~:From the Research Desk:  

What Inferences can be taken from the Nifty Chart?

Nifty Daily Chart on EOD data

Some points which needs to be mentioned here,  to point out why I feel before deepawali the Nifty could trade in 5900-6300 ranges:

(i) Warren Buffett ruled out a second recession in the U.S. and said businesses owned by his Berkshire Hathaway Inc. are growing. “I am a huge bull on this country,” Buffett, Berkshire’s chief executive officer, said earlier in remarks to the Montana Economic Development Summit. “We will not have a double-dip recession at all. I see our businesses coming back almost across the board.”

(ii) "I think the American economy is much stronger than what people think. I think you may be a little surprised and I hope I'm right about that," --amie Dimon, chief executive of JP Morgan Chase which figures among the very big banks that emerged almost unscathed from the 2008 crisis. It's always possible that there can be nasty surprises like a large mortgage loss that has been hidden so far. "But banks today have twice as much capital. There are no off balance sheet vehicles. All the bad actors are gone," said Dimon who thinks that Greece will eventually be restructured and that itself would not create any damage to institutions around the world. Dimon is not too bothered that consumers are not really spending in the US. "They don't have to. All they have to do is stay where they are. Incomes are going up, they are saving 5% now. They actually have much better savings now. If consumer income goes up, they spend 95% of it, you can actually see growth." It's hard for people to sense that things are "still so bad". [The Economic Times]

(iii) The Chancellor of Germany Angela Dorothea Merkel and French President Nicolas Sarkozy  have been saying that they will not let Europe collapse. Greece will eventually be restructured. I don't think that in itself would create any damage to institutions around the world. I think what they are trying to create the political stability underneath that so that Greece doesn't cause contagion. A couple of days back the Qatari sovereign wealth fund, which owns Harrods, is investing $775m (£497m) in European Goldfields, in what will be seen as a major boost for the ailing Greek economy. The deal will provide a significant fillip for Greece, bringing as many as 2,000 jobs to the north-east of the country. The agreement is designed to give European Goldfields the working capital to push ahead with production at three key mines. One of its most notable is the Olympias mine which is expected to produce between 100,000 and 200,000 ounces of gold a year.

(iv) Alongside the extra austerity, the euro-zone will rewrite a July deal that foresaw private investors contributing $50bn to new aid package for Greece, expected to be agreed in early November. Under a deal agreed on July 21, private creditors agreed to a voluntary 21pc write-down on their holdings of Greek debt combined with eurozone credit "enhancements" to sweeten the pill. EU officials said banks would be asked to take a bigger write-down but that a bond buy-back scheme would also be expanded using new "firepower" in the eurozone's EFSF rescue fund.

(v) Evangelos Venizelos, the Greek finance minister, insisted that Greece could wait until its next delayed EU-IMF payment came through next month and that its missed targets did not herald a default. "There is no discussion of default," he said. The euro-zone's delay on disbursing the next €8bn loan installment to Greece and the reopening of the private sector deal though raise default concerns, but then it would to too much of a guess, to give value to such arguments, "If they are having problems getting the sixth tranche of funding, what's going to happen to the seventh tranche of funding in three months' time? Nothing at present suggests that Greece is on the brink of a disaster. 

(vi) The price of gold is falling taking down along with it, the price of many other commodities, including crude oil. The United States has printed nearly $2.3 trillion since the investment bank Lehman Brothers went bust in 2008 in order to revive a moribund US economy. The market was expecting that the Dr.Bernanke led, US Fed will announce a third round of money printing which is euphemistically referred to as "Quantitative Easing III, or QE III. The earlier two rounds were known as QE I and QE II. As you would know that whenever people see more and more currency being printed they buy gold. But since this did not happen then we can expect the inflation and price of the commodities to go down, the two essentials of Bull market formation.

(vii) Speaking at the Conservative Party conference in Manchester, Mr. David Cameron, the prime minister of UK, has promised "a better time ahead". Mr.Cameron further, said that the Government is taking action where it can to help keep families' bills down, citing Chancellor George Osborne's recent announcement of a one-year council tax freeze. But he insisted that he would stick to the deficit reduction package of cuts and tax rises,

(viii)  Federal Reserve Chairman Ben Bernanke says the economic recovery "is close to faltering" and the central bank is prepared to take further steps to support it. The economy is growing more slowly than the Federal Reserve had expected, Bernanke said Tuesday before the congressional Joint Economic Committee. He said the biggest factor depressing consumer confidence is poor job growth. "We need to make sure that the recovery continues and doesn't drop back and that the unemployment rate continues to fall downward," Bernanke said. This gives some hint that QE series could continue further and the US will do everything to avoid any catastrophe, including punishing China for stealing its jobs. The US Stocks came off their morning lows after Bernanke inferred that the Fed could adopt additional stimulus measures in the coming months. The Dow Jones industrial average had fallen more than 200 points but recovered most of those losses to be down only 64 points at midday. Does it not indicate a start in the BULLISH TREND. THE MONTH OF OCTOBER HAS BEEN KNOWN AS BEAR KILLER, WHERE THE BEARS HAVE BEEN KILLED TO GIVE RISE TO NEW BULL PHASES. 

