06 May 2012

Monsoon - Eye on sky : Edelweiss, PDF link

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We attended the conference - “Monsoon 2012 prospects and challenges” - organized by SKYMET, a private weather forecasting agency. The key takeaways are: monsoon is likely to be 95% of LPA, not very far from 99% predicted by the IMD. Temporally, Jun-Jul rainfall is likely to be normal which should help the sowing season, though there is a likelihood of unfavourable El Niño conditions developing during Aug-Sept period. This may lead to the emergence of moisture stress. However, full clarity on El Niño is likely to materialize by the end of May.
Regards,

Technicals: Sundram Fasteners, Gammon Infrastructure, Bajaj Hindusthan, S.E. Investments, Symphony, JM Financial, Dewan Housing, :Business Line

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I am holding shares of Dewan Housing Finance bought at Rs 275 and JM Financial bought at Rs 35. Should I continue to hold or sell at current price?
Pragdas Mathuradas
Dewan Housing Finance Corporation (Rs 218.5): Dewan Housing still appears to be on strong foundation. It has key long-term support at Rs 155 and the stock bounced off the low at Rs 176 last December. Investors with long-term perspective can continue to hold the stock as long as it trades above this level.
If it manages to hold above Rs 176 in the upcoming months, investors can look forward to a rally to the previous peak at Rs 347 or even higher over the long term.
The near-term prospects for the stock are, however, under a cloud. Medium-term resistance for the stock is at Rs 280. Since the stock is reversing lower from this level, it can decline to Rs 175 or Rs 155 in the upcoming months. If your investment horizon is short-term, then exit the stock on a close below Rs 210.
JM Financial (Rs 13.5): This stock is in a vicious downtrend and it is advisable to switch over to some other stock. JM Financial recorded its long-term trough around Rs 19 in March 2009.
This trough was breached last September, and the stock is currently trading below this level. Since the stock is currently close to its multi-year low, it is hard to predict where the downward spiral can halt.
Immediate support for the stock is at Rs 11.6. If this level is breached, it may fall to Rs 5.1. Medium-term resistances will be at Rs 32, Rs 45 and Rs 65.
Please advise on the outlook for Symphony and S.E. Investments. Are these stocks worth holding?
Rakesh Duggal
Symphony (Rs 250.8): This stock moved out of wilderness, below Rs 20, in 2010 to move to the peak of Rs 334 in April 2011. Since then, the stock is moving sideways in a broad band between Rs 200 and Rs 300.
Long-term outlook is positive for the stock and investors can hold with stop at Rs 190. If the stock holds above this level, it will open the possibility of break out to Rs 400 over the next two years.
That said, breach of the support at Rs 190 will drag the stock down to Rs 168 or Rs 130. Therefore, investors should divest their holding on fall below Rs 190.
The medium-term trend in the stock is, however, sideways.
It could continue to oscillate in the band between Rs 200 and Rs 300. Investors with a shorter investment horizon should, therefore, exit the stock close to Rs 300 and look for buying opportunities near the floor of the current range.
S.E. Investments (Rs 319.9): This is an extremely volatile stock recommended only for the brave-heart. It is currently close to its long-term resistance between Rs 350 and Rs 400. S.E. Investments has reversed sharply from this band twice in the last two years.
Since the reversals can be very sharp giving little opportunity to investors to exit, it would be best to take some money off the table, if you have some in front of you.
Hold the rest with stop at Rs 285.
What is the long-term view on Bajaj Hindusthan?
R.N.B. Rao
Bajaj Hindusthan (Rs 29.2): Bajaj Hindusthan is hardly in a sweet spot, wallowing close to eight-year low. Needless to add that the long-term view on the stock is currently down.
Decline below the December 2011 low at Rs 24 will take the stock below the Rs 10 mark.
The stock needs to do a lot of work before it moves to a position of relative stability. The first requirement would be a strong close above Rs 60.
Investors with lower risk-taking ability should exit the stock at current juncture and consider re-investing on a strong close above Rs 60. Subsequent medium-term targets would be Rs 93 and Rs 136.
Long-term outlook for the stock will turn positive only on weekly close above Rs 200. Inability to move beyond this level will keep the stock in the Rs 25-200 band for a few more years.
I am holding shares of Gammon India purchased at Rs 123. Please advise on the prospects of this stock.
P.M. Rao
Gammon India (Rs 44.4): Gammon India has given up all the gains recorded in the 2009 rally and is currently trading near its 2009 trough. The trend across time frames — long, medium and short — are currently down for this stock.
Investors can hold the stock with stop at Rs 40. But given the fact that many stocks are currently trading well below their 2009 lows, the stock can head lower to Rs 33 or Rs 19 in the upcoming months.
Resistances in the upcoming months will be at Rs 130, Rs 180 and Rs 271. The long-term trend will, however, turn positive only if the stock manages a close above Rs 270.
Please advise on the future outlook of Sundram Fasteners.
Sajahan
Sundram Fasteners (Rs 53): Sundram Fasteners faces strong long-term resistance in the zone between Rs 65 and Rs 75.
The rally from 2009 lows halted in this zone and the stock is currently consolidating in the band between Rs 45 and Rs 65. Key long-term supports for the stock are at Rs 44 and Rs 36.
If the stock manages to hold above Rs 44, it will denote the propensity to break out higher to Rs 85 or Rs 94 in the next couple of years.

