Stocks
Nifty, Sensex on a downtrend: Monday closing report

As suggested, since last Wednesday, the markets have weakened, closing below last week’s low. Watch out for a close above 6,140 tomorrow for a possible short-term reversal. If not, then the Nifty is headed towards 6,070

We have been suggesting since Wednesday that bulls are on the backfoot. Huge volumes last week with no advancement, signified weakness. Friday confirmed the weakness and today the market broke down below the support of 6,116, the low of last week. We think the market is headed lower. However, there are too many macro factors in play and so bulls may take advantage of the any absence of negatives to push the market higher. If Nifty closes above 6,140, there could be a short-term reversal. If not, Nifty is headed below 6,070.
 

The markets opened Monday in the green, but the optimism didn’t last long. The indices declined continuously, throughout the trading session, with the bears taking control, emphasising the inherent weakness exposed last week.
 

The S&P BSE Sensex opened in the green at 20,696, then hit intra-day high in early trade at 20,771. It then declined throughout before hitting an intra-day high of 20,550 and closed weak at 20,570 (down 113.24 points or -0.55%). Similarly, Nifty opened at 6,155, hit an intra-day high of 6,168 and then went downwards to an intra-day low of 6,094 before closing at 6,101 (down 43.80 points or -0.71%).
 

The breadth of the market was widely negative, declines outpacing advances 2:1. Out of 1,212 stocks, 773 were down, 390 were up and 49 were unchanged. The volumes on the National Stock Exchange declined to 50.25 lakh shares, underscoring that the weakness could be temporary. All the sectoral indices were in the red except for energy which finished flat.
 

Of the 50 stocks in the Nifty, 13 stocks advanced and 37 declined, indicating clear weakness. The top five gainers were L&T (1.89%), ONGC (1.51%), HDFC (1.49%), Wipro (0.56%) and Kotak Bank (0.51%). The top five losers were JP Associates Jindal Steel (-5.36%), Bank of Baroda (-4.42%), ITC (-3.93%), PNB (-3.74%) and Sesa Sterlite (-3.63%).
 

The weakness of today’s market was partly due to the looming Reserve Bank of India (RBI) policy as well as the Federal Open Markets Committee (FOMC) meet, both of which are due to be held this week. Inflation continues to be a concern. Media news and rumours doing the rounds that RBI governor has no option but to increase interest rates once again to control inflation, sent the market spiraling downwards after an optimistic start. Moreover, company results haven’t shown encouraging signs of broad-based growth.
 

On the other hand, the positivity surrounding the upcoming FOMC meeting, with expectations of postponement of ‘tapering’ sent all Asian markets up, except India. Tokyo’s Nikkei’s index finished strong, moving up 2.19%.
 

European markets were mixed with a slight downwards bias, on Euro recovery fears as region’s jobless figures is due to be announced this week.

US stock futures were trading with a positive bias.

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Bank FDs Competing with Tax-free Bonds

Bank fixed deposits (FDs), offering 9%-9.5%pa for different tenures, are facing tough competition from tax-free bonds from government companies which are offering up to 8.92%pa tax free for 20 years. It means any taxpayer will have lower after-tax returns on FDs compared to tax-free returns offered by these bonds. The higher the tax bracket, the better the returns for investors. Banks are now offering differential rates for periods like 400 days, 555 days, 1,111 days and so on.

State Bank of Hyderabad is offering “SBH DDD (Dasara Deepavali 555 Days Deposit)” with an interest rate of 9.55%pa for public and 9.85%pa for senior citizens. Punjab National Bank is offering 9%pa for 400 days FD, but the interest is 8.75%pa for deposits for one year to five years. Incidentally, the Bank’s one-year FD too has 9%pa rate. Bank of Maharashtra has 9%pa rate for over three to 10 years while 92-month FD rate is 9.15%pa. Union Bank offers 9.25%pa only for tenure of seven years seven months. All other periods offer lower rates. Savers putting money in FDs need to be aware of such offers from banks.
 

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Tax-free Bonds—Buy in the Secondary Market?

Tax-free bonds from NHPC and PFC are offering identical returns: 8.92%pa returns for 20 years; from AAA rated bonds, it is an attractive option for those in higher tax bracket.
Both issues were to close on 11 November 2013, but the NHPC issue is already oversubscribed. PFC too is oversubscribed for all categories other than retail and is expected to be fully subscribed. If you missed on the current offerings, you can wait for future tax-free bonds.

The other option is to buy them from secondary market. Tax-free bonds launched last fiscal were at rates about 1% lower than the current offers. Last year, these had a step-down clause that would make the rate for secondary market buyers 0.5% lower than that for the retail investor in primary market. With the interest rates on G-secs heading north and lower coupon for secondary market buyers, the prices of last year’s bonds have fallen. These are available at a price lower than the face value and you can expect the yield to maturity (YTM) to be close to the coupon rate of tax-free bonds recently offered. If the YTM is lower than the coupon rate of new tax-free bonds, it is not worth buying them.

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