Liquidity Keeps Markets afloat

Lets look at some of the stats for the month of September:

1. Nifty has been 6.34% up as compared to 31st august

2. FIIs have pumped in 10,854 crores in September and DIIs have put in 518 crores in September.

3.For the year from Jan'09, FIIs have put 16300 crores and DIIs have put 23535 crores.

The above Stats say a lot. Out of a total of about 40000 crores pumped in 9 months,11300 crores have come in September which amounts to roughly about 26 pc of inflows yet the market moves up only 300 points as compared to 2400 points from the bottom.

So now in spite of so much buying the market is not moving means someone is selling. The Smart Money is moving out of the Markets.

The FIIs display a herd mentality.Now, if this FII flow were to disappear then there would a stampede towards the exit doors.

The cheap dollar and low interest rates in the US are fueling this fascination for emerging markets. FIIs tend to churn the money around.

China down 18 pc from its peak value, Hong Kong about 4 pc and the Indian markets 1.58 % from the peak.

India story is looking good domestically, the only thing which can spoil the party is global triggers.

The Best option is to keep a trailing stop loss for positions at the 50 EMA which comes at 4658.

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Markets Tomorrow - Key Levels

I would be putting in key levels for the next trading day for those interested. In case, you find them useful, please let me know so that I would keep posting them here.

5 EMA, 20 EMA and 50 EMA are key support levels. The Bollinger band tops are key resistance levels

BBtop 15, 20 5039, 5000

5DEMA - 4984

5 EMA - 4928

3 EMA - 4956

7 EMA - 4902

10 EMA - 4866

20 EMA -4777

50 EMA -4601

STochs - Buy

MACD - Buy

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Markets: How high can they go?

The Markets keep rising. All the prophets of doom and gloom are decreasing. The bears have gone into hibernation.Happy times are here again.

Lets check out the fundamentals. Domestically, the things have improved definitely. Forget the IIP numbers which are overcooked by the government anyway. I look at the Auto Sales numbers as a key measure. Maruti is producing at peak capacity. They are now only constrained by Production limitations.
Indian IT companies are again bagging orders. The freeze is beginning to thaw. Domestically, things are beginning to look bright. My sense is that the next downward trigger will not come domestically unless its a Mumbai style Terrorist Attack. This time, India will not be expected to give a muted response.
Globally, things are seemingly looking up. The US and so the world markets are at new 2009 highs. It seems pumping in cash has done the trick. I will keep a watch at China. They are often the leading indicators of things to come. It seems a dichotomy that Chinese Markets are tanking when Global Markets are partying.
How does China become so important?
They hold a large amount of US Treasury bills, they are largest purchasers of US debt and FIIs for BRIC countries look at China for direction.
The US data looks towards a stabilizing of the job markets. The rate of decline has reduced.
The nifty has gone up 6.75 % in September. This has primarily been due to FII inflows of almost 8000 crores. DIIs have put in just 800 crores. The Party will continue till liquidity keeps pouring.
The FII or the so called smart investors often so a herd mentality. When they stampede towards the exit they do not give an opportunity to exit.The Nifty is at a P/E of 22.31. This is historically where it takes a dip to at least 19.

So what should you as an investor do?
If you are already invested and looking to book profits, keep booking at every rise of say 200 nifty points or keep a trailing stop loss of 20 EMA which stands at 4777 as of yesterday.
If you want to invest money look for dips to buy. Again, one could look at dips to 50 EMA to buy which comes to 4601.

Remember, if the crash comes it will be swift and brutal. So, you will know that it is not time to enter.

The markets had come 50 EMA levels last around 18-19th August, nifty 4353 which was a buying opportunity.

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Shanghai Noon:Will History repeat itself?

The global markets are interlinked for all the talk of decoupling. The Chinese markets are supposed to be a advance indicator of what is going to happen in other emerging markets.
In Oct 07 when are markets were hitting new highs, the Chinese market corrected sharply.They were 21 pc down from their peak in 2 months.Then recovered 13 pc before the Jan 2008 meltdown.
This time, they corrected even more sharply in July down about 23 pc from its peak when our markets were hitting new peaks. They have now rallied back about 13 pc again.
Last time, it took about 3 months for the fall, rise and then the big fall. This time, it has been faster. The fall and the rise have consumed about 7 weeks.
Will history repeat itself?
Domestically, now the cues have been factored. The next positive triggers could be the half year results in October unless we have some unforseen event globally

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Nifty P/E and P/B ratios

2 of the most important and basic analytic ratios are Price/Earnings and Price/Book Ratio. Lets us explore how they have behaved over the past 9 years.

