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Wednesday, March 18, 2009

Holding the house!


One small cat changes coming home to an empty house to coming home.

Bulls may feel at home even as the debate is on whether the recent strength is merely a dead cat bounce. We had mentioned on Tuesday that the market could rebound after a breather if global markets hold firm. Rightly enough US stocks shot up overnight on the back of some encouraging news on housing starts. Asian indices too are mostly up though European shares closed marginally in the red.

In part, the current rebound in global equities is due to technical factors. Stock benchmarks had been under pressure since the start of the year. In the US, the Dow and the S&P hit 12-and-a-half-year lows early last week. However, since then they have recovered smartly and so have other markets.

Thankfully, there has not been too many bad news during this period. On the contrary, there have been a few bright spots like positive comments from top global banks. However, there are genuine fears that stocks could re-test lows hit in Oct ’08.

The Indian market should open strong today and remain so for most part of the day unless fresh bad news hits us.

FIIs were net buyers in the cash segment on Tuesday at Rs4.15bn while the local institutions pulled out Rs1.53bn. In the F&O segment, the foreign funds were net buyers at Rs9.51bn. On Monday, FIIs were net sellers of Rs143mn. Mutual Funds were net buyers of Rs2.26bn on the same day.

US stocks resumed their ascent on Tuesday after a day's breather, as a surprising rebound in housing starts coupled with an encouraging report on producer prices eased worries about deflationary conditions.

The sentiment also improved on hope that the Federal Reserve will outline new measures to revive the world's largest economy when it announces the outcome of its two-day meeting on Wednesday.

The S&P 500 index added 24 points, or 3.2% to 778.12, led by a 6.6% gain in financial companies. The Dow Jones Industrial Average advanced 178.73 points, or 2.5%, to 7,395.7. The Nasdaq Composite Index surged 24 points, or 4.1%, to 1,462.11.

About eight stocks rose for each that fell on the New York Stock Exchange.

The rally in global equities over the past week has been largely a rebound after all the sell-off suffered in the first two months. Between Jan. 6 and March 9, the S&P 500 slumped nearly 28%, ending at a 12-1/2 year low. Since March 9, stocks have gained in five of six sessions, with the S&P 500 rising 15% as of Tuesday's close.

The rally has also been powered by some good news. Citigroup and other top global banks said last week they were profitable in the first two months of the year, helping the financial sector. Banks also got a boost from talk about reinstating the "uptick rule" that limits short selling and changing mark-to-market accounting.

New legislation was introduced on Monday to reinstate the "uptick rule," adding to pressure on the Securities and Exchange Commission (SEC), which meets on April 8 to discuss restoring the rule. Critics have claimed that the rule's absence has exacerbated stock selling in the financial sector.

In the day's big economic news, new construction of US homes jumped in February, surprising economists who were expecting a decline. Housing starts rose to a seasonally adjusted annual rate of 583,000 in the month, up 22% from a revised 477,000 in January. Housing starts haven't risen month-over-month since last June. Economists expected starts to have fallen to a 453,000 annual unit rate.

Building permits, a measure of builder confidence, rose 3% to a seasonally adjusted rate of 547,000 versus forecasts for a drop to 500,000.

Another government report, the Producer Price Index (PPI), showed a smaller-than-expected rise. PPI, a measure of wholesale inflation, rose 0.1% in February after rising 0.8% in January. Economists had forecast a rise of 0.4%. The so-called core PPI, which excludes volatile food and energy prices, rose 0.2% after climbing 0.4% in the previous month. Economists had predicted a gain of 0.1%.

FOMC, the Fed's policy setting body kicked off its two-day meeting. The central bank is expected to hold the fed funds rate, its key short-term interest rate, close to zero. But it could say that it will start buying long-term US Treasurys after saying it was prepared to do so at its last few meetings.

Financial stocks gained, including Citi, JPMorgan Chase, Goldman Sachs and Wells Fargo. The KBW Bank sector index added 6%.

Technology shares too rose, lifting the Nasdaq. Cisco Systems' shares rose on an upbeat Goldman Sachs note with the brokerage adding it to its Conviction Buy list. Dell announced a new line of laptops and Apple introduced a new version of software for iPhone. Intel, Microsoft, Google and Yahoo! were among the other big tech gainers.

Alcoa shares slumped 8.7% after the aluminium major announced late on Monday that it will cut its dividend, issue stock and convertible notes worth about $1.1 billion and cut its spending in 2010.

