Concerns over stimulus withdrawal?
Closing

Although the markets managed to recover from the day's lows during the closing hours of trade, it did not prove enough to get them back in the positive territory. Thus, while the Sensex closed lower by around 85 points today (0.5%), NSE Nifty edged lower by around 20 points (down 0.4%). BSE Mid cap and Small cap indices showed divergent trends today with the former ending mostly flat and the latter closing higher once again and recording gains of 0.7%. More stocks declined as compared to the ones that gained on the Sensex today, with the advance to decline ratio coming in at 1:3. Auto and IT stocks caused the maximum damage.

While most Asian indices closed lower today, the European indices are also trading in the red currently. The rupee was seen trading at Rs 45.7 to the dollar at the time of writing.

Worldwide, inflation seems to be on the rise. And this seems to be the key reason behind today's profit booking. If the trend persists going forward, it could lead policymakers to act sooner than expected. And this could result in stimuli withdrawal, both monetary as well as fiscal, thus hurting economic growth. What more, if there is too fierce a withdrawal, there is every possibility that the global economy could again fall back into a recession. The irony is, no one knows for certain what should be the correct magnitude of withdrawal so as to not hurt the recovery process a great deal. Investors, on their part, do not want to take any chances and seem to be taking partial profits off the table. After all, they have made tons of money since March 2009 and no one has ever gone broke booking profits!

Although it continues to remain well over the government's comfort levels, food inflation softened to 18% in the previous week from the 20% figure touched earlier. As the officials in Finance Ministry debate whether to withdraw the fiscal stimuli, containing inflation remains high on their priority. Given the rise in rural income and shortage in food supply due to irregular rainfall, the problem of food inflation is unlikely to be resolved soon. Meanwhile, rise in commodity prices are also stoking inflationary concerns and heightening the possibility of monetary tightening. All eyes are therefore on the upcoming monetary policy and Union budget to know the government's stance on future economic direction.

IT stocks had yet another weak outing today. Major losers here included TCS, Wipro, and Infosys. Continued appreciation of the rupee against the US dollar seems to be the biggest reason for investors' sore sentiment towards IT stocks. The rupee today gained for the fourth day in a row thereby sparking fears that IT companies' profits might come under strain in the coming quarters. An appreciating rupee affects IT companies' margins. This is because every dollar earned can then be converted into lesser number of rupees while the rupee costs for these firms do not change much. With economists expecting the rupee to strengthen further on the back of rising foreign fund inflows, profits of IT companies can take some hit during the coming quarters. But that doesn't change our long term outlook on the sector, which is positive. We believe that the value proposition for IT offshoring remains strong and this will benefit the right kind of companies from the sector over the next 5 to 10 years.

Pharma stocks closed mixed today. While Wockhardt and GSK Pharma found favour, Ranbaxy and Dr.Reddy's closed in the red. As per a leading business daily, domestic pharma major Ranbaxy is said to be in talks with a privately held Bangalore based vaccines company. While Ranbaxy has not confirmed the same, the deal could be valued around Rs 500 m. Given that Ranbaxy has no presence in the vaccines segment, the rationale behind the same could be to augment its product portfolio in the domestic market. The vaccines segment in recent times has garnered interest from several players due to the opportunity from immunization programmes, government tenders and focus on prevention of diseases such as hepatitis and cancer. Interestingly, Ranbaxy had made a string of acquisitions in India in the biotech space to gain a foothold in this lucrative field. However, so far Ranbaxy has not been able to generate significant value from the same what with Daiichi Sankyo acquiring a majority stake in the company and the US FDA issuing warning letters with respect to two of its manufacturing plants. The company at present trails Cipla in the domestic market and it remains to be seen how this acquisition if it takes place adds further value to Ranbaxy's domestic business.

Markets slip further into the red
01:30 pm

After witnessing weakness during the morning session, the Indian stock markets slipped further into the red during the previous two hours of trade. Profit booking is being seen in IT and auto stocks among others. However, stocks from the consumer durables and oil & gas sectors are finding favour.

The BSE Sensex and NSE Nifty are trading in the red, down by 120 points and 30 points respectively. The BSE-Midcap index is trading lower by 0.2%, while the BSE-Smallcap index is trading up by 0.4% respectively. The rupee is trading at 46.81 to the dollar.

