INDIA

DECEMBER

The update is delayed as I was waiting for the US Fed Meet of 11^th Dec’07. The Fed reduced ‘Benchmark Interest’ rate by 25 basis pts to 4.25 % and also reduced ‘Discount Rate’ by 25 basis pts on 11^th Dec’07. Wall Street was expecting more !

BSE SENSEX closed today - Wednesday 12^th Dec’07 at a new lifetime high level of 20376, up 2.71 % from Friday 31^st Oct’07 close of 19838. The intra-period high and low for SENSEX were 20419 and 18333 respectively.

SENSEX breached below the S4 level of 19000 but recovered to near R3 level of 20500. It just fell short at 20419. The long-term trend for SENSEX remains intact i.e. bullish. India’s economic growth could come up against two major roadblocks – Energy and Infrastructure.

Gold tested a new 28 year high of Spot US $ 842 pto in New York on 7^th Nov’07. Gold is a safe bet for the next six months. We maintain a target of US $ 870 pto by March’08.

On 14^th Nov07 – SENSEX logged its highest daily gain of 894 pts as Left Front eased its stance on the ‘Indo-US’ Nuke Deal by allowing the Government to start negotiations with IAEA on ‘safeguards’. The negotiations are still on till date in Vienna between IAEA and Indian scientists. It seems the Left Front will not ‘rock the boat’ in Dec’07 and let the said ‘Nuke Deal’ go through, failing which the Govt. will fall and the nation will have to go in for fresh elections in 2008. It seems unlikely that this may happen over the next two weeks or so till 31^st Dec’07. But in politics one never knows. Winston Churchill said “One week is a long time in politics “ 

On 21^st Nov’07 - Crude Oil tested US $ 99.29 pbbl on NYMEX for Jan’08 delivery. Spot Brent tested $ 96.36 pbbl. Global equity markets corrected during the week 47 lead by ^DJI, which was down 211 pts. In India too SENSEX crashed by whopping 678 pts on 21^st Nov’07 – its third largest single day fall in its history.

The ‘Sub-prime Mortgage’ pain still lingers on in the US economy. CITI, Morgan Stanley and UBS reported further losses on this account in Nov’07. US Markets would have corrected further but the Fed announced on Monday 26^th Nov’07 that it would inject US $ 8.00 billion into the financial markets to ease liquidity. This statement calmed the US equity market and also global markets including SENSEX.

FIIs have been net sellers in the Indian equity markets in Nov’07 and also in the EMs. They sold equities worth US $ 1.46 billion in Nov’07. However they are net buyers again in the Indian equity markets in Dec’07 till today.

The US Economy is showing signs of slowing down. I do not know if the economy is heading towards a ‘recession’. The analysts expect that US Fed will again cut interest rates in Jan’08. If the world’s largest economy is heading towards recession – then I expect the global equity markets also to correct. I do not buy the most talked about ‘Decoupling’ theory.

The levels to note for the balance two weeks of Dec’07 are as :

S1 20260 S2 20000

R1 21000

These levels are subject to the Left Front not ‘pulling the plug’ on the Govt. of India over the Indo-US Nuke Deal.

NOVEMBER

My prediction that the UPA Govt. would fall in Oct’07 in India was incorrect. Hence the prediction about the SENSEX bearing very bearish was off target. I do not know what will be the fate of the “Indo-US Nuke Deal” now ? The political situation can change in one day in New Delhi. The UPA Govt. may decide to go ahead with the said deal and the Left Front can withdraw support. This could lead to fresh elections in India and a period of 'political instability'. FIIs do not like any form of political instability. 

BSE SENSEX closed today Wednesday 31^st Oct’07 at a new lifetime high of 19,838 - Up 11.62 % from Friday’s 5^th Oct’07 close of 17,773. The intra period high and lows for the month were a whopping 20,238 and 17,147 respectively. SENSEX turned tremendously bullish as political uncertainty looming large over New Delhi was blown away on 9^th Oct’07 as the UPA lead Govt. caved into the demand of the Left Front i.e. UPA Govt. put the “Indo-US Nuke Deal” in cold storage till 22^nd Oct’07. BSE SENSEX created history on 9^th Oct’07 by registering its single highest daily gain of 789 pts. SENSEX closed on 9^th Oct’07 at 18280. SENSEX just took eight trading days to leap from 17000 to 18000 on the basis of huge FII inflows. In these eight trading days FIIs pumped in US $ 3.54 billion in the cash market in Indian equities.    

FIIs inflows into Indian equities were unabated. SENSEX created history on Monday 15^th Oct’07 by testing another milestone – a level of 19000. In just four trading days the SENSEX zoomed from 18000 to 19000 level. These huge capital inflows got the Indian Regulator ( SEBI ) and RBI worried. Only around twelve stocks in the SENSEX were responsible for this surge from 18000 to 19000. The equity markets lacked depth. Capital Goods, Telecom and Financial Sector SENSEX Stocks were on fire. The rally was not secular. 

