BUY GTOFFSHORE 290 SL 280 TGT 310-330.
NIFTY FUT: If uptrend continues then it will zoom up to 3565.50-3567.50 zone. Corrections up to 3446.50 can be used to buy. SL at 3325.25-3327.25 zone.
NIFTY FUT: SL triggered. Unwinding should continue up to 3325.25-3327.25 zone. Rallies up to 3422.00 can be used to exit. SL at 3492.75-3494.75 zone
Cash Market Intra-Day: Buy ICICIBANK (NSE Cash CMP 419.60) for Intra-Day gains. Stop Loss at 415.60 level.
NIFTY FUT: Buy with a Stop Loss of 3398.00 level. Target at 3492.75-3494.75 zone.
Infosys consolidated net profit rose 9.9% to Rs. 14.32 bn on 11.6% growth in sales to Rs. 54.18 bn in Q2 September 2008 over Q1 June 2008. (BS)
Era Infra acquired a Rs. 1.13 bn order from the Airport Authority of India. (BS)
ONGC borrowed USD 1 bn to fund its proposed Rs. 64 bn aromatic petrochemical complex at Mangalore. (BS)
Inflation continued its downward journey at 11.8% for the last week of September from 11.99% last week. (ET)
The RBI announced an additional 100 bps reduction in the cash reserve ratio to inject more liquidity into the system. (BS)
Wells Fargo emerged as the apparent victor in the battle for control of Wachovia bank, after rival suitor Citigroup broke off talks with Wells Fargo and federal regulators but vowed to have its day in court. (Bloomberg)
Selling may continue up to 3254 level for time being.
Hurdles at 3313 & 3323 levels. Above these levels, expect short covering up to 3396-3398 zone by non-stop.
Sell if touches 3468-3470 zone. Stop Loss is too far on upper side and can be placed at around 3638-3640 zone.
On Negative Side, if breaks & sustains at below 3180-3182 zone then downtrend may continue and have caution.
Short-Term Upward Target at 3711-3713 zone.
Short-Term Support at at 3107-3109 zone.
ELECON ENGG (NSE Cash): Likely to Fall. Technically selling should happen.
If breaks & sustains at below 45 level then downtrend may continue and have caution.
Hurdle at 57 level. Supply expected at around this level. This supply should get absorbed too.
PUNJ LLOYD FUTURES (NSE): Likely to Fall. Technically selling should happen.
If breaks & sustains at below 185 level then downtrend may continue and have caution.
Hurdle at 207 level. Supply expected at around this level. This supply should get absorbed too.
The Dow Jones Industrial Average closed at 8,451.19. Down by 128.00 points.
The Broader S&P 500 closed at 899.22. Down by 10.70 points.
The Nasdaq Composite Index closed at 1,649.51. Up by 4.39 points.
ended at 48.38/43 per dollar on Friday, lower than 47.99/48.01 at close on Wednesday.
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+ve sectors & scripts : JMfinancial, Uttamstl, Abirlanuvo
Buy OBC-160 for 163-171 with sl 157
Buy Ranbaxy-293 for 314-322 with sl 286
+e to Market
1. Relief Rally 2. Govt.measures to improve the liquidity 3. DII buying 4. 50% of the investors will feel that market bottomout 5. some investment buying.
-ve to Market
1. US market 2.Asian Market Mixed 3. Sentiment 4. FII continous selling 5. Fresh Short positions were built-up 6. Rumours in the market 7. Reimbursement pressure in MF.
Strong & Weak futures
This is list of 10 Strong Futures:
Ntpc
Ubi
Indian bk
Obc
Maruti
Power Gride
Bpcl
Hero honda
Sterling Biotech &
Colgate Palmoliv.
And this is the list of 10 Weak Futures:
Kpit
Welspun Guj st
Suzlon energy
Ivr prime urban
Bomvay Dyein
Nagarjuna Constr
Bajaj hind
Hdil &
S Kumar
Nifty is in Down Trend.
