MARCH 2008

BSE SENSEX closed today – Wednesday 5^th March’08 at 16542 down 9.32 % from 1^st Feb’08 close of 18243. The intra month highs and lows were 18895 and 16165 respectively. I was bearish for the SENSEX for the month of  Feb’08. 

 

The update is late by a couple of days on account the OPEC meet today wherein the cartel decided not to increase the output of Crude Oil inspite of pressure from Bush Administration. NYMEX Crude Futures are above $ 102 pbbl level. Tested lifetime high of $ 103.76 pbbl on NYMEX on 3^rd March’08. I had predicted $ 90 pbbl would hold in Feb’08.

 

BSE SENSEX breached S1 level of 16500 on an intra-day basis on 3^rd March’08 on account of economic worries in the US Market. ^DJI corrected sharply in Feb’08 on account ‘recession’ confirmation in the US economy and hefty increase of estimated losses from the ‘ Subprime Mortgage ‘ business from earlier estimate of $ 400 billion to now about $ 800 to 900 billion. ^ DJI tanked on 28^th and 29^th Feb’08 by around 3.5 %. Equity markets corrected globally including India. FIIs were net buyers in the Indian equities in Feb’08. SENSEX fell by 901 pts on 3^rd March’08 – second largest daily fall in history of SENSEX

 

The US economy is now in ‘recession’ as per Mr. Warren Buffet although Ben has still not announced the ‘R-word’ officially. Bad economic news kept flowing out of the US in Feb’08 and hence ^DJI was bearish :

 

-          AIG stock was hammered as its auditors rebuked the management for overvaluing its CDO holdings.

-          Total losses for UBS on account of exposure to ‘Subprime Mortgage’ business in US in 2007 were $ 18.40 billion. UBS reported that in 2008 there could be additional ‘write offs’ to the tune of $ 12.00 billion on account of ‘Subprime’ business.  

-          One of Citibank’s Hedge Fund had redemption pressure.

-          HSBC Bank reported $ 17.20 billion losses from its US operations on account of exposure to ‘Subprime Mortgage’ business.

-          US Fed reduced the GDP growth estimate for 2008 to a lower level of 1.3 % to 2.0 % against earlier estimate of 1.8 to 2.5 %. Ben Bernake did signal slowdown but no ‘R-word’

 

Indian Banks cut PLR between 25 to 50 bpts in Feb’08 although RBI did not cut any interest rates. This failed to have any positive impact as the IIP figures were disappointing for the month of Dec’07 vis a vis Dec’06. The Indian economy is showing signs of slight slowdown and the GDP growth target of 9.0 % this fiscal may slip marginally to 8.7 %.  GoI finally hiked prices of Gasoline and Diesel marginally in Feb’08. This was anticipated but came too late due to the pressure from the Left Front.

 

The Union Budget announced on 29^th Feb’08 by the Indian Finance Minister for the next fiscal was completely over shadowed by the sharp correction in global equity markets including India. The Budget was very populist and farmer friendly. The Budget proposed increase in consumer spending by cutting taxes. However there were no tax breaks for corporates. Minimum exemption limit for income tax for salaried class was raised. In brief – a balanced Budget keeping in view that it is the last Budget of the current FM. The GDP growth forecast for the next fiscal is @ 9.0 % in the Budget. Fiscal Deficit is forecast at 3.2 % of GDP. These are encouraging signs for the Indian economy keeping in mind a slowdown in the US economy. Complete details are available on the MoF website.

 

The Indian Stock Markets did not appreciate some of the proposals by the Indian FM. The ‘short term capital gains tax’ was hiked from 10 % to 15 %. Secondly the proposal of OTS ( one time settlement ) of agricultural loans of about US $ 15 billion to approx. four million Indian farmers was perceived as a bad news for the PSU Banks. The PSU Banks will settle this loan of about US $ 15 billion. Modus operandi of this OTS is still not clear. It is not mentioned in the ‘fine print’ of the Budget document. How will the GoI re-imburse the PSU Banks as they ‘write off’ the loans to the farmers ? It is for sure that PSU Banks will not be re-imbursed in cash. They might get Sovereign Bonds like the Bonds issued to the Oil companies. This will leave the PSU Banks dry. PSU Banks were dumped by the investors on the Budget day and there after. Operators also hammered these Stocks.