SEBI issued a “Draft Circular on curbs on trading of Participatory Notes ( PNs ) by FIIs” after trading hours on Tuesday 16^th Oct’07. The fine print of this circular was not available to the overseas and Indian investors for a couple of days. On 17^th Oct’07 – Indian Equity markets crashed by 10.00 % and trading was shut at BSE and NSE for one hour as per rules laid down by SEBI. Both Indian Finance Minister and SEBI Chairman rushed on the National TV Channels to explain that the Circular issued was misinterpreted and that only ‘unregulated’ Hedge Funds were banned to issue PNs with immediate effect. The SENSEX witnessed its second highest daily fall in its history on 18^th Oct’07 – down on closing by a whopping 718 pts. Prior to this SENSEX fell 827 pts. on closing on 18^th May 2006. FIIs pulled out US $ 1.70 billion on 17^th Oct’07, US $ 300 million on 18^th and US $ 450 million on 19^th Oct’07 respectively from Indian equities over the confusion over the PNs issue. FIIs hold total Indian equities worth US $ 204.00 billion since 1993. This figure includes investment in ADRs and GDRs. FIIs are very major players in the Indian equities markets.

By week 43 – SEBI clarified the confusion over this whole PN Issue and FIIs were very pleased with the clarifications. The UPA and Left Front meeting on 22^nd Oct’07 on the ‘Indo-US Nuke Deal’ was a mere formality. The UPA Govt. agreed to ‘status quo’ on this important deal between USA and India.

Hence on Tuesday 23^rd  Oct’07 – BSE SENSEX created history by logging its single highest daily gain of 879 pts. on closing. Prior to this was the gain of 789 pts on 9^th Oct’07 as mentioned above.    

The brief details of SEBI’s Circular on PNs issue as are under :

i)                    No fresh PNs can be issued by anyone with Derivatives as the underlying instrument with effect from 25^th Oct’07.

ii)                  FIIs will have to unwind their PNs, which have Derivatives as underlying instrument in the next 18 months. JP Morgan feels that this will lead to an outflow of US $ 4.00 to 7.00 billion by the FIIs over the period of 18 months. The amount could be higher for ‘Sub-Accounts’.

iii)                Proprietary and Corporate ‘Sub-Accounts’ can be registered with SEBI as separate FIIs.

iv)                Individual Foreign Investors can buy and sell Indian stocks directly if their nett worth is worth US $ 50.00 million.

v)                  Pension Funds, Endowment Funds, Foundations and Charitable Trusts can register with SEBI as FIIs.

Other fine print details are now available on SEBI’s website. FIIs came back with vengeance in the Indian equity markets. In just two trading sessions i.e. Friday 26^th and Monday 29^th Oct’07 – BSE SENSEX gained 1000 pts and tested a level of  20,000 on 29^th Oct’07. Third highest daily gain in SENSEX of 735 pts. on closing. The previous two were on 9^th and 23rd  Oct’07 as per above. Only top six SENSEX stocks contributed 90.00 % of this 1000 pts. rally. Hot FII money chasing only a few blue chip SENSEX stocks. One cannot dictate the market moves. Fact is that these few stocks are from Construction and Power Sectors.  

FIIs have pumped in US $ 17.10 billion in calendar 2007 till 26^th Oct’07. This is a record as previous high was calendar 2005 with total FII flows of US $ 10.70 billion into Indian equities.

In India it took 20 years for the SENSEX  to cross the 10,000 level. It took only 20 months for the SENSEX to move from 10,000 to 20,000 level – largely on account of US $ 30.00 billion from FII flows since 6th Feb 2006. Analysts have started comparing India to Japan wherein ^ N225 moved from 20,000 in 1987 to 39,000 in 1989 – just two years. Just for info - In 1950 ^ N225 index was in double digits i.e. 85.00.  India and China are hot favourite destinations for capital inflows from the developed world.

Both India and China are attracting huge FII funds into their equity markets. Shanghai Composite Index ( SSE Comp ) also touched a lifetime high of 6124 in Oct’07. Other Asian markets also attracted FII funds. Hang Seng ( ^HSI ) in Hong Kong tested new life time high of 31,958. KOSPI ( ^ KS11 ) in Seoul also tested new lifetime high of 2071 in Oct’07.    

FII capital flows lead to excess liquidity in recipient country’s financial markets leading, which stokes inflation. Due to huge FII flows into India in Oct’07 – RBI on 30^th Oct’07 hiked CRR by 50 basis pts. to 7.5 %. This was aimed at sucking INR equivalent of US $ 4.10 billion from the Indian financial markets. The SENSEX corrected but again recovered lost ground to close today at 19,838. RBI has hiked CRR four times since Jan’07 by 225 basis pts but all in vain. It seems the Indian Equity Markets are in for a ‘long term bull run’. I tend to agree with the pundits now !

Today the US Fed cut ‘Fund Rates’ by 25 basis pts and ‘Discount Rates’ also by  25 basis pts. It seems Fed is cutting rates to avoid a recession in the US Economy. On 18^th Sept’07 when Fed had cut rates there was a huge rally in the global equity markets especially in Asia on 19^th Sept’07. By cutting interest rates in USA – The Fed is pursuing an easy monetary policy that is creating massive bubbles outside Asia according to Mr. Marc Faber. According to Mr. Faber – “If US Fed cuts interest rates, it will have Asia’s blood on its hands.” India and China face large capital inflows from global investors on account of these Fed interest rate cuts. China’s Yuan is controlled by the State at almost a fixed peg against the US Dollar. India has a problem with these large forex inflows as its currency – INR appreciates making exports unviable. The INR has appreciated by around 12.00 % since the beginning of the current fiscal to date. Govt. of India has to ‘sterilize’ these huge capital inflows to keep the inflation and INR appreciation under control. So far all steps taken by RBI and SEBI have shown little results.

