Support at 4471 level. Below this level, selling may continue up to 4453-4455 zone by non-stop.
Mild sell-off up to 75 level can be used to buy. If uptrend continues, then it may continue up to 81 level for time being.
Mild sell-off up to 74 level can be used to buy. If uptrend continues, then it may continue up to 77 level for time being.
Global Cues & Rupee
The Dow Jones Industrial Average closed at 9,370.07. Up by 113.81 points.
The Broader S&P 500 closed at 1,010.48. Up by 13.40 points.
The Nasdaq Composite Index closed at 2,000.25. Up by 27.09 points.
The rupee ended at 47.85/86 per dollar on Friday, weaker than Thursday's close of 47.68/69.
Interesting findings on web:
Stocks rallied Friday, with the Dow and S&P 500 closing at the highest point in nine months, after the July jobs report showed the smallest number of job cuts in nearly a year, adding to recovery hopes.
The Dow Jones industrial average (INDU) gained 114 points, or 1.2%, according to early tallies. The S&P 500 (SPX) index rose 13 points, or 1.3%. The Nasdaq composite (COMP) added 27 points, or 1.4%.
The economy's most vexing problem, unemployment, is showing the first signs of easing. And Wall Street is celebrating.
All three indexes finished higher for the week. All three indexes closed in positive territory for the fourth week in a row.
S&P 500, Dow industrials close at new '09 highs. The Dow Jones industrial average is trading at its highest level since November, while the Standard & Poor's 500-stock index has climbed to its highest level since October.
Wall Street gains after a smaller-than-expected number of jobs lost and a surprise drop in the unemployment rate.
Major stock indexes jumped more than 1 percent Friday after the government said the nation's unemployment rate unexpectedly fell in July for the first time in 15 months and that employers cut fewer jobs. Bond prices fell, driving yields higher as investors left the safety of Treasurys.
Employers cut 247,000 jobs from their payrolls in July after slashing a revised 443,000 jobs in June. Economists surveyed by Briefing.com thought they would cut 325,000 jobs. It was the lowest level of losses since last August.
"It was the best reading on non-farm payrolls since before Lehman's collapse last September, which was the pivotal event that precipitated the crisis," said Jeff Kleintop, chief market strategist at LPL Financial.
"It all starts and ends with jobs," said James Cox, managing partner at Harris Financial Group in Richmond.
The unemployment rate could still reach 10 percent this year, but it seems less likely to top it, Cox said. And any sign that the recession is ending puts Wall Street on track to return to its pre-financial crisis levels by the end of the year, he said. "I think we're safe up until then, and then we level off and go into a stage of slow growth," he said.
The report seemed to confirm other recent indications that the economy is stabilizing.
"Leading indicators have priced in a recovery for a while, now lagging indicators like unemployment are too," he said.
Although employment is seen as a lagging indicator in any recovery, the steady march higher of the unemployment rate over recent months has added to investor anxiety about the health of the economy.
The unemployment rate, generated by a separate survey, fell to 9.4% in July from 9.5% in June, versus forecasts for a rise to 9.6%.
Ian Shepherdson of High Frequency Economics said the unexpected improvement in the unemployment rate was unlikely to last, given July's number "was due entirely to a 422,000 drop in the labor force."
24 of 30 Dow components rising, led by IBM (IBM, Fortune 500), Boeing (BA, Fortune 500), United Technologies (UTX, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Chevron (CVX, Fortune 500).
American Express' gained about 4.4 percent.
Citigroup rose 5 cents, or 1.3%, to 3.85 after being up as much as 12% to 4.24 during the session. The high marked the shares' first time above 4 in two and a half months. The stock rose all five sessions during the week, for a 21% gain.
Industrials benefited from the upbeat outlook.
Boeing climbed 2.57 percent to 46.69 dollars, DuPont rose 1.14 percent to 32.83 dollars and Caterpillar added 1.36 percent at 47.78 dollars.
Media and theme park operator Walt Disney Co. was the Dow's biggest gainer, up 5.20 percent at 26.69 dollars.