WEEKLY OUTLOOK
Index Outlook
Sensex (10527.8)
Last week's rout in stock prices was on a scale that none of us have witnessed in our lifetimes. Sample this, the Dow Jones Industrial Average declined 18 percent, its worst weekly decline ever, Nikkei crashed 18 per cent in just three sessions, the unshakeable DAX, the German stock index, recorded a 21 per cent weekly decline and the volatility index of Chicago Board Options Exchange, the investor's fear gauge, touched 77 on Friday. This index has not risen beyond 48 in the last two decades.
It was capitulation with a capital C as investors abandoned equities and stock prices were sucked in to a black hole. The decline was broad-based, giving investors no place to hide. The selling was spear-headed by the FIIs who have already pulled out close to $1 billion in October so far. The tally of net outflow this year has crossed $10 billion. Static open interest shows that traders are equally bewildered by the market's moves.
With the breaking of the 12000 bastion and the 2000-point weekly slump, the possibility of resumption of the structural up-trend in the near future appears remote. Sensex closed emphatically below 12000 on Monday and went on to record a trough at 10240 on Friday. Oscillators have moved deep in to over sold zone, but the downward momentum is not showing any sign of abating yet.
The movement of the index last week has resolved the quandary that we were mulling over – whether the second leg of the correction from 21206 peak has ended at 15579 or if it will continue for a few more months resulting in a range between 12000 and 16000. The breadth, swiftness and the wide-spread devastation of the move last week leaves no room for doubt that the third wave from the 21206 is currently unfolding. We had indicated in our column dated September 28, 2008 that the minimum target for this wave was 10207. This target was achieved last week. Since we are reviewing the long-term counts in a separate column, we will stick to medium and short-term view in this week's index outlook.
Both medium and short term trends are down. However, the index is approaching a band where a cluster of long-term supports are positioned. The levels where medium-term supports can be expected are - 9972 (July 2006 trough), 9700 (61.8 per cent retracement of the up-move from 2001 and 8800 (trough formed in June 2006). Even if the vertical decline halts at either of these levels, there would be a period of intense volatility for a few weeks before a bottom is formed.
The resistances for the week ahead would be at 11433 and then 11753. Failure to move above these resistances would mean that the down trend would continue. The negative medium term outlook will be mitigated only on a weekly close above 12500.
Nifty (3279.9)
Nifty declined below the 3800 level on Monday and recorded a trough at 3198.9 on Friday, way below our outermost medium-term target. Though we were anticipating a decline, the swiftness definitely took us by surprise. The supports on the long-term charts for the Nifty are now at 2940 (61.8 per cent retracement of the up-move from 2001) and then at 2595 (June 2006 trough). The medium term outlook will turn positive only on a weekly close above 3800.
Near term resistances would be at 3530 and 3610. Reversal below these levels will indicate further weakness. Subsequent resistance is at 3879.
Global Cues
Most global indices lost between 15 to 25 per cent last week, proclaiming it as the worst week ever for stocks. The DJIA sliced through the support band between 10200 and 9900 to an intra week trough at 7882. The four-year old bull-market in DJIA has been decimated with the index just a whisker short of the 2003 trough at 7416. We are now staring at the possibility of a multi-year bear market in DJIA that corrects the entire up-move from 1932. The situation is similar in FTSE. Italy's MIBTEL index has already reached its 2003 trough.
Asian and Latin American markets were relatively resilient, having yielded about 60 per cent of the gains made since 2003. Nikkei is the only exception, the index is just 600 points above its 2003 trough. Commodities too reeled as risk aversion spread to all asset classes. CRB index declined 9 per cent. This index has now given up more than 50 per cent of the gains made since 2001.
FII DATA
FII
10/10: -2513.74 Cr. (Prov)
DII
10/10: 1744.68 Cr. (Prov)
Infosys
Infosys moved in line with our expectation and declined to test the long-term support at Rs 1125 on Friday. The intra day recovery from that level was strong and the stock went on to record a close well above this support. A short-term trough could have been formed here and the stock could attempt to move to Rs 1330 or Rs 1500 in the near term. Failure to move beyond the first resistance would denote that the stock would weaken again. Supports for the week would be at Rs 1110, Rs 1040 and then Rs 945.Infosys is currently hovering at key long-term support at Rs 1110. There is another support band just below between Rs 920 and Rs 940. It would be best to divest the holding on further decline since the next target is 200 points away.