Technicals- Reliance Industries, Tata Steel, Infosys, SBI, :Business Line

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The stock fell 1.8 per cent in the previous week and is testing key support at Rs 723. Short-term trend is down for the stock. This trend will persist as long as the stock hovers below Rs 800, an important trend deciding level. The stock is trading well below its 50 and 200-day moving averages. On Friday, it closed below the 21-day moving average and is showing signs of bearishness. The daily relative strength index has entered the bearish zone and the weekly RSI is on the brink of entering this zone. The daily volumes are deteriorating.
Short-term traders can initiate fresh short positions if the stock drops below Rs 723 while maintaining stop-loss at this level. Downside targets are Rs 700 and Rs 690.
A decisive breach of Rs 690 will pave way for a decline to Rs 675 which is a key medium-term support. Significant short-term resistances are at Rs 755 and Rs 770. Subsequent resistances are at Rs 783 and Rs 800.
Infosys (Rs 2,441.1)
Infosys advanced 1.8 per cent last week. Traders with high risk profile can consider holding their long position as long as the stock trades above Rs 2,400 with stop-loss at same level. An up move to Rs 2,485 and to Rs 2,540 (floor of the stock's recent gap) is possible. Resistance above Rs 2,540 are at Rs 2,580 and Rs 2,670. Conversely, a fall below Rs 2,400 will strengthen the bearishness and fall to Rs 2,360 and to Rs 2,310 in the ensuing week.
Medium-term trend is down for the stock from its February peak of Rs 2,990. A strong breakthrough of the stock's long-term support at Rs 2,360 will add momentum to the downtrend and pull the stock down to Rs 2,270 and to Rs 2,200.
State Bank of India (Rs 1,993.6)
In line with our expectation, the stock declined in the past week. It tumbled 6.5 per cent, breaking through the key support at Rs 2,130. The stock is currently testing the medium-term key support level at Rs 2,000. An emphatic close below this level will mar the medium-term uptrend and pull the stock down to Rs 1,890 and Rs 1,775 levels in the medium-term. Traders with short-term perspective can consider holding their short positions by maintaining the stop-loss at Rs 2,060.
On the other hand, a rally above Rs 2,060 will take the stock higher to Rs 2,130 in the near-term. Next important resistances are at Rs 2,200 and Rs 2,300.
Tata Steel (Rs 433.5)
Tata Steel plunged 6.4 per cent with good volume in the last week after testing the key resistance for over two months. It has emphatically breached the short-term support mentioned last week in this column. The daily relative strength index has entered the bearish zone from the neutral region. Further, daily moving average convergence divergence indicator has signalled a sell and is about to enter the negative territory implying downward momentum. Short-term outlook is bearish for the stock.
Traders can consider initiating short positions with stop-loss at Rs 444. Targets are Rs 420 and Rs 400. Key resistances to watch are pegged at Rs 454 and then Rs 470. Resistances above Rs 470 are at Rs 490 and Rs 500.