The S&P banking index rose 3.68 percent.
Fannie Mae, the ailing giant mortgage finance lender bailed out by taxpayers, plummeted 16.46 percent to 66 cents. The government-controlled firm reported another huge loss, 14.8 billion dollars in the second quarter, and tapped the US Treasure for an additional 10.7 billion dollars in aid.
Continental Airlines lifted 3.34 percent to 12.39 dollars after announcing a share issue to raise some 170 million dollars.
Chiquita shares [CQB 14.82 2.05 (+16.05%) ] soared 16 percent after the banana maker topped forecasts, helped by cost-cutting measures, and said its full-year results would be "significantly improved."
Ford [F 8.01 -0.06 (-0.74%) ] slipped by GM [MTLQQ 0.756 --- UNCH (0) ] rose after the Senate approved another $2 billion for the "Cash For Clunkers" program.
Shares of Crocs ( CROX - news - people ) surged $1.39, 32.6%, to $5.66, making fresh 52-week highs, after the footwear maker said it sees a path toward profitability in 2010.
CBS leapt 2.27, or 27%, to 10.81. Second-quarter profit fell 96% on one-time items as advertising sales remained weak, but the media and entertainment company issued a bullish advertising outlook for the remainder of the year.
Genzyme (Nasdaq) continued its descent, losing 62 cents, or 1.3%, to 48.19 to close at its lowest level in over five years.
Goldman Sachs on Friday added shares to its conviction sell list amid uncertainty surrounding the biotech firm's recent manufacturing problems at a large production facility.
The better-than-expected monthly jobs report was good news for the nation's embattled lodging industry. Marriott International gained 2.82, or 13%, to 25.28; Starwood Hotels & Resorts Worldwide rose 3.55, or 14%, to 29.68; and Host Hotels & Resorts advanced 92 cents, or 9.3%, to 10.86.
D.R. Horton gained 98 cents, or 7.8%, to 13.52. The home builder is the best-positioned in its industry to benefit from the end of the government's $8,000 tax credit for first-time home buyers given its lowest-in-the-industry pricing, Goldman Sachs said in adding shares to its "conviction buy" list.
Hansen Natural (Nasdaq) gained 5.41, or 18%, to 36.09. The all-natural soda and juice maker reported higher sales led by its Monster Energy drink and improved margins.
VeriSign lost 1.90, or 9.2%, to 18.66 on the Nasdaq. The Internet infrastructure services provider reversed a year-earlier loss caused by big restructuring charges, but the earnings fell short of analysts' expectations.
Nvidia rose 59 cents, or 4.5%, to 13.71 on the Nasdaq. The chip maker's second-quarter loss - its fourth in the past five quarters - narrowed on smaller charges, and the company issued a better-than-expected sales outlook.
Affiliated Computer Services dropped 2.40, or 5.1%, to 44.52. The outsourcing and information-services supplier reported solid fiscal fourth-quarter results, but shares fell on concern about margins in fiscal 2010.
AES rose 74 cents, or 5.6%, to 13.88. Second-quarter profit dropped, reflecting a year-earlier one-time gain, but the power giant still topped Wall Street's estimate and lifted its earnings target for the full year.
The Dow, Nasdaq and S&P 500 all hit fresh 2009 highs earlier in the week, following three weeks of gains. Since bottoming March 9 at a 12-year low, the S&P 500 has risen 49.4% as of Friday's close.
AIG (AIG, Fortune 500) reported its first quarterly profit in nearly two years Friday, but the troubled insurer continues to struggle in the aftermath of its near-collapse last fall. AIG still owes taxpayers $87.6 billion.
The stock nearly doubled in the run-up to the profit report. AIG gained another 20.5% Friday.
Generally, corporations have been beating profit expectations by slashing costs, even as their revenue remained weak, analysts said.
Analysts polled by Thomson Reuters had forecast that companies on the S&P 500 would report a 31 percent drop in profitability during the second quarter. Now that most of the companies have reported results, the forecast has been raised to a 28.3 percent drop in quarterly profits.