Cigarette major Godfrey Phillips India has entered the pan masala category by launching a premium pan masala brand called 'Pan Vilas' in Jaipur. The company plans to acquire 5% share of the premium pan masala market within the first year of its launch. The company is also planning to launch a zarda product by the end of next year. This will help the company establish further synergies with its newly launched pan masala product. As per the management, the company has conducted four years of extensive research before rolling out this new category of product which has traditionally not been part of its portfolio. Pan Vilas is magnesium carbonate free product and complies with PFA standards. The company estimates the premium pan masala market to be worth Rs 15 bn.

The management's bullishness on the prospects of the new business are evident from the fact that it expects the pan masala category to contribute 30% of the company's total revenue over the next five years. The company is planning to invest Rs 1 bn over the next 3 years for the aggressive marketing of the product and will push the product aggressively to penetrate deeper into existing markets. In the first phase it will look at covering the Rajasthan, Gujarat and Madhya Pradesh markets. In the next six months, it plans to have pan India presence with even deeper penetration. This is a good strategic move by the company considering the fact that it can easily leverage its existing sales and distribution network of cigarette category for the pan masala business through 800,000 retail centres. The stock is currently trading higher on the bourses.

The stock of Pidilite Industries has seen some sharp up moves in the last two days. This came on the back of reports that the company's board is seriously considering a bonus issue at its next meeting which is to be held by the end of January. Pidilite Industries' financials have seen a gradual improvement in the last trailing twelve months. However, the improvement has been restricted to the bottomline. That was on the back of savings on raw material costs leading to margin expansion as also lower forex losses. The company's revenues have not seen any such similar significant increases. However, investors need to be aware of the fact that a bonus issue as such is a non event for shareholders other than the fact that there will be a higher number of shares outstanding and a consequent increase in the stock's liquidity on the bourses.

IT, auto drive markets down
11:30 am

After witnessing a weak start, the Indian stock markets remained muted during the previous two hours of trade. They are currently trading in the red, on account of profit booking in IT, telecom, auto and capital goods stocks. However, the stocks from the consumer durables, healthcare and oil & gas sectors are finding favour.

The BSE Sensex and NSE Nifty are trading in the red, down by 67 points and 12 points respectively. However, midcap and small cap stocks have managed to buck the trend. The BSE-Midcap and BSE-Smallcap indices are trading up by 0.4% and 0.9% respectively. The rupee is trading at 46.85 to the dollar.

As per a leading business daily, Indian IT majors like TCS, Infosys and Wipro are seeking export credit covers as an insurance against the credit defaults from their customers in the recession hit western economies. As per talks with Export Credit Guarantee Corporation of India (ECGC), many IT biggies are planning to insulate their export receivables from the bad credit conditions in the US. It may be noted that this is a new move by the IT biggies as till recently credit was never an issue for the cash-rich companies. Their marquee clients in the US had the best credit ratings and repaid on time. However, the recession and the resulting bankruptcies have mandated a revisit on strategy. The US bankruptcy law which puts an automatic stay on the creditors also resulted in IT biggies seeking insurance against their exports. Such export covers have been a common phenomenon for other exporters of engineering goods, clothing, pharmaceuticals and jewellery and gems. Even small IT players used such export covers in the past. Now that Indian IT biggies are resorting to these insurances indicates that they still see a lot of uncertainty and risk in some businesses in the US. Nevertheless, it appears a good move by Indian IT companies which draw over 60% of their revenues from the developed economies of the West. This will ensure better visibility of revenue and lesser credit shocks.

According to a leading business daily, Indian pharma major Piramal Healthcare is planning to raise Rs 10 bn in the next 6 to 8 months in order to repay past debt. The company’s debt equity ratio had risen to 1:1 in FY09 due to the funding of its acquisition of Minrad. The raised sum is also likely to be utilised in funding foreign acquisitions. The company is eyeing multiple acquisitions in the healthcare and pharma areas like over-the-counter (OTC) drugs, patented drugs, contract research and research molecules. The company is open to all geographies for its inorganic plans. It may be noted that the company has around 250 patents in its kitty and registered a 25% topline growth over the last 3 quarters. We believe that brand acquisitions will aid the company in gaining foothold in global markets while also adding more products to its portfolio.

