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BSE SENSEX closed today Friday 28th
Nov’08 at 9093 down 7.10 % from 31st Oct’08 of 9788. The intra-month
high and low for SENSEX were 10668 and 8316 respectively. We were bearish for
the month of Nov’08. SENSEX could not breach past S2 level of 8080. On the flip
side SENSEX could not cross the R3 level of 11000.
FIIs were net sellers in the Indian equity markets
in Nov’08. Provisional nett outflow by FIIs from Indian equities w.e.f
1st Jan’08 till date is to the tune of US 13.60 billion. Domestic
financial institutions were nett buyers in the equity markets. FIIs were sellers
of Indian equities related to Real
Estate, Consumer Durables, Crude Oil & Natural Gas and Banking Sector.
Indian Financial Institutions were
buyers of equities related to Crude Oil & Natural Gas Sector, FMCG and
We have noticed that BSE SENSEX is dancing
to the tune of ^DJI for the past nine months. The same holds true for global
equities including equities in BRC economies. In Nov’08 all important ^DJI
tested a fresh 52 week low of 7392 on 20th Nov’08. ^TWII in
We will be forced to follow ^DJI for the year 2009
to predict the BSE SENSEX. I have done a technical analysis of ^DJI. This index
looks ‘very weak’ over the next 12 months. The bearish ^DJI for the next 12
months will cause a lot of ‘collateral damage’ globally and the most in
R1 9000 R2 9300 R3 9600 R4 10000 R5 10500
S1 8670 S2 8400 S3 8000 S4 7390 S5 7200 S6
If ^DJI closes below 7000 for three
consecutive days then we are in for a very sharp cut. Do not be surprised to see
^DJI at 6200 to 5355 levels in 2009
On the basis of the above ^DJI predictions it is
prudent to be very cautious in
Indian GDP growth is slowing down as other global
economies due the ‘financial sector’ meltdown in
I feel BSE SENSEX will be bullish for the first
half of December’08 on the back of bullish ^DJI. The levels for BSE SENSEX for
December’08 as are as under :
R1 9600 R2 10200 R3 10600 R4 11000 R5 11800
S1 9000 S2 8310 S3 8100
S4 7650 S5
Traders can buy Crude Oil Stocks at BSE viz ONGC
Crude Oil Jan’09 futures closed today at NYMEX at
US $ 54.43 pbbl. This is whopping 63.00 % down from the life time high price of
US $ 147.27 price as on 11th July’08. As predicted in the last
forecast US $ 60.00 pbbl level did not hold in Nov’08. In fact the price crashed
below US $ 50.00 pbbl at NYMEX in Nov’08. At US $ 54.43 pbbl close of today the
price is down by 19.73 % from US $ 67.81 pbbl as of close on 31st
Oct’08. I feel that US $ 50.00 pbbl will hold in Dec’08 at NYMEX. I feel the
fair price of Crude Oil is in the region of US $ 60.00 to 75.00 pbbl as
indicated in May’08 forecast.
Gold Spot closed today at
TIMING IS EVERYTHING IN INVESTING.
Let me re-fresh some of the land mark events in the history of global stock markets especially in reference to the American economy.
At the outset, there have been numerous
decade long ‘bear cycles’ where equities have given negative returns and in some
cases near complete wealth erosion. If you had bought NASDAQ stocks in 1998 –
you would be sitting on very large losses discounting the facts that you
invested in ‘blue chips’ like Microsoft or Yahoo etc. Needless to mention one’s
fate in investing in now extinct ‘dot com’ darlings where there has been almost
99 % wealth erosion. This is on the back of holding on to your equity
investments for over a decade. Now here a million dollar question – Why did Mr.
Warren Buffet not lose money in the ‘dot.com’ crash ? Very simple, Mr. Warren
Buffet does not invest in the businesses he does not understand. He did not know
the revenue model or was not convinced about the business model of these
‘dot.com’ companies.. This is when he personally knew another legend – Mr. Bill
Gates. When asked by the media about his ‘nil investments’ in the fancy
‘dot.com’ companies in late eighties – Mr. Buffet said he did not understand the
‘dot.com’ business. He had no qualms about admitting his ignorance to the ‘hot
shot’ world of transacting business on the internet. That is why Mr. Warren
Buffet is the legend as he is ! But his style of investment now needs a drastic
overhaul as per my little knowledge of equity markets in the world. One cannot
hold onto the stocks forever.
The NASDAQ bubble was not an ‘one off ’ event. It happened during the ‘Great Depression’ in 1929 followed by the total collapse of the banking system in 1930. It happened with Japanese stocks in 1990s. It happened with Asian stocks in 1987 during the ‘Currency Crisis’. It happened in India in 1992 and 2001. Some of the Indian stocks are still languishing way off the highs seen during their heydays. Not to forget the stock prices of ‘blue chip’ Indian stocks crash from Jan’08 to Oct’08. Some of the front line blue chip SENSEX stocks are as low as 84.00 to 87.00 % from their life time highs or Jan’08 highs. I do not think you will ever see those prices again for these battered stocks.
In 1981 in America – the situation was similar to what the financial markets are facing now triggered by the ‘Sub-prime Mortgage’ industry’s collapse in 2007. Back in 1970s, most of the US housing loans were made by what used to be known as ‘Savings and Loans’ or called ‘Thrifts’. These entities were giving long-term loans for housing , but were funding their loans from with short-term liabilities. When the US Fed increased the interest rates in October 1979, these ‘Thrifts’ had to pay more on their liabilities, which they could not pass on to the housing borrowers. This made ‘Thrifts’, that time a trillion dollar industry – bleed, leading to a huge crisis in the housing finance industry. To save these bleeding institutions the US Fed in October 1981 intervened and IRD gave massive tax reliefs to these ‘Thrifts’ to bail them out. This led the nefarious Wall Street ‘Bond Traders Scandal’. This was an ill-thought out plan as it looks now in retrospection. American equities markets crashed and especially the ‘Thrifts’ listed on NYSE. An investor has to learn to ‘cut losses’ quickly and maybe sometimes for a few months stay away from equity markets. I have often repeated that profit is ‘like a thief’ – catch it at the right time. Repeat time !
If one thought that this only happens when investors are caught in a ‘bubble burst’ situation, then there are many examples to the contrary, when the investors have lost money even though they bought stock at near absolute lows. Their only fault is that they did not sell out when the prices went up but decided to ‘hold on forever’. The US equity markets will be choppy from now to end 2012 with a series of corrections and rallies with a clear downwards bias. But these signals will appear to the technical analysts a bit too late as mentioned above. American investors have to forget the Warren Buffet style of investing and have to start exiting from American equities at rallies. As per my forecast the American economy will be in very deep recession by 2012 and equities will be around 75 to 90 % from their current values. The banking system will collapse in America in the year 2012, exactly the way it happened in 1930 after the Great Depression of 1929. Hyperinflation will cripple the American economy by 2012. The single biggest blunder the US Fed committed was in 1971 when it recommended to President Richard Nixon that the ‘Gold peg to the American Dollar’ be scrapped. President Nixon signed the proposal from the US Federal Reserve. As of 1972 – one only requires ‘special security paper’ and ‘green ink’ to churn out US Dollars ! History will remember this blunder past 2012 also.
