July Could be Jittery For the Markets

The month of July can cause real jitters for the Indian stock market and the party could end. Most of the top economists and market gurus have started saying that the year 2010 could be a mixture of two halves, the first half ending on a positive note and the second half leading to a sell off and a economic downturn.

There are 4 big events in the month of July because of which I believe markets may end lower in the month of July

• First which I had already discussed in my previous post is the $30 billion IPO, by the China AG bank, which could suck the liquidity out of the emerging markets and thus leading to a fall

• Second in July only, perhaps in the later half of the month the EU will come up with its bank stress test results and without any plan so as to how it would provide any kind of support to the ill banks the results may provide another reason to sell the financials and other related stocks around the world

• Third, from 17th July, Nifty futures will be traded on CME and this move is taken in order to facilitate US investors to take exposure in Indian markets without facing the hassles of cross border investing. This, I believe might lead to a liquidity crunched Indian markets

• On 27th July, is the RBI Q1 credit policy, with statements from the governor that inflation being the bigger concern than the EU crisis, and the recent fuel price hike, I believe it sets a strong case for the RBI to go for a rate hike (and I think it might come as a surprise well before the actual policy date). The Indian banking system which is already liquidity crunched because of the 3G and BWA auctions could take a serious hit if this happens. The Bank Nifty falling by around 3% on Friday just after the fuel price hike, signals the market expectations of a rate hike.

Thus, I believe that the best one could do in July, is to avoid long position and traders can also use low IVs as a tool to go short using the put options. Moreover, the currently going on G20 meet could again be a damp squib as has being the case in the past and can see some selling on Monday only.

Be Cautious & Happy Investing...!!!

Indian Impact of Chinese Yuan Revaluation

Facing growing pressure from around the world, The People’s Bank of China announced on Saturday that it is prepared to allow the country's currency to float more freely against the dollar and other foreign currencies. The bank said that “this step is in view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China”

This step by the Chinese government would end the two-year Yuan Peg to Dollar (6.83) and will take the pressure of Beijing at the G20 meet at Toronto next week. It seems that the Chinese will not strongly revalue its currency because the very next day in a follow up statement it ruled out a one-off revaluation and said there were no grounds for a big appreciation of Yuan. However, the revaluation will have a dual impact on Chinese economy

· On one hand it would make the Chinese exports expensive for the world market and will benefit exports from other competing countries like India, Brazil and other South East Asian economies

· On the other it would make imports cheaper for China and will give the government a strong tool to manage its inflation, increase the purchasing power of the people and resulting in more broad based growth and in turn leading to the establishment of service sector in the country

All and all this move by China is good news for the global economy and other developing countries that are unable to compete with China in terms of exports because of its week currency.

Indian Perspective

This will ease India’s trade deficit with China and will help Indian exports of textiles, leather products, marine products, engineering products, auto ancillaries more favorable in comparison to the Chinese exports.

The trade between India and China soars closer to the US$60 billion target, India’s trade deficit with China is increasing. In 2009, India suffered a trade deficit of US$15.8 billion against China, while in 2008 the trade deficit was 11.17 billion., thus a stronger Yuan will help in eliminating this deficit and also increase the cost of Chinese imports of electrical machinery and other goods into India and benefit Indian manufactures.

For Impact on Individual sectors/stocks that would benefit with this Chinese step, please use the following link to download our report on the same.

European Debt Crisis: Snow Ball Effect

The phrase Snow Ball effect draws its analogy with the rolling of a small snow ball down a snow-covered hillside. As it rolls the ball will pick up more snow, gaining more mass and surface area, and picking up even more snow and momentum as it rolls along.

This is precisely what is happening with the European financial crisis. Starting from an initial state of small significance it is building upon itself, becoming larger (graver, more serious), and perhaps potentially dangerous or disastrous for the global financial markets.

The problem is that the Debt to GDP ratio (D/Y) in most of the EU countries is far higher than, those mandated by the ECB's guidelines. The biggest task with the EU nations currently is to reduce this D/Y as much as they can in the coming years in order to avoid a mess. The Two ways in which this can be reduced are

• Rising Nominal GDP (which would lead to a fall in denominator Y)
• A falling Nominal interest rate, which would lead to a fall in the current expenses on interest and hence the deficit (The numerator D)

But what is happening in the EU zone currently, is that everyday when the government of these debt ridden countries are coming to the bond markets for an auction are paying higher and higher yield to sell those bonds (which means higher nominal interest rates) and also the budget cuts/ new taxes levied on the people will lead to a fall in the GDP growth rate. Thus, creating by what I mean a snow ball effect.

Its being said by the noted economists that A "1%-decrease in average funding costs from 2010 results in a 5-17%-point lower debt-to-GDP ratio in 2020". But the funding cost is continuously on an up trend, creating a risk of contagion (crisis spreading from one country to other).

Thus, the investors who are demanding higher yield to buy those EU countries bond because of a higher risk, need to understand that the higher yield they command the tougher it would be for these countries to pay back their debt in future because it will create a snow ball effect and make it virtually impossible for them to pay them back.

