Sunday, September 6, 2009


Benchmarking Recovery: Rhyming not Repeating

Recovery signals are in the air, corroborating our statistical model estimates, yet also intimating that the character of this recovery already is different than prior recoveries. Consumer spending is up, reflecting income growth, however such growth does not primarily reflect earned income but rather federal transfer payments. Meanwhile, as many dear readers suspect, production and employment advances lag, as they have done in recent cycles. The current recovery reflects more a “statistical” recovery than a recovery for the “man on the street”. Finally, the shape of the recovery, a topic for almost every senior corporate strategy session, remains the product of the confluence of expectations on the future of key price variables for credit (interest rates), commodities (goods), the dollar (exchange rate) and labor (wages) for both private and public decision-makers.

Three questions will be addressed in this essay. First, what are the signals for the recovery? Unfortunately our profession and the media are infested with perennial bulls and bears who fail to acknowledge that the economy follows cycles and that providing insights to the economic turns and not popular entertainment, should be the product of our efforts. Second, what benchmarks do we have to measure the progress and character of the recovery? The picture on recoveries is never black or white but the many colors of the multiple sectors in myriad phases of improvement. Finally, what factors will drive the shape of the recovery? Mindless speculation on the shape of the recovery fails to provide any depth of thought or guidance to decision-makers on how we may track the unfolding pattern of the recovery.

Signals for Recovery: Models and Surveys
Recovery is the signal from our statistical model.1 Over the past two years, we applied this model to first identify the rising risk of recession and now the significantly lower probability of a recession going forward. The probability of recession two quarters from now has downshifted sharply over the previous quarter (Figure 1) with the latest recession probability at below one percent as to be in agreement with probabilities associated with prior economic recoveries. We reviewed a very broad set of variables in our model and the results imply economic recovery is likely in six months. Faithful readers also recognize that we had expected recovery in the second half of 2009 in our Annual Economic Outlook published in December 2008. Supporting evidence for economic improvement began to show up in our model in recent months in the regional Chicago Manufacturing Survey. While the official recovery call will come much later from the National Bureau of Economic Research, our outlook is that the recovery on a quarterly basis will begin in the third quarter of this year.




Success stories are always especially nice to hear when they start repeating themselves. KSB was first recommended (VOL No 27, Dt 24/11/08) at the then price of Rs 186 and was once again repeated (VOL No 40, Dt 09/03/09) with a price target of Rs 310 in a years time. The stock is trading far above the targeted price and in view of an expected good outlook ahead (as this is especially true of orders from countries that are continuing to push ahead with important
infrastructure projects despite financial constraints), we are taking the liberty this week to repeat the recommendation. Along with China, India is one of the mega markets of the future. The pumps & valve industry has grown in line with the economic growth of the country. This has not surprised many, since the pumps industry is only expected to grow, driven by the demand from the capital goods, energy, mining, gas & oil sector. Valves may be a small component in the
production process, but they perform a vital function and thus have to be extremely reliable. This is particularly true in diary, beverage, food, petrochemicals and gas industry. KSB Pumps Limited (KSB) is a well established player in the pump & valve manufacturing industry.

Along with energy, water is one vital variable in the complicated equation called "the world’s future”. The growth in the world’s population and the progressive industrialization of many emerging markets is leading to a rising demand for clean water. Thus the market for water engineering is growing in line with the demand for water. The waste water disposal also requires a enormous use of pumps. KSB provides a range of pumps & valves for obtaining, treating and supplying water. Municipal waste disposal facilities need to build new sewage treatment plants
and modernize the existing ones. The idea of desalination of sea water is expected to catch up very fast in the country and KSB as a group is well equipped and has a special product range to offer for this segment of the business. Transporting water over long distance is also catching up and this favors the large pipeline pumps & valves business of the company.

The focus of the Indian economy to increase the energy generation capacity is positive for KSB as it is the leading supplier of power plant pumps for the energy sector. Natural gas as an energy source is also gaining importance and this source of energy shall play a dominant role in the Indian economy in the future because of the abundant findings of gas. Transportation of liquefied gas in compressed form requires special valves and these are manufactured by the KSB group. The demand for industrial goods is likely to remain strong in the coming years too owing to capacity expansions across the board. The growth areas could be chemicals & process engineering and waste & clean water management industries, as their utilities will increasingly rely on large scale water treatment plant. Efficient waste water treatment is vital to the community and has the largest growth potential in the future and KSB is all set to capitalize on the anticipated huge demand from this industry.

To see full report: KSB PUMPS LIMITED


In report, calendar is given indicating significant economic events/releases due in September 2009:

• For India, the data on industrial production for July and Balance of payments for Q2 CY09 will be the key events to be watched this month.

