Weekly Report For 27-01-2008 To 02-02-2007

Long term up trend has been scared by Bears

Support:17550, 16920. Resistance: 18930, 19350.

FUNDAMENTAL OUT LOOK

=> The sharp fall was triggered by setback in Global markets, selling by foreign institutional investors and margin calls after a proposed US stimulus package failed to soothe fears the US will tip into recession.
=> To start with the cash market, this is the steepest cut ever seen in the Indian markets. In the last seven trading sessions; FIIs have withdrawn nearly USD 3.8 billion which is equivalent to around Rs 15,000 crore. This total amount is the biggest which we have ever seen, of course, in the last seven trading sessions. But if you compare it to the total withdrawals seen in the Indian markets in 2007, it was equivalent to around Rs 14,700 crore just in three months. So in the last seven trading sessions, we have seen withdrawals which are far larger than the total withdrawals in entire 2007.

=> Global Economic Factors: The sub prime effect in US economy badly affected the global market. The City group has written off USD 18 billion and Morgan Stanly write off USD 1.53 billion due to sub prime losses. After weak recent reports on employment, retail sales, factory activity, and housing construction this month suggested the United States may be heading into recession. Margin Problem: Due to free fall of more than 20% in index in just two days, the huge selling comes from the margin funding in the markets.
=> Reliance Power IPO: Country’s largest IPO of reliance power dragged the liquidity from the systems. The IPO collected more than Rs 7000 billion from the markets which created the liquidity crisis in the systems.
=> The Q3 December 2007 results announced by Corporate India, so far, have been more or
less in line with market expectations.
=> Market could find some support from optimism that Federal Reserve Chairman Ben
Bernanke will cut interest rates at its meeting later in the month. The Indian finance
minister announced that the RBI would follow the Fed Bank decisions. The markets
expect that the RBI will cut the rate by 25 bps. Due to this reasons the banks shows
good strengths in the markets.
=> The sugar stocks are badly hit due to the withdrawals of the subsidy by the
governments on the ethanol.
=> The most hit sectors are capital goods, reality, oil & gas and power sectors which were
gains very sharply in the recent Bull Run.
=> The fall has been even steeper in small-cap and mid-cap indices during this correction.
The BSE Mid-Cap index has shed 3043.56 points or 29.70% from a record high of
10245.81 hit on 8 January 2008. The BSE Small-Cap index has lost 4210.85 points or
29.57% from a record high of 14239.24 hit on 8 January 2008.

BSE Sensex: -(18361):-
The week ended 25th Jan 08 was huge volatile for the market. Monday was gap down opening for the market following negative news flow regarding sub prime mortgage crisis in US. Tuesday was historical day for the market, and the Sensex hit lower circuit in the opening session due to local technical problem like margin funding off loading from corporate brokerages couple with liquidity problem in the system. The Sensex made a low of 15332 levels for the week on Tuesday and from Wednesday market recovered sharply after the Fed’s unexpected and
unscheduled rate cut of 75 basis points helped the Sensex to close near 18361 on Friday with a net loss of 652 points on weekly closing basis. ONGC, Ambuja Cement was the major loser among Sensex stocks, lost 16% and 11% respectively. Cipla, Grasim, ACC, TISCO, M&M and
NTPC followed it, all lost between 7% and 9%, While Satyam, Bharti Tel and Infosys bucked the
downtrend, gained 9%, 4.65% and 3.86% respectively among Sensex stocks.Bse Metal Indices
and Bse Oil & gas Indices were the worst hit sector Indices among all, lost 14% & 16.31%
respectively each, While IT sector indices and banking sector indices showed tremendous strength, lost 1.38% and 4.94% each. Major loser among F&O stocks are Sasken, WWIL,
Neyvelli, Nag.Fert, RNRL, SRF, all lost more than 28% and more for the week. GTL, PNB, Patni,
Tulip, BEL, Shree Cem, SESA Goa, Tata Tea were major gainers among F&O stocks, gained between 2% and 9% each

Intermediate Trend: -
The Sensex and the nifty are in major downtrends as they had closed well below their last intermediate bottom. A bear market will be confirmed once the CNX Mid cap closes below 6,400. The Sensex had already fallen by 27.70 %( 5864 points) in just nine trading sessions at the downtrend low. This compares to the 31% it lost in the 6-week long bear market in 2006. The Sensex will have to cross 20,986 to get back into an intermediate uptrend, the nifty
6,260 and the CNX Mid cap 8,948. These levels will come down to the point where the minor rally which started from Wednesday ends. In the last weekly news letter we mentioned that “as long as the Sensex remains below 50 DMA it will try to take support near 200 DMA which was
16521”. Surprisingly the fall was arrested near 200 DMA and it didn’t close below that Level yet. We found ‘Hammer’ pattern on the daily candle stick chart pattern on Tuesday near 18 months long upward sloping trend line connecting important lows of 8799, 13779( can be seen in append chart),which suggest that temporary bottom or may be intermediate bottom has
been formed in the Sensex, provide psychological comfort. The market recovered almost 50% of lost ground in one bounce which is phenomenon.The levels of 18980 which is technical resistance
(61.8% retracement) and a trading gap as well .The sharpness of the down fall after the recent bounce.If the Sensex’s decline after recent rally is small then there is fair chance of intermediate uptrend to develop.

Long Term Trend: -
From the last three weeks we were skeptical regarding long term trend due to technical picture was not so comfort. In the last weekly news letter we mentioned that correction below 50% put question mark to the long term trend and that had happened in the last week. The Sensex and the Nifty broke their major long term bottom of 18183 and 5394 respectively and entered in
the long term down trend. While a bear market will be confirmed once the CNX Mid cap closes below 6,400. Most global indicesare also in similar-looking bear markets.

