Return on equity is up, but valuations are down

The S&P 500 has seen return on equity up six quarters to 23% (it may reach 27% next year, the highest annual level since 2000), but companies are yet to reap the benefits in their stock valuations.

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Stocks likely to open lower on weak Asian cues: Tuesday Market Preview

US markets closed marginally lower on Monday while the Asian pack was in the red in early trade today as investors focussed on economic recovery

The Indian market is likely to open lower on unsupportive global cues and cautiousness ahead of the Reserve Bank of India’s announcement of the monetary policy for 2011-12. Markets in Asia were lower in early trade on Tuesday and US markets closed marginally lower overnight on profit booking after eight consecutive sessions of an upmove. The SGX Nifty was down 27.50 points to 5,691.50 against yesterday’s close of 5,719.

As expected the market fell on Monday for a sixth consecutive day. Both the Nifty and the Sensex have fallen for six days in a row. In the last six days, the Sensex declined 604 points and the Nifty lost 183 points.

In the past, when markets have fallen for six days in a row, what has been the outcome on the seventh day? In the period between July 1990 and 2nd May 2011, the Sensex has fallen for six days in a row on 79 occasions (excluding the current drop). Out of the past 79 instances, the market turned positive 42 times on the seventh trading day, while 37 times it continued in the negative. It's really a toss of a coin. A rally above 5,775, which was Monday's high, would be positive.

The US markets closed marginally lower on Monday on profit booking after eight straight days of gains. Lower oil prices pulled down Chevron (down 1.2%) and Exxon Mobil (down 1.01%) in trade. On the other hand, Cephalon gained 4% after Teva Pharmaceutical agreed to buy the company for $6.8 billion.

In economic news, the Institute for Supply Management’s April index of manufacturing fell less than expected to 60.4 from 61.2 in the previous month.  Besides, construction spending gained 1.4% in April to an annual rate of $768.9 billion, according to the Commerce Department, topping analysts’ expectations.

US crude initially slipped over 1% after the news that Bin Laden was killed, but prices later stabilised. London Brent crude fell slightly to close at $125.12 a barrel, while US light crude also fell marginally to $113.52.

The Dow fell 3.18 points (0.02%) at 12,807.36. The S&P 500 slid 2.39 points (0.18%) to 1,361.22 and the Nasdaq shed 9.46 points (0.33%) at 2,864.08.

Markets in Asia were lower in early trade on Tuesday as investors turned their attention to economic recovery. Automakers in South Korea were under pressure with shares of Kia Motors and Hyundai Motor down over 4%, dragging the Seoul market into the red.

In economic news, South Korean inflation was lower than expected in April, easing pressure on the country’s central bank to hike interest rates. However, economists said they still expected a 25 basis point rise this month. The consumer price index rose by 4.2% in April from a year ago and lower than the 29-month high of 4.7% in March. The core CPI climbed 3.2% year-on-year, down from a 3.3% rise in March.

The Shanghai Composite declined 0.55%, the Jakarta Composite fell by 0.53%, the KLSE Composite was down 0.15%, the Straits Times retraced 0.65%, the Seoul Composite tanked 1.19% and the Taiwan Weighted tumbled 1.21%. On the other hand, the Hang Seng gained 0.07%. The Japanese stock market is closed for a local holiday.

Back home, The Directorate General of Hydrocarbons (DGH) and the oil ministry were critical of Reliance for drilling only 20 out of the committed 22 wells by April 2011 while the Mukesh Ambani- run firm was of the opinion that more wells would not be able to solve the problems of falling pressure at its eastern offshore KG-D6 reservoir.

With the DGH and oil ministry trying to pin it down at the three-hour long meeting of the Management Committee that overseas operations of the Krishna Godavari basin fields, Reliance stated that more wells would only drain the same reservoir and would not help raise output.

DGH director general SK Srivastava said Reliance and its Canadian partner Niko Resources in the Field Development Plan (FDP) have committed to drill 31 wells on Dhirubhai-1 and 3 fields in the KG-D6 block by April 2012 to raise output to 80 million standard cubic meters per day.


RBI concerned about inflation; set to hike key policy rates

Ahead of its annual credit policy, the RBI said the government's inability to raise oil prices in line with increase in the international prices poses a "significant medium-term risk" to the economy

Mumbai: Hinting at a hike in key policy rates to contain price rise, the Reserve Bank of India (RBI) today warned that high inflation, driven by rising commodity and crude prices, poses a threat to the economic growth, reports PTI.

Another round of hike in key rates is likely to push further interest rates upwards, making loans dearer.

Ahead of its annual credit policy, the RBI also said the government's inability to raise oil prices in line with increase in the international prices poses a "significant medium-term risk" to the economy.

"Pass-through of global commodity prices, especially oil, has been as yet incomplete and constitute a significant medium-term risk," the central bank said in its report on Macroeconomic and Monetary Developments in 2010-11 released on the eve of its annual policy.

The RBI, according to experts, may raise its key policy rates by 25 basis points tomorrow to tame rising prices.

The RBI's analysis also that gross domestic product (GDP) growth is likely to mirror the trend in the past fiscal, though many downside risks have emerged.

Forecasting higher core inflation in the first half, the RBI report said headline inflation may moderate in the second half but could still be above comfort level, a signal that more monetary policy measures are likely tomorrow.

"Persistence of high inflation warrants continuation of anti-inflationary monetary stance to sustain the growth momentum over the medium-term," it said.

Sounding cautiously optimistic about the continued higher economic expansion, the report said the GDP growth is likely to mirror the trend in the past fiscal, though many downside risks have emerged.

"The risks to inflation from rising oil and commodity prices as well as domestic core inflationary pressures exist.

Unless addressed, they have a potential to adversely impact growth," it said.

"The high global crude prices and other commodity prices pose the biggest risks to our growth and inflation. Fresh pressures from commodity prices do make 2011-12 a challenging year for inflation management," the report added.

Pegging the current account deficit (CAD) significantly lower at 2.5% of GDP for FY10-11, from the earlier projection of 3%, the report however noted that spike in oil prices poses the risk of it widening.

Also the wild fluctuations in portfolio flows and rising debt flows pose risks to sustain lower CAD.

Meanwhile, public sector State Bank of India (SBI) said an increase in interest rates could lead to "derailing" the growth prospects of the country.

Inflation at present "is over 8% and an increase in interests rate can lead to the danger of derailing the growth prospects (of the country)," SBI chairman Pratip Chaudhuri said.

Further, he said that the bank was not is favour of deregulation of savings bank deposits and has sent its view to the RBI, stating that deregulation may not be necessary.


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