There will be ample opportunities for American equity investors from now till mid 2010 to completely exit from equities. Just start buying physical Gold and ‘Swiss Sovereign Debt Certificates’ when one sells equities. Do not keep too many American Dollars at home or in Banks. Just keep physical Gold under your bed and get the same insured. An American who takes my advice as of now to switch from equities to Gold and ‘Swiss Sovereign Debt’ will be a king in 2012 and not an American who has Dollars in cash. Today Cash is king in America . In 2012 – Gold will be the King in America .
The same holds true for global equity investors because when the American equities crash in 2011 through 2012 – equity markets will crash world wide. After the year 2012 – One will start to witness the “De-coupling” process of ^DJI index from Asian equity indices especially BSE SENSEX and NIFTY in India . Other Asian economies which are export oriented towards USA will be hit very hard. ^SSE Composite, ^N225, ^KOSPI KS11 and ^TWII in that order. There will be less collateral damage to Indian indices – SENSEX and NIFTY as India is ‘not an export-oriented economy’. India hardly exports about 18.00 % of its GDP where as China , Japan , Korea and Taiwan the figure ranges from anywhere between 27.00 to 36.00 %.
Let me take you down the memory lane for ^Dow Jones Industrial Average index ( ^DJI ) for ready reference for equity investors. ^DJI started rallying after hitting multi-year low of around 530 in 1962. Over the next decade, it went on to hit multiple highs of around 1000 in 1966, 1968 and in 1972. But then crashed all the way back to 500+ levels in 1974. So, an investor who had managed to get in even at the absolute bottom in 1962 at around 530+ levels in 1962 – would have actually lost money after 12 years, if he had just held on instead of booking profits when they were there on paper.
The story was the same during the Great
Depression, when the ^DJI rose six fold from just 64 in 1921 to about 380 in
1929. But when the big-crack emerged and by the time it found its bottom in 1932
at around 41 – it had given up all the gains of the eight year Bull Run and some
Needless to say, this is happening all over again as ^DJI has given up all the gains of the five-year Bull Run that started in 2003. ^DJI is back to where it was five years back – 9000 levels. The same holds good for BSE SENSEX and worst for some individual blue chip stocks which are part of the thirty stocks which form the SENSEX with their respective weightage. Fifteen SENSEX stocks are down about 63 % to 84 % of their yearly highs or life time highs witnessed in December 2007 through January 2008. This is complete wealth erosion and not a correction which will be reversible.
A few decades before Warren Buffet advocated investing for the long term, an equally brilliant, if not better – John Keynes had famously said, “In the long run, we are all dead”. Taking the risk of inviting the ire of all Warren Buffet fans – Keynes makes more sense than Buffet.
As regards Timing
the Markets – it is a very difficult job and only a few people can time the
market. But then, making money in the stock markets is not an easy job. It
requires a lot of experience, domain knowledge of industries, discipline and
some luck too !
It is almost impossible to buy at the absolute bottom and sell at the top, but even if one can catch the trend and skim a reasonable amount between the bottom and the top – one has achieved the objective.
To sum it up – Do not hold on to your
stocks till eternity and secondly contact yours truly to get some idea about
when to buy and when to sell equities !
BSE SENSEX closed
today Friday 31st Oct’08 at 9788 down whopping 23.89 % from
30th Sept’08 close of 12860. The intra-month high and low for the
SENSEX were 13204 and 7697
respectively. This level of SENSEX i.e. 7697 is a fresh three year low – as of
November 2005. At this level SENSEX is down 63.70 % from its 52 week high of
21207 as of 8th Jan’08. SENSEX is now trading at levels with its
peers in Asia and in the other emerging markets in Latin America and
FIIs sold net
about US $ 3.00 billion worth of Indian
equities in the month of Oct’08. Our assumption was US 1.00 billion in
Oct’08. This was on the back of global
financial meltdown triggered in
We had predicted
that SENSEX would be bullish in Oct’08 as US Administration’s proposed financial ‘ Bail Out ‘ plan would be approved
by the US Congress in some form or the other. Finally with some riders the US $
700.00 billion ‘bail out’ plan was cleared by the US Congress on Monday
13th Oct’08. ^DJI settled at close on 13th Oct’08 at 9388
– up 936 bpts from Friday’s 10th Oct’08 level of 8451. This 936 bpts surge was the ‘single largest
daily gain’ in the history of Dow Jones Index ( ^DJI ) since 1932. Also it
was a first ever 900+ bpts rally in the history of
My prediction for
SENSEX in Oct’08 were proved incorrect due to the ‘Financial Meltdown’ in global
equity and financial markets on account of the complete financial system
It was a complete
chaos in world equity markets. US Fed on 8th Oct’08 cut the ‘Fed
Funds Rate’ by 50 bpts to now at 1.5 %. Interest Rates were cut by ECB,
Sector : The Realty Sector was the worst hit at BSE. Realty Index
down by 80.82 %. Realty Stocks like
ii) Metals Sector : This index down by 68.95 %. Due to slowdown in the economy and crash of commodity prices globally this sector is the second worst performer at BSE. Copper, Aluminium and Steel prices have corrected globally from 20 to 25 % in the month of Oct’08. Ispat Industries down by 84 % and Jindal Steel by 71 %.
iii) Fertilizer Sector : This index down 68.56 %. GSFC down 78 % and NFL down by 70 %.
iv) Retail Sector : This
index down by 66.66 %.
v) Cement : This index down by 59.96 %. Due to lower GDP growth projections for the current fiscal and also Real Estate Sector in complete meltdown stage the perceived demand for Cement and Steel is weak. CENTURY down 82 %, PRISM CEMENT down 74 % and BIRLA CORP down 70 %.
vi) Banking Sector : This sector down by 54.86 % on account of exposure of Indian Banks to the world financial markets. Blue Chip Banks viz ICICI down 70 %, KOTAK BANK down 66 % and IOB down 55 %.
13th October’08 countries in Europe (
economies finalized a package of approx. US $ 1.45 trillion. Swiss National Bank
announced a package of US $ 5.30 billion to prevent collapse of UBS and Credit
Inspite of all
the measures taken by the Governments of various countries in the world – Equity
Markets were still sinking lower and lower. It seems that US ‘Hedge Funds’ were
unwinding their leveraged positions in equities and commodities and were bring
back cash home. This is reflected in the price of Yen versus the US
On the back of
global cues led by weak ^ DJI – All
global equity markets corrected to new multi-year lows in Oct’08. The sentiment
was still bearish because the operators felt that
Equity Indices in
Europe, Asia ( incl.