Short Term Trend: -
Early pull-back rally in world markets might help the Indian market to some extent but we could find the Indian market creating a lower top in the short-term.Important world market indices suggest that more bleeding is likely but minor pull-back rally could be witnessed later. US markets fell sharply more than 1.50% on Friday and if the Asian markets reacts sharply on the down side following US markets on Monday than our market could open on flat to weak note.

Strategy: -
Fresh long and medium-term purchases should be made only after the next intermediate downtrend ends. It is possible that the recovery could develop into an intermediate uptrend, but it is still too soon to tell. Long term investor should switch out of the stocks which hit 3 months low or worst. Short term traders should exit all long position on every rise. The stocks which fall heavily in the recent market condition are vulnerable if the recent rally fizzles out. Look for weaker relative strength stocks to exit on slightest spurts or recovery of 38% - 61.8% to the last weeks fall. There are some important events will take place like Fed meet on 29th, possibly
RBI’s credit policy announcement following Fed reserve and F&O expiry on Thursday.
All this events will drive the market trend in the near future.

Outlook – Public Sector Banks!!

> If we look at the current Indian capital market scenario the liquidity is the main concern for Indian market to survive the current growth, the reason is global monetary warming which took the wealth from Indian market also.
> Banking is one of the main sectors for the Indian market to remain or stop that monetary hurdle. In banking sector PSU banks is main which are having very attractive valuation from here both in terms of growth and profit.
> Our view on the banking sector is positive, though of course there are a lot of Indian banks which still have lot of potential in terms of what their reach is like, like State Bank of India very clearly.
> There are some midcap PSU banks, which are there which still have a lot of potential for two reasons, one is that of course the reach is very important for these banks to mass customers and secondly, they have lot of automation to go into for them to improve their efficiency of the entire networking area.
> Moreover for the quarter ended Oct-Dec 08 results of many PSUs banks are very encouraging which makes them very attractive. These banks are able to improve there Net Interest Margin (NIM) as well as able to control their NPAs level.
> So we believe in next two-three years time, both in terms of a reach and there maybe a potential bias for any other large foreign banks to enter into Indian markets. So post 2009 we think banking industry in India will change dramatically in terms of what the PSU banks can bring value to the book.
> According to bankers, as indicated by the minister, the forthcoming quarterly review of the monetary policy by the Reserve Bank of India later in January may provide clearer signals for rate reduction and any move to cut the rates may probably start with deposits followed by lending rates or they could run concurrently too.
> Union Finance Minister P Chidambaram today asked public-sector banks to cut lending
and deposit rates by 50 basis points (or half a per cent) to ensure credit flow that would
propel consumption and investment, sustain the economy on a high-growth path, and
pull some key sectors out of the “sluggish growth” of recent months.
> RBI must cut the repo rate by at least 25 basis points and then follow up with further cut
of another 25 basis points within next two months. Pointing out that inflation is within
"tolerable limits", it said that RBI needs to address the issue of industrial slowdown by
reducing interest rates.
> The U.S. Federal Reserve cut rates by 75 basis points to 3.5 percent in an emergency
move amid increasing signs of a recession in the world's biggest economy. India's central
bank holds its next monetary policy meeting on Jan. 29.
> The growth potentiality of the larger PSU banks looks attractive because of the various
M&A, which will happen this year. The future prospects of different arms of banking
industry including rural banking, banc assurance, financial cards, mobile banking, role of
technology in rural banking, pension funds, and the future course of action and strategies
for pension fund industry to be taken at macro level.

In Q3, 2008 results announce by banks are goods. Among PSU banks the bank of India, Dena banks, UCO Bank and Union bank announced good results. The Allahabad Bank and Syndicate Bank is looking under valued among all banks. The Bank of India, Bank of Baroda, Bank of Maharastra and the Punjab National Bank is looking very attractive on the basis of profitability.
The private sector banks are fast growing in the banking sectors. HDFC Bank, Kotak Mahindra Bank and the Axis banks have declared fantastic results but the valuation are looking stretched. The PSU banks are looking very attractive on the basis of valuations. One can buy stocks of PSU banks like Bank of India, Bank of Baroda, Allahabad Bank and Syndicates banks for medium to long term. The priceto Book value ratios and the NIM % of these banks are very reasonable

Outlook – Oil & Gas Sector!!

> Crude oil continuous rise in prices halted in December 2007 falling marginally on a sequentially basis on concerns of economic slowdown and rising inflation in the developed countries leading to expected fall in the demand of the crude oil.But concerns on increase in demand from emerging economies, geo-political tensions,OECD inventory tightness and depreciating dollar still remain. > International Energy Agency Report showed that world demand for crude oil now averages 85.7 mb/d in 2007, which is 1.1% higher over 2006. World oil supplies are seen at approx 86.5 mb/d. Also oil markets have seen an increased interest and participation from the investor’s community without direct commercial involvement in physical oil markets leading to speculation in crude oil prices. The rise in crude oil prices has forced Indian oil and exploration companies in India to step up its oil exploration activities and look towards acquisition of overseas oil fields in relation to rising demand giving thrust to oil producing companies. Overall, the chances of sharp fall in oil prices in the short term looks difficult.
> Following is the list of companies engaged in oil exploration and refining business. We recommend to buy ONGC, Mangalore Refinery, HPCL, Chennai Peroleum and Bongaigaon Refinery as these picks are available at attractive valuation on the basis of price to book value (P/BV), Operating margin and net profit Margin, market capitalization to sales ratios and are P/E multiple.