Weekly equity update: June 12, 2010

After 2 consecutive weeks of gains, equity markets ended this week slightly below the last week’s level, loosing 0.3% or 52 points on Sensex to close at 17064.95.

First two days of the week saw markets plunging 500 points to a weekly low of 16617 due to concerns of deepening Eurozone crisis. But thereafter, Wednesday onwards, markets started covering up and in three days regained almost all of the lost ground.

Friday’s IIP data which showed a stronger than expected growth of 17.6% also helped the markets along with news that RIL will buy Infotel Broadband Services, which won all India broadband spectrum in an auction that ended on Friday. This led RIL to gain 3% on Friday to close at Rs 1,046.25.

The way in which markets have rebounded from the recent low along with strong production data and comfortable monsoon progress have put markets are on a strong footing. Unless there are fresh jitters from Eurozone and high inflation (scheduled to be released next week) we expect market to carry on with the positive sentiments of last 3 days.

Author:Praveen Bajaj

Trading Nifty as global liquidity dries up…

This Could Evaporate Liquidity From Markets...

Yesterday the European Central Bank (ECB) announced the key rates and as the streets expected, they were unchanged.

There was no positive out of the press conference from Trichet, the only thing he did was subtly pleading to the world that “EURO is a stable currency’ and reiterated again the same things that the ECB would leave no stone unturned to save the real economy. This lead to over 200 points rally in Dow Jones and more than an 1.5% gain in Euro. I believe that it is more of a short covering bounce back and the only direction the Euro is headed is southwards.

I expected July to be a calm month for the markets, and the biggest reason is that the China AG Bank is coming up with the world’s biggest IPO of all time. On July 16th it is coming up with an IPO of $30 billion and this could really suck huge liquidity from the markets even if it is just fully subscribed. One should wonder what if, the issue gets oversubscribed by two times and three times. It could evaporate the liquidity of the size of two times Reliance Industries total market capitalization which is around Rs 3 lakh crores.

In history too IPOs of high magnitude from good companies have lead to a dearth of liquidity in the Secondary Markets and this time also I expect the same Ag Bank, whose 350 million customer base is bigger than the population of the United States, had $US7.1 trillion in assets as of 2008, its last public financial filing, is a bank which even the institution would love to own and hence the liquidity could dry up.

Hence a good trading strategy for Traders could be to establish position in put options in Nifty expiring in the month of July, as the VIX has also come down significantly. For Investors the best is to stay out of any extravagant short term positions and continue their SIP.

Happy Investing…!!

Author:Rahul Sonthalia, Research Head, Kredent

Auto Sector Review

 Friends we are very happy to post the 100th post on MoneyBol.com. In a short time we have got great response from readers and investors like you. Thanks for your appreciation for our research of Economy and Markets. We will continue our endevour to serve you with quality content via MoneyBol.

 

Our analysts update you regularly on the developments in sectoral outlook so as to enable you to take better investment decisions. Following is an update from our analyst Rahul Sonthalia on automobile sector

  • A reduction in excise duty helps to make car cheaper
  • Sale of passenger vehicle grew at 25% in FY2009-10
  • Although Tata Motors is delivering Nanos but Maruti 800 leads the market
  • Hyundai become the second-highest selling car by overtaking Maruti Wagon R market
  • Overall, Tata Indigo sales have risen in the last quarter of 2009-10
  • On the otherside Mahindra-Renault Logan sales fall by 60%
  • The UV major Mahindra & Mahindra’s share shot upto 55%,Armada grew 31.3%,scorpio grew 25%,but newly launched Xylo sold 28558 units which is 50% of its past
  • The second highest selling utility vehicle, Innova grew at 23.8%