"Earnings season was good, analysts had set a pretty low bar and companies have been aggressive in cutting costs," said J. Michael Gibbs, director of equity strategy at Morgan Keegan.
But this rally could be reaching its peak, analysts said. A bumpy and slow recovery could send stocks tumbling again, they said.
"I think the market is likely to do fairly well over the next year," said Sam Stovall, chief investment strategist at Standard & Poor's Equity Research. "But in the near term, I am a bit cautious because I think the market will have to digest some of these gains."
Earnings also helped: Of the 427 S&P companies that have reported so far, 73 percent beat expectations, 8 percent met and 19 percent missed.
Two bank failures in Florida raised the number of bank failures to 71 for the year, according to the Federal Deposit Insurance Corp.
Late Friday. Florida regulators closed Community National Bank of Sarasota County in Venice, Fla., and First State Bank of Sarasota, Fla. Stearns Bank, N.A., of St. Cloud, Minn. will assume all the deposits of First State Bank, and assume the deposits of Community National for a 0.25% premium. As of May 31, First State had deposits of about $387 million, and Community National had deposits of $93 million. The failures bring the number of Florida bank failures to six for 2009.
Berkshire Hathaway /quotes/comstock/13*!brk.a (BRK .A 108,100, +1,150, +1.08%) said late Friday that second-quarter net income came in at $3.3 billion, or $2,123 per Class A equivalent share, up 14% from a year earlier when the insurance-focused conglomerate made $2.88 billion, or $1,859 per Class A equivalent share. See more on Berkshire.
Late-traded shares of Citi /quotes/comstock/13*!c/quotes/nls/c (C 3.85, +0.05, +1.32%) led volume movers with more than 11 million shares exchanged. They slipped 0.5% to $3.83. Shares of the financial services provider, which is now owned more than 30% by U.S. taxpayers, had traded above $4 in the regular session and looked poised to mark their first close above that price for the first time since April 16. However, the advances were pared, along with the broader market.
President Obama on Friday signed into law an extension of the auto sales stimulus program that will keep it running through Labor Day.
Oil and gold:
Crude oil fell for a third day as gasoline futures declined on signs of slowing seasonal demand for auto fuel late in the U.S. summer.
Oil declined from a five-week high of $72.84 a barrel on Aug. 7 as the dollar traded near a one-week high against the euro, eroding investor demand for commodities priced in the U.S. currency. Oil prices around $70 are "not bad" and necessary to maintain investment, OPEC President Botelho de Vasconcelos told reporters in the Angolan capital of Luanda yesterday.
COMEX gold for December delivery fell $3.40 to settle at $959.50 an ounce.
Bonds & Currencies:
Treasury prices tumbled, raising the yield on the benchmark 10-year note to 3.85% from 3.74% late Thursday. Treasury prices and yields move in opposite directions.
The dollar traded near a one-week high against the euro on signs the U.S. economy is emerging from recession, boosting the appeal of the nation's assets.
The dollar was close to a seven-week high versus the yen as U.S. employers eliminated fewer jobs last month than economists forecast, adding to evidence the slump in the world's largest economy is abating. The yield advantage of 10-year Treasuries over similar-maturity Japanese bonds widened to 2.44 percentage points, the most since November, making U.S. assets more attractive to Japanese investors.
"Economies around the world are improving, with the U.S. leading the way," said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. "The dollar is likely to be bought and the yen will probably be sold."
The dollar traded at $1.4209 per euro as of 11:25 a.m. in Tokyo from $1.4183 in New York on Aug. 7, when it rose to $1.4155, the highest level since July 31. The U.S. currency declined to 97.25 yen from 97.57 yen. It touched 97.79 yen on Aug. 7, the strongest level since June 16.
The euro fell to 138.21 yen from 138.41 yen on Aug. 7, when it climbed to 138.72 yen, the highest since June 5. Europe's currency traded at 85.05 pence from 84.98 pence. It slipped to 84.56 pence on Aug. 6, the weakest level since June 30.
Exchange-rate movements may be exaggerated by Japan's Obon holidays this week, when Japanese often take week-long vacations to honor ancestors, Ishikawa said.