52-WEEK FLOP: ESS DEE ALUMINIUM:Business Line

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‘India story will urge Govt and FIIs to work towards a solution' :Chief Operating Officer, Daiwa Capital Markets India in Business Line

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People following traffic rules overseas start ignoring traffic rules when driving in India. After my recent overseas visit, I came to know how much beating, the image of India has taken lately. This deterioration began two years ago. Many believe that negative perception during Common Wealth games and occurrence of 2G scam around same time played a very big role in India's image taking a serious hit. Before that India was seen as a shining star in the world stage, more so since her growth story was built on the foundation of a vibrant democracy. Many foreign investors felt good about the growth of India as reconfirmation of the power of democracy.
Irony
The Government's job is to establish the law of the land, where the players can play by the rules for the benefit of all. The current political leadership should have been celebrating the completion of two decades of liberalisation and associated Indian growth story.
At that time, a number of over arching laws were simplified. With that experience, the current political leaders are looked upon to provide thought leadership in these times. This, precisely, is the irony.
It is hard to understand why the leadership is not coming out quickly from the current quagmire on GAAR (General Anti-Avoidance Rules). Every change in the law must happen with the objective of simplifying and clarifying the law. It should aim to obviate the need of lawyers and reduce stress on the over burdened judicial system.
The proposed GAAR has created exactly the opposite impact. It has unnerved the foreign community. There is stark reversal of the FII flows in the month of April.
It is legitimate to ask the enterprise which derives value out of India, to pay its share of taxes in India. Therefore, transactions done purely on the principle of tax arbitrage or to bypass tax laws with creative structuring, raise suspicion. It is similar to people following traffic rules overseas, start ignoring traffic rules when driving in India.
It is a question of a perception rather than the principle. It reflects the essential character of the market. If the general consensus is that tax avoidance is accepted then, any attempt by Government to fix the same, would face stiff opposition.
However, in such times, it becomes extremely critical for the Government to act fast and be seen as fair and unprejudiced.
Private players play a critical role in the development of the nation. Most of the players want to play by the rules in the market. However, they want the rules to be disclosed upfront. Investors are willing to stay put in bad markets, but abhor the uncertainty of the law.
There are compelling reasons to believe that many investors want to participate in the growth of India. Paying tax for such gains is acceptable and dutiful.
Time to prove
We, as country, also need to be cognizant that while China and the UK have got away with retroactive tax, India has yet to reach such a stature. That is where we have erred on judgment. India is new entrant in this game and has to prove its mettle in order to be accepted in this club.
It has to work extremely hard as country to make the environment credible, and most of all, deal with corruption. Fortunately for India, its nascent markets do not have structural problems which are a menace in most of the developed world. If we put our act together, we have strong case for climbing the ranking in the G20 ladder. It is a life time opportunity which is getting wasted.
Government, FIIs and domestic players all want to get most out of the Indian growth story. The opportunity is real and present and if acted right will result in win-win situation. We expect a quick action on this urgent matter by the Government so that the country regains its legitimate credibility.
Similarly, FIIs which have invested in long-term story of India also must play active role in engaging with Government and help in the formation of right regulatory environment. After all, these uncertainties are priced in the higher returns of the developing market.
(The author is Chief Operating Officer, Daiwa Capital Markets India Pvt Ltd. The views are personal.)

Stock Strategy: Consider going short on Educomp Solutions and ITC futures :Business Line