(ix) The continued rise in China’s trade surplus with the United States and the world, and complaints from U.S. manufacturing firms and workers over the competitive challenges posed by Chinese imports have led several Members to call for a more aggressive U.S. stance against certain Chinese trade policies they deem to be unfair. Among these is the value of the Chinese yuan relative to the dollar.
From 1994 to July 2005, China pegged its currency to the U.S. dollar. On July 21, 2005, China announced it would let its currency immediately appreciate by 2.1% and link its currency to a basket of currencies (rather than just to the dollar). Many Members complain that the yuan has appreciated only modestly (about 12%) since these reforms were implemented and that China continues to “manipulate” its currency in order to give its exporters an unfair trade advantage, and that this policy has led to U.S. job losses. Numerous bills have been introduced to move China to adopt a more flexible currency policy. If the yuan is undervalued against the dollar (as many analysts believe), there are likely to be both benefits and costs to the U.S. economy. It would mean that imported Chinese goods are cheaper than they would be if the yuan were market determined. This lowers prices for U.S. consumers and dampens inflationary pressures. It also lowers prices for U.S. firms that use imported inputs (such as parts). On the negative side, lower priced goods from China may hurt U.S. industries that compete with those products, reducing their production and employment. In addition, an undervalued yuan makes U.S. exports to China more expensive, thus reducing the level of U.S. exports to China and job opportunities for U.S. workers in those sectors. However, in the long run, trade can affect only the composition of employment, not its overall level. Thus, inducing China to appreciate its currency would likely benefit some U.S.economic sectors, but would harm others.When the U.S. runs a trade deficit with the Chinese, this requires a capital inflow from China to the United States, such as Chinese purchases of U.S. Treasury securities. This, in turn, lowers U.S. interest rates and increases U.S. investment spending. The RMB is now claimed variously to be anywhere from 25% to (most commonly used in political rhetoric) 40% undervalued against the dollar. A little dipper look gives us a completely different story. The chart on the right hand side (above) shows shows that the Yuan is probably trading at a 300% premium to today's price in the early 1980s.  So this is evidence that the true market-driven value or exchange rate for the Yuan should probably set the Yuan even more valuable than it was set at in the early 80s. 
In the early 80s it was set at roughly 2 Yuan per dollar, and it is currently set at over 6 Yuan per dollar. Some would argue that the Yuan should be set to a 1 to 1 ratio with the dollar, or close, just as the Euro is. This theory also helps explain the massive rise in the price of gold: namely the Chinese Yuan is at least 300% undervalued versus the dollar!

(x) The European and the American (US) economies are deeply intertwined. It is true that trade is the major channel through which ongoing stress in the European Union will affect the United States. In 2010, 22.5 percent, or $412 billion worth, of U.S. exports in goods and services went to the European Union. A sharp economic downturn in Europe means demand for U.S. products and services is likely to decline significantly. But what if the Europe recovers, as we are seeing lot of efforts are being put to solve the crisis, by the EU? In that case even the U.S. exports of intermediate goods and services to other countries that export to the Euro area may also go up. The rising of the U.S. exports will be an additional positive point on the US economy and on jobs at a time when America needs them badly.  Moreover, the U.S. banks hold just more than $113 billion in loans to Greece, Ireland, Portugal, and Spain. If some of these loans went good from  bad, then  there could be huge profits by banks that could spell an avalanche of spending in the US for businesses and consumers, there.  Growth patterns of the European Union and the United States closely mirror one another. During the recession in 1990, the United States went into recession first, leading the way before Europe’s economic decline. But in the two recessions since, Europe and the United States have gone into recession at the same time. Increasing integration since the 1990s, especially through trade, has bound the U.S. and EU economies closer together.

To put this argument in some perspective, analysts at ING tend to agree that the US economy could be in a muddy track, but not collapsing.  They cite 5 reasons for this perspective:

• Cyclical sensitive sectors, namely the housing sector and the auto sector, are already weak and are unlikely to contract much more.
• Households’ balance sheets have improved since the global financial crisis.  Lower rates over a considerable period of time benefit net borrowers.  Most US households will benefit from low borrowing rates.
• The trade deficit is likely to narrow due to slower import growth, decline in energy and commodity prices and a weak trade weighted dollar.
• Decline in commodity prices will check headline inflation and could lift households’ purchasing power.
• Investors’ fears are based on their most recent experience.  The unpleasant memories of the global financial crisis are biasing investors’ sentiments.