Author: Rahul Sonthalia, Research Head, Kredent

Sugar Decontrol

 
Sugar Free: Move to decontrol the sweetner comes amid differences
 
 
Our analyst Rahul Sonthalia updates our readers regularly on the sectoral updates. Here are his views on the recent updates in sugar sector.
  • The move for sugar decontrol i.e removing levy quota has once again gained momentum because of dip in sugar prices aided by both improved domestic forecast and higher production in Brazil, the world’s biggest exporter
  • Currently there are several restrictions imposed on sugar industry
  • Mills are expected to surrender 10% of their production to the government at prices below the market rate. This is called levy system
  • Levy sugar goes to meet the needs under the public distribution system
  • The remaining 90% is sold by mills in a restricted marketing environment
  • In present sugar control regime, the government decides the distance between two sugar mills and takes decisions with regard to sugar import and export
  • If the system of imposing levy quota is removed, government may have to buy at the prevailing market price
  • If prices rise, the government will then have to take on a subsidy burden, if it wishes to sell cheap
  • There have been suggestions that to compensate for this additional cost on government, a tax in the form of ces can be imposed on the industry
  • The sugar industry is divided into – Private sugar mills, under Indian Sugar Mills Association and co-operative sugar mills represented by the National Federation of Co-operative Sugar factories
  • ISMA wants the government to announce the decontrol decision at the earliest as they think it would be very beneficial for the industry as mills will be in a position to release floating capital after sale of sugar
  • On the other hand co- operative mills fear that decontrol will lead to crash in sugar prices
  • Still there are many issues which need to be resolved before decontrol can be implemented

 

Author:Rahul Sonthalia, Research Head, Kredent

Weekly crude oil update June 5, 2010

  • From the close of $73.97/ barrel last week, crude oil started the week with modest growth, but on Tuesday, prices fell $1.86 to $72.58 due to weak Chinese manufacturing data which raised concerns that crude demand from the world’s fastest growing economy might be slowing.
  • On following days, with the release of weekly oil inventories which showed a drawdown in oil reserves and good housing and auto numbers from US provided support to the market.
  • But the last day, saw crude prices plunging $3.10 with weaker than expected addition to non-farm payrolls and warnings of Hungarian economy. Weekly close of crude oil was at $71.51, 3.3% lower than last week’s close.
  • Crude oil prices very recently have rebounded from the lows of $67 and now seem to be consolidating at this level. We expect further drawdown in inventories in the coming weeks due to strong fuel demand. Thus unless we see any negative developments in the Eurozone, crude price are expected to rise in near term.

Author name:Praveen Bajaj

Weekly currency update June 5, 2010

  • USDINR Update
  • The partially convertible rupee ended at Rs 47.27 per dollar, depreciating about 2% for the week. The rupee weakened as the euro’s weakness triggered a bout of dollar buying by importers, but a stronger performance of the stock markets limited the local currency’s losses.
  • Earlier on Tuesday, the rupee fell the most in at least 15 months, tracking declines in Asian stocks, as weaker- than-expected manufacturing data from China spurred concern that Europe’s financial crisis could derail a nascent global economic recovery.
  • The rupee closed 1.7% lower at 47.155 against the dollar on Tuesday, the biggest decline since 17 February 2009. It slumped 4.3% in May, the worst performance among Asian currencies after South Korea’s won.
  • The euro traded close to a four-year low as the euro zone’s financial problems weighed on sentiment and the dollar rose because of expectations of a strong US employment report.
  • The rupee had fallen 4.3% in May on foreign fund outflows of $2 billion in the month. Foreigners are still net buyers of $4.5 billion worth of shares so far in 2010.
  • The rupee is expected to trade in the 46.75 to 47.00 range during the next week considering no major disturbance in the Euro region and local equity markets remain stable.

Author name:Abhijeet Ahir

Weekly equity update June 5, 2010

Dear readers, we have been publishing weekly review of major market movement to enable our readers to take better investing decisions. I hope these reviews are informative.