I hope some one from EU understand simple graduate level economics read this blog or.. :D

China in Stagflation...?

In Economics the term stagflation refers to a situation where the inflation rate is rising along with a fall in output levels.

Many eminent economists believe that In China, this could be a possible situation shaping up. Some of the most recent facts that highlight the same are:

• On Friday the Chinese government released the figures for CPI and IIP. On one hand the CPI figure for the month of May was at 3.1%, above the street expectations and on the other the IIP number for May was below the street expectations at 16.5%.

• The Other Indicator which points out that the Chinese economy has already peaked is the OECD's composite lead indicator. (For More Details you can use this LINK to download our report on the same)

• The Chinese government over the last week did not receive enough bids for any of its bond auctions to be fully subscribed. The reason attributed by the investors is the rising inflation concern in China and low yield offered by these bonds

• Last week, the Steel prices in 30 of China's major province has declined for the 7 straight week

• According to China's Commerce Ministry, the debt problems in the EU will impact Chinese exports in the coming months. The ministry said that it t typically takes Chinese companies about 2 months to fulfill orders, so May's shipments reflected order books before the EU crisis deepened

• The only positive news that came out lat week form the China front was that its exports figures grew by a whooping around 50%,

Kredent Analysis:

Thus we strongly believe that the macro economics events shaping up in China is a cause of concern for the global economic recovery and specially for the metal and mining space. Thus we would advise investors to remain cautious as the Nifty Index again reaches the levels form which it had retraced in the Past.

This could EVAPORATE Liquidity From Markets...

Yesterday the ECB announced the key rates and as the streets expected, they were unchanged.

There was no positive out of the press conference from Trichet, the only thing he did was subtly pleading to the world that "EURO is a stable currency' and reiterated again the same things that the ECB would leave no stone unturned to save the real economy. This lead to a over 200 points rally in Dow Jones and more than an 1.5% gain in Euro. I believe that its more of a short covering bounce back and the only direction the Euro is headed is southwards.

I expected July to be a calm month for the markets, and the biggest reason is that the China AG Bank is coming up with the world's biggest IPO of all time. On July 16th its coming up with an IPO of $30 billion and this could really suck huge liquidity from the markets even if it is just fully subscribed. One should wonder what if, the issue gets oversubscribed by two times and three times. It could evaporate the liquidity of the size of two times Reliance Industries total market capitalization which is around Rs 3 lakh crores.

In history too IPOs of high magnitude from good companies have lead to a dearth of liquidity in the Secondary Markets and this time also I expect the same. AgBank, whose 350 million customer base is bigger than the population of the United States, had $US7.1 trillion in assets as of 2008, its last public financial filing, is a bank which even the institution would love to own and hence the liquidity could dry up.

Hence a good trading strategy for Traders could be to establish position in put options in Nifty expiring in the month of July, as the VIX has also come down significantly. For Investors the best is to stay out of any extravagant short term positions and continue their SIP.

Happy Investing...!!!

Sugar becomes Sugar FREE...

The stocks in the Indian sugar sector which had given a strong run up last year owing to a shortage in the supply of sugar is showing the signs of weakness and is expected to do so.

Last year because of a bad monsoon, a fall in the supply from the Brazilian front and production surging, fortunes of the sugar industry changed dramatically. For some of the companies there market cap surged by over twice the debt on their books and it was a complete change in the capital structure, of the whole industry.

However, Sugar companies, which were expected to make bumper profits because of soaring sugar prices — Rs 41.15 per kg in January 2010 — are now facing the heat because of the peaking of the sugar cycle. Ever since scaling a peak in January, prices have corrected by almost 33.5 per cent to Rs 28 per kg. This is also one of the reasons why most sugar companies have seen a sharp decline in their share prices.

Sugar prices have corrected globally and in the domestic market. This is consequent to expectations of the global sugar industry moving from a deficit to a surplus situation. According to the International Sugar Organisation (ISO), the world sugar market, which was estimated to see a deficit of about 8.51 million tonnes for sugar season (October to September) 2009-10, could see surplus stocks of 2.5 million tonnes in the forthcoming season in 2010-11. This however is not something surprising. The Indian and the global sugar industry goes through this phase almost after every 5-7 years.

• With the Rise in sugar prices, the demand from the mill owners for the cane increases
• This leads to most of the farmers shifting to sugar form their current crop production to realize higher cane prizes
• As more and more farmers enter into cane production, the cane supply increases
• leading to a rise in the sugar supply and hence fall in the prices and then the reverse cycle starts, which is currently beginning to happen in the Indian Sugar Industry

Moreover, the profitability of the companies will also get hit on account of inventory losses both in the case of raw material and on the finishes sugar front. The industry is lobbying for a levy on the imported sugar to have a check on the imported sugar into the country and if this happens could give a little breather to the companies, otherwise its one sector which one, as an investor should avoid.

Happy Investing...!!!