20th Oct’08 – RBI cut ‘Repo Rate’ by 100 bpts from 9.0 % to now at
8.0%. SENSEX stabilized at 10000 level. Q2 results of corporate
A few countries
are facing the heat of ‘global financial meltdown’ to the extent that they may
default on interest payments or are on the verge of bankruptcy. These countries
need financial assistance from IMF or other donor countries to stay afloat.
Friday” on 24th Oct’08 for global equities. Global Equity markets
crash – this time led by Asian Equity Markets. KOSPI bench mark index in
Friday” in Indian equity markets too – BSE SENSEX breached very very important
support level of 9000. SENSEX tested a new low of 8567 on an intra-day basis and
closed at 8701 level on 24th Oct’08.. It fell by 10.96 % i.e. 1071 pts. – second biggest daily fall in
SENSEX in its history. SENSEX fell by 1408 pts on 21st Jan’08 –
its single largest daily fall. This SENSEX level of 8701 at close is lowest
since 24th Nov’05. SENSEX hitting three year lows. Unwinding of
‘Leveraged Positions’ in equities from world’s emerging markets by Hedge
Funds. Most of the SENSEX stocks were
down between 18.0 to 88.00 % from their
52 week highs of Jan’08. Complete collapse of the front line Indian Stocks on
Then came another
whammy on Monday 27th Oct’08 and 28th Oct’08. Global
equity markets tanked led by Asian and European Markets.
The US Fed cut ‘
Fed Funds Rate ’ by another 50 bpts on 29th Oct’08 now to 1.0 %. In
Sept’07 when the ‘Sub-Prime Mortgage’ crisis hit the
i) ‘Repo Rate’ cut by 50 bpts to 7.5 %
ii) ‘CRR’ cut by another 100 bpts to 5.5 %
iii) ‘SLR’ cut by 100 bpts from the current level of 24 %
iv) Buy back of ‘MSS Bonds’ by RBI
These measures as above will inject Rs. 400
billion ( US $ 8.1 billion ) into the Indian financial markets.
We are bearish on SENSEX for the month of Nov’08. We feel SENSEX will re-test its low of 7697 in Nov’08. The levels to watch for SENSEX in Nov’08 are :
S1 9000 S2
8080 S3 7650 S4 7500
R1 10300 R2
10600 R3 11000 R4 11800 R5 12500
We feel SENSEX can test a panic bottom of 7210 in
Nov’08. This could be on an ‘intra day’ basis.
We recommend investment in Indian equities at SENSEX levels close to
8000. PSU Banks, FMCG and Petroleum Majors look safe bets. We will advise which
stocks to buy in these sectors. Stay away from Real Estate, Steel, Finance and
Crude Oil Futures at NYMEX crashed from US $ 93.88
pbbl on 3rd Oct’08 to $ 67.81 pbbl today at NYMEX, down 27.77 %. My
call on Crude Oil was ‘wrong’ that US $ 90.00 pbbl would hold in Oct’08. I made
a ‘wrong call’ on Crude for the first time since the year 2000. To err is human
! I feel Crude Oil at NYMEX should hold US $ 60.00 pbbl in Nov’08. For the next
two months i.e. Nov’08 and Dec’08 – Crude should trade in a price band of $
60.00 to $ 75.00 pbbl. We however stick to our long term target prices for Crude
Oil i.e. US $ 180.00 to US $ 300.00 pbbl till the year 2012.
Spot Gold in
The web page was not updated for the past three months as we were very busy working with some of our clients who had ‘sticky’ assets.
BSE closed today 30th September’08 at a bearish level of 12860 down 4.47 % from 30th June’08 closing of 13462. The intra period high and low were 15580 and whopping 12153 respectively. We were bearish for the month of July’08. BSE SENSEX crashed to a new 52 week low of 12514 on 16th July’08. SENSEX rallied to a high of 15580 in Mid August’08 – short of the 200 DMA of 16500. BSE tested a intra-day low of 12153 today to close at 12860. This was a new 52 week low for the BSE SENSEX. At this level of 12153 – SENSEX was down 42.69 % from the yearly high of 21207. In September’08 – Shanghai Composite Index ( SSE Comp ) tested a new 52 week low of 1802 – whopping 70.57 % correction from the yearly high of 6124 level. If BSE SENSEX were to correct 70.00 % from its yearly high of 21207 – we will see a level of 6362. When it can happen in China – it can happen in India too. Please note China is a ‘surplus’ economy on both Trade Account and Current Account. Plus Yuan is controlled ‘in a price band’ by the the Central Bak of China. Indian equity markets are dependent on FII inflows to a great extent.
We had predicted that SENSEX could crash to a level of 12000 in July’08. We were close as it tested 12153 today ! I am reproducing a part of the text from the forecast for July’08 as under :
Preserve your capital and wait till SENSEX to test 12000. Value buying at these levels is logical.
SENSEX is showing a classic bear pattern of ‘head and shoulder’ formation with a neck line at 14000 level. Also it is trading well below the 200 DMA level of 16500. We forecast SENSEX to be bearish in the next 12 to 18 months. There are a few important macro economic factors of the Indian economy, which have a bearing on our forecast, as under :
i) Indian Trade Account Deficit for the current fiscal year 2008-09 will be as high as 8.20 % of GDP. This figure is too high on account of India’s import dependence of Crude Oil. India still imports more than 70.0 % of its total Crude Oil consumption.
ii) The Current Account Deficit for the current fiscal will be near budgeted figure of 1.50 % of GDP.
iii) The most worrying factor is India’s Fiscal Deficit which is expected to cross the dangerously high level of 8.00 % of GDP against a budgeted figure of 2.80 % of GDP. This huge deficit is on account of subsidies in the Petroleum, Fertilizer and Food Sector. FIIs are worried on the high levels of these deficits as above.
iv) Weakness of Indian Rupee ( INR ). FIIs have moved out US $ 9.00 billion from the Indian equity markets so far in calendar 2008. Weak INR is not a positive sign for the FII inflows. The Indian Rupee tested a level of Rs. 47.10 to a US Dollar – a level seen in May 2003.
v) Inflation tested a dangerous weekly level of near 13.0 % in September’08. It has moderated a bit to around 12.0 % but is still on the higher side. High inflation and high interest rates will slow down the Indian GDP growth in this fiscal to around 7.20 to 7.50 %. Targeted GDP figure by MoF, GoI was 9.0 %.
FIIs still hold Indian Equities worth US $ 180.00 billion. Can one imagine what will happen to SENSEX, if in the next three months of calendar 2008 – FIIs pull out another US $ 3.00 billion from the Indian Equities ? By end March’09 they pull out another us $ 3.00 billion. God bless Indian Equities !