P/E Ratio
Price to Earning ratio in layman's words is how many times the share trades to its profit made.
Infosys if it trades at Rs 2000 and Profit (Earning per share or EPS) is Rs 100, its P/E ratio is 20.

P/B Ratio
Price to Book value ratio states the number of times the company is trading to its book value. Book value is nothing but the assets of the company. If the company's assets are sold off tomorrow and money distributed to shareholders how much each shareholder will get per share. IT companies typically have high P/B ratios.

P/E Ratio

If we look at the past 10 years in graph above, we have add 2 bubbles in 2000 and 2008.In such extraordinary times, the P/E can go to even 28. We do not have bubbles every other year.
So in other times?

Market has corrected sharply when P/E is between 21 and 23.If you see the May 03 to May 04 period market has corrected sharply almost to hit the bottom again in P/E terms. Remember it would not be exact bottom because the earnings would have increased by then ( In 1 Year).
This has happened almost 4-5 times in last 10 years that market has reacted from P/E 21-23.

Also, historically it makes a bottom around P/E 11.

P/B Ratio

During the dot com bubble it made a top of 5 and 2008 of around 6.5. This time it made a higher top because there are companies in the Nifty like RPl and Reliance Petro who have low book value along with the IT pack.
What is interesting is the lows it made.It has bounced 3 times when price is just 2 times the book value.

What do the above 2 graphs tell us?
Correction could be round the corner. If we take P/E of 23 as top, then 5159 could be near the top on Nifty. Whenever it corrects from this level it can goto P/E 11 to 15 range.
This could be in Nifty terms 2600-3400 range. It makes sense to take profits off the table if you go by the P/E historical data.

One caveat, companies in the Nifty change, but we take nifty as a broad barometer of the Indian Market.Hence, everything evens itself out.

Lets see if history repeats itself this time.

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L&T Finance NCD- To Invest or not to Invest

L&T Finance is coming out with a NCD issue. The issue opens 18^th August and closes September 04^th. Should the retail investors invest or not?

What are Non-Convertible Debentures?

NCDs are instruments which enable the borrower to borrow money against some collateral. The collateral in this case would be the company’ assets. L&T Finance would also be creating a Debenture Redemption Reserve to take care of payments for the NCD. (To the extent of 50% of value of NCD)

Debenture holders stand a greater right to the assets than shareholders in case the company goes bust. The assets are sold and shareholders are the last to receive anything, once all debtors are paid.

How safe is this issue?

L&T Finance is 100% owned subsidiary of Larsen and Toubro. So, if you can buy L&T shares you can buy these NCDs. It has received high credit rating from the rating agencies.

How good are the returns?han shareholders in case the company goes bust. The assets are sold and s

They are offering returns from 9.5 to 10.25% as per the table below. A government 10 year bond is yielding 7.3% as of yesterday.

What if I need the money early?

These bonds will be listed on the NSE, and they will be available in your Demat account.So you can exit anytime you want. Tata capital NCDs which came out in Feb are traded on NSE and there is adequate liquidity. You will get the money in 3 days time from the time you sell.

Is there something more I can expect?

There is a reservation of 35% for the retail. The Retail quota is almost never oversubscribed so you get full allotment. The HNI and Insitituins oversubscribe. Ur They will want to buy it from you on listing.

If the issue on listing, trades at 9 pc, your bond will yield you Rs 1030 (0.6 pc gain per year for next 5 years).

The Tata Cap NCD issued at Rs 1000 is now trading at Rs 1122.So if the rates go down, the value of your bond increases, if it goes up, keep holding the NCD and enjoy 9.65 pc interest for next 5 years.

Should I wait for the last day for investing?

Allotment is on first cum first serve basis. The issue may close earlier also.

