How to Select a Company for Investment - a guest post

The long correction since Mar '15 in the Indian stock market may have finally come to an end. The time for a pre-budget rally has arrived. If you were waiting to enter the market, don't wait any more.

But which stocks should you buy from the hundreds that trade every day? Buying a stock is not buying a piece of paper (or an entry in a demat account). You are buying a 'share' of a business.

In this month's guest post, Nishit explains how you should go about selecting different companies for investment. Promoter integrity is at the top of his selection criteria.

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The Indian economy is showing signs of green shoots and we are in the take off state right now.  People who I meet often ask me how to select a company for investment. There are many things which go into the selection of a company but the most important parameters for me are Corporate Governance, Ethics and Transparency.

I usually look at where the broad economy is going and from that I identify which sectors will do well. Once the sectors are identified, next is identifying companies within the sectors. Investing in a company with a crooked promoter in a good sector will still lose you money. An honest promoter is the most important yardstick while selecting a company.

Promoters can make mistakes which are acceptable; skimming off money from the shareholders is not. Satyam is a prime example of a blue chip company in a very exciting sector of IT going bad. Satyam not only jeopardized the jobs of its employees, eroded shareholder value, it also shook the confidence within the IT industry.

If I was a foreigner waiting to invest in India, I would constantly think which other Satyam was lurking in the wings in the Indian IT industry. Now if we were to compare this with a TCS or Infosys or even a Wipro, the promoter ethics are above board. Wipro might be slow to change but at least we know that the promoter is not skimming off money.

This is the very reason the Tata group of companies is my favorite while investing. With their long history and illustrious background, there is very little chance of fraud happening with the Tata companies. They may be slow to change, there could be some mishaps in decision making but that is acceptable.

If I am assured of promoter honesty then 50% of my worries are taken care of. Stock picking is an art. I normally make up my mind in 30 minutes whether or not to buy or not to buy a stock. If I cannot decide in 30 minutes it means there is something wrong somewhere.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

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Market Cycles and Sectors

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How to read an Annual Report

It is that time of the year when Annual Reports start hitting the mailboxes of investors. There are three things you can do with the Annual Reports you receive:

1. Toss it into the recycling pile with the old newspapers and beer bottles without even opening the envelope

2. Check the Profit & Loss statement and the dividend amount before tossing it into the recycling pile

3. Actually take the trouble of going through the Annual Report in detail to find out whether the company whose stocks you are holding is growing, stagnating or flying kites.

In the wild west days in the USA, there used to be a saying: The only good Indian is a dead Indian. Of course they didn’t mean people from India (though Columbus thought he had reached the East Indies – the islands of South East Asia - when he landed up on the shores of the Bahamas).

If you believe that the only good Annual Report is the one lying ‘dead’ in the recycling pile, then this post isn’t for you. If you think otherwise, please read on.

First, go to the Cash Flow Statement to find out if the company is generating enough cash from its business to finance part or most of its expenditure for growth. If you don’t know how to read a Cash Flow Statement, please read my posts of  Mar 22 2011, Mar 24 2011, Mar 29 2011 and Apr 5 2011.

Next, check out the Profit & Loss statement and the Balance Sheet. Of particular interest should be inventory and accounts receivable (if percentage increases are more than the sales percentage increase, they are warning signs); increase in equity capital and loans (not a good sign if these increase frequently); cash in hand/banks should tally with the figure in the Cash Flow Statement (so that a Satyam-like situation doesn’t recur).

Next comes the Directors’ Report and Management Discussion and Analysis. Read through these even though there will be hardly any negative feedback in them. They will give an idea about the industry and the company’s growth plans and (rosy) prospects.

Last, but not the least, are the Notes on Accounts. However boring these notes may seem – particularly to non-accountants like me – they contain a wealth of information that usually have adverse implications on profits. If a company suddenly announces a surprising turnaround or spectacular recovery in results, chance are that they have ‘cooked their books’ (a Punj Lloyd speciality). Look for changes in depreciation calculation and inventory valuation, which can significantly alter profits without an actual improvement in performance.