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Educomp Solutions (Rs 178): The stock has been in the grips of bear for quite a long time. It is unlikely to see any relaxation from bears. The stock is close to its all-time low of Rs 162 and is on the verge of breaking below that level. In that event, the Educomp Solutions stock could reach Rs 147. Immediate resistance appears at Rs 192 and only a close above Rs 267 will arrest the downward bias in the stock. However, that is unlikely to happen anytime soon.
F&O Pointers: The Educomp Solutions May Futures accumulated fresh short positions on Friday. Options are not that active. However, cue available from Option trading suggests negative bias.
Strategy: Consider going short on Educomp May Futures with a tight stop-loss at Rs 192 (spot price on a closing day basis) for a target of Rs 147. Shift the stop-loss to Rs 175 once it dips below that level. Market lot of Educomp Solution is 1,000.
Alternatively, traders can consider writing 180 May Call, which closed around Rs 9 on Friday. Maximum profit in the strategy is the premium collected (i.e. 9 * 1,000 market lot excluding brokerages and charges), while loss could be unlimited if Educomp Solutions recovers sharply. Besides, writing an Option involves margin commitments. So this strategy is only for traders who can afford to bear those risks. Hold this position till expiry or till the Option premium erodes sharply.
ITC (Rs 238): The long-term positive outlook remains intact for ITC. However, after the recent sharp rally, ITC could face some resistance in the immediate-term. One more conclusive close below Rs 242 can take the stock towards its next support level at Rs 224. A close below Rs 202 will change the outlook to negative for ITC. If the stock manages to hold on to Rs 225 level, then it can touch Rs 275-280.
F&O pointers: The ITC May Futures witnessed heavy unwinding of long positions on Friday. This indicates that traders are reluctant to carry over their long positions, and instead booked profits. Option trading also indicates a negative bias as 230 Put saw unwinding of open interest.
Strategy: Consider shorting ITC with a stop-loss at Rs 242. Stop-loss could be adjusted to Rs 237 once it dips below that level. Traders could consider exiting from ITC, if it reaches Rs 224. Market lot for ITC is 1000.
Alternatively, traders could also consider selling 240 Call, which closed at around Rs 6 on Friday. While the maximum profit is the premium collected (Rs 6 * 1000), the loss could be unlimited if ITC breaches Rs 240. As mentioned above, this strategy is only for traders who can bear the risk. Consider holding it for at least two weeks.
Follow-up: Last week we advised a short on Coal India for an initial target of Rs 308. As expected, Coal India moved downwards. Traders could consider holding the position with a revised stop-loss of Rs 331.
We also recommended a sell on SAIL with a stiff target of Rs 73. The stock is currently hovering around Rs 94. As mentioned, adjust the stop-loss to Rs 92, once it dips below that level. We also recommended a sell on 100 Call option. Traders could consider holding it for one more week.

Sizzling Stocks - IRB Infrastructure Developers (Rs 128.7) :Business Line,

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Sizzling Stocks - IRB Infrastructure Developers (Rs 128.7)


IRB Infrastructure nose-dived 24 per cent with extraordinary volumes breaking through a key long-term support around Rs 170 last week .
However, the stock is hovering above its next long-term support at Rs 125. As the stock has fallen steeply and its daily indicators and oscillators are featuring in the oversold levels, we do not rule out a near-term corrective rally to Rs 140 and then to Rs 150.
The stock has breached the lower boundary of the daily Bollinger Bands indicating an oversold counter.
The stock's primary trend is down from its August 2010 peak of Rs 312. A strong weekly close below Rs 125 will strengthen its downtrend and drag the stock down to Rs 108 and to Rs 80 in the medium-term. Significant resistances above Rs 150 are pegged at Rs 170 and Rs 190.
Apollo Tyres (Rs 80.5)
Last week Apollo Tyres did a volte-face and plummeted 12.8 per cent. This reversal was triggered by negative divergence in the daily relative strength index and daily moving average convergence divergence indicators.
The stock has breached its 21- and 50-day moving averages and is hovering well below them.
We notice the formation of a bearish engulfing candlestick pattern in the weekly candlestick chart, implying a bearish reversal in trend.
Further, confirming the change in direction, the stock penetrated its intermediate-term up trend-line last Friday.
The stock can fall to Rs 75 in the short-term. Strong tumble below Rs 75 will drag the stock down to Rs 67 and then to Rs 63.5 in the medium-term. Key resistances are positioned at Rs 85, 89 and Rs 94.