The gains in the greenback on Aug. 7 marked a return to the view that good U.S. economic news should benefit the currency as traders speculated that the Federal Reserve will boost borrowing costs sooner rather than later.
What to expect:
Next week kicks off with an SEC hearing on Bank of America. We'll have a trickle of a few more earnings, including Applied Materials, Macy's, Wal-Mart and JCPenney. Plus, the government's reading on retail sales, CPI, industrial production, consumer sentiment and the main event: A two-day Fed meeting, starting Tuesday.
Asia:
Asian markets marched higher early Monday after the latest U.S. employment numbers showed signs of a stabilizing job market.
The Nikkei 225 [JP;N225 10559.99 147.9004 (+1.42%) ] jumped 1.7 percent to hit a 10-month high led by exporters, while the broader Topix climbed 1.7 percent.
Rakuten Inc. (4755) shares were weak Monday morning despite the company's announcement Friday evening that its January-June group net profit expanded 420% on the year to 38.1 billion yen.
Shares in Mitsubishi Chemical Holdings Corp. (4188) shot up Monday, following a Nikkei report the same morning that the firm plans to acquire Mitsubishi Rayon Co. (3404) via a tender offer.
Shares in GS Yuasa Corp. (6674) treaded water Monday.
South Korea's KOSPI gained 0.4 percent early Monday as the U.S. employment figures boosted sentiment. KB Financial and Hyundai Motor were amongst the gainers.
Over in Australia, the S&P/ASX 200 climbed 1.1 percent as earnings season got into full swing. BHP Billiton, CBA and Telstra were among the key reports to watch out for.
Property investor Goodman Group surged after the firm raised US$1.1 billion through a share placement.
Taiwan shares were flat after a typhoon hit the island over the weekend, but TSMC inched higher ahead of its sales report.
In South-east Asia, Malaysia's KLCI was marginally higher while Singapore was closed for the National Day holiday.
HSI 20826.32 +450.95 +2.21% (08.38 AM IST)
Hong Kong shares rebounded early Monday in the wake of a higher opening in Shanghai and pre-weekend gains on Wall Street, with heavyweights HSBC Holdings /quotes/comstock/22h!e:5 (HK:5 85.90, +2.05, +2.45%) /quotes/comstock/13*!hbc/quotes/nls/hbc (HBC 55.50, -0.27, -0.48%) and China Mobile /quotes/comstock/22h!e:941 (HK:941 90.90, +2.40, +2.71%) /quotes/comstock/13*!chl/quotes/nls/chl (CHL 57.40, +1.09, +1.94%) lifted by persistant hopes of a listing in Shanghai. The Hang Seng Index rose 2.2% to 20,824.03 and the Hang Seng China Enterprises Index gained 2.1%, with HSBC up 2.6% and China Mobile climbing 3.1%. China's Shanghai Composite, meanwhile, added 0.4% to 3,273.37.
Hong Kong stocks rose on Monday morning, with the benchmark Hang Seng Index opening 383 points higher at 20,758.
The Hang Seng China Enterprise Index, which tracks the overall performance of 43 mainland Chinese state-owned enterprises on the Hong Kong Stock Exchange, opened 204 points higher at 11,816.
Sinopec<600028><0386><SNP>, the largest refiner in Asia by capacity, increased 1.93% from the previous closing to HK$6.86.
PetroChina<601857><0857><PTR>, the country's largest oil producer, rose 1.66% and opened at HK$9.16.
Chinese stocks opened higher on Monday morning.
The benchmark Shanghai Composite Index, which covers both A shares and B shares on the Shanghai Stock Exchange, opened at 3,287.76 points, up 0.83% or 27.07 points from the previous closing.
The Shenzhen Component Index on the smaller Shenzhen Stock Exchange opened 1.03% or 134.07 points higher at 13,109.32 points.
China's ChangAn Auto Co., Ltd., a leading domestic auto maker, announced Saturday that its sales volume rose more than 82 percent year on year last month.