Also look at the court cases – usually with various tax authorities regarding disputed demands. Prudent managements will make at least part provisions against likely future liabilities. For companies that provide stock options to their employees, use the diluted EPS to calculate P/E ratios. For companies that have several subsidiaries – listed or otherwise – use the consolidated results for analysis.

There are many other things to look for in an Annual Report – but these are the broad areas for a first-cut analysis to ensure that business and growth are on track.

(Note: Thanks to reader Jalal for suggesting this topic.)

The LIC Housing Finance scam: bigger than Satyam?

The scale of the LIC Housing Finance scam is possibly bigger than the Satyam scam. The amount involved hasn’t been revealed yet. But the simultaneous raids in several cities by the CBI and arrest of senior officials of PSU banks and financial institutions point to a significantly larger operation.

A few months back, when the Sensex was consolidating in a sideways channel, a stockbroker friend had made a surprising comment: “Bull markets require a nice scam to shoot up to new highs.”

A reader commented: “The markets have NEVER peaked out on scams.” My counter argument was: “The Sensex hit recent bull market tops because of the excess liquidity created by the scams. The scams were detected much later - after the scamsters sold out and made huge profits.”

No doubt that FII inflows have provided the major fuel for the bull market rise. But what caused the sudden jump out of the year-long trading channel to an all-time high close above the 21000 level? Could it be that the ill-gotten loans were channeled into the stock market? Only a detailed investigation by SEBI may reveal that. I won’t be a bit surprised if the real estate sharks were dabbling in the stock market to quickly recover the bribes they paid to the PSU officials to get the loans.

As with all such scams in India, the big fish will probably get away and most of the money will vanish into thin air (or into Swiss bank vaults). And who will bear the brunt of the fall in stock prices? Small investors like us.

I could only sympathise with a reader who wrote the following email:

‘I had been investing in LIC housing finance for some time now and sitting on decent returns. And just when all looked rosy, here comes a housing scam involving it and as a result the share tanks 20% :(

No respite for us poor retailers. Wonder whether there is any sense in becoming a long term investor at all ... its like waiting for some scam to happen n wipe off your money!’

My advice? Sell tomorrow or switch to HDFC. Small investors are better off regularly investing in index funds or index ETFs, rather than in individual stocks.

Now a quick look at the one year bar chart pattern of LIC Housing Finance:

After touching an all-time high of 1496 on Sep 29 ‘10, the stock has been making a bearish pattern of lower tops and bottoms and had fallen below both its 20 day and 50 day EMAs. It bounced off the 100 day EMA yesterday, only to find resistance from the falling 50 day EMA.

As of yesterday (Nov 23 ‘10), the technical indicators were all bearish. The MACD was negative and below the signal line. The ROC was also negative and below its 10 day MA. The RSI was below the 50% level. The slow stochastic was in the oversold zone.

While the news of the scam caused a high volume drop below the 200 day EMA today, the stock was already on a down trend. Higher volumes on down days had given ample indications to investors to book profits. Was it insider selling? Only SEBI can answer that.

Buying and holding fundamentally strong stocks for the long term is an excellent investment idea, but one makes money only by selling. Partial profit booking near all-time highs can save some pain if sudden calamity hits.

Bottomline? Unforeseen situations do happen in the stock market. No one rings a bell to warn investors. Partially eliminate blows to your portfolio by following disciplined investment strategies: Partial profit booking is one; buying only the best is another (HDFC instead of LIC Housing Finance, or TCS instead of Satyam); basic knowledge of technical analysis often provides clues.

Is every drop in the Sensex a buying opportunity?

There is no easy answer to that question. A drop in the Sensex can happen due to several reasons. Some external event like a terror attack or war can cause a sudden fall. Stock markets recover from such shocks pretty quickly - so it provides a buying opportunity.