In the near term there could be sharp 1000 to 1200 pts rally in the SENSEX in month of October’08 – after the American Financial Bailout plan is approved by the US Congress. ^DJI crashed on 29th September’08 to close at 10365 down 778 pts after the US Congress did not give a green signal to the $ 700 billion ‘bail out’ plan proposed by the Bush Administration. This was the single largest daily fall in the history of ^DJI in absolute terms. NASDAQ also crashed on 29th Sept’08 by 200 pts to close at 1984 – lowest closing since April 2000. Republicans are for ‘free markets’ and Democrats saw no ‘consumer protection’ in the proposed plan. Hence the rejection of the said plan. We feel that this financial ‘bail out’ by the US Government is not a panacea for the problem facing the US Financial system. Some basic overhauling is needed.
We in India today saw the first signs of ‘De-coupling’ from the American Equity markets. The SENSEX did crash today to a low of 12153 but recovered over 700 pts from this low to close at 12860 – up from 29th Sept’08 close of 12596. This was on the back of SEBI’s announcement that the ‘US Financial Crisis’ would not effect the Indian banking system in a major way as it has hit Europe. Sate owned Indian banks have limited exposure to the US Financial Sector. Some Private Sector Indian banks were hit especially – ICICI as tested a new 52 week low today but recovered at closing of trade. Also the news from America was positive that the ‘bail out’ plan will be approved by the Congress in a few days with some amendments or some riders. This calmed the sentiment in Indian and some Asian Equity Markets. Only ^N225 was down by about 4.12 % today at close and rest of the markets in Asia – China, Singapore, Taiwan, Korea and Hong Kong were up or flat on close.
The financial crisis which has hit America in the month of September 2008 has left the equity investors stunned. We are not giving a details of the giants which have gone under in this crisis. Who would have thought that the ‘Sub-prime Mortgage’ crisis of 2007 in USA would have such ramifications ? LEHMAN, MERILL, FANNIE, FREDDIE, AIG etc would be bankrupt, merged or nationalized. We think there were ‘excesses’ in the US Financial Sector on the back of capitalism at its peak and free enterprise. Land of Opportunities ! It is now being said in the hindsight that the sector needs some more regulation and checks.
We think that the market operators in USA and Europe knew that they were playing with fire. These guys have made their bucks and the retail investors are having junk equities in hand. It is always the small investor who suffers. This is a worldwide story !
We feel that Indian Equities will rally as mentioned above in the month of October’08 as the US financial ‘bail out’ plan will be approved by the US Congress in some form or the other. ^DJI and NASDAQ will rally. For the balance two months – November’08 and December’08 we feel that US Markets will correct again. We strongly believe that this malaise in the US Financial Markets will not be solved by a US $ 700 billion to US $ 1.20 trillion ‘bail out’.
The levels to watch for the SENSEX in October 2008 are :
S1 12500 S2 12000 S3 11500 S4 11000
We are not recommending any investments in Indian Equities till further advise. Trend reversal is only when SENSEX trades covincingly above 14500 levels. Looks very difficult in October'08.
Crude Oil futures tested a record high US $ 147.27 pbbl at NYMEX on 7th July’08 and then corrected to as low as US $ 90.00 pbbl in September’08. It is today trading at NYMEX at US $ 100.00 pbbl for November’08 Futures. We feel Crude can test a level of US $ 90.00 pbbl again in Oct’08. We feel US $ 90.00 pbbl level should hold in Oct’08. Global analysts expect that Crude Oil will slip to US $ 80.00 pbbl level in the short term due to slow down of the American economy. Long term we remain bullish on Crude Oil.
The BSE SENSEX closed today Monday 30th June’08 at 13462 down whopping 13.55 % from 6th June’08 close of 15572. The intra month high and low for the SENSEX were 15790 and a whopping 13406 respectively. SENSEX earlier 52-week low was 13760. I had predicted that BSE SENSEX would be bearish in June’08 as per last month’s update. SENSEX is now 36.50 % below its all time high of 21202 as of Jan’08. I feel there is some more downside in the SENSEX due to political uncertainity in India and higher global Crude Oil prices.
SSE Composite in Shanghai crashed today to a new 52 week low of 2693 ( earlier 52 week low was 2696 ) but recovered marginally to close at 2736. Chinese SSE Composite has corrected the most in Asia. At close today of 2736 – SSE Composite in Shanghai is down by 55.32 % from its peak of 6124.
S4 level of 14700 was breached convincingly and SENSEX today tested a new 52 week low of 13406 on an ‘intra day’ basis. As predicted the main culprit was record high Crude Oil prices and contingent inflation worldwide. FIIs and Indian investors have dumped stocks in a situation which looks like ‘bull capitulation’ for the past three trading sessions. Blue Chip stocks are trading at their yearly lows and in some cases at two yearly lows. Sectors the most brutally hit are :
i) Capital Goods - Siemens, Alstom India, Larsen & Toubro, ABB
ii) Real Estate - Unitech, DLF, Omaxe, Parsvanath, Shobha, IBRE
iii) Infrastructure - HCC, Gammon, IVRCL, Nagarjuna
iv) Cement - ACC, Gujarat Ambuja, Ultra Tech Cement
v) Banks - HDFC, ICICI, IDFC, SBI, PNB and all PSU Banks
vi) Crude Oil Refiners – BPCL, HPCL, IOC, RPL
The worst hit are the Stocks from the Real Estate Sector in India. I also feel that there will be a 15.00 to 20.00 % further correction nationwide in residential real estate prices and also in organized retail sector i.e. shopping malls. There is already a 10.00 to 15.00 % correction in real estate prices in some pockets of India since the past six months. Too much supply, credit crunch and higher cost of funds will affect this sector. Indian stock markets are in a bearish trend now. Trend reversal will happen if SENSEX trades above 14500. Looks difficult as Crude Oil and recession in the American economy are of concern.
Inflation in India hit at a 13 year high ( since 1995 ) at 11.42 % as on week ending 14th June’08. Corresponding figure for June 2007 on week on week basis was lower at 4.13 %. RBI moved in swiftly and hiked CRR by 50 basis pts to 8.75 % on 24th June’08. It also hiked ‘Repo Rates’ by 75 basis pts in two stages ( 25 bpts on 11th and 50 bpts on 24th June’08 ) to 8.5 %. Dalal Street was not expecting a ‘double whammy’ from RBI i.e. hikes both in ‘Repo Rate’ and ‘CRR’ . Post these hikes major Indian Banks have hiked their PLRs. Inflation in India is galloping @ 0.39 % on week on week basis as seen in the past four weeks. This is a cause of major concern as at this rate yearly inflation would be in excess of 16.00 %. Remember this is when the GoI has only hiked motor fuel prices of only 10.0 %.
