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So even if there is any kind of a modest bounce in Satyam from whatever price level because people believe that the 5,000 crore of cash is still there, there is a big line of people and the Fidelity and Aberdeen’s of the world are not going to stand down with Satyam right now because of whatever cash is lying on its books. They want out and they want out like yesterday.
So this stock now has huge amount of overhead supply which just cannot be absorbed because the number of sellers far outnumbers the number of buyers in Satyam Computers at any price point. So this stock could fall to Rs 10 even if there is cash on the balance sheet because there would be a large number of institutional investors who have completely seen this lie and I do not think that they would want to hang on there at Rs 80-70 because of any kind of cash lying on its books.
This stock’s value despite the cash or the business operations right now is probably in single digit rupees. Nobody trust this, you have just broken down the trust completely, how do you believe a management which just cooked up everything from its balance sheet to its earning statement over the last many quarters and serially quarter after quarter went on national TV and reported to the exchanges one magnificent lie after another. It is just completely preposterous.
Who do you believe now?
Satyam is a company which is listed on the New York Stock Exchange (NYSE); this is an index company, quarter after quarter it announces numbers which we take as gospel and we do a lot of analysis, every analyst does on whether margin slipped a bit and wage hikes happened and now you know that none of those numbers existed then who do you believe?. Do you believe auditors, who are supposed to be looking at these companies?
This is a fundamental issue of trust and faith which has been shaken. One can forget about the Satyam stock much that we feel very bad about Satyam shareholders that is one company. Here you stand the risk of actually losing your faith and trust in the system, which is supposed to be policing the numbers which you have faith and trust in. What happens to the auditors? This is a company which is not a fly by night small company, it is listed on a global exchange, global investor – they are supposed to be following US GAAP norms etc and quarter after quarter they keep blinkering all their investors and none of us find out till the promoter one fine day decides to confess.
Could there be more companies doing these kind of thing? What are the auditors doing? How will we ever know? You and I cannot be looking at going into and checking the bank accounts of Satyam and what they earned in a particular quarter or not. At some level there has to be an implicit code of faith that we believe what is posted on the walls of the exchange but today we cannot. So what are these people doing – these auditors and tax consultants and even rating agencies, how have they conducted themselves over the last two-three quarters. It is absolutely appalling.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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Ramalinga Raju, Chairman of Satyam has resigned from the board, reports CNBC-TV18. In his letter to the board, Raju admitted that the IT major's balance sheet has inflated cash and bank balance of Rs 5,040 crore. "No board member had any knowledge of the real situation. Accrued interest of Rs 376 crore in books is non-existent. Rs 1,230 crore was arranged to Satyam, but was not reflected in the books."
Here is a verbatim transcript of Udayan Mukherjee's comments on CNBC-TV18. Also watch the accompanying video.
On shareholders of Satyam:
It was a very cleverly crafted scam. Not to overstate this because this is one company which has enacted a fraud on its shareholders and board of members, investors large and small but the temptation would be to now extrapolate that and to drive conclusions like the FII will now lose complete faith in every Indian corporate not knowing what to trust because these kind of frauds happen in every country.
So we don’t want to extrapolate this to a very dire situation where Satyam equals many other companies in India and therefore not to believe anything that is reported on the exchanges on a daily basis. That I think would be a complete and gross over reaction. So if you are asking whether this leads to a complete derating of the market, it may happen but it would in my eyes be a very extreme reaction because one bad apple does not mean that everything in the basket is rotten.
Having said that will it shake investor’s confidence? Absolutely and unequivocally yes, more than anything else that has shaken investor confidence. This is not one crooked stock broker scamming investors by leading them up and getting a line of finance from a bank, it is one of the country’s biggest companies; it is an index stock with a several billion dollar marketcap, it was thought just a few months back as one of the beacons of Indian IT and today the promoters come and said, everything that I shared with you was a complete scam. Do you think this will have no repercussions? Absolutely not, that would be too simplistic an inference to draw. I am finding it difficult to articulate what one should after looking at the scale and magnitude of this scam which has played out, where the promoter in five pages has just blown the biggest scam going in this country and has submitted himself to the forces of law.
To think that when the scam actually broke, Ramalinga Raju came on our channel and spoke so eloquently about justifying the Maytas deal, holding everything up. So I think investors would be completely rattled not just in Satyam Computers but in their whole conviction and belief in what numbers are reported because if Satyam can do it, where do you draw the line. So I am completely aghast about what has happened and we should just put out a graphic of the first couple of pages of this confession within quotes.
I really feel sorry for investors like Aberdeen and Fidelity who have picked up, who are sitting on very large chunks of Satyam Computers. We cannot blame them for naively believing the numbers which Satyam kept putting out quarter after quarter but now they are holding stock in a completely dud company – we don’t know what to believe.