SBI
The out-performance of SBI continued in a week when the entire stock market edifice was crumbling. Though the stock could not progress higher, the decline was not very severe either. The stock recorded an intra-week trough at Rs 1181 on Friday before reversing to close above our key medium-term support at Rs 1250. We stay with the view that the medium term view would stay positive as long as the stock holds above this level. The third leg of the up-move from the Rs 1007 trough can take the stock higher to Rs 1571 or Rs 1813. The support at Rs 1250 can be tested again next week. Subsequent support would be Rs 1180. Resistance would be at Rs 1350 and then Rs 1450. Fresh longs are advised only above the first resistance.
Unitech
Unitech declined with the rest of the market to an intra-week trough at Rs 80.
As indicated earlier, there is a confluence of supports between Rs 62 and Rs 96 where the stock can form a significant trough. These levels are Rs 96, Rs 78 and then Rs 62.
Though the stock has not reversed yet, it can form a trough at either of these levels.
There is however no support on the chart below Rs 63 and there can be a free-fall below that level.
The supports for the week ahead are at Rs 78 and then at Rs 63.
Resistances for the week would be at Rs 100 and then Rs 115.
Fresh shorts can be initiated on a failure to move beyond the first resistance.
Reliance Infra
Reliance Infrastructure fell in to a bottom-less pit and the stock ceded 30 per cent in just four sessions. We had expected the stock to move sideways between Rs 660 and Rs 1100 over the medium-term. But the break of the lower boundary brings the next supports at Rs 440 and then at Rs 390 in to play.
Though it is certain that a long-term trough will be formed at the end of this decline, it is difficult to gauge at which point the stock would bottom out.
Supports in the week ahead would be at Rs 480 and then at Rs 440. Resistances would be at Rs 666 and then at Rs 768. A close above the first resistance will mitigate the negative short-term outlook to some extent.
Tata Steel
Tata Steel was bludgeoned out of shape last week as it plunged to a 26 per cent decline. The stock fell to the long-term support at Rs 290 indicated in our previous column. The stock halted at this level in June and again in October 2005.
The next support is at Rs 275.
Long-term investors can hold the stock as long as it remains above these levels. A decline below Rs 275 would denote a possible move lower to Rs 156.
The short-term view remains negative since the stock has not reversed yet.
Resistances for the short-term would be at Rs 365 and then Rs 420. Fresh longs can be initiated only if the stock moves above the first resistance.
Reliance
Reliance Industries recorded an emphatic close below the long-term support at Rs 1700 on Monday and ended with a 13 per cent loss for the week.
As mentioned earlier, the next support on the long-term chart is at Rs 1338, that is 61.8 per cent retracement of the up-move from September 2001.
The target of the third wave from the January peak gives the levels of Rs 1503 and then Rs 994.
The June 2006 trough at Rs 810 would be next support on the chart. The near-term trend is down.
Supports for the week ahead would be at Rs 1445 and then Rs 1250.
Traders can hold their shorts with a stop at Rs 1730. Resistance beyond is at Rs 1890.
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Sensex long-term outlook review
If 2007 was the year of the raging bull market, 2008 will go down in history as the year in which the bear charged out from its lair rejuvenated after four years in hibernation.
We had expected a benign correction between 13700 and 21000 at the turn of 2008. This was revised to a more sombre move between 12000 and 16500 in our review on July 6.
In our review in July, we had stated that, "The decline below 13700 brings the next long-term supports for the Sensex at 11,900 (50 per cent retracement of the up-move from 2001) and then 9703 (61.8 per cent retracement) in to focus. We stay with our long-term count that the current down-move is the fourth part of the long-term cycle that began in 1980. The fifth leg (upward) would then take the index beyond 25,000 again. Caveat - decline below 9,703 would need recasting of the counts.
The more difficult question is, how long would this down-trend last? As per Elliott Wave theory, corrections can extend from anywhere between 0.33 to 1.618 times the time consumed by the previous up-move.
The previous up-move lasted four years. That gives us the range between 16 to 77 months. Since the previous long-term correction from 1994 to 2003 was a long-drawn one, applying rules of alteration, the correction this time can be a sharp and swift one that ends in one to one- and- a- half years."