It could also be an external event of a more 'fundamental' nature. The recent economic downturn had its origins in the financial excesses of the western world. But its ripple effects - large scale withdrawal by FIIs - caused a major bear market in the Sensex that lasted more than a year.

Many investors who were facing a bear market for the first time made the error of jumping in during April/May 2008 - only to find that the Sensex fell steeply thereafter making a big dent in their savings.

Newsworthy internal events can also induce a sharp fall. Remember the Satyam scam hitting the front pages in Jan 2009? The Sensex had a sharp downward reaction in the middle of a bear market that lasted two months. Most news driven index falls last only 2 or 3 days, and can be bought into.

Internal events of a more fundamental nature - a deteriorating economy or a major stock market scam (a la Harshad Mehta or Ketan Parekh) can cause the Sensex to change its trend from bull to bear in a flash. Bear markets are not the time to buy - except when it is close to, or emerging from, a major bottom.

Being able to identify such reversal points constitute the "Holy Grail" of stock market investment success. Which means it is easier said than done. But it isn't impossible.

One of the thumb rules for the Sensex that I have observed is the widening distance between the 50 day and 200 day EMAs. A reversal or correction occurs when the gap stretches to about 2000 points. Please remember that this is not a rule, but an observation.

The 'correct' answer to the question is another question: Why does it matter? Small investors don't buy the Sensex. They may invest in an index fund or an index ETF. In which case, they should be following a SIP method and be oblivious to Sensex gyrations.

Even if a small investor decides to buy individual stocks, it is unlikely that a particular stock's bull or bear phase will coincide with that of the Sensex.

HUL had a long bull market from 2006 to 2009 - right through the Sensex bear market. It hit its peak in July '09, 6 months before the recent Sensex top, and has been correcting for 8 months.

The bear phase in Tata Motors preceded the Sensex by a good 20 months. The bear market bottoms in the stock and the Sensex were formed together. The subsequent bull rally by the Tata Motors stock hugely outperformed the Sensex.

Keep close track of the individual stocks in your portfolio. Otherwise, the noise and hype created by the media about Sensex movements may confuse you into making a poor investment decision.

Why stock market technical analysis chart patterns act like airport windsocks

One of the interesting aspects of writing a blog is that I get almost instant feedback from readers. It is a real joy when my posts on technical analysis of stock index chart patterns motivate some of you to get interested in the subject.

Carl Swenlin, a self-taught technical analyst, has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports.

Below his weekly technical analysis posts is the following comment:

'Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.'

(If you have never seen a windsock or don't know its purpose, here is a link that will enlighten you.)

One of the reasons that technical analysis of stock market chart patterns doesn't find favour among many well-known stock market gurus (like Warren Buffett, Peter Lynch and others) is probably because they don't need to use it.

They are like the 'jumbo jets' of the investment world that can take off and land in fair weather and foul, regardless of wind conditions. They have ready access to the upper echelons of the corporate world.

But what about us - the single-engine turboprops trying to fly with limited resources? Wind and weather conditions play an important role in our longevity. We have to use as many tools as are available to make our path to investment success a little less thorny.

Fundamental analysis alone may not help us to reach our goal of financial independence. Why? The Satyam scam has shown how managements out to commit fraud can hoodwink the best known auditors. Even if we are convinced about the management, we rarely have information about the actual operations inside any company.

The collective wisdom (or lack of it) of the market players tend to get reflected in the price charts. If we learn to identify similarities in price patterns from stock charts, it gives us an idea about which way the wind is blowing.

What these chart patterns can not reveal with a high degree of accuracy is which way the wind will be blowing three months or a year later. But, like a windsock, they can be very useful when we decide to land ('sell') or take off ('buy').

What exactly is the Margin of Safety?

The heading of Chapter 20 of Benjamin Graham's 'The Intelligent Investor' (4th edition) reads: "Margin of Safety" as the Central Concept of Investment.

What is the Margin of Safety as applicable to stock investments? It is the amount by which a stock's price is lower than the intrinsic, or underlying, value of the stock.