Markets gained for a second consecutive week to reach 17,117 on Friday, rising 1.5% over the last week. The week saw a lot of good news for the markets. In the beginning of the week, better than anticipated GDP data set the bullish tone. But on Tuesday, week Chinese industrial production combined with negative global cues pushed the markets to the extent of 372 points or 2.2%. However, post that, positive global cues, good auto and cement numbers kept the mood upbeat in the market for the rest of the week. Sensex touched 17,000 mark on Thursday, first time since May 18. The BSE auto index jumped 4.4% to 7,894, it was followed by FMCG, PSU and healthcare. Fact that monsoon reached the coast earlier also added to positive sentiments.

Markets should open weak under the influence of weaker than expected US Employment numbers and weak closing of US markets on Friday. For next week, key events to watch out will be the meeting of empowered group of ministers (EGoM) on Monday, 7 June 2010 regarding the decontrolling of oil prices. Also IIP data for the month of April will be released which is keenly watched. 

Author:Praveen Bajaj

Banking terms explained

Friends, in many of the posts on this website, our analysts have used terms like repo rate, reverse repo rate and host of other ratios which might not be easily comprehensible to many of us. I have been receiving some queries regarding them as well. So here goes my small bit on few of these important ratios. I have also tried to explain in brief how these ratios are used by regulators to control inflation-

Repo transaction

The term Repo has been derived from the word repurchase which literally means selling today and buying back at a later date. To be specific, in money market terms, it means a repo trader sells securities, gets funds for a certain specified time, and after this time period, purchases back the securities by paying the previously taken (read borrowed) funds along with some interest for the said period. The securities in question basically act as an insurance against borrower’s default. A forex money market also repo works on similar terms.

Repo rate

In the above transaction, if the lender of the funds is RBI, it I termed as a repo transaction with RBI. Following may be noted-

  • Whenever the banks have any shortage of funds they can borrow it from RBI.
  • Repo rate is the rate at which banks borrow rupees from Reserve Bank of India (RBI).
  • A reduction in the Repo rate will help banks to get money at a cheaper rate.
  • When the Repo rate increases borrowing from RBI becomes more expensive.
  • The rate charged by RBI for its Repo operations is 5.25%.
  • When RBI lends money to bankers against approved securities for meeting their day to day requirements or to fill short term gap, it takes approved securities as security and lends money. These types of operations are generally for overnight operations.
  • Repo rate is the medium through which RBI infuses funds in the system. Recently, in view of the decreased (read tightening) liquidity conditions, RBI has allowed a second Repo facility which means that RBI is giving banks to borrow money from RBI and thus RBI is looking to infuse more money into the system
  • A bank’s money market trader typically can use RBI’s LAF and money market for arbitrage opportunities sometimes

Reverse repo rate

If the borrower of the funds is RBI, it is termed as reverse repo transaction.

  • Reverse Repo rate is the rate at which RBI absorbs money from the system.
  • Banks are always happy to lend money to RBI since their money is in safe hands with a good interest.
  • An increase in Reverse Repo rate can cause the banks to transfer more funds to RBI due to attractive interest rates.
  • It can cause the money to be drawn out of the banking system.
  • The rate charged by RBI for its Reverse Repo operations is 3.25%.

Cash Reserve Ratio (CRR)

CRR is the amount of funds that the banks have to keep with RBI. It is calculated on the total deposits that the bank has as on the date. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. In order to understand this, consider following example-

  • Suppose RBI says the CRR as 5%. Now if a bank A receives Rs.100 as deposit then it can lend Rs.95 as loan and will have to keep Rs.5 as balance in Deposit account.
  • Now the Borrower who has received Rs.95 as loan will deposit the same in his bank, borrower’s bank will now lend him Rs.90.25 and keep Rs.4.75 in deposit account.
  • This process continues in the banking system resulting to expand its initial deposit of Rs.100 to maximum of Rs.2000.
  • Similarly if suppose RBI says the CRR as 10%. Now if a bank A receives Rs.100 as deposit then it can lend Rs.90 as loan and will have to keep Rs.10 as balance in Deposit account.
  • Now the Borrower who has received Rs.90 as loan will deposit the same in his bank, borrower’s bank will now lend him Rs.81 and keep Rs.9 in deposit account.
  • This process continues in the banking system resulting to expand its initial deposit of Rs.100 to maximum of Rs.1000.
  • Higher the CRR, the lower the money available for lending, resulting into reduction in credit expansion by controlling the money that goes out of loans.
  • Thus RBI increases the requirement of CRR whenever they feel the need to control money supply.