If prices of Diesel, Gasoline, LPG and Kerosene are hiked by another 20.00 % in India – annual inflation figures would hit around 18.00 %. If Crude Oil prices test US $ 150.00 pbbl in July’08 – Government of India ( GoI ) may not be in a position to hike prices of the said four petroleum products. This fiscal is an election year in India. Left Front will oppose any further hikes. If GoI does not hike prices - Fiscal deficit will be further hit. China can afford to subsidize prices of Gasoline and Diesel to some more extent as it is a ‘fiscal surplus’ country. India on the other hand has the highest percentage of ‘Fiscal Deficit’ to GDP ratio in the world.
Indonesia has hiked motor fuel prices by 30.00 % and Malaysia by 41.00 % recently. Oil exporting and producing countries viz Venezuela, Russia, Malaysia and Indonesia also face double-digit inflation rates ranging from 10.50 % to 29.30 %. Inflation is a global phenomenon due to high Crude Oil and other commodity prices - especially food grains ( rice and wheat) and edible oils. Prices of food grains and edible oils have doubled or trebled in the past twelve to eighteen months. These are a common man’s daily needs worldwide and high food prices hurt people in poor countries in Africa, Asia and Latin America. In India the Food subsidy for over 200 million poor people through PDS ( Public Distribution System ) insulates them from high global food grain, edible oil, sugar and cooking fuel ( LPG and Kerosene ) prices. But there is a massive corruption in the PDS in India. It is assumed that only 50.00 % of the above subsidized items are actually sold through PDS to the poor people in India. The rest is ‘siphoned off’ ! There is a nationwide mafia, which sells these subsdised items as above in the open market and makes money. We cannot do anything about this malaise in India.
Crude Oil Futures today hit a record high of US $ 142.99 pbbl at NYMEX in Asian electronic trading today. US Dollar hit a new three week low against major global currencies – Euro, Pound Sterling and Swiss Franc etc. OPEC President told the world media on 26th June’08 in Jeddah, Saudi Arabia that prices could test US $ 150.00 pbbl in July’08. Morgan Stanley also predicted that Crude Oil will test a price of US $ 150.00 pbbl on 4th July’08. The prediction by the day really surprised me ! The equity markets tanked globally on Friday 27th June’08. In New York ^ DJI tested 11298 not far from its 52 week low of 11249. It closed at 11347. SSE Composite in Shanghai crashed by 5.29 % to close at 2723 ( close to its 52 week low of 2696 ). BSE SENSEX crashed by 4.30 % to close at 13802 ( breaching its 52 week low of 13780 on intra-day basis as 13760 ).
I feel there is some more pain left in ^ DJI and hence the global equity market indices. The ‘De-Coupling’ from the American Economy has still not started and maybe it might take another three years or the same to happen for emerging markets and other global equity markets.
The Crude Oil prices overshot my target of US $ 141.00 pbbl as per my ‘Special Crude Oil Alert’ of May’08. Bingo – again bull’s eye ! Crude Oil has broken major resistance level of US $ 140.00 pbbl. Crude Oil will flare up to US $ 150.00 pbbl in a matter of days if the prices at NYMEX close above US $ 143.10 pbbl for three consecutive days. Expect this to happen in July’08. There is a strong support for Crude Oil at US $ 139.00 pbbl.
I stick to my prediction as of 28th April’08 that Crude Oil will test US $ 180.00 pbbl in June 2009. Maybe we will see this level of US $ 180.00 before June 2009 if Israel attacks Iran’s nuclear facilities at Natanz and Ishafan. There is a serious possibility of Israel’s attack on Iran’s nuclear assets before January 2009.
The whole world including King Abdullah of Saudi Arabia is blaming ‘speculators’ for the current high prices of Crude Oil. Mr. Chakib Khelil – President of OPEC ( Oil Minister, Algeria ) made it public in Jeddah on 22nd June’08 after the crucial meeting of representatives of OPEC countries and of the importing countries and also later that :
- There was no need to increase supply of Crude Oil.
- Increased production was irrational and illogical. We believe the market is in equilibrium.
- Price of Crude Oil is disconnected from the fundamentals. It is not a problem of supply.
- Speculators have played a key role in doubling the price of Crude Oil in the last twelve months.
- Why would you have a supply problem when demand is going down ?
- We have done what was to be done at Jeddah and the prices of Crude will not come down. In Q3 2008 – we expect the price of Crude Oil will be in the range of US $ 150.00 to $ 170.00 pbbl.
- ECB’s decision to hike interest rates to 4.25 % in July’08 will lead to further depreciation of US Dollar and will trigger Crude Oil prices further upwards.
- If Iran conflict erupts price of Crude Oil could be anywhere between US $ $ 200.00 to US $ 400.00 pbbl.
It seems the Israelis are preparing for an attack any time on Iran’s nuclear establishments at Natanz and Ishafan. Israeli Transport Minister told media last week – “ If Iran continues with its nuclear program for developing nuclear weapons, we will attack it any day. UN Sanctions on Iran are ineffective”. Iran is preparing for such an impending attack from Israel.
On insistence of European consumers – Saudi Arabia agreed to increase its daily Crude Oil output in July’08 onwards by 2,00,000 bpd. This is peanuts up from 9.50 million bpd to 9.70 million bpd. This had no effect on global Crude Oil prices. OPEC conclave at Jeddah was a ‘sham’ in my view. I feel that Saudis – world’s largest exporter of Crude Oil and other OPEC members – UAE, Oman, Qatar Kuwait etc viz have a ‘vested interest’ in high prices of Crude Oil. Even Non OPEC countries viz Russia, Venezuela etc have a similar interest. There are some supply constraints from a few countries – Nigeria which is producing 20.0 % below its capacity due to militancy in the Niger Delta and also now in ‘Offshore’ Nigerian region. Libya which only controls only 2.00 % of world output has threatened to cut Crude Oil production if the American administration puts ‘freeze on its US Dollar assets’ in global banks on account of any ‘terrorism related sanctions’ being slapped on it. Libya has Africa’s largest proven Oil reserves. Production from world’s second largest exporter of Crude – Russia is stagnant. These developments further stoked global Crude Oil prices.
Now it is a known fact that apart from the above countries – Investors, Hedge Funds, Pension Funds and Sovereign Funds have pumped in trillions of US Dollars in Crude Oil Futures as a hedge against a weak US Dollar. This bubble will not burst, as there is too much money at stake. Yes there could be corrections in the price of Crude on its upward journey to US $ 170 pbbl. At what price level there is a major correction in Crude Oil prices is anybody’s guess? Renowned energy analysts from America expect that Crude Oil prices will correct from US $ 160.00+, as demand destruction will set in at prices higher than US $ 160.00+ pbbl. They expect the prices to correct to US $ 110.00 to US $ 120.00 pbl. They feel that at US $ 100.00 pbl there is a very strong support. I feel if Crude Oil prices correct to US $ 120.00 pbbl – it is a good buying opportunity.