Index Outlook - Stepping below 17,000 :Business Line,

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It doesn't take much to spook the market these days. You just have to stand up and shout “Mauritius” or “GAAR” and stocks will tumble pell-mell. Stocks that were coasting along peacefully till Thursday took a sudden dive on reports that Mauritian tax treaty might be reviewed.
Rupee threatening to go below its previous low at 54.3 against the dollar and burgeoning trade deficit were the other factors that roiled sentiment, pulling the Sensex below 17,000 and the Nifty below 5,200.
Much noise is also being made about FIIs turning away from the Indian market due to the uncertainty on GAAR. But if we consider the flows from these investors as published by SEBI, there was mild outflow of $82.7 million in April and inflow of $166 million in May.
The secondary market has received $8.5 billion so far this year.
This data shows that despite the tax treatment tangle and the S&P downgrade, foreign investors have not really pulled money out of the country.
They seem to be more in the wait-and-watch mode. As we have mentioned earlier in this column, even if the Mauritian route for FII flows is closed, it will have only a short-term impact. Foreign investors will find other conduits for investing in the country.
Volumes in the cash and derivative segment were subdued at the outset but picked up towards the weekend. Open interest remains below Rs 100,000 crore and the put call ratio is also low close to 1 indicating that many shorts have already covered their position.
The upcoming week is likely to be heavy on news flow. Quarterly earnings will continue to vie for investor's attention.
The Finance Bill scheduled to be passed next week and industrial production numbers will provide the other interesting sidelights.
Momentum indicators in the daily chart have declined into the oversold zone. Weekly oscillators are still in the neutral zone on the verge of entering the negative zone.
That both the Sensex and the Nifty have closed below the 200-day moving average is a trifle disconcerting. But the indices need to continue trading below this level for few more sessions before we can consider this a definitive breach.
Sensex (16,831)
The Sensex moved to the high of 17,432 on Wednesday before turning downward to reach the intra-week low of 16,777. Short-term trend for the index has now reversed lower with the close below 17,000. We should give the index filter of one more session to climb back above this level. If it does not do so then we will have to assume that the downtrend that began at February peak is resuming.
The sideways move witnessed since March 29 could be the second wave that unfolded into a descending triangle. The third leg of this move has the minimum target of 16,441. Since this coincides with the 61.8 per cent retracement of the up-move from 15,135, investors should now watch out for the medium-term support in the band between 16,400 and 16,500.
As we have been reiterating, long-term view will stay positive as long as the index holds above this support. But close below 16,400 will mar the long-term view paving the way for further decline to 15,829 over the medium-term.
Short-term trend is currently very weak and the index can decline to 16,429. Short-term resistances would be at 17,037, 17,190 and 17,444.
Inability to move above the first resistance will indicate a propensity to decline in the near term. Strong close above 17,443 is needed to signal that the worst is over as far the near-term trend is concerned. Subsequent hurdles will be at 17,650 and 17,856.
Nifty (5,086.8)
The Nifty reversed lower from the intra-week high of 5,279 to close 122 points down. Close below 5,100 implies that the short-term trend has reversed lower in the index. If we assume that the C wave of the down-move from 5,621 is currently in progress, the targets are 5,058 and 4,882.
Fibonacci retracement of the up-move from 4,531 low gives us the targets at 5,080 and 4,950. In other words, if the decline continues next week, investors can look out for the support at 5,058 and then at 4,950. Long-term view will turn negative only if the index goes on to close below 4,950.
Short-term trend in the index is down but it is drawing close to critical supports at 5,080 and 4,950. Traders should, therefore, watch out for reversals from these levels. Short-term resistances are at 5,200 and 5,280. Traders can initiate fresh short positions if the index is unable to clear the first resistance.
Short-term trend will turn positive only when the index moves above 5,280. Subsequent targets are 5,357 and 5,424.
Global Cues
Global stock markets took a step lower last week. Volatility returned with the results of elections in France around the corner and Greece going in for polls. Weaker than expected job numbers in the US in April also pressured stocks lower towards weekend. This is reflected in the sharp spike in CBOE volatility index on Friday. The index moved sharply higher to close at 19.1 in that session.
The bearish engulfing candlestick in the weekly chart of DJ Euro STOXX 50 does not bode well for the prospects of European stocks. It implies that the medium-term trend continues to be down in this index and there is a possibility of further decline to the next medium-term support at 2,200 that is 2 per cent below current levels.
The Dow reversed lower once again after flirting with the resistance at 13,300. This index has made repeated attempts to get past this level since mid-March. It can now decline to 13,057 or 12,513 in the weeks ahead. The positive short-term outlook will however not be challenged as long as the index holds above 12,500. Medium-term trend in Dow stays positive as long as it holds above 12,200.
Many benchmarks in emerging Asia recorded a strong week. Jakarta Composite and Philippines PSE Composite moved to a new life-time high while Karachi 100 surged 4 per cent higher.