No floor for a stock like Satyam:
It is an F&O stock so there cannot be any kind of a circuit filter on that. This is a truly extraordinary circumstance, the promoter has just come in and said that everything was a figment of his imagination, it was a big lie which he enacted and therefore you don’t know how to value this stock anymore.
He still says that there is some cash on the books but the way he has cooked up Q2 accounts which was just reported from 60 crore to 600 crore, you don’t want to believe even his confession what he has put out. So if it was a non-F&O stock maybe there would have been a circuit filter and trade would have got stopped and people would have got some time to analyze it but maybe it is just as well that trade is happening and people who want to get out as they would at this point would want to get out of the stock.
I just feel bad for the guy who does not own 500 shares of Satyam but owns several lakh shares or million shares of Satyam Computers. How does an Aberdeen exit right now and he is a blue-blooded FII who has taken a lot of India bets running a several billion dollar India portfolio. What happens to Fidelity who owns several million shares between various Fidelity accounts probably 9% of Satyam? He cannot sell in the secondary market today and get out for his lot of shares and he would be standing in line at some point to exit.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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If that continues on the margin and you see volumes and participation picking up, then the dips will be bought that is what the traders would want to do. So, even the internals are suggesting a rally of hope. People do believe that in the near-term the market might scale higher and therefore they are flocking to the market right now, as you can see with the volumes. It could all get turned on its head by five bad days out there, but so far that has not happened.
The other thing, which is happening in the midcaps, if one is tracking internals, is that people are asking that big question on whether many strong midcaps did see their bottom in the October 2008 fall. Now the question is, whether even if there is another a sell-off, of course at some point there will be another fall in the market, whenever that happens because this can’t be a straight tree to the sky. In that fall will many of the good quality midcaps which lost 90% of their marketcap in the October fall from the peak, will they go back and retest those October lows or has that price bottom been formed, they might just linger around these levels, give up a little bit. But even if they go nowhere close to their highs in the next couple of years, have they formed some kind of a price bottom and that is something, which a lot of fund managers and money managers and even High Net Worth Individual (HNIs) are debating and grappling with at this point, which has made for a nice market breadth over the few weeks of trade.
It’s been a blockbuster start in terms of news flow at the start of the year. Does that change the tactic for how the Q1 might shape up?
What all of us are talking everyday is whether we can put in with periodic sell offs, a good January-February performance which I do not think a lot of people would given a good chance for in the month of November or going into December but so far the going has not been too bad. So say that this rally does not end on its tracks start next week which is also a possibility and not a very small one either but if it does not the market cannot wade through these earnings and then come out of it without having broken down below 2,800 Nifty and then manages to put in a bit more of an effort in the month of February as well. Essentially what we are asking is if the Nifty can head up 10-15% more from here?
If that happens that you get a good Q1 equity performance it would be good and it would be surprising for a lot of people. But then my favourite thing is to go back and look at the lessons of history. If you just go back and look at the data pre-2002-2003 when the bull market started then you find that in the trend less years which is when you didn’t have roaring bull market but the market was either in a bear phase or recovering from bear phase or essentially sideways kind of moves.
From 1991 to 2002 – and this is fact that 7 out of 13 years the market actually made its peak for the year in the month of January or February. So the Q1, we saw a peak for the market in 7 out of 13 years, it’s not an insignificant statistics. In bull markets of course the picture changes because every bull market year is a positive year, so you are continuously trending up. But when the market was robbed off a trend as we seem to be right now then one in two years the market formed its stop in the first quarter of the year.
I do not want to sound alarmist and this is not my preferred view either but history tells you that if you get a good Q1 bounce in a trend less market sometimes that maybe the high for the year. So is it a possibility – I am asking the question – I do not know the answer - that you get a good Q1 performance, the Sensex goes to 12,500 or 13,000 which we can’t see today but it may happen and then the market sells off, forms a range and that is pretty much the highest level that you see for the rest of 2009. It doesn’t look like a preferred scenario as I keep saying but it’s something which history says you should not scoff at.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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While you were sleeping all was well with the world. The US was fine, Asia is woken up pretty okay from the bed. Yesterday, while we had a bit of an intra-day scare, it didn’t quite last. The market managed to claw back and close in the green, at least the Sensex did.
Yesterday the trend was not broken and this morning global cues are not supportive to the trend breaking either. Surprises can happen but that said we still seem to be in a little groove for our market here.