China's monetary policy to remain unchanged.
China's central bank "is still committed to a 'moderately loose monetary policy'."
The country's banks have lent nearly 1.08 trillion U.S. dollars in the first half of the year.
The government would give private businesses more access to the market.
Beijing municipal government plans to invest a total of RMB 10.4 billion in power grid projects this year, representing an 18% year-on-year growth, sources reported.
Japan Machinery Orders Jump More Than Expected
Japan's core machinery orders rose a bigger than expected 9.7 percent in June, marking the first gain in four months, but it was unclear whether the rise marked a lasting recovery in capital spending.
Japanese manufacturers forecast a sixth straight quarterly fall in machinery orders in July-September, suggesting they remain wary of expanding their production capacity despite signs of a global economic recovery.
June data showed the biggest rise in more than a year, but the outlook figures suggest capital spending will not contribute much to overall economic growth in the foreseeable future.
With the outlook murky, the Bank of Japan will likely maintain its cautious view on the economy and keep interest rates near zero at least until early 2011, analysts say. No policy change is expected at the bank's two-day rate review that ends on Tuesday.
Manufacturers surveyed by the Cabinet Office forecast that core machinery orders, a highly volatile series seen as an indicator of capital spending in the coming six to nine months, would fall 8.6 percent in July-September from the previous quarter.
Core orders rose 9.7 percent in June, the first gain in four months and the biggest increase since April 2008, Cabinet Office data showed on Monday.
"Despite the rebound in machinery orders in June, manufacturers' forecast for an 8.6 percent fall in July-September suggests the overall trend in orders is still weak as the utilisation rate at factories remains low and corporate profits remain at a low level despite their recovering trend," said Seiji Shiraishi, chief Japan economist at HSBC Securities.
In April-June, core private-sector machinery orders, which exclude those for ships and machinery at electric power firms, fell 4.9 percent from the previous three months.
The yen ticked slightly higher to 97.17 yen per dollar after the data, while the Nikkei share average opened up 1.1 percent and hit its highest in 10 months.
Ten-year JGB futures fell 0.25 point to 137.34.
The numbers suggest the Bank of Japan's view that the economy will improve from the latter half of this year may be a bit too rosy, said Junko Nishioka, chief Japan economist at RBS Securities.
"The stance on capital spending is very cautious due to the weak demand outlook, including foreign demand. I think the Bank of Japan's scenario is relatively positive compared with that of the private sector," she said.
"If final demand continues to be very weak and if it is difficult to see when companies will recover, then it will take a long time for the BOJ to seek an exit strategy, including normalising interest rates. I think the bank will continue its loose policies for a while."
Japanese companies are expected to keep cutting back on capital expenditure to cope with weak demand both at home and abroad, after the global economy suffered its deepest slump in many decades.
Although manufacturers have increased output steadily in recent months thanks to a recovery in exports, they are still running their factories at less than 70 percent of capacity.
The huge slack in the economy shows how little companies need to increase spending on equipment and also suggests they may have to continue cutting jobs to make profits.
Japan's economy is expected to have grown 1.0 percent in April-June after four straight quarters of contraction, a Reuters poll showed. But economists expect any recovery to be fragile as uncertainty over the global economic outlook keep companies and households from boosting spending.
Separate data released by the Bank of Japan showed bank lending rose 2.1 percent in July from a year earlier, slowing further from a record gain in January as credit conditions eased.
Fed Likely to Keep Key Interest Rate at Record Low
With the economy strengthening but still fragile, Federal Reserve policymakers are expected to hold a key lending rate at a record low this week and will weigh whether to extend some programs that were created to ease the financial crisis.
Fed Chairman Ben Bernanke and his colleagues also are likely to signal that while the recession is winding down, the pain isn't over.
Though the unemployment rate dipped to 9.4 percent in July — its first drop in 15 months — economists predict it will start climbing again. Many, including people in the Obama administration and at the Fed, say it could still top 10 percent this year.
For months, consumers have pulled back on spending and borrowing. To try to stimulate economic activity, Fed policymakers are all but certain to keep the target range for its bank lending rate between zero and 0.25 percent at the end of their two-day meeting Wednesday.
