Bears aim for ‘top kill’, bulls hope for a durable bottom
The short-term top I had called, when the recent market decline started on 15th April, is still in place and looks likely to stay for quite some time. And there are only vague signs that we are about to get a short-term rally. Two weeks ago, as I was writing this column, the Sensex did stage a strong rally—650 points. I had mentioned that the market is not headed anywhere, despite this rally, and despite the fact that global markets had all rebounded nicely. Indeed, the Sensex is at the same level after two weeks of trading. I had marked that rally of two weeks ago as a short-term uptrend. This uptrend fizzled out at the Sensex level of 17,150 the following Friday; the index has given up 600 points thereafter and is trying to rally again.
There is absolutely no conviction among investors. Foreign institutional investors are continuing with their alternative bouts of buying and selling; but, over the past few days, their investment volumes have shrunk. Are they keeping their shrinking powder dry or are they waiting to bolt at every rally? The way the bulls have been ambushed by fierce selling at every rise, especially on the days when the global markets were down, should now make them fearful of the market taking away the gains of last year.
After all, the bulk of ‘smart investors’ has invested after mid-May 2009, when the Sensex was already around 15,000. As the fear of losing their gains spreads, bulls will have one thought uppermost in their minds: who bags the gains first? At every fall, real losses start kicking in. When fearful bulls make an exit in the same direction as confident bears, we know how low the market can go. It’s mob psychology, pure and simple, that happens in the market again and again. On the other hand, for the bears to gleefully enjoy a waterfall decline, they must find ways to break 16,500 and then 16,000—the lines on the sand that separate hope from chaos for the bulls. We have sailed dangerously close to those levels but since the market has so far turned higher, we have no prediction—just a probable scenario to keep in mind.
The only silver lining is that pessimism about the global economy is running deep. This always sets the stage for a snapback rally that seems to have started. The rally may take the Sensex all the way to 17,300. And beyond that?
India Infoline had issued two different recommendations on Punj Lloyd to its clients on the same day
Have you ever come in contact with someone who advises you to buy and sell the same thing at the same time? No, then welcome to the world of Indian retail brokerages. One such brokerage, India Infoline, has come out with two different reports on Punj Lloyd Ltd on the same day but with opposite recommendations.
Both the reports, whose copies are with Moneylife, were published on 31 May 2010. In one report, India Infoline wanted institutional investors to 'sell' (which according to its recommendation structure meant, "Absolute-stock expected to fall by more than 10% over a 1-year horizon") shares of Punj Lloyd. It also gave a 12-month target price of Rs97 or 29% lower than the current trading price of Rs137 as on 28th May.
On the other hand, India Infoline's second report, issued on the same date and on the same company for its private client group recommended to 'buy' Punj Lloyd shares with a target price of Rs158 as against the closing price at the end of 28th May of Rs137. There was no time frame or limit mentioned for the target price in this report. According to India Infoline's recommendations parameters mentioned in this report, a 'buy' meant absolute return of over +10% (no time frame or limit mentioned).
For its private client group, the brokerage advised: "With a robust order book, the company is well covered for the next couple of years. The company does not have any legacy orders remaining to be executed and Punj Lloyd is shifting projects from Simon Carves to the parent entity. We expect the company's PBT to witness 74% CAGR over FY09-12E. We reduce our target price to Rs158 per share from Rs198 per share earlier to reflect concerns on extended period of non-billing its client and slow execution rate. However the recent correction in the price provides room for upside, hence we recommend high-risk investors to take exposure in the stock."
When contacted, Harshad Apte, India Infoline's vice president for corporate communications, said, "Both these reports are in fact, targeted and sent to two separate set of customers and also both these recommendations are for differing time horizons. One of the recommendations (IIFL Private Client Group) is for the retail clients and carries a shorter time horizon while the other one is meant for institutional clients and is for a longer time horizon."
There is no period mentioned in the report for the private client group. However, it is assumed that all brokerages use 12 months as standard period for target price.
So, the question still remains as to why the brokerage wants one group of its clients to sell and other to buy Punj Lloyd shares? Maybe the brokerage-and its clients-knew better.
After Moneylife wrote about this case and also brought it to the attention of the Securities and Exchange Board of India (SEBI), the brokerage firm has come out with a press release clarifying the research calls made by different teams of the IIFL group. However, the company's stand does nothing to comfort the investors; in fact it should raise eyebrows higher.
India Infoline had published two reports on 31 May 2010. In one report, the firm wanted institutional investors to 'sell' shares of Punj Lloyd, with a 12-month target price of Rs97 or 29% lower than the then trading price of Rs137 as on 28th May. On the other hand, the second report issued on the same date recommended its private client group to 'buy' Punj Lloyd shares with a target price of Rs158. No time horizon was mentioned for the private client group report.
The company, in its response, has very conveniently stated that the IIFL group has two separate and distinct retail and institutional research teams that are separated by 'Chinese walls'. In today's world of finance, it isn't too difficult to see the irony in this idea. The Chinese wall concept is most commonly utilised in financial institutions with interests in both investment banking and brokerage operations. Its purpose is to provide a separation between the two, while allowing the company to engage in both activities without creating a conflict of interest. This wall is not a physical boundary, but rather an ethical one that financial institutions are expected to observe.