Markets this morning:
I think probably we are getting carried away here because we had such a bad one year. It’s nice to be optimistic sometimes and we remain optimistic about this pullback rally which has taken us seven-eight weeks on the trot with some minor blips and it looks like it’s not ready to fizzle out just yet. Its running into a bit of resistance admittedly but the screen is not telling you that the party is over, the music stopped and everybody is been shown the door just yet.
Asian Indices:
Asia is okay, no problems there. The Nikkei is up 2%, Korea is up 2% and the other markets are just about flat to positive, China is absolutely unchanged. So, not bad the cues from across Asia.
On Nifty:
It still looks in good shape, its doing all the right things; it’s moving up just spending a bit of time and then trying to move up again circling around the resistance points, giving it some respect and then breaking them and moving higher. So the Nifty has a nice shape going about it.
There are a couple of things out there – one of course is that the next 100 points is a bit of a heavy water situation for the Nifty because everybody is been talking about this congestion zone of 3,150-3,250 and it plays on the psyche of traders as well; the fact that you are getting close to the levels which were targets which were set out earlier and then inevitably a lot of profit taking happens around these levels.
We could have stop-start kind of days, volatile days like you saw yesterday over the next 100 points on the Nifty. While the market does that you have got two days left before earnings starts kicking in and it might be true that the market has seen the earnings, expected them and priced it in many weeks back, it still might lead to volatility given the extent of surprise it is thrown up once earnings actually starts coming in. We are at an interesting juncture now where you are just hitting that line of resistance which anyway should cause a touch bit of volatility before the market takes it out if it has to and then with that there is a lot of expected news flow which the market will have to wade through over the next week-ten days at least when the first few earnings come in.
It would be interesting to watch what the Nifty does from here but its entirely likely as we were saying yesterday that as we hit the earnings season, the Nifty having gone up to these levels of 3,150-3,250. If it do get to that 3,250 by then - then it may give up a bit of ground. It’s entirely conceivable that the Nifty retraces 200-250 points but if it does that and say stops at 2,900-3,000 and then resumes its upward journey having digested those earnings then the market’s shape will be the better for it because the more the Nifty does this kind of thing - that it rallies, pauses, gives back, makes a slightly higher bottom and then tries to move higher that always makes for a more durable rally.
We are still in a pullback rally mood and of course it’s a classic bear market rally as we can see it right now. But it can be far more durable rally which is what we are debating whether it will be or not and if you see this kind of moves where the market takes ten steps forward gives back five then takes seven steps forward and gives back two that is a nicer shape which makes for a very durable rally.
For now the Nifty is doing all the right things sometime in the next one week-ten days do factor in that 200-300 point dip in the Nifty which is entirely possible that it may play out and then the market might eventually go up. Right now no significant cracks have appeared.
On the internals:
There are two things there; you want to track volumes and you want to track flows. So, in January what you have seen on these two fronts- exactly what I was saying that if you are screen-watching then the cracks haven’t appeared yet. Because the volumes are picking up everyday and the flows are also seem to be on the positive side. You are once again getting to that January groove, where you get more than USD 70-80 million net plus on the margin everyday from Foreign Institutional Investor (FIIs). It may not be the gush of 2006, where on a day you would get a USD 25 billion, but you are getting USD 70-80 million for the last 2-3 sessions.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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Metals stocks too are rallying. It is a strong pullback and it follows from the kind of movements we have seen in the last one week. Nickel is up 21%, Lead is up 20% and Copper is up 10% over the last one week. So its no surprise that some of these metal stocks are bouncing back.
Some of the liquidity is getting back into the beaten down commodities and they are giving you a very smart pullback. One would want to think that this is a smart pullback which can carry on for a bit longer and you would want to be a bit nimble on your commodity trades because these are essentially going to be trades for the year, at many points you will get these strong pullbacks and eventually they will get sold into because of the fundamental news flows but they would be strong trading opportunities.
The interesting thing to watch out since there is such a lot of midcap activity in the market is when you see the big moves happening in some of those beaten down midcap metal stocks like Sunflag Iron, Uttam Galva, those kind of stocks and there too you will get those rallies but when you get those rallies which sometimes turnout to be very sharp, I think investors will do well to remember to check out because we know what is going on with Ispat; they want restructuring of their Rs 600 crore debt obligation. So things are not good and are not going to be good for many quarters from here for some of the smaller metal plays, non-integrated but you will get these kinds of trading pops but I suppose you are better off trying to milk them.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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That’s a big play globally. Its interesting how things are moving because if you notice the last few days the dollar is been reasonably strong but crude snap back from USD 33-34 per barrel to almost USD 50 per barrel. I do not know whether this is strong bear market rally or a dead cat bounce in crude or indeed crude is showing the first signs of bottoming out around those kinds of levels.