I feel the SENSEX has made its top for the calendar 2007 and should consolidate now in the month of Nov’07. But you never know about these Hedge Funds. I feel the levels to watch for SENSEX are as below :

S1 19700 S2 19500 S3 19270 S4 19000

R1 20000 R2 20250 R3 20500 R4 21000

GOLD tested Spot US $ 800 pto in NY today. Very close to my prediction of US $ 810 pto. Gold looks like moving towards US $ 870 pto by March 2008.

Crude Oil also tested new highs. Spot Brent Crude tested an all time high of US $ 91.00 pbbl today on an intra day basis to close at US $ 90.30 pbbl. NYMEX Light Crude Futures for Dec’07 tested an all time high of US $ 95.00 pbbl but closed lower at US $ 94.53 pbbl.

The BSE SENSEX closed today Friday 5^th Oct’07 at a record new lifetime high at 17773. During the day it tested a new lifetime high of 17979 to close at 17773. This is up 16.10 % from the 31^st Aug’07 close of 15319. My prediction was that SENSEX would hit 16000 (R4) during September’07. The intra period high and low for the SENSEX were 17979 and 15323 respectively. FOMC meet on 18th Sept’07 changed the liquidity scenario in USA. Fed announced a “double whammy” – 50 basis pts. cut in ‘Interest Rate’ and another 50 basis pts cut in ‘Discount Rate’. ^DJI was on fire in New York and so were the global equity markets on 19^th Sept’07 and onwards. BSE SENSEX created history on 19^th Sept’07 by registering its single highest daily gain of 654 pts. to close at 16323. Asian equity markets were on fire too along with other emerging economies. Shanghai Composite index tested new 52 week high of 5560 on 28^th Sept’07 and Hang Seng index tested new 52 week high of 28871 on 3^rd Oct’07. It is confirmed now that  India was the biggest beneficiary of FII flows after the FOMC meet.

The forecast is delayed intentionally as I was not able to understand the reason behind the huge surge in the SENSEX from 18^th Sept’07 till today.  The story is clear now - FIIs pumped in record US $ 4.50 billion into Indian equity markets in just nine trading sessions i.e. from 20^th Sept to 3^rd Oct’07. Some analysts say majority of this investment is from Hedge Funds. This propelled the SENSEX to near 18000 mark today ( 17979 ). It just took six trading days for the SENSEX to move from 16000 to 17000 level from 19^th Sept’07 onwards. Almost all blue chips were on fire except Software and Pharma stocks. This kind of FII flows have never been witnessed in the history of  Indian equity markets. Hectic covering by bears also aided this

straight line rally in SENSEX from 19^th Sept to 3^rd Oct’07.  Overall in 12 trading sessions from 18^th Sept to 3^rd Oct’07 – SENSEX gained 2261 pts in absolute terms, translating to a gain of about 14.50 %. This is a record gain in the history of the SENSEX over a period of time as above.

FIIs have pumped in US $ 14.57 billion so far till date in calendar 2007. Still eleven weeks are left in current calendar year. This is a record for FII investments in equities in India on an annual basis as the earlier record was US $ 10.7 billion in calendar 2005. These kind of inflows will rattle any equity market.

It is reported in ET that India maybe one of the top seven recipients of PE Firm’s investments in equities of Indian companies. This figure in calendar 2007 could be as high as US $ 13.50 billion. This is over and above the FII investment of  US $ 14.57 billion in Indian equities. These kind of forex inflows have its repercussions – The Indian Rupee appreciates vis a vis the US $. Today the Indian Rupee ( INR ) tested a new nine-year high of 39.36 against the US Dollar. A strong INR hurts the Indian Exporters. Hence the stocks of export-oriented companies have taken a beating since the past few months.  Indian Software industry gets more than 60.0 % of its revenue from the US Market. Stocks of Indian IT majors viz INFOSYS, SATYAM, WIPRO and TCS are near their 52 week lows whereas the other blue chip domestic consumption stocks are on fire at lifetime highs with PE multiples of 100+ !

FDI has also been very encouraging for India in the last fiscal i.e. 2006-07 at US $ 21.19 billion. FII portfolio investments in last fiscal were US $ 15.62 billion. This a record in the history of Indian Economy – FDI in India exceeded FII Funds into India in Portfolio Investments. India needs higher level of FDIs to keep the GDP growth in excess of 9.0 % per annum. Just for info – India is no way near China, which has attracted FDI of approx. US $ 60.00 billion per annum for the past few years on the trot.