The above view need not be altered since the Sensex has not yet breached 9700. However, a move below 9700 would mean that the down-move from 21,206 belongs to a correction of larger degree and the downward targets would then get deeper.
Let us consider how far the Sensex can go if it penetrates 9700. The Immediate support below 9700 is the June 2006 trough at 8800.
A 60-percent decline from the 21,206 peak also gives us another support close by, at 8482. If we consider the count from the January peak, one leg of the long-term down trend ended at 12,514 in July and the Sensex was in a corrective up-move between 12,514 and 15,579. The third leg of the down-move that began at 15,579 has the first target at 10207 and the second target at 6887.
Can things get dire enough to take the Sensex to the second target? If the current decline was caused by domestic factors alone, we could have said with reasonable certainty that decline would not extend beyond 8,500. But this fall is a part of a global sell-off in equities.
Many of the Asian markets have retraced more than 60 per cent of their four-year up-moves. Indices in developed markets in US and Europe are close to their 2003 lows.
Viewed against this back-drop, it is extremely difficult to tell how far the current decline can take us.
The good news is that third waves are extremely swift and end in a very short time (after devastating the markets).
So the Sensex should halt this vertical descent soon and there can be a pull back rally or at least a period of sideways movement.
We need to see the end of this October decline before we can form an opinion about the next move of the index.
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What the CRR cut means for investors
As a result of the CRR reduction, a huge volume of money would be released into the banking system, which will ease liquidity and bring support to the debt market. Hence we may see short-term rates easing up.
The RBI's recent move to cut the cash reserve ratio by 150 basis points was welcomed by many participants in the debt market as it is expected to infuse much wanted liquidity to the extent of Rs 60,000 crore into the banking system.
How would the CRR cut change the outlook for debt instruments? How should investors react to this move? The following Q&A throws some light on the above issues:
What is CRR and what does the present CRR cut seek to achieve?
Cash reserve ratio (CRR) is the amount of funds banks have to keep with the Reserve Bank of India. If the RBI decides to increase this ratio, the available amount with the banks comes down.
In other words, the RBI would use this strategy (increase of CRR rate), to drain out the excessive money from the banks. On October 8 the RBI decided to reduce the CRR with effect from the fortnight beginning October 11, 2008.
As a result of this reduction in the CRR, huge money would be released into the banking system, which will ease liquidity and bring support to the debt market. Hence we may see short-term rates easing up.
What does this mean for the money market?
With the cut in CRR, we may see money market and short-term rates easing.
What does it mean for Institutions, retail and HNIs?
Our view on the fixed income market will continue to remain positive in the medium to long term. Investors may allocate a higher share of their fixed income assets into long-term instruments.
What does this mean for the FMPs you already hold?
Fixed Maturity Plans are typically held-till-maturity schemes and there is minimal interest rate risk in such schemes.
What does this mean for bank fixed deposits?
As we have seen peaking of short-term rates and since the RBI has gone into a neutral stance, we can see easing of short-term interest rates within the next three months.
What opportunity does this bring for me?
Investors should invest in long-term funds to capture the positive interest rate environment.
What kind of returns should I expect from debt over a six, nine and 12-month investment horizon?
With a 6-9 months investment horizon, investors can expect returns of 200 basis points over the liquid fund returns; those with a 12-month investment horizon can expect to earn 400 basis points over liquid fund returns.
What does this mean for real estate companies in the market?
This CRR cut will bring back the liquidity in the banking system and ease up the cash availability for corporates.
How would my investment in a one-year fixed maturity plan compare with an investment in a bond fund with a similar holding period?
Fixed maturity plans are typically held-to-maturity schemes wherein you lock your assets at particular interest rates.
Hence, there is minimal interest rate risk in such kind of schemes.
On the other hand, income funds have a diversified portfolio of government securities and public sector corporate bonds (largely).
Hence, it would primarily be an interest rate and duration call, wherein the investor can benefit in a declining interest rate scenario.
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Union Bank of India: Buy
Strong return ratios, a CBS-enabled network, a diversified loan book, high NPA provision cover and higher efficiencies are positives.
Mr M. V. Nair, CMD. Investors can consider buying the Union Bank of India stock with an investment horizon of more than a year. A low price-to-book value, with a high return on equity, indicates the stock to be relatively undervalued. Investors should, however, be willing to wait out the current period of tight liquidity and uncertain macro environment.