There are several methods by which one can arrive at the intrinsic value of a company's stock - and I plan to write a post about it in future. Suffice it to say that none of these methods can give an exact value. At best it will be a reasonably close approximation.

Here is a definition from the master:

'Over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid. The figure is sufficient to provide a very real margin of safety - which, under favorable conditions, will prevent or minimize a loss. If such a margin is present in each of a diversified list of twenty or more stocks, the probability of a favorable result under "fairly normal conditions" becomes very large.'

Some terms may require a bit more explanation. By 'bond interest', Graham means yield from strong corporate bonds. Since the bond market in India is underdeveloped, we will use Fixed Deposit(FD) interest in a public sector bank as an equivalent guideline. 'Stock earning power' is the same as earnings yield, which is the inverse of the P/E ratio.

Enough talk. Time for some concrete examples.

(a) Company XYZ has declared its results and has an EPS (i.e. earnings per share, calculated by dividing the net profit by the number of equity shares) of 10. The recent market rally has taken the stock's price to 150. That gives a P/E ratio of 15.

The earnings yield is E/P= 1/15= 6.7%. This is lower than the current FD interest rate of 8%. The Margin of Safety is a negative 1.3% (=6.7-8). What does it mean? The current yield from the stock is less than that from a risk free FD.

(b) Company PQR also has an EPS of 10. But its price hasn't moved up as much as XYZ, and is currently trading at 100. The P/E is 10 and the earnings yield= E/P= 10%. The Margin of Safety is 2%. That gives an excess of only 20% over the FD interest, which doesn't meet Graham's criterion of 50% excess over a 10 year period.

(c) Company ABC has a lower EPS of 9, and its price is also lower at 63. The P/E is 7; earnings yield= E/P= 14%; Margin of Safety is 6%. This meets Graham's criteria, because the excess of stock earning power over FD yield is 60% over 10 years. The greater risk of owning the stock is adequately covered by the margin of safety.

Does it mean that you rush out to buy Company ABC? Not yet. You still have to perform a detailed fundamental analysis using Graham's criteria mentioned in my earlier blog post about stock picking (link given below).

These examples have been simplified by excluding the effects of inflation and any tax incidence. But the 'Central Concept of Investment' is de-risking your portfolio by maintaining adequate margin of safety for each stock that you select.

Even by using the Margin of Safety method, you may pick a stock or two that go down. That is why Graham has mentioned owning about 20 stocks, so that in aggregate, the portfolio will gain over the long term.

Graham passed away in 1976. How relevant are these figures and methods in today's environment? Apparently, they work just as well, as John Reese has mentioned in his book, The Guru Investor.

Individual investors can tweak the figures to suit their investment style and risk tolerance. Remember that it is just as important to protect the downside of your portfolio while you try to build long term wealth through stock investments.

For those readers, who are beginning to get a little tired of my exhortations towards the slow but steady value investing concept of wealth building, I have some good news.

By keeping a higher margin of safety, even fundamentally weak stocks can be bought when they sink to abysmal depths during bear markets. Just look at the prices of Satyam, Suzlon, Unitech when they hit their recent bottoms, and compare with current prices. But that would be succumbing to the 'greater fool' theory!

Related posts

How to pick Stocks for Investment - Part III

How to build wealth using a buy and hold strategy

Now, learn portfolio strategies from a game of stud poker

One of the best ideas for managing your portfolio on an ongoing basis is to treat each stock (or fund) in your portfolio as a hand in a game of stud poker. Not my idea. Peter Lynch mentioned it in his book: "One Up on Wall Street".

Stud poker is a 'man's game', pitting strong-willed men with nerves of steel and expressionless faces against each other across a card table. The game has been immortalised in several Hollywood films.

Two of them - my favourites - come to mind. The old pro, Edward G. Robinson playing against the new kid on the block, Steve McQueen, in "The Cincinnati Kid". And a sophisticated Robert Shaw being taken for a ride by a bumbling Paul Newman in "The Sting".

