>EAGLE EYE ON 15/06/09 (SHAREKHAN)

BULL'S ARREST

After witnessing a rise in early hours, the stock market fell into the red on persistent profit booking all through the day. This week’s feeble closing sounds a ring of caution, as after thirteen consecutive positive weeks, we have a negative close. It seems that bull’s momentum has been arrested and the rally has come to a stand still. So from here a correction cannot be ruled out. The Sensex ended the day 173 points lower, while Nifty closed 54 points down. Stocks from the mid-cap and small-cap spaces also moved downhill as the BSE MIDCAP and BSE SMLCAP were
down by 2.10% and 2.21% respectively. On the daily chart, Nifty is forming a rising wedge with negative divergence in the momentum oscillator KST, which indicates there is high probability of wedge breaking in favour of bears. On the hourly chart, Nifty is still traveling aligned to the upper boundary of the channel, but on the other hand moving average support has been violated. Bears totally dominated the market breadth with 1,041 declines and 214 advances on the NSE.

The hourly KST is in sell mode. Our short-term bias is down for the target of 4200 with the reversal pegged at 4700, while our mid-term bias is still up for the target of 4850 with reversal placed at 3861.

Consumer goods, realty and auto sector scrips tanked the most, while buying was seen in metal and oil & gas stocks. From the 30 stocks of the Sensex, Reliance Industries (up 2%) and Sterlite Industries (up 2%) led the pack of gainers, while Ranbaxy Laboratories (down 6%), DLF (down 6%) and Reliance Communications (down 4%) led the pack of losers.

To see full report: EAGLE EYE 150609

>ASIA INSIGHTS (HSBC)

Does valuation not matter any more?

• Asian markets are up 65% since early March
• Valuations are becoming a concern, with prospective PE now 16.3x and PB 1.9x
• For markets to rise much further requires a bubble

We wrote a month ago – in the AI of May 8 – that it was time for Asian equities to “take a breather”. Our main argument was that the better news on the economy was already largely priced in to markets. Markets did briefly pause for breath in mid-May, but in the past week or so they have set off at a sprint again. Since our piece, Asia ex Japan is up another 9% – taking the rebound since March 2 to 65% (Chart 1).

We are now starting to get alarmed about valuations. PE (based on 12-month forward earnings) for Asia ex Japan has reached 16.3x. Even if we use analysts’ forecasts for 2010 (which are highly optimistic, expecting 30% EPS growth (Chart 2), with many countries expecting a new peak for earnings), PE is still a pricey 14x. Price/book is similarly expensive at 1.9x. We think that comparisons with the normal (i.e. pre-bubble) phase of the last bull market, 2002-6, are most useful: in that period PE averaged 11.4x and PB 1.7x. And, even though the economy is clearly improving, we find that the market has already discounted the US manufacturing ISM getting back to 55-60 (it is now 42.8) by the autumn.

In this AI, we look at various possible reasons why multiples could justifiably be higher this time around – lower interest rates (maybe), less risk (hardly), higher expected trend growth (unlikely) – but reject all of them. The truth is that if Asian stocks rise much further they will, frankly, be getting into bubble territory. We think markets need to move sideways for a couple of quarters to allow fundamentals to catch up.

To see full report: ASIA INSIGHTS

>JP MORGAN CHASE

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comprehensive suite of integrated supply chain management solutions that gives buyers and sellers the ability to link the financial flows of their trade transactions with the physical movement of goods.

Background: JPMorgan Chase has been building capabilities around integrating cash, trade and logistics solutions to address the physical and financial supply chain. In 2006, it acquired Vastera and renamed the company JPMorgan Chase Vastera. Vastera was combined with the Logistics and Trade Services businesses of JPMorgan Chase's Treasury Services unit. More recently, JPMorgan Chase acquired Xign, a leading provder of invoice presentment and payment solutions.

Key Strengths:
• JPMorgan Chase brings a vast array of global treasury and international cash management capabilities and is applying its experience integrating cash, trade, and logistics across the physical and financial supply chains in a way that maximizes benefits to its clients

• With a banking presence in over 55 countries serving 75,000 customers, and a global trade management staff of more than 1,200, JPMorgan Chase applies expertise and technological sophistication to all aspects of our clients’ supply chain needs.

• JPMorgan Chase is uniquely positioned to offer clients a creative combination of financial and logistics capabilities whereby clients are offered a true end-to-end solution. JPMorgan Chase has gained specific industry knowledge as well as an understanding of trade lanes outside of North America (eg. Asia to Latam)

• Successful players in today’s international trade environment need to understand their entire supply chain process and have strong knowledge on the data model that takes into account the breadth and depth of information exchanged between the multiplicity of interrelated entities. JPMorgan Chase has financial and logistics solutions closing the gap that currently separates the management of financial flows from the management of inventory.

• JPMorgan Chase Global Trade Services is uniquely positioned to offer our clients a creative combination of financial and logistics capabilities whereby clients are offered a true end-to-end solution.

To see full report: JP MORGAN CHASE

>ASIA EX STRATEGY (CITI)

Markets Up, EPS Revisions Up

■ Markets have risen and earnings have been revised up — Back in early 2009 earnings revisions were the most bearish since 1990. In many cases we are now back above the average and heading towards the upper end of the post 1990 range. In March 2009 the risk was upside surprise, but increasingly the risk is downside surprise. Australia and Singapore have seen the least earnings revisions, Indonesia, Korea and Taiwan the most.

■ IBES forecast for 2009 is for a 5% decline and then a 30% increase in 2010 — Excluding the 1980’s cycle, which culminated in the 1987 crash, it takes on average 17 months for earnings to go from trough to prior peaks. Once the old peak is reached, the average P/BV has been 1.8x. We are currently on 1.8x P/BV, the 10-year and 30-year average, so we ask ourselves are these average times?

■ Terms of trade are worsening again and exports need to grow 48% to reach prior peak — The rise in commodity input costs has increased downside pressure on corporate profitability, a distinct change from Q4 of 2008. Without sharp improvements in exports, i.e. volume, we view the risk to earnings is to the downside for the manufacturing sector.

■ With P/BV at the same multiple historically seen two years post the recovery, the risk reward is fading — Markets have discounted further than in any prior cycles. On its current trajectory the MXASJ will have recaptured the 2007 peak by Christmas of 2009, a fantastic wish but not one we’re sure we’ll get.

To see full report: ASIA EX STRATEGY