Given the volatility in the markets, investors are advised to accumulate the stock gradually during dips. Union Bank of India at current market price of Rs 145, trades at 5.4times its estimated FY-09 earnings and 1.26 times its June 30 book value, at a discount to most PSU banks, except Syndicate Bank and Allahabad Bank.
Strong return ratios (return on equity of 26.8 per cent and return on assets of 1.26 per cent) place the bank among the best in the PSU space in terms of profitability.
This apart, a strong branch network, which is 100 per cent CBS-enabled, a diversified loan book with a tilt towards corporate advances, a high NPA provision cover and higher efficiencies (cost-income of 40 per cent) are also investment positives.
Business
Union Bank's advances mix features a 16.6 per cent exposure to SMEs, 21 per cent to retail clients, 14 per cent to agriculture, while the rest of the portfolio is contributed by corporate advances. The bank is the first nationalised bank to be 100 per cent Core Banking Solutions (CBS) enabled. This enables the bank to receive fee income by way of electronic fund transfers (from NEFT, RTGS) and reduce processing time and expenses. The bank expects 25 per cent of its transactions to be done electronically by March 2009.
Over the past five years, the bank's balance-sheet and advances have grown at a 20.8 per cent and 26.5 per cent Compounded Annual Growth Rate (CAGR) respectively.
During the June quarter, the advances and deposits grew at 19 per cent and 23 per cent year-on-year, driven by SME advances growth. Net profits grew marginally at 1.51 per cent owing to higher provisioning and employee costs, both of which will continue to be a challenge in the quarters ahead.
Union Bank has seen high cost deposits reduced to 15 per cent in the quarter, from 21 per cent; but this ratio could show some increase this quarter because of the ongoing liquidity crunch. The bank has been successful in improving its CASA by 1.5 percentage points to 34.76 per cent.
The advances growth did not translate into growth in net interest income due to increased cost of funds and falling yields on funds due to 25 bps cut in PLR in February. The net interest margin stood at 2.63 per cent for the quarter. Operating profits were hit by shrinking non-interest income and higher operating expenses. Cost-income ratio has increased from 38 per cent to 40 per cent, still among the lowest in the industry. The bank had taken a one-time hit on the additional AS-15 employee provisions last year. Going forward, provisions on this count will not be necessary, placing it in a better position than peers, in terms of earnings. Lower provisioning on the investment portfolios on softening bond yields, may also see a partial writeback of the Rs 330 crore it provided last quarter.
Though gross NPA to advances stands at 2.06 per cent, the provision coverage of 93 per cent has helped the bank maintain its net NPA to advances at 0.15 per cent.
The Government stake in the bank is 55.4 per cent, which will make it challenging for the bank to raise additional capital in the form of equity; but head-room exists for raising capital up to Rs 3,500 crore in the form of tier-1 bonds, perpetual cumulative bonds and so on.
The bank's capital adequacy ratio is 11.28 per cent according to Basel-II. Focussed lending to different sectors by setting up specialised branches helped the bank in healthy disbursement of the loans.
Outlook
Among PSU banks, Union Bank of India has a first-mover advantage in technology adoption. The bank's re-branding exercise at Rs 75 crore to target the younger generation may also help; the roll-out of more than 100 branches this fiscal may also aid in attracting low-cost deposits. A recent entry into wealth management services has the potential to boost 'other income'. Though an entry into mutual funds and insurance businesses is also on the cards, these may be challenging in the current environment.
The bank's 'other income' covers only 53 per cent of total expenses. Leveraging on branch expansion and international presence can boost its 'other income'; with 55 per cent of the branches in rural and semi-urban areas where there is lower competition, there is greater scope for sourcing low-cost deposits.
The bank expects to grow deposits and advances at 23 per cent and 22 per cent respectively over the next year, but earnings growth may be muted because of tighter liquidity, leading to high cost of funds. NIMs may also be flat, though the bank expects them to improve to 2.85 per cent by end-FY-09 as it has increased PLR by 125 bps.
The bank intends to improve asset quality by bringing GNPA/advances down to less than 2 per cent, but the prevailing interest scenario may lead to higher delinquencies.