American economy is showing signs of distress. M/s. General Motors stock was trading at only US $ 11.00 on 6/27/2008. This is the lowest price for GM’s stock in the last in 53 yrs. ( lowest since 1955 ). As per Marc Faber, Investment Guru :
- One or two big car makers in Detroit will be bankrupt in 2008 or 2009.
- Same holds good for Airline Companies in USA due to sky-high ATF prices.
- One or two more Bear Sterns could happen. Already more than 150 Banks and Financial Companies in USA are already bankrupt since mid 2007. They hide their rotten NPAs. It is a joke that investment banks go bankrupt and Fed bails them out with taxpayer’s money.
- Lehman and CITI have declared huge Q2 losses – US $ 3.00 billion each.
- Buy Gold at these US $ 900+ pto levels.
I had mentioned on 9th May’09 forecast that : “ I expect SENSEX to be bearish and feel we will see a level of 13680 in 2008 and by end 2009 we could see a level of sub 10000. The prime reason is inflation and reduced FII inflows in balance seven months of calendar 2008 and through 2009. Crude Oil will spoil the party ! ” Bulls eye again !
We have seen a low of 13406 today for the SENSEX as mentioned above. India is ‘not a preferred destination’ for FIIs as compared to Latin America, Africa and Asia as per EPFR. Countries in Latin American and Africa have commodities export driven economies and are ‘surplus trade account’ economies. In India we might not be able to achieve the export target of US $ 200 billion for the fiscal, as there is a recession in the American market. Also there is a ban on exports of Rice from India. FIIs are not keen to invest in countries having large ‘trade account deficits’ and ‘current account deficits’ – India currently has huge deficits on both the accounts.
FIIs have a net outflow of US $ 6.0 billion from Indian equities as of 27th June’08 as compared to US $ 18.00 billion of inflows in the corresponding period in 2007. There is a sliver lining on forex flows into India - PE Funds. As per M/s. Zephyr Inc. – India is among the top ten countries in terms of value of PE deals across the world. This is inspite of global credit crunch, high crude oil prices and inflation.
As of end May’08 - PE companies have invested a record US $ 6.40 billion into Indian companies. By end December’08 – the figure could touch US $ 16.00 billion. In India – manufacturing, telecom and infrastructure are the three main recipients these PE Funds.
India tops as regards global inward remittances by NRIs who stay overseas. Indian abroad sent home US $ 27.00 billion in the last fiscal 2007-08. This makes India the world’s single largest recipient of global remittances. In India fiscal 1990-91 this figure was only US $ 2.10 billion. India’s forex reserves stood at US $ 312.00 billion as of 27th June’08. PE funds and Forex remittances will make up for the FIIs outflows from Indian equity markets.
Global analysts expect Indian Stock Markets to be bearish in the coming months.
CLSA in a note to its clients mentions that a re-test of SENSEX at 12000 cannot be ruled out in 2008 due to high inflation and weaker INR. But this level will a ‘massive buying’ opportunity for Indian Stocks. Politics is not a big worry as compared to inflation inspite of RBI’s increasingly ‘pre-emptive’ monetary tightening stance.
JP Morgan Asian Equity Strategist – Mr. Adrian Mowat expects SENSEX to test 9900 in 2008 due to high inflation, huge fiscal deficit and reduced FIIs flows into Indian equities. I had predicted as highlighted above that we could see a level of sub 10000 for SENSEX by end 2009. This may need a revision. If price of Crude indeed tests US $ 180 pbbl in 2008 itself then we can see SENSEX at 9900.
I am bearish for the Indian equity markets for the month of July’08. If BSE SENSEX trades below 13680 for three consecutive days then expect a sharp cut in the SENSEX. The levels to watch in July’08 are :
R1 13680 R2 14000 R3 14500
The update is delayed as I was waiting for the Government of India (GoI) to announce a hike in fuel prices. GoI today finally increased retail prices of Gasoline, Diesel and LPG by Rs. 5.00/ltr, Rs. 3.00/ltr and Rs. 50.00/15 Kg cylinder respectively. The poor man’s fuel was – Kerosene was ‘untouched’. India still imports Kerosene and LPG. Import duty on Crude Oil was brought to 0.00 %. Import duty on Gasoline and Diesel was reduced to only 2.50 %. Import duty on other Petro-products ( FO, BITUMEN, LSHS, ATF etc ) was reduced to 5.00 %. GoI reduced central excise duty on Gasoline and Diesel by Rs. 1.00/ltr. This Petro products fuel hike is nominal because of political compulsions of running a coalition government in India. Indian consumers are still largely insulated by high global Crude Oil prices. Post hike there is still a ‘huge subsidy’ burden on GoI. Details are given below in this update. Sri Lanka, Pakistan, Indonesia and Russia have hiked retail prices of Gasoline and Diesel by as high as 33.0 % in the recent past. Malaysia is debating a 40 % hike in retail prices of Gasoline and Diesel by August’08. JFI – International prices of Gasoline, Diesel and ATF are up by 44.2%, 91.3% and 91.0 % respectively since the past twelve months. GoI has increased retail prices max. by 10.0 % only.
BSE SENSEX closed today Friday 6th June’08 at 15572 down 8.8% from 9th May close of 17081. The intra month high and low for the SENSEX were 17386 and 15314 respectively. In my last month’s forecast I mentioned that I am bearish on the SENSEX and expect to see a level of 13680 in 2008. I also mentioned that Crude Oil would spoil the party ! OPEC still supplies 30.0 % of world’s Crude Oil output. ‘Dubai-Muscat’ Crude Oil basket now sells at sixty times its cost. OPEC blames speculators for the price of Crude since US $ 60.00 – 75.00 pbbl. I have been saying the same from US $ 75.00 pbbl onwards. On 25th May’08, OPEC officially announced to the world media that “Quote – There is no need to raise oil output as supply is already above demand – “Unquote. Please see my Crude Oil Special Update of 5/22/08 !!!
NYMEX Crude Oil futures tested an intra-day high of US $ 139.15 today in NY and closed at a bullish level of $ 138.54 pbbl. Today the price of Crude Oil rose by $ 10.75 pbbl ( up 8.41 % ) at close at NYMEX vis a vis a close of $ 127.79 on Thurday 6/5/2008. If one adds the gains of Crude Oil prices on 5th June’08 and today – then a record has been created as the highest two day rise in the Crude Oil prices in the history of NYMEX since its inception in NY, USA. Analysts claim this rise on account of – Weak US Dollar, Highest monthly unemployment rate hike in USA in the past twenty two years ( up 5.5 % ) and Tensions in the Middle East on account of Israel’s posture towards Iran. In addition Morgan Stanley in its report to its investors today predicted that Crude Oil prices could test US $ 150.00 pbbl at NYMEX in the first week of July’08 on account of freight constraints. This record surge of 8.41 % in the price of Crude Oil Futures at NYMEX in a single trading day today sent shivers down the ^DJI and NASDAQ COMP indices which were down at close by 3.13 % ( 395 pts down at 12209 ) and 2.96 % ( 75 pts down at 2475 ) respectively. Expect a 3.00 to 5.00 % fall in Asian Equity indices on Monday 9th June’08 !