Also if you notice at the same time crude has rallied, gold has eased off a bit. So gold is the out performer in that pack and it’s probably a tad overbought as well so maybe that is just giving up a bit as the beaten down under owned commodity crude has been steadily bouncing back.
Closer home what does it mean? The one fear, the big fear that the market had going into this earning season is that Reliance will have a big skeleton to disclose from its closet either a massive inventory loss or something like that and that has kept the stock very subdued and the Nifty from breaking out in any significant manner.
But as crude has bounced back to nearly USD 50 per barrel, Reliance has got the impetus to rally on and that’s probably the reason; no coincidence that the Nifty broke out on the day that Reliance actually lead it because of crude bouncing back. So certainly it augurs well for stocks like ONGC and Cairn in the upstream space and both those stocks could run more from here if crude consolidates and moves to more than USD 50 per barrel levels and maybe it will pickup Reliance as well on the margin.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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On global set up:
This week is a bit of a test because the market there shrugged off the manufacturing data which was quite terrible. When the jobs data comes in and if the market is able to withstand that and still move on then you will know for sure that even the global markets are not focused on macroeconomic or poor macroeconomic data for the moment. What global markets are also placing their bets on (a) the stimulus packages and (b) on some resurfacing of liquidity into various asset classes, which have been quite depressed.
So a telling point in that is the way crude is bounced back and metals have bounced back early this year. I think people are focusing on that that there is a lot of money, asset prices are depressed, stimulus packages have come again so lets forget the bad macroeconomic data which we know is going to be bad for the moment and focus on the technical plays right now and see if the markets or asset classes can move up a bit in the near-term.
As the jobs data comes in this week if the Dow or the S&P 500 does not fall off too much then I think that trend will be confirm that right now the market is focusing on slightly different things than what it was a few weeks or months back even globally.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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We were talking this possibility earlier, ten days back and the one possibility which we were examining then is a surprise January rally which extends a bit longer than people expect and it takes the Nifty to levels which people would not ordinarily have expected it to. I am not saying that that is a given after yesterday’s move but certainly the possibility of that has increased. You still do not know what cues you will get from the world but it is certainly a 50-50 kind of a situation that you get a more meaningful bear market rally. That’s the interesting bit because if you just look back and it’s always instructive to go back and see the patterns of these bear market rallies in the past.
If we just look at the 2001 experience which is what we keep going back to because it was a fairly well fleshed out bear market when it bottom got formed at 850 on the Nifty in September 2001 after that what we got was a multi-month and a strong bear market rally. At that point it didn’t look like a bear market rally; it looked like the market had bottomed out and it had started moving up and resumed its uptrend once again because the rally was not a two week rally, it was a multi-month rally which took the Nifty from 850 to 1,200 that was a 42% rally on that base of 850 and it panned out over several months. Once that got over -that 1,200 fell back to about 900 and then you form that narrower range of 900 to 1,100.
I am not suggesting that exactly that pattern will play out this time because every bear market is different. But that is an instructive pattern to keep in mind that sometimes these bear market rallies are not flashes in the pan which play out over ten days and give you 20-20% and then fall off and form a new low. Sometimes they can be multi-month affairs and can take you 40-50% higher and if indeed this is one of those then you are already 1.5 months into it, it could certainly extent for a month or two more and could take you 3,700-3,800 which could be a 50% rally from that level of 2,500.
That is the interesting possibility that you want to keep your mind open towards not a given not a done deal, you can stop much before that and go back once again. But can that happen in one shot with small breaks? It certainly is in the realm of possibility because that’s exactly what happened in the last bear market.
On Foreign Institutional Investors:
The Foreign Institutional Investor (FII) selling seems to have abated a little bit over the last few days and that Rs 470 crore figure that we have, the provisional buy figure from the FIIs is not something which is insignificant. You couple that with domestic institutional flows Rs 420 crore and that will only grow because the insurance sector will continuously put in money, one expects in January, February and March.
Also if you look at the FII action in the Futures and Options (F&O) market, where they bought about Rs 650 crore of Nifty futures and clearly fresh longs are being created and that 1.5 crore shares were added on stock futures. You are beginning to get a little bit sense of momentum, which inevitably happens when the markets give you a nice rally, which we had so far from 2,500 to 3,100.
So, the first signs of little bit of a liquidity push and momentum are happening, if that continues into the first few couple of weeks of January, where you get some foreign money and some local institutional money and traders keep doing the midcaps on the sides, then who know we are probably in a reasonable technical situation as well, for the Nifty to push forward some more. Of course with that caveat that you will probably get some running corrections on the way that is inevitable, because people will take profits, conviction cannot be very high despite the recent rally. So, even the technicals are not looking too bad just from a liquidity perspective over the last few days.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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In the current market rally, bulls are making the play and not the bears. Also, there will be some bout of short covering in the coming days. Money is coming in to the markets from FIIs. There are traders coming in to the market since the past 2-3 weeks.