That means commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will stay around 3.25 percent, the lowest rate in decades.
Fed policymakers also will probably pledge anew to keep rates there for "an extended period," which economists interpret to mean through the rest of the year and into part of 2010.
"We're doing everything we can to support the economy," Bernanke said recently. "We will try to get through this process. It's going to take some patience."
By holding rates so low, the Fed hopes to induce consumers and businesses to boost spending, even though banks are still being stingy about extending credit.
"The Fed will be guardedly optimistic," said Brian Bethune, economist at IHS Global Insight. "We're seeing initial signs of the economy moving toward recovery ... (but) the underlying fundamentals are still weak."
With numerous signs that the recession is finally ending and financial stresses easing, the Fed will consider whether some rescue programs should continue. Any such decisions, though, might not come at this week's meeting.
One such program, aimed at driving down interest rates on mortgages and other consumer debt, involves buying U.S. Treasurys. The central bank is on track to buy $300 billion worth of Treasury bonds by the fall; it has bought $236 billion so far.
Another program, the Term Asset-Backed Securities Loan Facility, or TALF, is intended to spark lending to consumers and small businesses. It got off to a slow start in March and is slated to shut down at the end of December. Despite this program, many people are still having trouble getting loans, analysts say.
The Fed isn't expected to launch any new revival efforts or change another existing program that aims to push down mortgage rates. In that venture, the Fed is on track to buy $1.25 trillion worth of securities issued by mortgage finance companies Fannie Mae and Freddie Mac by the end of the year. The central bank's recent purchases have averaged $542.8 billion.
In the meantime, the economy has shown clear signs of improvement. Employers cut only 247,000 jobs in July, the fewest in a year, the government said Friday. Wages and workers' hours also nudged up — encouraging signs that companies no longer see the need for drastic cost-cutting. Those developments could deliver a psychological boost to both companies and consumers.
The economy in the second quarter contracted at a pace of just 1 percent, suggesting that the recession, which started in December 2007, is ending.
That dip came after a dizzying free-fall in the first three months of this year. The economy had plunged at an annual rate of 6.4 percent in the first quarter, the worst showing in nearly three decades.
With the economy improving but still weak, inflation should stay low, the Fed says. Given consumers' caution, companies won't have much power to raise prices.
And the weak job market will limit wage growth. Companies aren't going to feel generous about wages and benefits until they are confident a recovery will last.
MARKET BUZZ:
(May not be useful for day-traders.)
PSL-Another Equity For Debt Deal
The poor quality of management apart, PSL is doing what Unitech and Suzlon have already done. Do Rs 300 crore QIP to bail-out of Rs 900 crore of debt. This will give a short term pop to the stock, all said and done.
Profits bogged down by high interest cost…
After posting Rs 12 bn in revenues during Q4FY09, PSL reported muted top line of Rs 6 bn for Q1FY10. Management informs that the April - September period is generally affected by the monsoons during which most of the EPC activities associated with the laying of line pipes slows down in India. It is pertinent to note that PSL has larger proportion of domestic orders as compared to other pipe manufactures whose order book is loaded with international orders.
Revenues for the current quarter were at Rs 6.33 bn as compared to Rs 6.59 bn y-o-y (down 3.9%) and Rs12.1 bn q-o-q (down 47.9 %). PSL had produced 101,604 tonnes of pipes during Q1FY10 as compared to 74,295 tonnes y-o-y (up by 35.6%). Pipe shipments during the current quarter were at 82,207 tonnes as compared to 75,240 tonnes in Q1FY09.
The consolidated order backlog as on 30th June 09 stood at Rs 39 bn. As most of the raw material requirements have been tied up, investors can expect stable EBIDTA margins going forward. PSL's order backlog mainly comprises of domestic orders and hence the company is relatively insulated from the vagaries of the export markets.
GAIL is expected to release orders for more than 500,000 tonnes of steel pipes in the near future. PSL's ability to erect its own mills enables the company to quickly and efficiently move capacities near to the pipeline projects resulting in significant savings in freight costs.
