Commentary from a Newsletter

MARKETS LIVE ON HOPES: It is said that all market operators know the quotations of all the shares but they hardly know the value of the shares. Hence the market keeps fluctuating. In other words the values keep changing with happenings all around us. Market always thrives on hopes. There are hopes that the man who gave the dream Budget will give one similar to that. In reality the Budget presented did not have the trade mark of Chidambaram at all. The hopes got shattered. The budget even tried to introduce controls over prices and the worst part of it was to tax construction cos with retrospective effect from the year 2000.

The Budget tried to bring down prices and control inflation. One wonders when one cannot control the steep increase in the prices of essential food stuff, rice, dhal and vegetables why the ministers are so sure of bringing down the price of Cement. Finally what they have achieved is bringing down the price of cement shares and the whole share market.

When the markets zoomed up by almost 500 points on Thursday the situation was nothing to be hopeful but gave rise to fear that the markets may crash the next day. Every rise is seen as a mere dead cat bouncing and not the revival of the market.

IMMEDIATE OUT LOOK: The market is expected to remain under selling pressure, as profit booking might continue. A host of factors including lack of inflows at higher levels, the defeat of Congress in Punjab and Uttarakhand, the surprise CRR-hike, high valuations, rising inflation and rising interest rates, fears of an earnings slowdown in the coming quarters keep the fears alive. A reversal of the trend can happen if the Finance Minister solves the Cement price control and if the inflation declines even slightly next month. After liquidating shares worth Rs.3000 Cr during the Budget period the FII have turned buyers in the last three sessions. The Mutual Funds are sitting on huge pile of cash. They have in fact soLd out even before the budget. Hence steep falls are ruled out. All are waiting to enter but do not know when. Some feel 12500 will be the ideal time for cherry picking. But markets never do what is expected.

FOREIGN MARKETS: Unlike the earlier year our market was totally independent of the foreign markets as the FII were pumping money at this time. This time the FII are not active. Hence the course of our markets is determined by what is happening elsewhere. In spite of we have a booming economy and there is no recession and demand for products is zooming shares have declined.

YEN – CARRY TRADE: Carry trades involve borrowing in a low-interest rate currency and investing the proceeds in higher yielding assets. In Japan, investors took advantage of the near-zero interest rate in the past many years by borrowing yen, converting them into dollars and investing in higher-yielding assets including overseas equities. Recently Japan has started hiking the interest rates. Things became more complicated as dollar started depreciating and the Yen appreciated. This had a nasty effect on those who borrow money in Japan. Several Hedge Funds had to sell off in the commodity markets as well as in the share markets. This bought a near crisis in the world stock markets. In other words the sources of funds are becoming more expensive with the interest rates moving up. Most of the stock markets too have run up hence there is a rush to sell and return the money borrowed..