Government spends, at what cost? :Business Line,

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Government spending, when it exceeds its income can reduce growth through inflation, tax distortions, and lowering private investment. India's fiscal deficit (excess of government spending over its income) is currently close to 5.1 per cent of GDP. While a scientifically “acceptable” rate of fiscal deficit does not exist, most economists are comfortable with 3-4 per cent of GDP (more as a convention). Evidence show that countries running large fiscal deficits experience slower economic growth in the medium and long term, and India may not be an exception to this phenomenon.

FALL-OUT OF GOVERNMENT SPENDING

When government spends, say to build highways, it generates employment, which creates income for people. Increase in income leads to increased demand for goods and services, and thus stimulates economic activity. Then, why not keep doing this? Hold on! There is no free lunch in economics.
The Government's usual sources of revenues are taxes, borrowing, and inflation, each of which comes with its own demerits.
Typically, taxes are insufficient to cover expenditures. Borrowing entails repayment of a larger amount than what was borrowed because of interest rates applied to the borrowed sum. This amount is typically sourced from additional taxes.
People, in general, are resistant and averse to paying taxes because a) they are left with less money to spend or save after paying for taxes, and b) the amount collected is not effectively and efficiently used by the government.
For instance, in India, poorly maintained roads, public schools, or hospitals, do not reflect immaculate use of tax money.
The Government can also source its funding by printing money, which leads to inflation. To counter inflation, the interest rates are raised, which increases the cost of borrowing, leading to a fall in private investment.

LONG-TERM GROWTH

Tax distortions and inflation create uncertainties in the business environment, which deter private investments. Displacing private with government investment is not always a zero-sum game. Unlike government investment, private investment is undertaken on a profit-motive, which ensures that resources are more effectively and efficiently utilised.
Consequently, a fall in private investment is typically associated with a fall in efficient and effective allocation and utilisation of resources.
Moreover, excess borrowing can affect the repaying capacity of the borrowing country, and force credit rating agencies to downgrade the credit standing of the country. Such quandary send negative signal to investors, and may lead to a further fall in investments.

DEBT AND ECONOMIC GROWTH

Every time the Government runs a fiscal deficit, it adds to the public debt — the sum of internal and external borrowings (or the accumulated borrowing by the government). In India, internal debt that is largely caused by fiscal deficit accounts for 80-90 per cent of public debt.
Different economists project different numbers for the effect of public debt on economic growth.
An International Monetary Fund paper published in 2010 estimates that, on an average, a 10 percentage point increase in debt-GDP ratio decreases the ensuing five-year GDP growth by 0.3 to 0.4 percentage points in developing countries.
Countries that have debt-GDP ratio of 30- 60 per cent experience a decline of 0.11 percentage points growth. India, with a debt-to-GDP ratio of about 60 per cent, falls under both the categories — so conservatively, let us assume the decline in growth rate is the average of 0.4 and 0.1, that is, 0.25.

REDUCING POVERTY

This reduction of 0.25 per cent of our GDP (averaged over the last five years) roughly amounts to $9509769 per day! According to the liberal definition of poverty-line by the World Bank, which is fixed at $1.25 per day, the amount above is sufficient to move 7.6 million people out of poverty.
Looking at it differently, India fails to move 7.6 million poor people out of poverty because of its current debt-GDP ratio. It is the government's lack of accountability in policy implementation that creates wastefulness in its spending. However, the fact is that government's expenditure has been constantly rising over the last few years.
Recognising its inefficiencies, the government can actively provide a favourable environment in which private investment can flourish.
Public-Private-Partnership is an arrangement that internalises both social and economic motive, and is proven to be very effective. With the outlook on credit rating for India being downgraded from safe to negative, it is time India focuses on tightening its belt, and paves way for the more efficient private investment to take the lead.