all loopholes available to evade the tax net, take advantage of the porous capital controls in the financial system, engage in perennial round tripping of money and explore other alternative routes to ensure that their capital appreciation and incomes go tax free. Ours is a country where the Income tax department serves a notice every day to the honest tax payer asking him to pay more, uses its workforce to locate mistakes in salary returns on paltry or meagre surcharge computations and acts so diligently in recovering money from the middle class Indian. Successive FM's have been rest assured that direct tax revenues will remain bouyant on account of the tax recoveries from the rising middle class (the eternal suspect of the Ayakar Bhavan). Every loophole in taxation ambiguties affecting the common man gets plugged through TDS, VAT or an FBT. What about the FM's own fraternity? We still have a Laloo Prasad Yadav leading a king-size life wit his comrades, cattles and their fodder; We still have a Mayawati declaring her unaccounted wealth as gifts from her BSP cadres and getting them exempted from the tax authorities themselves through their imprimatur orders; We still have an Amma (As im from chennai i will call her 'Amma') who has been exonerated from all the disproportionate wealth that she has amassed over two decades; We still have a Rahul Gandhi who derives illegal income through drug lords from Latin American countries; but its always film stars and real estate magnates who make news when it comes to tax authorities. They are an easy target to make up for the deficits of the IT department but where are these double standards taking us going forward. Equality before law is a constitutional neccesity but that seems to be a term unheard of in our economy.All the debates on our economy and the budget talks or even listening to the budget seems futile and worthless when the proponents of the parallel economy are sitting right under the nose of our finance minister.

The 'Budget Mania' seems to have caught on to most of my friends. An almost non event has become a festival of sorts due to the media hype and hoopla among the avergae masses. As many have been asking me about my "wishlist " to Mr. Chidambaram...here it goes...
Dear Mr. PC
Iam not gonna request you to keep your word on maintaining the growth momentum of this economy or give the much needed thrust on reforms front or focus on social infrastructure, agriculture etc etc...There must have been a half a billion who must have already told u all this with enough economic jargons interspersed between the lines. I have a unique request. Its a far more economical and largely profitable way to wipe out the entire fiscal deficit of our nation in one stroke. Unearthing of black money should start at the top of the pecking order and those sitting at the fountain head are your own colleagues in the parliament (572 of them if my numbers are right). Iam given to understand that the budget session, i mean the time when u would be presenting your final budget prior to the election year to the nation, has historically witnessed full attendance by both houses of the parliament. Therefore if an Income Tax raid can be arranged at all the houses of these 572 elite chosen ones of your wonderful 'Ivy league'(which may include ur residence at Haddows Road too), that would prove to be a wonderful icing on the cake in your chequered political and business career. U can leave your esteemed chair after presenting the budget filled with a pompous gait and a satisfaction at having done the biggest political class act that would benefit the common man and the country at large. You would kill two birds with one stone by adding a humongous amount to the government's currency chest as well as wiping out the fiscal deficit in toto, a major negative that has harmed our economic image globally over the years. So honourable finance minister, kindly ponder over this citizen's wish list, maybe over a cup of "black coffee" if i may suggest so. May god give you the political will to carry out this "dream reform". You have one chance to create history now!!!