I would recommend invest in this issue under the retail section.

Option I II III IV Interest Payment Quarterly Semi-annual Cumulative Semi-annual Minimum Application (Rs.) 10,000/-(Retail) 1,01,000/-(NIIs & QIBs) 10,000/-(Retail) 1,01,000/-(NIIs & QIBs) 10,000/-(Retail) 1,01,000/-(NIIs & QIBs) 10,000/-(Retail) 1,01,000/-(NIIs & QIBs) Multiples (Rs.) 1,000/- 1,000/- 1,000/- 1,000/- Face Value (Rs.) 1,000/- 1,000/- 1,000/- 1,000/- Mode of Interest Payment Through various modes available* Through various modes available* Through various modes available* Through various modes available* Coupon Rate 9.51% p.a. 9.62% p.a. 9.95% p.a. compounded annually 10.24% p.a. Yield on Redemption 9.85% 9.85% 9.95% 10.50% Tenor 60 months 60 months 88 months 120 months Redemption Date / Maturity Period 60 months from the deemed date of allotment 60 months from the deemed date of allotment 88 months from the deemed date of allotment 120 months from the deemed date of allotment Redemption Amount Face value plus any interest that may have accrued payable on redemption. Face value plus any interest that may have accrued payable on redemption Rs.2,005/-per NCD Face value plus any interest that may have accrued payable on redemption

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Is the Bear market Over?

Is the Bear Market over?

That is the key question these days. I feel it is not so. Some of my reasoning for why it is not so.
I have been talking of a W-shaped recovery since April now. Well, here are some more people talking about the same. Pual Krugman is a Nobel Laureate in Economics. Here is what he has to say.
http://economictimes.indiatimes.com/articleshow/4879356.cms
He is talking about a W-shaped recovery for the US. We are 1 half through. We are just at the point of the 2nd leg up, from where if the recovery continues it will be a V-shaped recovery or 3rd leg down before the final recovery. The 2nd leg down may not be very bad in terms of economic impact, but the markets have risen up on the assumption that the recession is over. If it’s a W-shape, I expect the Dow to touch 4500-6000 levels by end of the year.

Second point I am making, is of the effect of the drought. The government has said the economy will grow at 5.8-6 pc this year. The government forecast is always beaten on the lower side never on the upper side (Government being the most optimistic entity around). Now, if the impact of drought hits the economy GDP can be shaved of 1-2 pc. Again I am quoting CMIE
http://www.equitymaster.com/5MinWrapup/detail.asp?date=8/14/2009&story=5

This is without factoring any global weakness. If we grow at 3-4 pc (back to the Hindu rate of growth), do we justify P/E multiples of 20+. We are at P/E of 20.72.

Third point I would like to make is of Bear Market Rallies. The current rally bears an uncanny resemblance to the Bear market rally of the Great Depression 1928-1932.
Look at the chart below:
http://images.creditwritedowns.com/2008/06/dow-1928-1932.png
There was a similar rally like these times, with similar time frame.
The 1929-1930 equity ‘rally’ lasted 147 days and shares gained 46%. The rally off the March 6th low this year has been 145 days and gains of 46% have been made.
There have been 23 occasions going back to 1950 when the UK market rose at least 10 days in a row and every time it has been said it was a confirmed bull market.

This reminds me of my favourite quote:”Those who forget history are destined to repeat it.”
The folks who come on CNBC and other channels have a vested interest. They have to sell stocks to people. So they talk about Green shoots and stuff. Naina Lal Kidwai of HSBC in a moment of great honesty said the other day. “ I believe the recovery would be skittish. Government and other private companies should be greedy. They should raise funds while the going is good.”

That is why you will see such mega IPOs. The markets may not crash overnight. There is large scale distribution going on ever since we hit 4693. We are rising on lower volumes and falling on larger volumes.Classical case of strong hands distributing stuff to retail.

To sum up , China wall is alredy cracking. Here is what my favourite writer Yelnick has to say, http://yelnick.typepad.com/
We may well hit 16500 on the sensex before beginning the leg down.Remember the markets can retrace a fall by 61.8%.
All in all, definitely no new buying, and look to book profits.

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