Caterpillar said it is laying off over 2,400 more employees at five plants in Illinois, Indiana and Georgia so as to save costs amid the economic slowdown. Shares of the Dow component ended 1.5% higher.

AIG remained in focus amid growing fury that the company paid millions in bonuses to executives, even as the company received $170 billion in federal bailout money. President Obama has said he will try to block the bonuses. AIG's CEO Edward Liddy will go before a House panel on Wednesday that is probing the government's involvement in the troubled insurer.

Despite the recent bounce in global equities, most market analysts believe that investors need to be cautious, as a few better-than-expected economic reports does not change the overall picture on the global economy and the mess in the financial sector.

This is very much a bear market rally and at some point stocks will retest the lows hit in October-November period. One also needs to start having a look at the corporate earnings which could well be the next turning point.

Quarterly earnings reports - which will start trickling out next month - are expected to be weak across the board. The earnings will probably cause the markets to retest recent lows.

Treasury prices tumbled, raising the yield on the benchmark 10-year note to 3.01% from 2.95% on Monday.

Lending rates were improved. The 3-month Libor rate fell to 1.3% from 1.31% on Monday, while the overnight Libor rate dipped to 0.31% from 0.33%. Libor is a bank-to-bank lending rate.

In currency trading, the dollar fell versus the euro and gained against the yen.

US light crude oil for April delivery rose $1.81 to settle at $49.16 a barrel on Monday.

COMEX gold for April delivery fell $5.20 to settle at $916.80 an ounce.

Europe stocks ended lower on Tuesday, bringing a winning streak that has stretched to five sessions to a halt, led by weakness in the metals space. The pan-European Dow Jones Stoxx 600 fell 0.7% to 172.05, in a session where losses had stretched to as much as 2%.

The UK's FTSE 100 index was down 0.2% to 3,857.10, while Germany's DAX 30 index fell 1.4% to 3,987.77 and the French CAC 40 index shed 0.9% to 2,767.28.

ndian market ended with losses snapping three day winning streak on the back of weak cues from the US and Asian Markets. The banking stocks which had a significant rally in previous couple of trading sessions led the slide, followed by the auto and the oil & gas stocks. However, the FMCG, auto and power stocks provided some support bucking the negative trend.

The BSE Sensex and the NSE Nifty breached past the 9,000 and the 2,800 levels respectively in the early afternoon trades. However, the advance lost steam as traders and investors preferred to book profits at higher levels. The BSE Sensex fell 80 points to close at 8,863 and the NSE Nifty was down 20 at 2,757.

Among the 30-components of Sensex, 20 stocks ended in negative terrain and only 10 stocks ended in the green. TCS, JP Associates, SBI, Ranbaxy, Reliance Industries, Infosys and ACC were among the major losers. Tata Motors, Hindalco, Maruti, ITC and NTPC were among the major gainers.

Shares of Ingersoll-Rand surged by over 10% to Rs272 after the company announced that board of directors would meet on March 24, 2009 to consider buyback back of equity shares. The scrip touched an intra-day high of Rs294 and a low of Rs257 and recorded volumes of over 98,000 shares on NSE.

Shares of Mercator Lines rallied after the company announced that it took the delivery of its new build Jack Up Rig at a cost of approx Rs10bn from Keppels FELS, Singapore.

The rig was delivered on March 11, 2009 about three weeks before schedule and has been immediately deployed under a firm bare boat contract for a period of three years. The stock was up by over 10% to Rs25 after hitting an intra-day high of Rs27.35 and a low of Rs24 and recorded volumes of over 4.1mn shares on BSE.

Jagatjit Industries was in high spirits after the long rivalry between two brothers is nearing closing stages.

CLB chairman S Balasubramanian, in an order dated March 12 took the view that there was no merit in challenging the allotment of shares with differential voting rights (DVRs), as it is legally permissible. It dismissed the petitions filed by the two estranged brothers — Anand Jaiswal and Jagatjit Jaiswal.

Besides settling the family dispute the order is also significant as it may offer clarity on minority promoters using DVRs to fend off hostile takeover threats.

The stock was frozen at 20% upper circuit to Rs55.20 recording volumes of over 5,000 shares on the BSE.

Fed policymakers are holding a two-day meeting. With interest rates already low, investors are expecting Fed officials to shed light on the potential for quantitative easing. The next big event will be the quarterly earnings. It will throw up both positive as well as negative surprises. Till then investors may remain cautious