With 11 pipe mills located across multiple locations in India, PSL is poised to garner larger share of the GAIL orders. At the CMP of Rs. 126.80, PSL trades at 4XFY10E earnings.
(Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.)
Sensex retreated from the threshold of 16,000 impeded by scattering monsoon clouds and ominous noises emanating from China on clamping down on excessive speculation.
It is a relief that Indian stock prices have stopped their blind hurtle skywards that made Sensex gain over 2,700 points since July 13.
Market participants appeared edgy as the Sensex neared the 16,000 mark and the Nifty closed in on 4,700. Volumes were subdued through the week. Nifty put-call ratio declined below 1 indicating that the shorts have squared their position. Open interest of over Rs 23,000 crore in the stock futures is however a point of concern since it shows increased retail interest in leveraged trading.
The reversal in stock prices last week coincided with reversal of FII flows. With the US and European markets beginning to show momentum, funds could move to developed markets, which have underperformed in the rally since March.
Sensex recorded an intra-week high of 16,002 on Tuesday before reversing to end with 510 point loss. The negative divergence in daily oscillators accentuated last week with the 10-day rate of change oscillator declining in to negative zone and the 14-day relative strength index moving to 51.
This indicates that the current decline can prolong in the short-term. But what is of greater concern is the weakness in the weekly oscillators. These oscillators peaked in the last week of May and have been diverging negatively since then.
Another week of decline will indicate the onset of a medium-term correction in Sensex.
The unsuccessful attempt to move past 16,000 last week implies that the Sensex needs to do some more work before it can surpass this level.
The medium-term trend can now be revised to neutral and the index can be expected to consolidate in a range between 13,000 and 16,000 for a few more weeks.
Retracement of the move from March lows gives us the initial medium-term supports at 13,616 and then at 12,963.
In other words, the gap formed in the post-election push should be a strong medium-term support. Weekly close below 12,963 is needed to make the medium-term view overtly negative. The short-term trend has turned lower from the 16,002 peak. Sensex has immediate supports at 14,939 and 14,800. Short-term investors should, however, exit long positions on a close below 14,800 since the next halt can be at 14,471 or 14,282. Resistances for the week would be 16,002 and 16,217.
The Nifty reversed from the intra-week peak of 4,731 after flirting with the 4,700 mark for three sessions.
We stay with the view that the medium-term range for the Nifty is between 3,900 and 4,700 and a strong break beyond either boundary is required to make the medium-term outlook positive or negative.
Medium-term supports based on retracement levels are 4,073 and 3,894.
The short-term supports for Nifty are at 4,422 and 4,230. Presence of the 21 and 50-day moving averages around the first support makes it a likely area from where bulls can engineer a reversal. Resistances for the week are 4,640, 4,730 and 4,794.
It was a good week for the equity markets in Europe and Americas. Indices of this region ended the week with 2-3 per cent gains.
CBOE VIX came down slightly implying growing complacency among global investors. Asian markets were, however, subdued and some of the Asian indices such as the Hang Seng, PSE Composite, Shanghai Composite, Strait Times Index and Taiwan Weighted Index closed the week with losses.
Shanghai Composite has recorded its largest weekly decline since March, forming an evening star in the weekly chart.
This chart needs to be followed closely over the ensuing weeks since the fate of the Indian and Chinese markets are closely entwined.
The Dow ended the week 2 per cent higher and the first target indicated in our last column was achieved on Friday. The index has strong resistance in the zone between 9,400 and 9,600 and a reversal from here would imply that the long-term view remains negative.
But a break past 9,600 will give the next target of 10,500 for Dow and 1,150 for the S&P 500. —
The NHPC initial public offer (IPO) is ideally suited for long-term investors. Hydroelectric projects, by their nature, have long gestation periods of 5-7 years. On the existing generation capacity and financial profile, the offer appears to be fully priced. Valuations could, however, undergo a change as the company gradually commissions the different projects that are under implementation over the next four years and as the return on equity improves.