The rally is more like a bear market rally, which will ignore the earnings pain. Therefore, markets look good for next 10 days or so.
January started pretty well for the stock market; yesterday afternoon we had a good rally, a surprising rally some would say in the second half of the session and that cleared a couple of hurdles from a trading perspective for the Nifty and for the Sensex.
This morning we do not have great cues from US and from Asia but not bad cues either so flattish kind of cues. But our market seems to be exhibiting a bit of momentum after some time, so let’s see whether we can build on it at some point during the day.
We have got a market that’s actually displaying momentum these past few days regardless of global move:
Yes it looks like the bulls are making the play right now and not the bears because there was one round of short covering which happened a few days back and we are headed for another bout of short covering as well now. There seems to be bit of money coming into the market from FIIs (Foreign Institutional Investor); traders have been in the market for the last two-three weeks if not more with the midcap end of it.
So there is a bit of rediscovered momentum and the general feelings seems to be that we are in the midst of a what seemed like a reasonable bear market rally but looks like a more powerful kind of a bear market rally which might even ignore earnings. That’s the hope which is playing out in January; we have come quite a bit already and if you will ask people on the street they will probably tell you that the market looks good for a bit more at least over the next week-ten days at least.
Asian Indices:
China was up quite a bit. Hang Seng marginally in the red, the Nikkei is flat, Taiwan and Korea are not doing too bad; Asian markets are actually quite a bit positive with the exception of Hong Kong, so reasonable cues despite a fall in the US across Asian markets.
On Nifty:
It crossed an important hump yesterday by the end of trade. If you asked traders, they were quite happy with the way Nifty crossed over 3,100-3,115 and closed above that. That might have been significant because the first hurdle would have been crossed; even the Sensex the way it closed above 10,200 was quite encouraging. I think that paved the way for a bit more of a rally on the Nifty- that zone of broadly 3,250 that is the next point of reckoning for the Nifty. Because 3,250 would take you back to the old lows for the index, after that people are talking about 3,400.
We have had a few days of rally and you have just affected a bit of a breakout, it is possible that sometime in the next couple of days today, tomorrow you get a bit of a reaction from the market that is entirely conceivable. In that if you look at the options data, what is interesting is that the 3,000 Put is being written quite aggressively and that is the trader telling you that they are expecting a bit of a reaction. But they do not believe that the reaction will take the Nifty substantially below 3,000, just in the near-term, which is why they are comfortable writing the Put out there.
I still think that given what has happened over the last few days, if there is a dip in the next day or two, at least the trader for a while will try and buy that dip unless the Nifty keeps breaking down and closes below 3,000, and then I think people will just become cautious. But any dip of 50-60-100-points on the Nifty, traders will probably want to buy and see if the Nifty is getting to those levels of 3,250-3,400 in the near-term, which seems like a possibility after yesterday’s move up.
So near-term, I suspect for the traders it is still trading long and looking northwards. However with a possibility of a dip anytime in the next few days, anytime this week, which might take the Nifty closer to 3,000, which I suspect the traders will want to buy for once.
We were talking about this possibility that news flow and sentiment might give it this much impetus. Over the more medium-term has anything changed? Has the ceiling become higher?
-Udayan Mukherjee, Managing Editor,CNBC TV18
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On Fiscal package:
That is a little bit more ambiguous because the more you study the fine print of that fiscal package, the less you feel enthusiastic about it. One thing that one should say is that there is nothing about a fiscal stimulus package, there cannot be because everything on the margin is a positive. So whatever you want to call it, you will want to call it neutral to positive never with a negative stance because any help which is coming for the market at best will not work and so at best it is neutral, there is nothing negative about it.
That Rs 30,000 crore extra which India Infrastructure Finance Company Ltd (IIFCL) will get over a period of time, I don’t think will help the market or the economy big time beyond a point. That special purpose vehicle (SPV) for non-banking finance companies (NBFCs) too or allowing external commercial borrowings (ECBs) to NBFCs in the current global capital environment – they are all marginal positives. But I doubt in material they would have any major impact on the market.
Then if you drill it down to specific sectors in terms of commercial vehicles, their depreciation clause I doubt will have any major impact. So sentiment might on the margin get affected and you will see a little bit of a pop-up but I don’t think materially things change for commercial vehicle makers at all.