Record inflows of Dollars and other Foreign Currencies ( read ‘Forex’ in future ) into India has led to a strange paradox. Govt. of India appears to be borrowing more INR from the domestic market rather than spending on development projects. RBI is worried about the appreciating INR and excess liquidity. It has resorted to various measures but all in vain. RBI since the start of the current fiscal i.e. with effect from April 2007 has mopped  INR equivalent to US $ 48.6 billion from the Indian financial markets. Yet INR has gained by 10.0 % against the US Dollar. Many economists in India feel that RBI cannot fight market forces. Record high Forex inflows into India by way of FIIs into Equities and FDI is a reality and RBI can do little to offset the impact of the said inflows. But Indian Central Banker is very conservative. It wishes to further mop up INR from the Indian Financial Markets. RBI will soon issue MSS Bonds next week worth INR 80.00 billion ( US $ 2.00 billion ). It will issue 364 days T-Bills worth INR 30.00 billion ( $ 750 million ) and will sell Dated Securities worth INR 100.00 billion ( $ 2.50 billion ). Today RBI mopped up INR 544.00 billion ( $ 13.60 billion ) under its ‘Reverse Repo’ window. A further CRR hike by RBI is not ruled out by analysts to curb excessive liquidity in the system. INR closed today at 39.48/49 !      

Apart from FIIs the Indian Mutual Fund Industry has grown very big over the last decade. The latest entrants into the Indian equity markets are ‘Life Insurance Companies’ in higher quantum as compared to the previous fiscal i.e. 2005-06. The Indian Life Insurance Industry is growing annually @ about  20.00 % . The life insurance premium collected by State Owned and Private Life Insurance Cos. in India is at present to the tune of US $ 1.00 billion per month. Current  Life Insurance Premium amount is about US $ 40.00 billion in India as of end March’07.   As per a recent report by Mckinsey this premium will grow to US $ 80.00 to 100.00 billion by the year 2011. We are already witnessing a ‘rub off’ effect of this booming business in the Indian Equity Markets.  Both State Owned and Private Life Insurance Companies  launched “ULIPs” which have been highly successful due to the bull market since 2005. These life insurance products called ULIPs – Unit Linked Insurance Products have seen a phenomenal growth in the past one year or so as SENSEX has been bullish. What are these ULIPs ?  ULIPs are Life Insurance Products wherein the Indian Insurance Regulator ( IRDA) allows the Life Insurance Companies to invest a max. of  70.00 % of the premium collected to be invested in equities. Balance in Debt, Govt. Bonds etc. The Insured is told that he/she is taking a ULIP based life insurance on his/her discretion and that this Product has a linkage to the equity markets as regards returns on his/her investment. Before the launch of ULIPs – Indian Life Insurance  Cos. were allowed to invest in equities to a max. of  10.00 % of the premium collected. As per Mckinsey’s Report - Life Insurance Cos. in India could beat the Indian Mutual Fund industry in the very near future on account of buoyant nature of the Indian Equity Markets. 

As of the last fiscal i.e. 31^st March 2007 the Indian Mutual Funds ( MFs) total exposure to Indian Equities was approx. US $ 38.78 billion. Life Insurance Cos. exposure through ULIPs was close behind at US $ 36.58 billion. Bulk of this $ 36.58 billion fund is from M/s. Life Insurance Corp. of India ( LIC of India ) – State owned life insurance company, which also happens to be the biggest in India. As ULIPs have been highly successful with working class in India – Life Insurance Cos. will soon catch up with the Indian MFs as regards investment in equities. Just for reference - Assets under Management ( AUM) of the Indian MF Industry as of July’07 were to the tune of US $ 118.54 billion. Total AUM of all Life Insurance Companies( LICs) in India as of March 2007 were US $ 148.78 billion. These figures are not ‘like to like’ as figures for MF industry are till end July’07 and for all LICs is for end March’07. M/s. LIC of India is a giant as compared to private Life Insurance Cos. in India.  M/s LIC of India had total AUM as of 10^th Sept’07 at US $ 158.54 billion and out of this corpus investments in equities was US $ 40.24 billion. ULIPs accounted to about 70.00 % of LIC premium income in 2006-07. This trend is more or less the same for Private Life Insurance Cos. viz – ICICI Prudential Life, Bajaj Allianz Life, HDFC Life, SBI Life etc. The important point to give the data as above is that apart from MFs and Domestic FIs – LICs are a force to reckon with as regards investment into Indian equities. Having said all this as above – Indian Equity Markets are still very heavily dependent on FII investments which are mostly through the ’PN Route’ wherein, the identity of the actual buyer is not known to SEBI. Govt. of India and Ministry of Finance want this ‘PN Route’ to be abolished but it is being strongly resisted by the FIIs. Maybe some slush funds from India come back as legitimate investments via this ‘PN Route’ of the FIIs. I have already mentioned about this possibility in my earlier postings.    

The red hot Real Estate Sector in India has been highlighted by M/s. Knight Frank India( KFI ). They feel that commercial rentals in Bombay are not sustainable. M/s. ABN AMRO BANK in Nariman Point in Bombay renewed its lease @ INR 500 per sq. ft. This translates to US $ 12.20 per. sq. ft.  As per M/s. KFI  this is two times the prime office rental in posh Park Lane in Manhattan, New York. The rentals in premium Manhattan office spaces are in the range of US $ 6.00 per sq. ft to 7.5 per sq. ft. Office rentals in Bombay’s new BKC region are in the region of US $ 7.2 to 10.8 per sq. ft. M/s. KFI feel that Indian Real Estate and also Retail Sector rentals will correct by a whopping  40.00 to 45.00 % in the next six to nine months. I agree with the views of KFI.