Central bank of any country uses a combination of these 3 rates to influence the lending rate in the economy and thus contain inflation and stimulate growth. This adjustment of the 3 rates (commonly known as policy rates) is known as monetary policy.

Relation between Inflation and Bank interest Rates: How does inflation affect rates?

Inflation, in simple terms is a sustained increase in general price level. In other words, it can also be described as a situation in which excess money chases fewer goods, causing increase in demand of goods and thus leading to an increase in price. Thus if this demand created by excess money can be curtailed, inflation would be contained. This is the genesis behind controlling inflation through monetary policy.

If inflation is high, interest rates are increased. If repo, ie rates at which banks borrow from RBI, is increased, such borrowing will become costly and banks would thus either borrow less or pass on this increased cost to their borrowers. Again if reverse repo is increased, banks would divert more funds towards RBI and excess liquidity will be absorbed by RBI rather than going at cheaper cost in the economy. In either of the cases, actual lending will be less and demand for goods and services will be less

In the case of CRR, if the rate is increased, it affects in two ways. First, immediate liquidity in the system is absorbed to the extent CRR is increased as more money needs to be placed with the regulator. Second, in the incremental lending, potential capacity of banks to lend is curtailed. This again leads to less lending by banks.

Another ratio which does not directly affect inflation but is important for banking is statutory liquidity ratio.

Statutory Liquidity Ratio (SLR)

SLR is the amount a commercial bank needs to maintain in the form of cash or gold or approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI in order to control the expansion of bank credit. SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. RBI ensures the solvency of a commercial bank from SLR. It is helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds.

Currently, in India, banks have to maintain a SLR of 25% which means that 25% of the value of demand and time liabilities has to be invested in approved securities. SLR of banking system in India has a SLR of about 27% ie above the statutory SLR because due to the economic crisis, banks were conservative in lending and invested in sae heaven Government securities.

Hope this article would be useful and help you in understanding the economic scenario better.

Author: CA Shalini Tibe

Mutual Fund Analysis-May 2010

Friends, we all saw equity markets diving about 3.5% in May, its first monthly decline since January. As I saw this, I wondered what would be the scene in mutual funds and did some analysis. Results, as expected, showed that all the equity markets based mutual funds resulted in negative yield for the month of May. Debt funds (both short term and Long to medium term) as well as Gilt funds yielded good returns with top funds in both the categories giving 35 and 40% returns respectively. I would lile to share the names of some top mutual funds (as per 1 month yield as on May 26) for selected types of funds with you which might help you in investing your money in mutual funds accordingly-

