Fortnightly Market View: Still in Neutral Gear

There has been no change in market climate but is the US going be worse off?

In the previous issue, I had pointed out that from a low of 15,960 it hit on 25th May, the Sensex has rallied by 2,500 points already. This is long rally and is unusual at this stage of a bull market. It has been three months of rally without any meaningful correction, after 15 months of rise. The market usually goes through a violent and substantial correction towards the end of such a long and continuous rally. So, while there is every possibility of the market running away, thanks to the force of liquidity from foreign investors, there no need to get tempted, certainly not by the large-cap, blue-chip stocks that are not cheap.

A fortnight ago, the Sensex was at 18,400. At the time of writing, it is 18,221. Over a fortnight, it has gone nowhere. On the other hand, there has been no serious correction. Only a dip to 17,820, from where it quickly bounced back. Institutional investors are ready to buy the dips.  

Markets are trending up in the rest of the world, especially the troubled US market. As I said previously, the market may go up further-all the way to 19,000-but it would only be followed by a violent downward move. Whether the decline happens now or later is a matter of detail. Stay ready to buy select stocks when that decline happens, as our Cover Story suggests.
Since the overall market trend remains directionless, I thought of bringing you some interesting thoughts on where the US economy is headed over the next few months from Scott Minerd, CIO of Guggenheim Partners.

Mr Minerd has looked at the crucial Great Depression years, focusing on 1936, when the economy plunged into the second great recession till 1938, after the relative growth and stability from 1932 to 1936. What precipitated the second collapse? The immediate catalyst, according to Minerd, was "the fiscal policy missteps of the Roosevelt Administration, who, in an effort to balance the budget after six years of deficits, implemented a series of tax increases in 1936 and 1937 that caused output, prices, and income to fall and sent unemployment skyrocketing."

Fed chairman Ben Bernanke's speech, in late August, shows that the Fed stands ready to continue to provide quantitative easing, if necessary. Mr Minerd says that despite the Fed's commitments, some of the very same issues that occurred in 1937 loom on the horizon today. For instance, in the first quarter of 2011, the United States faces massive tax increases.
Similar to the mid-1930s, many have argued that deficits must be tamed now and that the economy is healthy enough to sustain austerity measures. Under such political pressure, the tax cuts of Bush administration may not be extended. If so, Macroeconomic Advisers (a US economics research firm) believes it will subtract 0.9 percentage points off GDP, points out Mr Minerd. ISI Consulting (an international consulting outfit) thinks the deceleration could be even larger, around 1.2 percentage points. Arthur Laffer, the famed supply-side economist, predicts as much as 6 percentage points of fiscal drag. "Any way you slice it, if estimates for economic growth in 2011 range from 2 to 3 percent, these tax increases could result in flat to anaemic growth and elevate the risk of recession due to the slightest bit of economic turbulence," argues Mr Minerd. "In addition to the expiration of the Bush tax cuts, there is the additional cost of healthcare reform."

While I love history, I ignore parallels between one period and another; each period is distinct from another. But Mr Minerd's points are immediate and specific to tax burdens. Let's see how it plays out.


FIIs pump in $2.5 billion in the Indian stock market in August

New Delhi: Maintaining their bullish stance for the third month in a row, global fund houses made a net investment of Rs11,685 crore ($2.5 billion) in Indian equities in August, reports PTI.

As per the data available with the Securities and Exchange Board of India (SEBI), foreign institutional investors (FIIs) purchased shares worth Rs62,187.50 crore, while they offloaded equities worth Rs50,500.40 crore during August, resulting in a net investment of Rs11,687.50 crore.

With the August inflow, the total investment made by FIIs in the local stocks now stands at Rs60,447 crore ($13.1 billion) so far this year.

Analysts believe that the Indian market is likely to attract more inflow from overseas in medium to long-term investments, as they see higher return from emerging economies.

"FII inflow is likely to be robust in the medium to long-term, as Indian equities are still under-owned by foreign investors as compared to their peers in the other emerging markets," Anil Ambani Group's renowned fund manager Madhusudan Kela has said.

The sustained inflow by overseas funds helped the Bombay Stock Exchange benchmark Sensex record a rise of 0.6% in August, though domestic institutional investors (both mutual fund and insurance companies) have been continuous net sellers due to redemption pressure and valuation discomfort.

In June and July, FIIs made a total net investment of Rs27,125 crore.

FIIs play a significant role in domestic equity markets and their movement (inflow and outflow) causes fluctuation in benchmark indices.

FIIs had pumped a record Rs83,400 crore into the domestic equities in 2009, but started exiting in early 2010. In January, they were net sellers of Rs500 crore.

But from February, the scenario started changing and they were net buyers of Rs1,216 crore. In April, FIIs were net purchasers of shares worth Rs9,361 crore, after pumping in Rs19,928 crore in March.


Govt to allow export of 55 lakh bales of cotton from October

New Delhi: The government will allow unrestricted export of 55 lakh bales of cotton from 1st October but dispatches beyond the ceiling would attract export duty of Rs2500 per tonne, reports PTI quoting a government official.

Cotton production this season, starting next month, is projected at a record 330 lakh bales, the official told PTI.

In the cotton year 2009-2010 (Oct-Sep), the production was 292 lakh bales. One bale is equal to 170 kg.

The decision to allow unrestricted export of 55 lakh bales was taken at a meeting of commerce secretary Rahul Khullar, agriculture secretary P K Basu and textiles secretary Rita Menon here on 1st September, he said.

However, exporters will have to register their overseas contracts with the Textiles Commissioner. The registration process is scheduled to start from 15th September, he said.

With domestic consumption estimates of 220 lakh bales, the country may have a closing stock of 50-55 lakh bales at the end of the season.

While cotton exports aggregated about 83 lakh bales during the last season and closing stocks 40.5 lakh bales, the government had brought in several restrictions in the wake of high prices of the natural fibre.

Cotton prices had increased by about 35% in the global market between October 2009 and May 2010.

The commerce secretary had earlier said that overseas shipments of cotton beyond the quota would attract export duty.

The export restrictions, which were mostly announced during April-May this year, included export duty of Rs2,500 per tonne and suspension of registration of new export contracts, besides restriction of shipments under the licence regime.

The government has also announced doing away with the licence regime.


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