There are a number of positives to recommend an investment in this IPO not the least of which is the 12 per cent gap between demand and supply of electricity in the country. NHPC's established record in implementing hydropower projects, its good operating performance and the fact that all of its capacity has been tied up with different customers through power purchase agreements are pluses.
Existing capacity of 5,175 megawatt (MW) will almost double in the next four years as new projects totalling 4,292 MW are commissioned. With a further 4,565 MW of projects awaiting government clearances, NHPC is expanding rapidly in an industry that is set to undergo a lot of changes, mostly favourable to the generators.
For instance, some of NHPC's future projects, either in whole or in part, will sell power on a 'merchant basis'. Given the large deficit in availability of power and the active part played by traders such as PTC India, generators such as NHPC can hope for higher realisations.
Given that its fuel cost is next to nil, NHPC sold its power last year at an average price of Rs 2.03 per unit. Though this is an advantage in the merit-order despatch system where the cheapest power is picked up first, it also means that the company is not able to capitalise on the supply shortfall.
NHPC has the advantage of its projects being located on perennial rivers and it has managed a capacity index of 95 per cent on an average. This is a major plus given that the northern grid, where NHPC sells most of its generation, is extremely starved for power.
Not surprisingly, some of its projects such as Chamera II in Himachal Pradesh have managed to earn a handsome sum as fees for meeting excess demand over that projected by the consuming State electricity board.
That said, NHPC also suffers from some blemishes that could, if not managed well, scar its financial performance and balance-sheet. Thanks to a historical reliance on equity funding through government grants, NHPC carries a huge equity base of Rs 11,182 crore that will increase to Rs 12,300 crore after the public offer now. A large quantum of equity funds is locked up at any given time in ongoing projects and this does not earn any return till the projects are commissioned.
The result is that the company's return on equity is a poor 7 per cent despite it earning an assured return of 14 per cent on its equity till last year (15.5 per cent from this fiscal for the next five years) as per regulatory norms. Peers such as NTPC boast of a return on equity that is double that of NHPC's.
The picture could change for the better in the next few years due to two reasons. First, NHPC has been off government grants since the last two years and its projects are now funded on 70:30 debt:equity with the equity coming from internal accruals. Second, as the projects under construction now start generating returns, the return on equity will gradually improve.
NHPC's projects are implemented in difficult physical terrain that are also often environmentally sensitive and hence require numerous government clearances. Given this, delays in commissioning projects are not uncommon, leading to big cost and time overruns.
For instance, the 2,000 MW Subansiri Lower project in Arunachal Pradesh was originally scheduled to be completed in September 2010 but the company now expects to commission it only by December 2012. The 240 MW Uri II and 160 MW Teesta Low Dam IV projects are also on a delayed schedule. Incidentally, these are among the projects that are proposed to be part-funded from the IPO now.
The increased costs have to be approved by the regulator, failing which the company will have to bear the burden.
The central electricity regulator issues a five-year tariff policy that governs NHPC's tariffs. The 2009-2014 policy, while increasing the return on equity to 15.5 per cent from 14 per cent earlier, has changed the method of computation of annual fixed cost recovery in a manner that is adverse to NHPC. Incentives for generation beyond the design energy level have also been capped at Rs 0.80 per unit. Given the large public interest involved in the sector and also the huge demand-supply gap, it is likely that the regulator will play an active role which may not always work to NHPC's interests.
The offer price band of Rs 30-36 does not leave much on the table for investors in the near-term. The price-earning multiple of 30 at the lower end of the price band is almost the same as that of Jai Prakash Hydro and higher than NTPC's PEM of 21 based on historical earnings.
In price-to-book-value (P/BV) terms though, NHPC's offer price compares favourably with the rest. At the offer price band, NHPC has a P/BV of 1.8-2.2 times; JP Hydro's, in comparison, stands at close to four times while NTPC has a P/BV of three.
Given the high institutional interest in the power sector and the company's fundamentals, it is likely that the stock will attract much attention in the market. Investors with a long-term holding strategy can subscribe to this offer.