 

On top of this ICICI, State Bank of India and Bank of Baroda reported losses on account of their exposure to overseas financial derivative instruments – CDS ( Credit Debt Swap ) and CLN ( Credit Link Notes ) primarily in the US market. Due to the turmoil in the US financial system the market value of these financial instruments declined and hence provision for losses has to be made by the said Indian Banks on their books. This turmoil was triggered by the ‘Subprime Mortgage’ business. ICICI and other Indian banks through their overseas offices sell these CDS and CLN to foreign banks who lend money to Indian corporates for overseas acquisitions. ICICI took a hit of US $ 265 million on its exposure to CDS in the US Market. The losses incurred by other Indian banks with offices in New York are still not known. This was another blow to the banking stocks. ICICI was hammered and so were banking stocks, which have operations in the US. We must note that as we liberalize our economy and open up our Banking Sector – Indian banks will take more exposure to overseas risks and we must be prepared for such losses. ICICI and other banks need to improve internal risk management systems and regulatory oversight. We do not want another Societe General story !

 

I expect SENSEX to be bearish in the month of March’08 as ^ DJI would be bearish. The so-called ‘De-coupling’ of the emerging markets from US equity markets will take time. How much time ? I am not able to comment on this issue. I wish I could. ^ DJI will be in an intermediate downtrend if it trades below the 12000 level for three consecutive days.

 

I expect SENSEX to test its low of Jan’08 in the coming weeks. The levels to watch for the SENSEX are :

 

R1 18300

 

S1 16400 S2 16000 S3 15500 S3 15330

 

If the SENSEX cannot hold 15330 then expect can crash to 15000 – 14700 levels. Elliot’s Wave theory indicates these levels. I feel this can happen if the global equity markets crash.  

 

The SENSEX has been in a ‘bull phase’ from March 2003 till January 2008. The recent correction has brought valuations to attractive levels but investors should be careful. If SENSEX trades below 16500 level for a couple of weeks – Indian equity markets will enter a ‘short term bear cycle’. Some renowned Indian analysts feel India cannot deliver on Infrastructure, Airports, Ports, and Power Generation etc. They feel India is not on par with China and South Korea and will slip on the said sectors. SENSEX could take five to six months to recover from the said ‘bear cycle’. I agree with these analysts. Smart money will soon move to ‘Debt Instruments’ as equity markets look shaky in India on back of weak global markets. 

 

There could be a ‘stand off’ between the Congress and the Left Front on the Indo-US Nuke Deal in March’08. There could be political uncertainty in India. Markets do not like political turmoil.

 

Gold tested a new lifetime high of $ 990.40 Spot on 3^rd March’08 in NY. Dollar slumped to a new low against the Euro at 1.50. There is news that Russian and Qatari Governments are buying physical Gold as a hedge against their US Dollar assets.

 

I am bullish on Crude Oil and the next level is $ 105+ pbbl, which will be tested in coming weeks. I am of the view that Crude Oil will test $ 120 level by H1 2008 and not $ 80 pbbl by H1 2008.

 

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FEBRUARY 2008

BSE SENSEX closed today – Friday 1^st Feb’08 at 18243 down 11.80 % from 4^th Jan’08 close of 20687. SENSEX tested a new lifetime high of 21207 and a low of 15332 during Jan’08. Indian investors were very highly leveraged on their ‘long positions’ in Jan’08. I had predicted that SENSEX would test a level of R1 21000 during Jan’08 but the SENSEX breezed past and tested a high of 21207 as mentioned above.

 

My comments on the ‘ Decoupling Theory ‘ were correct. ^ DJI corrected in Jan’08 and in fact crashed to a new 52 week low of 11509 on 22^nd Jan’08 over concerns of an economic recession looming large over the US Economy. Asian equity markets crashed on 22^nd and 28^th Jan’08. BSE SENSEX crashed on 21^st and 22^nd Jan’08. FIIs pressed the ‘exit button’ in Asian and other emerging economies around the globe. This was the day I was dreading since Oct’07. I mentioned in Oct’07 that if FIIs press the ‘exit’ button – SENSEX could crash to 15000 level. Although the context in Oct’07 was ‘political instability’.  On Monday 21^st Jan’08, BSE SENSEX fell 1409 pts – single largest daily fall in the history of SENSEX. There was blood on Dalal Street but worse was to follow. On 22^nd Jan’08 - fourth time in the history of SENSEX, trading was suspended at BSE and NSE for one hour ( cooling period ) as the SENSEX fell by 10.0 % from the close of the previous day. After the trading resumed, the SENSEX recovered from an intra-day low of 15332 on 22^nd Jan’08 to close at 16730, a fall of 875 pts – second highest daily fall in the history of SENSEX.