FIIs feel and other overseas investors feel that Indian Stock Markets are in for   ‘long term’ bull phase as was the case in Japan in early seventies to nineties. CLSA is referring that SENSEX could test 40,000 in the next three to five years if the Indian GDP growth is apace @ 9.0 to 10.0 % per annum till 2011. I have my doubts as Indian political system needs complete overhaul. There is too much to be done as regards – primary education, healthcare and basic amenities for over 300 million people in India who do not have the said basic facilities.

On 28^th Sept’07 - Crude Oil tested new highs. Dated Brent Crude at ICE in London kissed US $ 79.93 pbbl and NYMEX Nov’07  Futures tested new highs of $ 83.34 pbbl. I am still bullish on Crude and feel the next barrier for Dated Brent is 84.00+ by the end of 2007. Gold  tested a new high of US $ 746.70 pto in NY COMEX Spot. London Spot was quoted at US $ 743.00 pto. I am still sticking to my prediction of Gold at US $ 810.00 pto by March 2008. 

In the short term in balance three weeks of October 2007 – I am very bearish on Indian Equity Markets. I feel that the Left Front will withdraw support to the Congress led UPA in the coming three weeks. The differences between the Congress and the Left Front will reach to a ‘flash point’ over the Indo-US Civilian Nuclear Deal. The Left Front does not want this deal to go through to its logical completion. Congress wants the opposite as it is committed to the Bush Administration for implementation of the said Nuke Deal. The UPA Government will be reduced to a minority and will fall. Fresh elections are not ruled out and could be held in early 2008. In this period the current Government will run as a ‘Caretaker Govt.’ as per the Indian Constitution. The other reasons for my forecast to be extremely bearish for the SENSEX are - A possible hike in CRR by RBI and restrictions by SEBI on FIIs for bringing huge amount Forex into India via the controversial 'PNotes' route. This route lacks transparency. SEBI does not know who is the 'actual buyer' of Indian stocks. There is an excessive liquidity in the Indian financial markets on account of record FII inflows. RBI and SEBI for for the past two years has been advocating a total ban of PNotes but the MoF, Govt. of India has been defering this move. About US $ 69.00 billion has  come into Indian equities since 2003. The Left Front is also pushing the MoF- Govt. of India for 'total ban' of PNotes.        

I am advising investors to exit from the equities. Investors who hold blue chips for “keeps” can sell the same in the ‘F & O’ window so as to avoid erosion of capital. Invest in Gold and/or sit on cash. Let this political crisis blow over. This could take a few months, as I cannot predict when will the next general elections be held – January or February 2008.

There is no point to mention about the level to which SENSEX can correct in the next three weeks. I feel if the UPA Govt. falls in Oct’07 as predicted above, the SENSEX could tank to 16000 and then maybe lower. It depends on how the FIIs view the political crisis. If  FIIs press the ‘exit’ button – SENSEX can fall to 15000 level or even lower.

The BSE SENSEX closed today – Friday 31^st Aug’07 at 15319 up 6.17 % from close of 14428 as of 20^th Aug’07 as per last update. The high and low for the period under review i.e. from 20^th to 31^st Aug’07 were 15319 and 13871. The SENSEX was very volatile during this period due to political uncertainty in India on account of stiff opposition to the ‘Indo-US Nuke Deal’ from the Left Front.

I mentioned in the last update that – The UPA Govt. should not fall. There is now a truce between the UPA and Left Front for the next six weeks or so. It seems that Congress lead UPA has put the ‘Indo-US Nuke Deal’ on hold or backburner. I had predicted that the 200 DMA level of 13900 will be breached by end Aug’07. It did only an intra-day basis on 22^nd Aug’07 and then rallied over the next seven trading days on bullish global cues. Asian Markets were on fire with ^HSI ( Hang Seng ) testing new 52 week of high of 24089 and SSE Composite Index ( Shanghai Composite ) testing 5235 respectively.

The world markets were in a very bullish mode during the period under review. The Fed and Market Forces contained the ‘US Subprime’ Issue and the ‘Unwinding of the Yen Carry Trade’ respectively. The Fed injected funds into the US Financial Markets to bring some liquidity into the system. The US Equity Markets seem to have already factored in a ‘Fed Rate Cut’ by 25 or 50 basis pts. on 18^th Sept’07 FOMC Meet.

I was bearish for the period under review but the SENSEX bound back with vengeance from 13870 to close at 15300+ level today. FIIs have sold equities worth US $ 2.25 billion in Aug’07. Hence the SENSEX tanked. It rebounded as local FIs and MFs pumped in US $ 600 million in Aug’07. If the local operators had not pumped in this kind of funds – the SENSEX would have tanked below the level of 13870. The SENSEX was in the green for six straight trading days from 24th through 31^st Aug’07 on the back of strong global cues. The Indian GDP grew by 9.30 % in Q1 of the current fiscal and RBI managed the inflation quite well in the last six months of 2007. Inflation was at 4.00 % on week ended 18^th Aug’07. This was a big ‘bull trigger’ for the SENSEX.

