Excerpts from my last Sunday Report sent to the Premium Group Members:

..........................Meanwhile, my apprehensions as mentioned in my last Sunday’s write up came to be correct as the Sensex breached 15332-mark which was the previous low of 22nd January, 2008. The highly manipulated government figures on IIP added fuel to the fire and somewhat gave a negative response to the Wall Street’s rise previous evening. IIP figures are just aberration which is understood by common man in the street. One does not have to be a great economist to understand the simple fact that the FM wants to create a low base so that next year just before the Lok Sabha elections everything looks rosy and palatable. Our markets have started to behave differently in comparison to Asian Peers to some extent, if we go by the statistics of the last week. It is now a known fact that Indian Economy is domestic driven unlike most of its Asian Peers. But the catch point is that even if the US slows down, India is expected to perform in a robust way due to the outsourcing angle which mentioned in a number of my earlier mails. It is true that US firms which outsource to Indian companies do not get any tax incentives but then most of them save a lot in terms of cost. This is expected to increase in the days to come if the US slows down further. In the run up to the Presidential Elections all the candidates has talked of not giving any tax incentives to the Indian firms in future, but this is simply rhetoric, as the outsourcing story is doing well even without any impetus from the US government at present. The Presidential aspirant, Barrack Hussein Obama (his middle name confuses everybody, as he had a Muslim father who abandoned him and ultimately brought up by his Christian Mother), has recently started talking against NAFTA, as it makes it more profitable for the US companies to shift factories to lower cost Mexico than in the US, to woo blue collar workers. This could spell positive triggers to the domestic unemployment story. Having said this one of the niggling problem with the current finance minister and the RBI is the too much importance is given to the inflation, at the altar of growth. It is to be noted that though inflation is above the RBI’s tolerance level of 5% but it is still less than China. I cannot understand the use of running after a thing which is not in the hands of Indian Government!! The food and oil prices are rising throughout the world and how can India be insulated. Recently I read somewhere that the price of rice per tonne has touched a 20 year high for the first time since 1969 and the price of wheat has sky-rocketed to 80%-plus in the last few months. In the last few years, the US has diverted about 20% of the maize crop to the production of Bio-diesel, with price of the former shooting by 60%. So is it possible to do anything realistically, by keeping the benchmark interest rate high to check inflation., except bringing pains to the Indian Industry??!! The inflation is expected to rise further in the days to come if the dollar weakens and crude rises. What will RBI do then: do the most stupid thing of hiking the interest rate and inviting stagflation??!! Like Mr. Damodaran’s lackluster tenure at the SEBI chief, I think time has come for this bald-headed Dr. Reddy, to be “ready” to leave the chair unless he replaces these pedestrian policies with some innovative solutions. Till now his answer to the inflation has been rather hawkish and his approach to contain it with the tools of an “average riskshaw puller” has been in many occasions pooh-poohed by the eminent economists like Dr. Surjit Bhalla. If highly qualified Dr.Y V Reddy’s policies can be predicted by a “Paan Walla”, then why have this person at all at the helm of such an important office once adorned by the likes of Dr.Manmohan Singh or Dr.Bimal Jalan…..Can’t we get a more “sexy policy” maker at the helm of the Central Bank???