• Central bank policy stance across nations, and data released on inflation, manufacturing indices and unemployment will be keenly awaited.

To see full report: ECONOMY CALENDAR



•Weekly rainfall was 8% above normalfor the week ended September 2:On an unweighted basis, aggregate country-wide rainfall was 8% above normal for the week ended September 2, compared to 5% above normal in the previous week. Total country-wide rainfall weighted by cropped area was 4% above normal for the week ended September 2 compared to 5% below normal for the week ended August 26. According to IMD, on an all India area weightedbasis, cumulative rainfall was 23% below normal up to September2, compared to 25% below normal during the previous week.

•Southern and western region received more rains this week:On an unweighted basis, rainfall for the week ended September 2 was above normal in the southern (51%) and western (34%) regions, but below normal in the eastern (-29%) and northern (-24%) regions. On a cumulative basis, the rain-fed states of Andhra Pradesh, Madhya Pradesh, and Bihar remain affected by below-normal rainfall. The northern states of Uttar Pradesh, Haryana, and Punjab have also witnessed a large shortfall in rain; however we believe the well-developed irrigation facilities in these states could provide some buffer. So far, 278 districts have been declared drought prone (out of a total of 626 districts in the country).

•Cropped area affected by below-normal rainfall was largely steady:Based on cumulative rainfall up to September 2, the cropped area affected by below-normal rainfall (most important measure for assessing risk to crops) was largely stable at 72.9% compared to the previous week.

•Water reservoir level in dams less than last year: According to Central Water Commission data, the water storage at81 key reservoirs across the country was 68.8 billion cubic metresfor the week ended September 3, which is 45% of the live capacity at full reservoir level. This is lower than the storage level of 64% during the same period last year and 60% average for the last 10 years.

•Crop area under cultivation for kharif crops stabilized comparedto previous week: As of August 28, crop area under cultivation for summer (kharif) crop (accounting for about52% of total crop output) declined 8.2% YoY. This compares with declines of 8.1% and 6.4% registered during the weeks ending August 20 and August 12, respectively.

To see full report: MONSOON UPDATE

>Introducing our 2010 Market Outlook (CITI)


Tuesday Tidings

Establishing a year-end 2010 S&P 500 target of 1,100. The forecasts for the equity market reflects both the 50%-like recovery from the lows of 2009 thus far as well as several indicators that are used to calibrate a year-end objective, incorporating sentiment, earnings, valuation, credit trends and historical post-recession returns. Gains are likely in 2010 but are expected to be uneven and could spike above 1,100 during earlier parts of the year and then back off. Note that our 2010 Dow Jones Industrial Average target, which is derived from our S&P 500 analytics, is 10,400.

The beginning of 2010 could be relatively constructive for equities. Markets should benefit from a backdrop of earnings recovery first determined by the moderation of inventory de-stocking leading to some inventory re-stocking, a better (though still subdued) employment environment, and the consumption benefits of some restored wealth via higher financial markets. All of these dynamics should bolster equities initially, especially if money flows begin to chase returns as has often been the case in the past.

Mid-year weakness seems probable given likely softening of economic trends. A confluence of factors could take down markets heading into mid-2010 including the realization of higher federal income taxes in 2011 (given expiration of the Bush tax cuts), increased state and local taxes in 2010 (due to budget pressures), Fed exit strategies which may affect P/E multiples, and normalization of growth to a lower level than existed coming out of prior recessions.

Sector shifts may be required as the year progresses. A focus on value stocks and industrially-sensitive groups including Capital Goods, Materials and Energy as well as select areas within the Financials and Technology sectors still seems appropriate for now but there does appear to be clear signs for significant portfolio repositioning during the coming year as economic conditions shift. Risk appetite could moderate and even turn adverse which would affect a host of preferences for capitalization size, balance sheet strength and dividends.

The “Trading Places” thesis, first initiated in 2001, remains intact. Our trading markets view is not altered but rather reinforced by intermediate term economic uncertainties which are further confused by possible domestic legislative actions that may alter the economic forecast. Growing fiscal imbalances and debt remain looming issues as do the stimulus programs globally including China given its impact on commodity prices. And, one cannot forget about pension funding issues that have not gone away either.

To see full report: MARKET OUTLOOK 2010


Dead cat bounce
Markets on Sep 04, 2009: Bounce

Nifty has closed positive less supported by volumes giving a sharp pullback till 61.8% retracement of the fall from 4750-4575. Further it is expected to move lower, as it has strong resistance at 4750 from where it has reversed down thrice earlier and which is also a 61.8% retracement of the entire fall from 6357-2552. Since Nifty was unable to breach 4750 on the upside on three occasions, the significance of this resistance level becomes crucial. So unless this level is taken off on the upside, we maintain our short-term bias down for the target of 4350.

On daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA ie 4558 and 4506 respectively, which are crucial supports going forward. The momentum indicator (KST) has given negative crossover and is trading above the zero line. The market breadth was positive with 775 advances and 487 declines on the NSE and 1,581 advances and 1,215 declines on the BSE.

On hourly chart, Nifty is trading above its 20 hourly moving average (HMA) and 40HMA ie 4661 and 4628 respectively, which are crucial supports in the short term. The momentum indicator (KST) has given positive crossover and is trading around the zero line.

To see full report: EAGLE EYE 070909


Banking Industry - Funding the Economy

Banking Industry is an essential part of any economy. In fact, banks are the single most important supplier of credit. The banking industry has the capital and commitment to support the financial needs of individuals, businesses and all levels of government. Banks make loans to
consumers to finance purchases of homes, education, cars and major appliances. Bank credit helps small businesses get started, grow and prosper. Banks help state and local governments fund a variety of public improvements like schools, roads, water & sewer and public health
facilities. In each of these roles, banks support the creation of jobs and the growth of our economy.

Banking Industry is the most dominant sector of the financial system in India, and with good valuations and increasing profits, the sector has been among the top performers in the markets. But currently worldwide the banking industry is facing a tough time due to the failure of
financial system in the biggest economy i.e. United State of America. The problem arises due to default in sub prime mortgage lending clubbed with rising national debt, current account deficit, and fiscal policies of US. This has led to the failure of some big investment banking firm leading to file bankruptcy. Financial Institutions are the one to face the toughest challenge.

Indian Industries has witness an indirect, knock-on effect of the global financial situation and is a reflection of the uncertainty and anxiety in the global financial markets. While no country in world remained completely insulated from the global financial crisis, Indian banking industry
was better placed to cope with the adverse consequences of the financial turmoil. India is relatively better placed due to its robust policy framework, stricter prudential regulations with respect to capital and liquidity and strong growth performance. Recently we have experienced
few positive signs that indicate the recovery of the economy. Increase in primary demand clubbed with stable government has built a strong confidence in the mind of investor.

An added obstacle to the sustained improvement of the banking system is the fact that banks are mandated to provide funding to government- defined priority sectors dominated by small-scale business and agriculture. Loans to these sectors are at high risk of be-coming nonperforming. Private-sector banks must ensure that 25 per cent of their loans are directed towards these priority sectors; for state-owned banks, the figure is 40 per cent. These thresholds restrict the level of credit available to more efficient companies in non-priority sectors.

The level of bad loans has been falling in recent years as a result of the creation of asset-reconstruction companies and a rapid expansion in lending. Non-performing assets (NPA) fell to less than 1.0 per cent for the fiscal year 2008-09. In the near future, for a stint, we expect to
see an increase in Non-performing Assets.

To see full report: YES BANK


Quick Comment: Asarco Decision Good for the Stock: Stay OW

The decision reduces confusion, brings focus back to Sterlite’s main businesses: We believe the bankruptcy court’s decision in the Asarco ownership case favoring Grupo Mexico is positive for Sterlite stock as: 1) This removes the confusion surrounding Asarco, 2) With this, the optimism regarding possible gains for Sterlite from the “Fraudulent Asset Transfer Case” may be put to rest; and 3) Based on our current assumptions, an acquisition would have been value dilutive by ~ 1.5% to 3.5% for Sterlite. Further, we believe that a possible case against Sterlite to hold it liable for its original bid of US$2.6b may be weakened now as the winning bid is just US$100m short of the amount. Note that our base case estimates for Sterlite do not include Asarco. In our
view, Sterlite should be better off without the Asarco assets than having bought them at a price higher than US$2.2bn (last bid by Sterlite). We remain Overweight on Sterlite due to its strong volume growth prospects, high chances to purchase the remaining stakes in HZL and Balco, and likelihood of higher valuations as we come close to commissioning of its power plant.

The stock may trade down on knee-jerk, offering good buying opportunity: In our view, there is a possibility that the stock may react negatively near term due to the recent media reports portraying a higher probability for Sterlite to win Asarco.

What’s New; The bankruptcy court has ruled in favor of Grupo Mexico as it believes the terms offered by the latter (US$2.2 billion in cash plus a US$280 million note) are superior. US Bankruptcy Judge today sent his recommendation to a district court judge who will make the final decision on Asarco, possibly in the next 2-3 months.

To see full report: STERLITE INDUSTRIES