Record high Crude Oil prices did spoil the party in the equity markets in India in May’08, but there are a couple of other macro-economic factors which need to be addressed by the GoI very seriously failing which FIIs will pull out more funds from the Indian equity markets in the short to medium term. As of 5th June’08 – FIIs have been net sellers of Indian Equities for approx US $ 4.50 billion in calendar 2008. Had it not been investment of funds into Indian equities by Mutual Funds to the tune of US $ 7.12 billion in April and May’08 – SENSEX would have crashed to my predicted level of 13680 in May’08 itself. Indian Banks are also parking funds in MFs, as corporate loan demand is slow on account of lower growth in the Indian economy. Indian Mutual Fund industry is now worth approx. US $ 150.00 billion. JFI – In India all commercial banks have to invest at least 25.0 % of their deposits in Government Bonds under RBI guidelines as under SLR (Statutory Liquidity Ratio ).
The first factor is Inflation in the Indian economy, which for week ended 30th May was at 8.10 % - highest since September 2004 at 7.86 %. This figure does not reflect the real level of inflation, as there are huge subsidies in the Indian economy. If the Petroleum and Fertilizer subsidies were cut by 50 % - even then the real inflation would be in excess of 10.00 to 12.00 %. High inflation is a global phenomenon because of high Crude Oil prices. Inflation in China is running at a twelve year high at 10.00 to 12.00 %.
The second macro factor, which needs to be highlighted, is India’s growing Fiscal Deficit. The target for the current financial year ( April 2008 – March 2009 ) for India’s Fiscal Deficit is 2.50 % of the GDP. India has the highest Fiscal Deficit as a percentage of the GDP in the world as of this calendar year. Even after the marginal price hike of Petro-products today – India’s Fiscal Deficit will be is close to 6.0 % of its GDP. RBI Governor feels that the GoI is not correctly reporting fiscal deficit figures. He feels India’s Fiscal Deficit for current financial year will be in excess of 6.0 % of the projected GDP. He feels the figure could be anywhere in between 6.0 % to 9.0 %. These are alarming levels assuming the GDP growth this fiscal year is one percent lower at 8.0 % instead of 9.0 % as reported by GoI for the last fiscal year i.e. 2007-08. Indian GDP growth has been 9.0 % for the past three fiscal years and in the fiscal year 2006-07 – Indian GDP for the first time crossed US $ 1.00 trillion. India joined the trillion-dollar club after sixty years of Independence.
The subsidies in the various sectors of the Indian economy are to be blamed for these alarming levels of Fiscal Deficit. Subsidy for Petroleum Sector for current fiscal is at whopping (post price hike, duty cuts and tax breaks ) Rs. 2,000.00 billion ( US $ 50.00 billion ) assuming the Crude Oil price basket for India remains at US $ 129.00 pbbl for the current financial year. The break up of Petroleum Subsidy at Rs. 2000.00 billion ( US $ 50.00 billion ) is as under :
i) PSU Oil and Gas companies i.e. ONGC, OIL and GAIL will bear a loss of Rs. 450.00 billion ( US $ 11.25 billion )
ii) PSU OMCs will bear a loss of Rs. 200.00 billion ( US $ 5.00 billion )
iii ) For the balance Rs. 1350.00 billion ( US $ 33.75 billion ) GoI will issue ‘Oil Bonds’ to OMCs.
This in my view is utter nonsense. At least pass on 30.00 % of the effect of Crude Oil prices to Indian consumers and not 100 % as in USA where Gasoline is at US $ 4.00+ per gallon at the retail gas station level.
The Fertilizer Subsidy estimated for the current fiscal is Rs. 1,000.00 billion ( US $ 25.00 billion ). Farmer’s Loan waiver scheme of OTS ( one time settlement ) will cost the GoI now Rs. 716.00 billion ( US $ 17.90 billion ) up from US $ 15.00 billion as reported earlier. This figure has gone up from US $ 15.00 billion to US $ 17.90 billion. NREGS will cost the GoI approx. Rs. 500.00 billion ( US $ 12.50 billion ).
I am not taking other small subsidies in the Indian economy. Just add the above four main subsidy heads - US $ 50.00 + 25.00 + 17.90 + 12.50 billion and the total subsidies in the Indian economy will be US $ 105.40 billion in fiscal 2008-09. Assuming Indian GDP for the current fiscal is US $ 1080.00 billion – Subsidies are estimated at 9.76 % of GDP. This figure is too high. FIIs are not comfortable with countries, which have high current account deficits and fiscal deficits. As mentioned above - FIIs have pulled out US $ 4.50 billion from the Indian Equity markets as of 5th June’08.
Financial markets in USA and EC are still ‘jittery’ as Financial Sector stocks have taken a beating in May’08. Credit market is still nervous in USA on account of some bankruptcies in Financial Sector. Lehman Bros. needs cash infusion to stay afloat on account of losses due to the exposure to ‘ Sub-prime Mortgage’ business in USA. Now there are undercurrents in the US Airlines Industry as ATF prices have doubled in the past twelve months from $ 79.36 pbbl to 151.62 pbbl.
I feel the American Equity markets and prices of Crude Oil will keep the global equity markets bearish in June and July’08. SENSEX could test lows of March’08. The levels to watch for SENSEX in June’08 are as below :
R1 16000 R2 16400 R3 17400
There was some good news on the Agricultural sector for the Indian economy. Agriculture sector grew by 3.5 % in fiscal 2007-08 as against target of 2.6 %. I hope the SW monsoon in India is above average this fiscal.
The forecast for April 2008 was not posted as I was unsure of the trend of the Indian equity markets and also because of announcement of monetary policy by the RBI on 29th April’08. BSE SENSEX closed today – Friday 9th May’08 at a bullish level of 17081 up 3.2% from 5th March’08 close of 16542. The BSE SENSEX breached S3 level of 15330 as predicted in the last forecast on 17th March’08. I had mentioned in my last forecast that – Quote “ I expect SENSEX to test its low of Jan’08 in the coming weeks.” Unquote. My prediction was correct. Not only did the SENSEX test its low of Jan’08 ( 15332 ) but crashed to fresh low 14738 ( close call of 14700 as predicted ) on 17th March’08. At this level of 14738 – BSE SENSEX was down 30 % from its lifetime high of 21207. SENSEX fell by 951 pts on 17th March’08 – second largest daily fall in the history of SENSEX. On the other side BSE SENSEX could not breakout the R1 level of 18300 as mentioned in the last forecast. RBI hiked CRR for Commercial Banks by 25 basis pts on 29th April to 8 % from 7.75 % earlier.