Let me give you some hard facts: Any cut in the interest rate might increase inflation but then if we dig dipper we would see that Y-o-Y growth in money supply has declined from the permissible limits of 17% to 14% this February, 2008; but Foreign exchange assets with banks, despite a marginal decline, remained more than 2 (two) times those levels thus contributing to excess liquidity. So Finance minister should work in tandem with the RBI for effective management of our ever-bulging Forex reserves and not by going for the short-cut route of “Paan wala” type policies. My contention is that RBI has already reached its goal to slowdown the Indian economy through harsh measures so why not let it grow again unless inflation reaches, double digits-mark. RBI should address supply side factors first instead of raising interest rate everytime, the inflation-tiger starts clawing-back to his office. I have made my voice hoarse shouting from roof tops to address the supply side factors from the last couple of years, but then has it been addressed?!! This inflation is still mainly due to supply side factors, both from the domestic and international front. Thus, both the RBI and FM should stop mouthing the same slogans borrowed from the “backdated-Marxists’--lexicon” but on the contrary go for softer benchmark interest rates which will spur not only spending and but also industrial growth, especially the moribund Real Estate and Auto sectors. I think both the RBI and FM are both running out of time before the economy falter further and become unmanageable, in the short term. Having said this, one thing which this government has done and which is laudable is the reduction of revenue deficit consistently and hence the next two years’ revenue account should show surplus of at least 1.5% which could be used for capital expenditure and is achievable if the receipts from the divestment of the PSUs are used judiciously to repay the government debts. It is worth mentioning here that more than a third of the government revenues is devoured by debt servicing and that the government often resorts to market borrowings to pay off the debts. Over and above, in the present budget, the government decided to issue bonds to shelter Oil and Fertilizer sectors. This is a cosmetic route the FM has tried to find out for the present crisis, but in the long term, the government will have to redeem these bonds by again resorting to borrowings. So it is a never ending “tale of tales”….. who knows when this FM and RBI Governor will shed off their “tails”….to give the Indian economy more teeth and not “elephants’ tusks”. Meanwhile, Global cues remained mixed. The Federal Reserves’ decision to infuse $200 billion to strained credit markets in a coordinated manner with other central banks was greeted with positive enthusiasm by the Wall Street. However, this sudden optimism about the Fed-bailout package fizzled out soon, as the Wall Street fell flat on the nose the very next day on the concerns of northward marching of the crude prices. What is more annoying is that the Indian crude basket keeping pace with global scenario has crossed $102 per barrel mark. This is a negative sign and will definitely add to the inflation. So in this case is inflation due to excess of Money Supply or due to some other extraneous factors??? The market sentiment is likely to remain cautious ahead of the Federal Reserve meeting on Monday, March 18, 2008 where the Fed is going cut at least 50 basis points if not 75 basis points. Any rate cut could be taken as a positive trigger by the markets but if there is too much cut in the interest rate it could be viewed negatively by the markets, since it could given indication that the US economy is in very bad shape. So Dr.Bernanke has a tough time ahead. Another factor which could influence the global markets is the Yen-dollar-ratio which is precariously balanced at the present. Any further appreciation of Yen could give rise to a crisis due to unwinding of the forward positions in the Yen-carry trade. The sudden collapse of a major players of the order of Bear Sterns will not only shake entire system but also make markets that are depended on Bear Sterns to buy and sell securities to a screeching halt, if they have till now not grounded. Mr.Richard Sylla, a financial pundit at New York University has rightly said, “In a trading firm, trust is everything. The person at the other end of the phone or the trading screen has to believe that you will make good on any deal that you make”. Bear Sterns was one of the firms that have experienced a direct blow from the sub-prime mortgage crisis when two of its hedge funds collapsed because of the declining value of the mortgage backed securities. Bear Sterns is among the biggest firms in the prime brokerage business or the financing of the hedge funds. It is worth noting that Hedge funds rely on Wall Street for a range of services from the Humdrum, like holding their securities to the critical like providing loans they use to increase their bets. As Wall Street has bucked under multibillion-dollar write-downs, the firms have cut financing to hedge funds and asked the funds to put up more assets to back their borrowings forming the managers to sell en-masses. This has caused a series of hedge fund blowups including Carlyle Capital, an affiliate of the powerful private equity Carlyle Groups; Peloton Partners, a hedge fund founded by the former Goldman Sachs traders; Drake Capital, a bule-chip fund that has been struggling. The President Mr. George Bush admitted on Friday, that the US economy was going through a tough time, but avoided the dreaded “R-word”, as he sought to reassure voters that better times lay ahead. So we can hope against hope when Uncle Sam is recovering….. If US Fed actually cuts rate more than 75 basis points it would widen the spread between the US and India's main short-term lending of 7.75%, and could encourage flows to higher-yielding Indian assets. Moreover, 8.5% growth is not a slowdown at all when developed nations grow a sub-5% rate every year. At present Sensex has a delicious P/E of 18 and 14 for FY08 and FY09; which in other words means that at the present moment the Sensex has an estimated EPS of Rs.856 (FY08) and Rs.1040 (FY09). Historically, P/E multiples at such lows levels don’t last long. Also some positive sentiments are prevailing after the Bail out of the bank Bear Stearns Cos by its rival and the Fed. The markets could start rallying from Monday in the short term till 18, 000 on the Sensex, with occasional bouts of choppiness and volatility. I think at this stage, we have very little downslide left apart from the hard fact that the March of every year is very weak in the stock market point of view. Graphically, the benchmark indices are forming a positive divergence pattern on the daily charts. However, it is still in an early phase. A few of good rallies with good volumes would complete this pattern, which will confirm the uptrend and prepare the indices for the next move upwards. The Sensex has support at 15,700 and 14140 levels. On should wait for the Sensex to cross 16500 on the upside for any major purchases. Please use 15, 230 as the Stop Loss. At this stage those risk-averse investors/traders should use wait and watch policy.

Note: The crude was moving up when this article was written last week. But what will be the changed scenario when the crude prices have started to retreated in the US....??? Why would now, FIIs could think of investing in the Indian bourses??? Is there a option in the hands of RBI to cut benchmark interest rate in the next meeting??? What are the options available for the common investors at the present situation??? Should one go for bargain hunting now???? What will happen to the US housing market now after the Fed has cut the benchmark interest rate??? should Fed cut more interest rates??? Which sectors could underperform in the next few months??? Which are my recommended scrips which should not be averaged at the present moment or till the March, 2008 quarter results are declared???!!! Is there a relation between the share prices of Kohinoor Broadcasting Corporation Ltd/ Ennore Coke Ltd/ BOC India Ltd/ H S India Ltd/ Phoenix International Ltd/ Southern Online Bio Technologies Ltd with the functioning of the company??? ALL THESE TO THE PAID MEMBERS!!!