With the CRR cut of 150 bps, the bank may have around Rs 1,500 crore additional funds, which were yielding no returns; this may helpin reducing the burgeoning cost of funds.
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What 'long-term' portfolio? Risk management for the trader
The commonly-held belief is that investors have a long term horizon and traders, a short-term perspective on the market.
Managing core portfolio in a tough market Stock prices are down more 50 per cent down from the all-time highs. This sharp decline in prices has resulted in large losses for even the astute traders. Most "investors" continue their loss-making exposure under the pretext that asset prices would move up in the "long-term".
This article carries a message for these "investors". Specifically, the article shows that every "investor" is essentially a long-term as well as a short-term trader within the core-satellite portfolio framework. A trader should, hence, have a risk management system to ensure that the portfolio meets the horizon objectives.
Investor Vs Trader
A commonly-held belief is that an investor is a person with a long-term horizon whereas a trader is one with a short-term horizon. The real difference, however, has to do with the source of returns, not with the length of the investment horizon. A trader is a person who depends primarily on market prices for returns. An investor, on the other hand, depends on dividends.
The market primarily consists of traders because the sharp rise in asset prices since 2003 has made dividend yields largely irrelevant. Endowment trusts create portfolios only for dividend income. But such structures are a small proportion of total investments in the market.
Consider an individual who wants to structure a core-satellite portfolio to fund her child's college education 5 years hence. The core portfolio will invest for a 5-year horizon while the satellite portfolio will trade actively to generate short-term income.
The horizon objective will be met only if the portfolio generates the desired returns. And that is largely dependent on the asset prices at the horizon as well as in short term. This dependence on market prices at all times necessitates an appropriate risk management system.
Risk tolerance Vs Loss tolerance
A systematically-structured portfolio would be based on the investment policy statement. This is a statement that lays down the investment objectives, risk tolerance levels, expected returns and other constraints of the trader.
Emotions play a significant role in the portfolio management process. "Investors" typically believe that stocks carry an upside bias in the long run. This pushes such "investors" to non-action when asset prices decline.
At the other extreme is the trader who is overly conscious of short-term losses. Often, such traders cut their exposure sooner because their loss tolerance level is lower than their risk tolerance level. Suppose the risk tolerance level is 10 per cent, there is a strong likelihood that the trader will sell her holdings if the portfolio declines 7-8 per cent. The reason is to do with the inability to hold on to the loss-making positions when asset prices decline.
Cutting exposure too soon as in the case of the short-term trader denies participation in further upside in asset prices. Carrying exposure for too long as in the case of the "investor", however, exposes the portfolio to large downside risk. It is, hence, important to actively manage losses within the core-satellite framework.
Managing losses
It is easier to manage losses in the satellite (short-term) portfolio as such trades are set-up with strict stop-loss levels to manage the downside risk.
A different risk management approach has to be adopted to manage losses within the core portfolio. One approach would be to optimally size the exposure to minimize downside risk.
Suppose Tata Steel has a further downside of Rs 80. If the risk management system allows a downside risk of 2 per cent on a total capital of Rs 25 lakh, the capital-at-risk on Tata Steel will be Rs 50,000 (2 per cent of Rs 25 lakh). The core portfolio can take exposure to not more than 625 shares (Rs 50,000 divided by Rs 80 per share).
What if the portfolio has exposure to Tata Steel in both the core and the satellite portfolio and the stock declines by more than Rs 80? The trader can choose to do nothing with the core exposure but may take losses and cut exposure in the satellite portfolio.
This allocation of assets between the core and satellite portfolio and the different risk management rules reduce overall downside risk. Investor-traders can also "borrow" shares from the core portfolio and engage in some disciplined trading to reduce overall losses. Besides, once the long-dated options on Nifty become active, traders can buy insurance to protect downside risk on the core portfolio.
Conclusion
It is important to understand the difference between traders and investors. Appreciating the difference enables better management of portfolio risk. This article shows why "investors" should be concerned about the price levels through the investment horizon. It also suggests some risk management rules that traders can adopt to minimize downside risk within the core-satellite framework.
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Arvind Parekh
+ 91 98432 32381