I feel the inflation in India is not a true reflection as the Petroleum Subsidy in the current fiscal is to the tune of US $ 12.60 billion. If the real market prices of Gasoline, Diesel, SKO and LPG are passed on to the consumer in India then the inflation figure would cross 6.0 %. The ‘Left Front’ will never let this happen and will let the OMCs bleed to death !

A few reputed economic analysts in Europe and Asia feel that there is some more pain left in the US Financial Markets and that some companies could still go ‘belly up’ in the housing mortgage sector. I feel the Fed will step in again and calm the markets if some more bad news trickles from the housing mortgage sector. We must keep an eye on the Housing Market Data in the US.

I feel the SENSEX will be bullish for the next two weeks or so and then we could see a correction. This is subject to no major correction in the global equity markets over the next few weeks. The levels to watch for SENSEX for the next four weeks are :

R1 15450 R2 15600 R3 15870 R4 16000    

S1 15200 S2 15000 S3 14840 S4 14720 S5 14500      

There is a major support for SENSEX at 14720. The SENSEX can retest its 200 DMA of 13900 in Sept’07 if the US Markets corrects after 18^th Sept’07. The global stock markets could be very volatile and so will be the Indian Equity Markets.

I would advise investors to trade with caution in Sept’07 as there could be very volatile times in the next few weeks.

BSE SENSEX closed today - Monday 20^th Aug’07 at 14428 down 4.69 % from close of 3^rd Aug’07 of 15138. I had predicted that SENSEX would be bearish in Aug’07. The intra period high and low were 15542 and 13780 respectively. The SENSEX has closed below 14720 level for three consecutive trading days i.e. 16^th, 17th and 20^th Aug’07. Hence this Special Update as mentioned in my last forecast.

FIIs were net sellers in Indian equities for the period under review. The American housing mortgage sector is in a turbulent stage. M/s. American Home Mortgage Inc. – the tenth largest mortgage lender in USA filed for Chapter 11 Bankruptcy on 6^th Aug’07. In the last four months about 70 Housing Mortgage Companies in USA have filed for Chapter 11 Bankruptcies. Tuscon (USA) based M/s. First Magnus Financial Corp. a national mortgage lender, suspended operations on Friday 17^th Aug’07. It announced that the company has laid off  99.00 % of its nearly 6000 employees nationwide and has closed nearly all its 300 Offices. It will retain only 60 employees. The company will file for Chapter 11 Bankruptcy. M/s. Countrywide Finance Corp. – the largest home mortgage company in the US took a US $ 11.50 Billion fresh line of credit from its bankers on 16^th Aug’07 to keep running its operations. In short the US American Housing Mortgage Market is still in trouble. 

Two of BEAR STERNS ‘Hedge Funds’ have been wiped out since first week of Aug’07. MACQUARIE Bank’s two ‘High Yield Funds’ have lost upto 25.00 % of its value. Three ‘Funds’ under management of BNP PARIBAS and ‘Alpha Fund’ of GOLDMAN SACHS are facing redemption pressures. The shakeout has been global. IKB Bank in Germany and NIBC Bank in Holland have taken a hit. These are just a few examples, which demonstrate that if America sneezes – all other countries will have pneumonia ! 

The big danger ahead according to ET is not a ‘stock market’ panic. The ‘Subprime’ problem is

A symptom of a much deeper malaise – A burst in the US Housing Market. Global contagion from the US ‘Subprime Mortgage’ losses is a minor worry. The major worry is that the housing market burst if any, in USA will spread to other countries - Many of which look far overheated than the US Market. India will not escape from a global housing burst. Indian Real Estate Market is too overheated. 

According to UBS :

-          The problem is not in the global Equity Markets. Its all about ‘Credit Market’ in USA. There is a serious problem in the American Market  - Commercial Paper, Bonds etc. Basically Liquidity has shrunk. Even some good companies with low debt have problems to raise funds. It will take some time in USA to calm the financial markets.

-          Further Yen ‘Carry Trade Unwinding’ could take place by Japanese Investors. This will trigger on a major scale if the Yen appreciates to 107 to 108 levels vs. the US Dollar. This leads to the said investors selling equity assets aggressively in the global markets – which will effect ^N225 also. 

-          October’07 should be the time to have a re-look at the Equity Market in USA.

-          If the American economy slows down in Q3 and Q4’07 – Emerging Equity Markets could stagnate, especially export oriented economies like China. One needs to keep a close eye on the US Economy for the next six months. If the world’s largest economy goes into a recession – expect a global meltdown in commodities and equities.

-          SENSEX could breach the 200 DMA level of 13900 and settle down at around 13000 levels. Other global brokerage houses are also indicating this level of SENSEX in the coming two months.

-          The Equity Markets will be volatile in the coming weeks. The commodity prices could take a beating including prices of GOLD.