One would want to look at NBFC stocks this morning though for a fillip because a lot of the package seems to be directed or seems to be seeking to use NBFCs as a conduit for financing infrastructure and in that at least an initial pop will happen in stocks like IDFC, which has rallied quite a bit in anticipation, the SREI Infrastructure, even the Sundaram Finance type of stocks, some of these NBFCs – the liquid ones – might give you a little bit of a jig up and infrastructure stocks may also move up a little bit but in material, I doubt whether this will have any far reaching kind of implications.
The one thing which I think this one does is probably to aid sentiment on the margin and while we may scoff at that and say that nothing material happen so what is the big deal about sentiment, I think it is a big deal because right now a lot of the problems of infrastructure are linked with sentiment because companies at the end of the day are run by human beings and if this kind of packages – if they don’t aid materially can lift that pall of gloom a little bit, I think it might go a little vain in resolving the recovery issue that we are talking about
-Udayan Mukherjee, Managing Editor,CNBC TV18
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January is pitted with events both global and local with the earnings coming in here, so it is not an easy call to say that now we have a clean rally from here. But I think what the screen is telling you is that the Nifty has given itself a reasonable shot at a January rally going into earnings. If starting 10th or 12th, you get consistent bad and unexpected bad news from the earnings front then obviously the Nifty will struggle to make is pass 3,250-3,400 and keep rallying from there. So rallies might be stopped by unexpectedly bad earnings that is a given. But it is certainly not betraying a lot of weakness this market for the last few days particularly the broader market which is what makes it quite interesting.
I think it is a lot of pent-up emotion - if you feel - which is stuck around that 3,100-3,200 level, I doubt if the bears are going to throw in the towel before the earnings or before the Nifty meaningfully takes out 3,200. But once that happens - if you are not in the first week of earnings getting any major downward surprises - then you will see short covering and the longs getting even more emboldened and then you play for a bigger rally. Which turns a little bit of the expectation on its head because it could then work out that you have a first couple of months which is pretty good for the market and then when everybody gets very excited, you get that fall but not to start with the fall which people can use to buy and then rally up. So I think the market if it does an early year rally, it would be surprising a segment of participants for sure and maybe even some fund managers who were sitting on cash.
Stimulus package – Monetary policy:
That is the good bit of what came through on Friday. We saw the bond yield at sub 5% after so many years and that psychologically certainly helps a lot of the financial sector stocks and so the rate sensitives will almost certainly rally today.
There will be meaningful rallies in banks, maybe even in real estate but that is the good bit which is happening, it doesn’t work right away but with a lag. Our best case expectation is that as we get into the second half of 2009, things economically or fundamentally start to turnaround a bit and the Reserve Bank of India is doing whatever it can to put that turf in place. For all other things being equal to just raise the possibility of a recovery in the second half and there it is doing the right thing. There could be more for sure going forward.
I think all that debate on whether banks will cut or not is a bit academic- because it is not ‘if they will cut but when they will cut.’ I am sure in the next 4 to 8 weeks we will see deposit and lending rates go down quite significantly for banks and that process might well continue through the first 3-4-5 months of this year. That is the good thing for equities and quite unambiguously so.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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Global cues are not too bad for markets today. The fiscal and monetary packages announced on Friday will also play out today. It is an important morning of trade and Nifty will get into an interesting territory.
Holiday week is over and the world comes back to trade this morning. Infact the global cues are not too bad. The US markets, the Asian markets all seem to be entering January at least with a bit of a positive tone and we have got a lot to react ourselves, the fiscal and monetary stimulus packages which came on Friday evening and the market has not had a chance to react to that.
So we will see all of that playing out this Monday morning. Part of it of course would be in the price because the market was expecting those packages but global market impact too should help the market upbeat this morning. So it is an important morning of trade.
On current reckoning it is more plus-plus than minus?
Yes for sure it has been quite plus-plus for the last couple of weeks. The Nifty has got back above 3,000, the Sensex virtually at 10,000 and generally there is a little bit of a feel good across global markets - we could sense that - despite weak economic data. I think they are calling that The Obama Rally in the US. Expectations of much more detail about the stimulus package in the US. One can see that global markets are reluctant to go down even commodities selectively are bouncing back. So it is likely and possible that we are seeing a bit of a January move shaping-up up here.
So far it looks that way that the market is more inclined to move up than move down and of course our own stimulus packages - we can debate how effective they could be or not but I suspect that at least for starters they will nudge up this morning.
The Nifty gets into interesting territory starting this morning from both the global and the local impetus after that I think questions will be asked on whether it has the legs to carry on for a more meaningful January rally from there.
Asian Indices:
Asian is not a bad picture this morning; most markets are up about 1.5-2%. So good cues from Asia but alongside the global cues what the stock market here will be reacting to are the twin packages fiscal and monetary.