Type Fund / Benchmarks AUM (Rs. Cr) NAV (Rs) Yield       (1 Month)
Large Cap JM Large Cap 5 17.19 -3.32
Principal Large Cap 474 25.42 -4.04
Quantum Long Term Equity 53 18.69 -4.55
General Equity Benchmark Equity & Derivative Opportunities 40 11.53 0.35
Templeton India Pension 202 54.54 -1.84
FT India Dynamic PE Ratio FoF 556 36.69 -2.43
Capex Infrastructure Canara Robeco Infrastructure 177 20.87 -5.78
Principal Services Industries 123 13.39 -5.97
HDFC Infrastructure 1539 10.87 -6.21
Tax Saving Schemes Fidelity Tax Advantage 1162 18.83 -3.78
HDFC Taxsaver 2470 201.14 -4.18
Religare Tax Plan 100 15.37 -4.65
Balanced-Equity Oriented HDFC Prudence 3945 184.32 -1.75
UTI CCP Balanced 2831 14.28 -2.15
HDFC Balanced 157 47.22 -2.53
MIP – Moderate DWS Twin Advantage 249 15.7 0.45
DSPBR Savings Manager Moderate 157 19.01 0.16
Magnum Income Plus Inv 161 15.6 -0.13
Debt  (Medium-to-long-term) Kotak Bond Deposit 165 25.36 35.22
IDFC Dynamic Bond Plan A 130 18.46 28.31
JP Morgan India Active Bond Retail 9 10.63 20.45
Debt Short Term JM Short-term Reg 16 18.2 8.45
Canara Robeco Short Term Ret 270 10.71 6.98
Taurus Short Term Income 14 1570.64 6.39
Gilt Funds Birla Sun Life GSF Long-term 48 27.38 40.15
DSPBR Government Securities 68 32.57 31.65
IDFC GSF Investment Plan A 12 17.72 29.67

In terms of market size,  Reliance MF was the market leader managing Rs 118,973 cr accounting for about 14.8% of the total Asset Under Management (AUM) of the MF industry. Reliance was follwed by HDFC and ICICI Prudential MF. Total AUM of the industry was Rs 803,559 cr.

Hope this analysis will be useful to you. In case you have any suggestions to improve this article please write in to us…happy investing…

Author:Praveen Bajaj

Book review: A Colossal Failure of Common Sense

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Friends, I have just finished reading a really nice book discussed below. This is the first time I have tried my hand on writing a book review. I have tried to be very objective and honest. Please let me know your views by posting a comment below.

Background: A Colossal Failure of Common Sense

A Colossal Failure of Common Sense

A Colossal Failure of Common Sense

One date that any person across the world would like to forget in recent times would be September 12, 2008- the day when Lehman Brothers, one of the mighty Investment Banks on Wall Street filed for bankruptcy and set in motion sequence of events which led to one of the most severe recession the World had ever experienced. One question which has still not been answered is what conspired inside such a huge investment bank which led to its dramatic fall?

“Colossal Failure of common sense: The inside story of collapse of Lehman Brothers” is an attempt in that direction.

About the Author

Lawrence G McDonald, until 2008 was vice president of distressed debt and convertible securities trading at Lehman Brothers and was considered as the firm’s most profitable traders.

About the Book

Positives

The book very well describes the causes of crisis and how the seeds of the crisis were sowed with the repealing of Glass-Steagal Act and watered by the subsequent developments in financial markets like wide-spread use of instruments like CDS, MBS etc. One thing for which I really liked the book was the simple way in which such instruments have been explained.

As the title claims, the book does give a good insight into the inside culture and happenings at Lehman Brothers. Different people involved in the decision making hierarchy and their roles have been apt fully described which gives the reader an understanding of what might have happened. For instance, Lehman’s former chief executive, Richard Fuld, who, on reading the book appears to be arrogant, stupid, greedy, reckless and a cause which led Lehman in the mess. Mr. Fuld appears to have supported many others who led to a concentration of risk in the then highly profitable segment of CDOs etc which ultimately led to huge losses and MTM write offs.

It also gives a good account of how Mr Mc Donald and others realized that Lehman might be out in troubled waters early on and how they tried to bring it to the notice of seniors but where put down.

Negatives

What might disappoint readers are initial few chapters which describe the early life of the author which have no connection what so ever with the Lehman failure. Also, at some points in the book, there has been a considerable room for ambiguity but there are only few of them.

My Personal Opinion

Overall, I would say this would be a good read for people who either have no knowledge or just a basic knowledge of the financial world. If you are an expert, looking for some high profile details of what transpired, you might be disappointed.

You can buy this book from FlipCart at 10% discount and free shipping here : Buy A Colossal Failure of Common Sense

Author name: Praveen Bajaj

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