While this was widely practised until a few years ago, wide cracks have become increasingly evident in the Chinese wall model over the years. The porous nature of this so-called wall was in full display during the recent debacle in Wall Street, when investment banks tumbled one after the other. These institutions are supposed to have internal policies that necessitate impartiality on the part of analysts. But very often, these policies are based on flimsy structures, open to being twisted and violated in the process. These institutions compensate the very same 'impartial' analysts based on some investment banking deals they might have participated in. The end result is there for all to see.
The case is no different in India where insider trading and market manipulation are rampant. Fancy portfolio management services (PMS) products offered by various brokerages show that there are, in effect, no Chinese walls. Moneylife has written about cases where PMS money has dramatically shrunk because the broking arm took the money heavily traded in and out of stocks that not only meant huge costs but also huge losses. These products are designed in such a way as to entice high net-worth individuals (HNIs), but are usually based on shoddy strategies that end up creating havoc on the client's portfolio. Very often, the advice to HNIs is diametrically opposite to that given to retail investors.
India Infoline's press release also states, "The respective research teams conduct independent research and reports are made by separate research analysts considering the various factors including client group to which they are providing the services, risk profile, investment goals, horizon of investment etc. Since the different sets of investors, institutional and non-institutional customers, have different time horizons and different investment philosophy, they need to be serviced differently." This looks good only on paper. Besides, we are not even sure if this is what the reality is. Indeed, SEBI is now thinking of actually removing Chinese walls inside asset management companies because they actually serve no purpose.
The market is about to make a major move but is not clear now in which direction
The market was down at the beginning of the week on weak global cues on concerns over the debt crisis in Hungary. Strong Chinese export data and domestic industrial output helped the market to pare losses posted early in the week. However, the negative closing on Monday and Tuesday caused the damage and both benchmarks-the Sensex and the Nifty-ended flat for the week.
The top weekly gainers on the Sensex were Cipla (up 4%), Mahindra & Mahindra, HDFC Bank, Reliance Communications (RCom) and BHEL (up 3% each). The top losers were DLF (down 7%), Hindalco Industries (down 6%), Infosys Technologies (down 4%), ITC and Tata Steel (down 3% each).
In the sectoral space on the BSE, auto surged 2% while healthcare gained 1% while realty tanked 4% and IT was down 3%.
The monsoon arrived in the early part of the week as per the prediction by the weather office in the previous week. For the week ended 2nd June, rainfall was at 16.7 millimetres, down 11.2% from the normal weekly rainfall of 18.8 millimetres.
Montek Singh Ahluwalia, deputy chairman of the Planning Commission said that fuel prices must be increased. Oil minister Murli Deora has made a strong pitch for raising fuel prices, saying it was needed to cut losses of State-run oil companies. The oil ministry is in favour of a gradual increase in fuel prices starting with a quick rise in petrol prices and gradual increase in diesel prices. The empowered group of ministers (EGoM) is likely to meet on 17th June to discuss fuel pricing reforms, as the meeting to be held earlier this week was deferred due to absence of key members.
The Bank of Japan has kept interest rates near zero and had outlined last month a new loan programme aimed at encouraging commercial banks to lend more to industries with growth potential. Japanese bank lending marked its biggest annual fall in nearly five years in May, as companies were reluctant to increase capital spending. Bank lending fell 2% in May from a year earlier, dropping for the sixth straight month and marking the biggest annual decline since July 2005.
The Reserve Bank of India (RBI) said that inflation is likely to ease with the monsoon; however, it is speculated that the central bank will tighten the monetary policy in its quarterly review next month. It has played down any concerns regarding food prices.
The International Monetary Fund (IMF) said that the euro crisis could affect global trade dampening demand for Asian exports and sending "hot money" into the region if policymakers fail to act swiftly and appropriately. The strong growth prospects in Asia were also likely to bring capital inflows into the region leading to an asset bubble.
Chinese exports in May grew about 50% from a year earlier. Consumer prices in May rose 3.1% from a year earlier, accelerating from 2.8% in April.
The Indian government has a cash balance of Rs480 billion with the RBI and will spend it gradually rather than in one go. It will expand liquidity support as banks are likely to need more cash ahead of the payment of advance tax and payment towards the broadband wireless access (BWA) spectrum fees.
Finance minister Pranab Mukherjee said that the target of direct tax receipts for the financial year 2010-11 is expected to exceed the target of Rs4.30 lakh crore.
The government has deferred its decision to announce the date of selling stake in two mining companies-Coal India and Hindustan Copper. It planned to sell about 10% stake in Coal India, the world's largest coal miner, through an initial public offering to raise roughly $2.7 billion. It also planned to sell about 20% stake in Hindustan Copper to raise up to about Rs50 billion ($1.06 billion).
The food price index rose 16.74% in the year to 29th May, higher than the previous week's annual reading of 16.55%, following a rise in prices of fruits and potato. The fuel price index climbed 14.23%, compared with an annual rise of 14.14% in the previous week.
Industrial output rose 17.6% in April from a year earlier, the strongest since December 2009, helped by buoyant domestic consumer demand, a revival in exports and higher infrastructure spending, data showed on Friday. Manufacturing production was up 19.4% over the year-ago period. Mining output was up 11.4% and power generation rose 6%. Car sales in India rose an annual 30% in May over the year-ago period. The finance minister termed the industrial output data as "encouraging."
Japan has indicated that it will raise taxes and warned on defaulting on its public borrowing. The government plans to compile a medium- and long-term plan for reining in debt by 22nd June at the latest and to limit the government bond issuance at 44.3 trillion yen ($484.6 billion) in the year to 31st March 2012.