-          Political Uncertainty is another issue, which can keep FDIs at bay. There are major differences between the coalition partners – ‘ Congress lead UPA’ and ‘Left Front’ on the ‘Indo-US Nuclear Deal’. The Left Front wants the UPA not to proceed any further with the said Deal whereas UPA is all set to ‘operationalize’ the Deal. The Nuclear Deal is already signed between the Govt. of India and the American Administration. The Deal is called - “The 123 Agreement”. The next step in the Deal is to have “India Specific Safeguards” in place after discussions between India and IAEA on 12^th Sept’07 onwards. The ‘Left Front’ does not want that representatives from India to go to Vienna for discussions with IAEA. The next step is to have the NSG nod on the Deal. The final step is to get approval from the “US Congress” on the Deal. The Left Front can extend ‘Issue Based’ support to the UPA Govt. w.e.f. from tomorrow or in the worst case withdraw support to the UPA Govt. in the coming weeks. In case of the latter – The UPA Govt. will fall and this could lead to political instability for the next six months till fresh elections are held. In view of this the Indian Equity Markets could under perform vis a vis other emerging markets.

According to a leading economist in India, following are major concerns on the macro level :

-          The Indian Govt. has to scrap the subsidies in the Petroleum Sector. It has to dismantle the APM in the Petroleum Sector, which was put in place by the NDA Govt. in 2002. These ‘ Leftists ‘ have forced the current Government to do a ‘U Turn’ and we in India are back to APM in the Petroleum and Natural Gas Sector. The Govt. should pass on ‘real market’ prices of Gasoline, Diesel, SKO and LPG to the end use customers. Some ‘cross subsidization’ can be put in place. As of now State run OMCs are bleeding profusely. As long as this Government is in power, one really cannot expect scrapping of APM in the Petroleum Sector.

-          If the Indian Economy has to grow @ 9.00 % pa for the next five years till 2012 – then India has to attract huge amount of FDIs annually. At today’s prices the investment required in the Indian Infrastructure to meet the said GDP growth is around US $ 450.00 billion. India has to attract FDI by putting ‘Reforms Process’  back on track. As of now all Reforms – Disinvestment of PSUs, Hike of FDI Caps in nominated Sectors, Banking Sector Reforms, Reforms in Pension Sector etc. are ‘On Hold’ because of the opposition from the ‘Leftists’ who support the current coalition Govt. in New Delhi. Very hapless situation for the Hon. Prime Minister and Finance Minister of India – Without the support of the ‘Leftists’ the Congress Party and its allies do not have the numbers in the Lok Sabha ( lower house of Indian Parliament ) to run the Government. India does not need FII type of funds in Equity/Debt Sector as these funds leave as fast as they come ! These are so called ‘hot funds’. It took Japan two decades to get ‘long term capital’ flows through the seventies onwards to reach where they are today. India also needs ‘long term capital’ inflows from overseas investors to sustain the said GDP growth.

      -     India needs to curtail its Current Account Deficit, if not come to a Credit status.

I agree with the above issues raised by the learned economist.

The Indian Rupee continued to appreciate against the US Dollar ( Rs. 40.50). This hurts Indian Exports. To stem the rot further - Ministry of Finance, Govt. of India announced curbs on ECB ( External Commercial Borrowings ) for corporate India. For all ECBs exceeding US $ 20.00 million – Companies will need approval from RBI. This lead to a temporary rally in the Indian equity markets on 8^th Aug’07, as Bank Stocks flared up. Indian Rupee depreciated from 40.50 level to 41.20 level by this move by RBI. This rally in the equity markets unfortunately was very short lived.    

Please refer to para (v) of my last forecast. I had written  - “I feel that DJIA has some more pain left on account of turmoil in its financial markets on account of ‘Liquidity Crunch’ and ‘Sub-Prime Mortgage’ losses.“ My views were more or less correct. DJIA crashed 14^th through 17^th Aug’07.  The global equity markets corrected sharply except SSE Composite Index in Shanghai. BSE SENSEX fell by  643.00 pts on 16^th Aug’07 – second largest fall in SENSEX since 18^th May’06 when it fell by 827 pts. US Federal Reserve and ECB jumped in to inject liquidity in their respective markets. US Fed also cut its ‘Discount Rate’ by 50 basis pts. to 5.75 % on 17^th Aug’07, in order to calm down the Financial Markets. DJIA saluted this move by the Fed !  

I feel that political instability in India as per details mentioned above will have its toll on the equity markets. In addition the major support of 14720 for the BSE SENSEX has been breached convincingly. I feel that the 200 DMA for SENSEX - 13900 will be breached by end of Aug’07. This is a major long-term support for the SENSEX. If SENSEX closes for three consecutive days below the 13900 level, then we are in for a short-term bearish mode.

The levels to watch for SENSEX for the balance  :

S1 14200 S2 14000 S3 13900 ( 200 DMA ) S4 13780

R1 14500 R2 14720 R3 14840 R4 15000 R5 15200

I hope the Left Front and UPA can resolve their differences over the ‘Indo-US Nuclear Deal’. Failing which SENSEX will test 13000 by end Aug’07.

CLSA said on 10^th Aug’07 that in the next six months or so BSE SENSEX could test 12700. I predict that in case of fall of the UPA Govt. in the next three weeks, SENSEX can correct to 12000 levels by the of September’07.