Stocks begin on a choppy note
09:30 am

Indian markets have started today's session a choppy note. Although the benchmark indices opened above yesterday's closing levels, they quickly slipped into the negative territory and have not managed to break out since then. Asia is currently trading marginally in the green with Malaysia (up 0.1%) leading the pack of gainers. The US markets also closed marginally higher yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading a mixed bag with metal and telecom stocks leading the pack of gainers. However, select auto and power stocks are in the red. The BSE-Sensex is trading lower by around 30 point, while the NSE-Nifty is down by 5 points. However, buying interest is being witnessed among mid and small-cap stocks as the BSE Midcap and BSE Smallcap indices are trading higher by 0.2% and 0.5% respectively. The rupee is trading at 45.87 to the US dollar.

Auto stocks have opened the day on a weak note. Losers here include M&M and Hero Honda. However, Maruti Suzuki is trading in the positive. As per a leading business daily, commercial vehicle (CV) manufacturers like Tata Motors, Ashok Leyland and Eicher are set to introduce a flurry of new models and variants. Tata Motors will make about 15 new launches during 2010. They will range from mini trucks to busses and lorries. M&M plans to introduce at least four new heavy trucks on the new platform developed by its joint venture Mahindra Navistar. The joint venture between Volvo and Eicher plans to launch a series of tractor trailers, buses and tippers. It may be noted that the CV segment had gone into hibernation during the economic slowdown. These launches indicate the intention of manufacturers to make full use of the economic recovery as well as challenge the entrenched market leaders.

Energy stocks have opened the day on a mixed note. Gainers here include ONGC and GAIL. However, BPCL and HPCL are in the red. As per a leading business daily, all the fourteen state-owned oil companies will present a health report to Prime Minister Manmohan Singh next week following concerns over their performance. It should be noted that oil marketing companies (OMCs) - Indian Oil, BPCL and HPCL - are forced to sell fuels below cost. This under recovery is split between the upstream oil producers, the government and the OMCs themselves. As a result, the OMCs have had a tough time in the last several years. Apparently, the government is keen to ensure that they do not go the Air India way. But given the political compulsion to keep fuel prices low, it is difficult to see how the government will unburden the OMCs.

What is this inflation indicator saying?
Pre-Open

It is believed that if you want to track inflation, you should track copper prices. Historically, copper prices have proved to be a reliable indicator of inflation. The reason may not be hard to find. Copper is an excellent conductor of heat and electricity. Thus, it is perhaps used in the widest variety of consumer goods. It finds applications in goods ranging right from the basic plumbing materials to cars and super computers. Thus, if copper prices are rising, it would mean that an economic recovery is underway and inflation is about to show up on the horizon.

Copper prices have been climbing steadily over the past few months. Recently, they broke into new highs of the current rally. Hence, does this signify that a major inflationary environment could be upon us?

It is well known that the argument before we entered 2010 was whether we are staring at a deflation or an inflation caused by money printing by central banks. Barely a few days into 2010 and we are getting some sort of signals from the way copper prices are behaving. However, a short-term movement in copper prices could also be because of some other factors. Thus, we may have to wait for the trend to sustain itself for some more time.

However, the buzz around rising inflation is getting hard to dismiss. In India too, investors seem to be warming up to commodity producing companies. Quite a few steelmakers have seen their prices spike in the past few trading sessions. Same is the case with producers of non-ferrous metals. Are we seeing sector leadership changing hands here? Well, only time will tell.

The flawed concept that is destroying America
Paul Krugman is one of the most respected economists of our times. And is also a Nobel Laureate to boot. Hence, it is not every day that such economists come under fire. Dr Ron Paul, a Republican Congress member from Texas has come down rather heavily on Krugman and others of his ilk who believe in Keynesian economics. Ron Paul opines that infatuation with Keynesianism has delivered a decade of zero to the US economy as it has gone nowhere in real terms in the last decade.

He further argues that the US policymakers should start listening to the Austrian free-market economists if the US economy has to make anything of the current decade. The Austrian school of thought, he believes, is based on some extremely common sense principles and does not believe in the nonsensical theory that one can spend one’s way out of a recession.

Indeed. There is enough empirical evidence at hand to prove that what most of Mr Paul is saying is true. Every time the US economy has gone under, the authorities have responded by loosening monetary policies and encouraging creation of more paper money by relaxing lending standards. But this has helped to only postpone the pain and not completely get rid of it. And things could be no different even now. By injecting record amounts of cash into the system, the US Fed has once again managed to push the problem in the future and has not made any attempt to tackle it head on. Needless to say, when the problems will return, they will be bigger than ever. Clearly, the US economic model seems to have broken down and is in need of some major overhaul.