On Nifty:
We were discussing this possibility or probability last week that the Nifty after this push will probably get to that point which it is struggling to cross that point is broadly between 3,100 and 3,250 which are the pervious levels on which the Nifty has got stuck, on one occasion at 3,250 and on one occasion at 3,100, so in that zone of 150 points some questions will be asked out here.
The best case and hopeful scenario if you are bullish is that the Nifty after this policy impetus and the kind of moves that you are seeing globally, gets to 3150 straight away in the next few hours of trading and then you get some help from the global markets because this is not just going to be an India rally in January if that happens. I think it will be probably a global kind of an affair and if the Obama rally is to continue a bit longer in the US and there is every chance that the Nifty gets back to its 3,250 levels and scales it from there.
But for near term traders, some people went long when the Nifty bounced back from those 2,800 kind of levels, so if you were long from 2,800-2,900 in that zone then the short term trader will probably once take profits around 3,150 to 3,200 and then see if the Nifty is breaking past that level and if it does effortlessly, then you will see fresh momentum being created by the market. I suspect what will all happen is that the positional shorts will go out, some short covering has happened already but there would be some longer-term shorts who would be keeping that zone of 3,100-3,200 as a stop-loss, the moment the Nifty successfully scales that level you will probably see another bout of short covering and that might propel the Nifty up or impart some momentum to it.
So today we get that 3,100-3,150 zone and there we need to see if the Nifty is seeing a wave of profit taking or it’s showing strength and not coming off too much from there and trying to slowly nudge and work its way towards the 3,200 level.
On how January might shape up, is it now leaning towards one versus the other i.e. a tremendous rally versus a sell off?
I think you would want to imagine that – I know you don’t want to count your chicks before they are hatched but I think in the last few days the market or the screen at least has shown an inclination to move up rather than move down. It did not breakdown 2,800 when it looked like the rally was over and it was reversing and then it slowly clawed back to more than 3,000.
-Udayan Mukherjee, Managing Editor,CNBC TV18
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So one hopes the next bull run will also be reasonably well spread out so that it doesn`t exclude large sections of participants. Maybe banks will not suffer as badly with their asset quality this time round and present buying opportunities; maybe the pessimism of a drying up of the capex cycle will bring infrastructure stocks to irrational levels, maybe post elections sectors like agri, fertilisers and sugar will recover yet again. And anytime gold sells off close to 700$ buy a brick, it will shine brighter than most over the next couple of years. Keep watching closely. Even the worst hit cyclicals will turn sometime in 2010, I hope. Yes, you will have to take risks and look beyond the relative safety of existing cash flows. The big trade is all about that.
There, I have stuck my neck out. More pain but a bear market bottom sometime in 2009, then a consolidation range that extends into 2010 - the point where it may seem hopeless but when the next bull market starts slowly. I know you will smile indulgently at me if it happens before that because we will all be happy again then. Just remember 2009 is a buyer`s market. Let stock prices come to you, don`t go chasing them. That was 2007, this is 2009. Horses for courses, as they say. Be brave, be stingy, be patient. You won`t lose your shirt buying at the lows of 2009 or even at the lows of 2008, at best you will be made to wait longer than you would like to. So as the sun shines tomorrow on a New Year, maybe shift a gear in your head. Who knows, 2009 could be a year of opportunity. Of toiling under the sun and sowing the seeds of wealth creation. You may not see the harvest this year but the hard work will bear fruit in the not so distant future. Keep the faith, this too shall pass. Here`s wishing you a healthy, safe and profitable 2009.
End of message
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contd from above..
Okay then, for the Sensex and Nifty watchers, what does the turf look like? Again, my humble submission: I have no clue about the sequence of moves in 2009. The one thing I believe in is that you will get dips in 2009 and the ideal buying zone for me lies in that band between 6500 to 8500 points. Obviously, the implicit assumption is that the index will dip into that range next year, maybe even spend time within part of that range. Now could the Sensex rally to anywhere between 11000 and 12500 points before that happens? It certainly can. The window is wide open for such surprises. The thing about bear markets though, and we are still in one, is that they tend to be kind to stock buyers. They turn back, repeatedly, to test the lower end of the ranges formed. So the trick is not to get sucked into the rallies but to wait for the selloffs to accumulate what you like. Again, the central risk to this strategy is that the market has already formed a bottom in 2008 and does not turn back in 2009 to even touch 8500 Sensex or 2500 Nifty. It can happen but I would be surprised if the lower end of any bear market consolidation range is substantially beyond 9000 Sensex or say 2800 Nifty. Now I know all that wisdom about how one should not look at the index and only at stock prices but inevitably we all look at the index and it does impart a broad sense of where we are so that`s that. The way past bear markets have panned out is that the index first forms a capitulation bottom (whether Oct 2008 or one to come in 2009) and then forms a multi month trading range. In the last bear market the Nifty made a bottom of 850 points in September 2001. Then it had rallies and sell offs, in the process forming a 17-month trading range that held till April 2003. The lower end of that trading range was 950 and the top 1200, but the last 7 months of that range was a tighter 950 to 1100. History should never be ignored. So one possible scenario could be that the Sensex makes a bottom around 7000, give or take a few hundred points either way, and then forms a broad multi month trading range of between 8500 and 12,500. It could be narrower of course. The eventual piercing of the previous bull market top of 21000 may take much longer. Who knows, it may not happen before 2011. But even if the Sensex formed a range in 2009 after bottoming and then 2010 and 2011 turned out to be positive years leading up to a new bull market, that should surely be an acceptable outcome for most investors.