Chinese Equity Market needs a special mention. I had predicted last month that SSE Composite Index could test 5000 level. On 15^th Aug’07 – SSE Index in Shanghai tested a new intra-day high of 4916. It closed at 4870. There after it did not fall as sharply as other Asian Indices - ^HSI, ^KOSPI, ^ STI, ^TWII and ^N225. This shows that Chinese Equity Markets are ‘not in sync’ with other Asian Markets. I expect a sharp correction in SSE Composite Index from around 5000 levels. The American Administration has requested the Chinese Govt. several times over the past two months that they should ‘Re-Value’ their Yuan. The Chinese are sticking to their stand and are not willing to toe the American line on Yuan. China has threatened America that they will dump US $ 900 million worth of T-Bills in the world financial markets, if USA pushes it to re-value its Yuan.

Let us pray that UPA Govt. does not fall in India and the housing market does not burst in USA.     

BSE SENSEX closed today – Friday 3^rd Aug’07 at 15138 up 3.33 % from close of 29^th June’07 of 14650. The highs and lows for the SENSEX were 15869 and 14896 respectively. I had predicted BSE SENSEX to be bullish in the month of July’07. The global equity markets were bullish in the month of July’07 and BSE SENSEX tested its new lifetime of 15869 on 24^th July’07. My prediction for July’07 was R3 – 15000. SENSEX steamed past my estimates !

DJIA tested a level of 14000 on 17^th July’07. Equity Markets tested new highs in Hong Kong, South Korea, Japan, Singapore and China from 24^th through 26^th July’07. DJIA crashed on Friday 27^th July on account of mounting ‘Sub-Prime Mortgage’ losses and rattled the global equity markets including BSE SENSEX. Black Friday – SENSEX corrected by 542 pts basis ( 3.43 % ).

On 31^st July’07 – India’s Central Bank ( RBI ) raised CRR by 50 basis pts from 6.5 % to 7.0 %. This meant liquidity suction of INR 135.00 Billion (US $ 3.33 Billion ) from the Indian financial markets. BSE SENSEX tanked by a massive 615 pts ( 3.95 % ) on 1^st Aug’07 – Its second largest fall in a day in its history. Also on 1^st Aug’07 – Asian Equity markets were in a correction phase plus Crude Oil tested new highs at London’s ICE @ US $ 78.80 pbbl. I had predicted Cude Oil to be bullish in the month of July’07.

FIIs have pumped in US $ 11.80 Billion into Indian Equity Markets in calendar 2007 till date. Five more months are left in the year 2007. This is the highest figure since 1993 when FIIs started investing in India. Previous highest FII investment in Indian Equities was in the year 2005 when they pumped in US $ 10.7 Billion. CITI Group in its report on 23^rd July’07 mentioned that India was the most expensive equity markets in Asia Pacific Region excluding Japan. India was more expensive than China, Hong Kong, Philippines, Australia, Thailand, South Korea, Taiwan and Malaysia.

The global equity markets are taking cues from DJIA, which has been extremely volatile since the past few trading sessions. I am not bullish for the Indian Equity Markets for the month of Aug’07. I feel that DJIA has some more pain left on account of turmoil in its financial markets on account of ‘Liquidity Crunch’ and ‘Sub-Prime Mortgage’ losses. The levels to watch for BSE SENSEX for the month of Aug’07 are :

S1 15000 S2 14840 S3 14720 S4 14500

R1 15200 R2 15450 R3 15600 R4 15900

SENSEX has a very strong support at 14720. If this level is breached – SENSEX will correct to 14500 levels or even lower to 14200 levels. I am a buyer at these levels for a few select blue chips. I will post the same on this site for reference for esteemed investors. The Indian Stock Markets will follow global cues lead by DJIA. SENSEX is heavily dependent on FII inflows although there is huge domestic appetite for equities from Indian FIs, MFs, HNWIs and Retail Investors.

Please keep a watch on Pakistan. Bush administration has openly admitted now that they will attack terrorist camps inside Pakistan to contain Al Qaida. Pakistani military establishment and its rouge intelligence outfit (ISI ) are very disturbed by Bush Administration ‘volte face’ on its old ally. US officially are now directly blaming Prez Musharraf for giving Al Qaida space and time to rebuild capacity and reorganize. Do not be surprised by a massive strike by US Army and Air Force inside Pakistan on the Pak-Afghan Border where CIA feels that Osama bin Laden is re-grouping. Please read my comments on the said subject in the forecast for May’07.

China Equity Markets – Please refer to last month’s forecast. I had predicted that SHANGHAI Composite Index ( SSE ) could test 4500 levels. SSE Composite Index tested a new lifetime high of 4440 on Monday 30^th July’07. The Chinese Govt. is worried about this ‘bubble like’ situation in the Chinese Equity Markets. Retail Investors are fuelling this boom in SSE Index. No one in China wants to ‘miss the bus’ ! The charts suggest that SSE Index might even ‘pole vault’ past the 4500 levels and test 5000 in a matter of weeks ahead. The SSE Index is surprisingly not affected by correction in the other Asian Markets. The Dragon is roaring. Please keep a close eye on SSE Index. There could be a massive correction around 5000 levels. This will rattle global equity markets including DJIA.

In India – please trade with caution, as short-term trend looks bearish.