On Friday 14th March’09 – BEAR STERNS went bankrupt and ^DJI tanked by nearly 200 pts. On the same day US Federal Reserve cut ‘Discount Rates’ for the commercial Banks by 25 basis pts. In addition the US Fed allowed access to the ‘sovereign funds’ for Investment Banks. On 18th March’08 – US Federal Reserve cut ‘ Fed Funds Rate’ by 75 basis pts from 3.0 % to 2.25 %. ^ DJI gained by a massive 420 pts on close of 18th March’08 after this huge interest rate cut announcement by US Federal Reserve. This brought stability in the global equity markets including markets in Asia. BSE SENSEX recovered thereafter as global markets also recovered after BEAR STERNS’s revised bailout by the US Federal Reserve through JP Morgan !
I am bearish on the Indian Equity Markets from now till the next eighteen months or so i.e till end 2009. There could be rallies in between this period but the same will be short-lived and should be used to exit the equity markets in India. I mentioned in early May’07 that investors should allocate only 15 % of their funds in equity markets in India and balance 85 % should be invested in Debt, Crude Oil and Gold. SENSEX in early May’07 was at 14000+ levels and peaked in Jan’08 to 21200+ levels. Crude was at $ 68 pbbl levels and Gold was at $ 690 levels during the same period. Then again in Oct’07 – I advised investors to completely exit the equity markets and sit on cash or invest in Gold or Crude Oil. There was a savage correction in Indian Equity Markets in Jan’08 and also in the Asian Equity Markets. Some blue chip stocks were down between 25 to 50 % in this correction. Needless to mention the fate of secondary and momentum stocks, which were hammered over 100 % and above. Indian investors may have lost substantial profits which they made since the bull run started in India in 2003 in this brutal correction in Jan’08. Just for information at 3100 levels as of now – SSE Composite Index i.e. Shanghai Comp Index is down 50 % from its life time high of 6100+ levels. Why BSE SENSEX cannot correct by around 50 % from its life time high of 21200+ levels ? Indian GDP growth can slow down in the current fiscal ( April 2008- March 2009 ) from the projected 8.4 % to around 7.5 % on account of rising global inflation.
I expect SENSEX to be bearish as per above and feel we will see a level of 13680 in 2008 and by end 2009 we could see a level of sub 10000. The prime reason is inflation and reduced FII inflows in balance seven months of calendar 2008 and through 2009. Crude Oil will spoil the party !
In Feb’07 when Crude was hovering US $ 58 pbbl – I had predicted that it will test a level of US $ 84 pbbl in the next six to nine months. Crude Oil zoomed past $ 84 pbbl level to test an all important level of US $ 90 pbbl in Oct’07. Commodity pundits and economists who follow Crude Oil prices were laughing at my predictions in Feb’07 as they were laughing at my prediction about prices of Gold in Oct’05. Investors can re-check my website for the respective time periods as mentioned above. I had predicted a price of US $ 120 pbbl by H1 2008 ( June 2008 ) in my last forecast. Crude Futures tested a new life time high of US $ 126 pbbl today at NYMEX today on an intra-day basis. Slightly earlier than my target of June 2008 !
I wrote to my principals in USA on 28th April’07 as below :
BSE SENSEX closed today – Wednesday 5th March’08 at 16542 down 9.32 % from 1st 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 3rd 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 3rd 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 28th and 29th 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 3rd 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 29th 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 :
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 3rd 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.
BSE SENSEX closed today – Friday 1st Feb’08 at 18243 down 11.80 % from 4th 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 22nd Jan’08 over concerns of an economic recession looming large over the US Economy. Asian equity markets crashed on 22nd and 28th Jan’08. BSE SENSEX crashed on 21st and 22nd 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 21st 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 22nd 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 22nd 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 – 18th, 21st and 22nd 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 22nd 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 25th 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 30th 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 :
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 29th 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.
conserve your capital and invest in Gold for long-term gains
The update is delayed as I was waiting for some important data from the US Market. Economic indicators from US are not encouraging. Job data, housing market and manufacturing show signs of distress and slow down respectively.
BSE SENSEX closed today – Friday 4th January 2008 at a new life time high level of 20687 up 1.53 % from 12th Dec’07 close of 20376 as per last update. The intra-period high and low for the SENSEX were 20763 and 19009. SENSEX convincingly breached S2 level of 20000 on account of weak US equity markets as there were further losses announced by financial institutions on account of ‘sub-prime’ issue.
SENSEX recovered all its losses from 19000 level on account of buying from domestic institutions and investors. FIIs were sellers in the Indian equity markets from 12th Dec through 31st Dec’07. On 17th Dec’07 – SENSEX fell by 769 pts, second largest daily fall in its history. NIFTY had its largest daily fall in its history – 271 pts.
On a net basis FIIs have invested US $ 17.00 billion in Indian equities in calendar 2007 – highest so far on an annual basis. Previous high was $ 10.70 billion in calendar 2005.
FIIs have been active buyers in the Indian Equity markets since start of 2008. Their annual allocations are still to be announced but it is felt by leading analysts that India will be a major destination for FIIs in 2008 ahead of other emerging economies in the world. The SENSEX levels predicted by the pundits is in the region of 22000 to 25000 for calendar 2008. I have my doubts on these levels. The world’s largest economy is showing signs of entering into a ‘recession’. The benchmark ^DJI is showing signs of weakness. I do not believe in the much discussed ‘Decoupling’ theory.
Global equity markets will correct in case ^DJI and NASDAQ correct in USA. I am sure SENSEX will also correct in India. The level to watch for SENSEX in Jan 2008 are :
S1 20500 S2 20250 S3 20000
If 20000 is breached then be prepared to see a level of 19000 in Jan or Feb’08 – It all depends on the global equity markets led by ^DJI. I am of the opinion that SENSEX is not ‘decoupled’ from global equity indices - ^DJI, ^N225, ^HSI, KS11 etc.
On 2nd Jan’08 – Crude Oil at NYMEX tested a record US $ 100 pbbl. In the short term Crude should hold $ 90 pbbl level. If Crude Oil closes for three consecutive days above US $ 100 pbbl at NYMEX – the next level would be $ 105 pbbl. Hectic short covering could push Crude from $ 105 level to $ 110+ level in a matter of days. Expect a global sell off in equities if Crude tests $ 110+ levels.
On 3rd Jan’08 – Spot Gold tested a life time high of US $ 868 pto.This is the highest level since 17th Jan 1980 when in the futures market Gold tested $ 871 pto. My prediction of US $ 870 pto was by Mid 2008. BINGO ! I am revising my target for Gold to US $ 900 pto latest by end 2009.
Buy Gold and have joy ride!
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