So how do you position yourself as an investor? First, identify the amount of money that you are ready to forego for the moment and then don`t approach investing with the sole purpose of minimising losses. The defensives will help you hide while the market consolidates but will never generate the supernormal returns that you are playing for once the bull returns. No, that doesn`t mean you have to rush out and buy the next real estate stock. That`s ultra aggressive. But you have to focus on the businesses which will exhibit growth once this lean patch is over and bet on them when the market gives you that opportunity in 2009. And in doing that don`t look back. History may repeat itself but bull market leaders seldom do. The problem is that, sitting right in the middle of a bear market it is difficult to identify what the next leader sectors would be. Maybe the leaders of the next bull run are still not adequately represented in the listed space. How many listed realty stocks did you have after all when the last bear market was ending? None. But leave that aside, as it`s a hidden paradigm today. The last bull run was fairly secular in that sense, not a one trick pony as the one that preceded it. Real estate, commodities, banks, infrastructure were all pillars of the last bull market.
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Contd from above..
An important caveat. I have no idea what the best time to buy is or will be. The bottom, for all you know is already behind us, though I am disinclined to believe that. I could be entirely wrong. If you ask people, they will tell you that the market will be weak in the first half of 2009 and then there will be a recovery in the second half. Yes, that is certainly a possibility but the more I hear this the more I am inclined to believe that the market will turn this consensus on its head. For one, it`s too pat. It`s never that easy to time the end of a bear market, almost never. Who knows, there could be a magnificent rally in the first bit of the year and then a collapse, that too is entirely possible. Markets always surprise. So the short point, I don`t know what the exact sequence of the twists and turns of 2009 could be and I suspect no one does. The reason I prefaced this by saying this is not for the trader. My only assumption, admittedly a dangerous one, is that there will be more falls in 2009. Falls which could take us close to the October 2008 lows, if not lower. Let`s say, in that broad vicinity. At least once. That`s when you need to be brave. The real recovery may only start in 2010. So say you buy in January or March or May, whenever this expected fall comes, be prepared to not see any gains for another full year or more. Till well into 2010. That`s a very likely scenario. But ask yourself this simple question: if you buy something for X, and then it becomes 2X in 24 months, you would still take it, right? Even if the returns are back ended, meaning you make nothing for 15 months and then suddenly a lot in the 9 months that follow. That`s a 40% compounded annual return, tax free and you could get luckier. Fortune favours the brave, haven`t you heard? That my friends, is the big trade and it lies somewhere in the depths of despair in 2009. Or so I believe.
And there will be despair in 2009. No bear market, certainly not one of such monstrous proportions, gets over easily. There will be pain in global economies and India, while not in recession, will hurt too. While acknowledging this pain, don`t get into the trap of wallowing in all that drivel about how the world has changed because investment banks like Lehman went bust. Yes, that may temper the flow of liquidity for a while but finally money will come around to chasing growth and returns. The conduits may have changed and in turn the near term velocity of money flows but money will come. And with the kind of monetary and fiscal stimuli that are being put in place by most countries there is no dearth of money. You just can`t see it today. So while the world has genuine problems today which are not to be dismissed or scoffed at, don`t let all that blind you. Eventually, economies and asset classes will be reflated again. You have to believe that at a very fundamental level else you shouldn`t be putting a dime into equities. There`s one caveat and it is also the central risk to my hypothesis that starting 2010 things are on the mend again. That, despite all the stimuli, global demand just does not pick up, asset prices remain depressed for several years like they did in Japan and we don`t get a meaningful bounce even in the next many years. This is certainly not a ludicrous proposition and in the US one can even believe it may happen but I struggle to envisage it in countries like India and China. A multi-year demise of demand. If that happens, I am proved wrong and we are all dead meat anyway. I am a believer. Yes, even after 2008, I am.
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