 

This savage fall in SENSEX and NIFTY in a matter of three trading sessions – 18^th, 21^st and 22^nd Jan’08 took the ‘speculators’ by surprise in the Indian equity markets. The fall was so steep that said operators could not ‘square off’ their long positions in time. There were some ‘systemic’ shortcomings in the Indian equity markets which lead to this situation wherein the brokers ‘squared off’ the client’s long positions as the ‘margin calls’ got triggered in the fall. In brief – the operators lost so much money in a day that they could not pay up the brokers in 24 hrs. as per rules of ‘mark to margin’. Some Brokers in turn could not pay up BSE and NSE and had their ‘terminals’ shut off, till the dues were paid.  As per media reports, some brokers still have dues to recover from clients. Remember SENSEX tested its lifetime high only about ten days back. There were huge ‘long positions’ in the derivatives segment. Some of the liquid frontline and mid-cap stocks corrected between 25.0 to 60.0 %. Retail level sentiment is cautious in India.

 

SEBI is looking into this sharp crack in the SENSEX and NIFTY. RBI is probing if large amount of funds from a few ‘Cooperative Banks’ were siphoned off by Bond Traders to fund the stock market losses ? There could be a ‘scam’ in the wings. We must keep in mind the stock market scams of 1992 and 2001, wherein two operators siphoned out large amount of funds from the Indian banking system in order to rig the stock prices and indices.  

 

I had predicted a level of 19000 for the SENSEX - if the global equity markets corrected but the SENSEX crashed below its 200 DMA of 16500. The economic data trickling from US was the culprit. MERRILL LYNCH, AMEX, CITI and UBS reported huge losses from their operations in US in Q4 2007 on account of losses from ‘Sub-prime Mortgage’ business. US GDP growth was at 0.6 % during Q4 2007 – lower than estimates. ^DJI corrected on account of the above news.

 

US Fed moved in on 22^nd Jan’08 with an aggressive ‘Fed Funds’ interest rate cut of 75 bps to 3.50 % in order to arrest the further fall of ^ DJI. This is the biggest interest cut in more than 23 years by US Fed. Ben also cut the ‘Discount Rate’ by 75 bps to 4.0 %. The ^DJI recovered and so did global equity markets. In fact SENSEX recorded its single highest daily gain of 1140 pts on 25^th Jan’08.

 

FIIs have pulled out approx. US $ 4.50 billion from the Indian equities in Jan’08. Exact figures are awaited from SEBI. SENSEX has corrected from its lifetime high of 21207 to a recent low of 15332 i.e. by 27.7 %. NIFTY has corrected by 30.0 %. SHANGHAI COMP has corrected from its life time high of 6124 to a low of 4196 ( of date ) i.e. by 31.5 %.

 

China and India are the two fastest growing economies in the world. China’s GDP grew by 11.4 % in 2007 – highest in the last 14 yrs. Infrastructure is growing too fast in China. Bank of China has raised interest rates six times in 2007 – still the dragon fails to slow down. Indian annual GDP will grow at approx. 9.0 % this fiscal year i.e. April'07 to March’08. Chinese GDP growth may slow down in 2008, as its economy is ‘export oriented’ with focus on exports to USA. Chinese annual GDP growth may fall by 1.0 % or so on account of US recession. Indian GDP growth may fall by 0.5 %.

 

On 30^th Jan’08 – Ben further cut ‘Fed Funds’ interest rates by another 50 bps. This rates now stands at 3.0 %. This step was again a surprise as the Wall Street expected a cut by 25 bps.  I feel it is a matter of time and Ben will declare the R-Word !

 

In the past year or so – I have not been recommending individual stocks on my web page. I have been providing PMS to my clients for a ‘fee’. A large number of small investors have requested me to provide the service on my web page as earlier. I will review and post accordingly.

 

The technicals and the volatility in the Indian Equity market suggests that we are in for further correction in the SENSEX. Lower volumes and unwinding of ‘long positions’ in the derivatives segment indicates weak participation from investors. SENSEX breached the all important 200 DMA level of 16500 in Jan’08. We will re-test the recent lows and maybe even drift lower. The relief rally, which SENSEX is in at present, will not last for long. The levels to watch for the SENSEX in Feb’08 are :

 

R1 18720   R2 19100  

 

S1 16500 ( 200 DMA )  S2 15500   S3 15330  

 

Any decisive closing above R4 20000, on rising volumes, will lead to a fresh uptrend. Looks difficult in Feb’08.

 

I am also very vary if the Bond Traders do not keep their financial commitments with the ‘Cooperative Banks’ for delivery of

“G-Secs”. Any failure will expose the scam and above support levels could be tested.

 

Crude Oil tested US $ 86.50 pbbl but re-bounded to $ 90.00+ levels. I still feel that $ 90.00 level should hold.

 

Gold tested new lifetime high of US $ 933.10 pto Spot NY on 29^th Jan’08. The next level is US $ 960.00 pto. I feel we will see this level before June’08. By Sept’08 – Gold will test US $ 1000 pto.

 

Please conserve your capital and invest in Gold for long-term gains

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JANUARY 9TH SPECIAL ALERT

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JANUARY 2008