The game - for the uninitiated - is simple enough. A card is dealt face-down, which can only be seen by the player to whom it was dealt. This is immediately followed by a second card dealt face-up to each player. All players get to see the face-up cards. A round of betting follows. Each bet is for a specific amount.

A player has the option to 'fold' (i.e. take no further part, if the cards he has been dealt are not to his liking); 'call' (i.e. stay in the game by betting an equal amount) or 'raise' (i.e. increase the bet by a pre-determined amount). Every time a player raises the bet, another round of betting follows.

The process is repeated three more times, as a card is dealt face-up to each player remaining in the game. After all five cards for each hand have been dealt (one face-down and four face-up) and the betting is concluded, the players remaining in the game show their hands to the others. The player with the best five card combination wins.

I'm not a gambling man, nor do I advocate a gambling mentality in the stock market. But the analogy - that each stock (or fund) in your portfolio is akin to a hand at stud poker - seems very apt.

The face-down card is like some knowledge or information you may have about the company that may not be known to the general public. Each face-up card is some bit of financial news or company-specific information that becomes available in the market.

As each 'card' is dealt, you need to take some action as an investor. If it is pretty bad news - like the Satyam fraud, or Punj Lloyd's overseas subsidiary delaying a project and incurring a huge penalty - you should fold (i.e. sell) that particular hand.

If it is so-so or good information - like Larsen and Toubro bagging a new order, or Tata Investment declaring a marginal profit and matching last year's dividend - you may hold your stock (or fund).

If it is better news - like 3i Infotech declaring increased profits when most IT companies were struggling in the down turn - raise the bet (i.e. buy some more).

You'll need the mental and physical discipline of tracking each bit of information about each of the stocks (or funds) in your portfolio, analysing the consequences and filing it properly at a place from where it can be retrieved easily.

It is not rocket science, but it has to be followed diligently on a regular basis - at least once a week. That means not only tracking company results and announcements, but also the forex rates and macro-economic and political news to understand the implications and likely effects on your portfolio.

Many intelligent individuals never succeed in their market investments. A probable cause can be the lack of time and/or discipline in following a regular process of updating information about their portfolio holdings.

Life becomes a lot easier if you manage to limit your holdings to 10-12 stocks or 5-6 mutual funds. Keeping track of fewer companies improves your chances of being able to move quickly as the situation demands.

Weekly tracking of a smaller number of companies (or funds) means you will tend to remember the important bits of information necessary for taking buy-sell-hold decisions.

Why you need to learn about the Stochastic Oscillator

I have been planning to write about the Stochastic oscillator for quite some time. Reader Nikesh deserves special thanks for reminding me about it every once in a while.

In an article last July, identifying stock market trends using exponential moving averages (EMAs) and their crossovers was explained. A problem that one often faces with EMAs is that before they can confirm a change of trend, price levels often rise (or fall) by a significant amount.

I discovered that the Stochastic oscillator worked very well with EMAs to give early buy/sell indications and was very useful for timing entry into (or exit from) individual stocks. There are other indicators that can be used as well. But the stochastic oscillator provides clear and simple visual guidance.

Let us take a look at the 6 months bar chart pattern of Balrampur Chini, a sugar stock which I discussed last Wednesday, to find out the utility of the Stochastic oscillator:-

 

(Please right-click on the image; open it in a new tab or window for a better view.)

The Stochastic oscillator compares the closing price level of a stock (or index) with its price range over a given time period - say 10 days. It comprises two lines - the main '%K' line (in blue) and the '%D' line (in red); the '%D' line is a moving average of the '%K' and acts as a 'signal' line. When the '%K' moves above the '%D', it is considered bullish; when it moves below, it is bearish.

Both the lines 'oscillate' (i.e. alternatively go up and down) between values of 0% and 100%. The zone between 0-20% is considered 'oversold'; the zone between 80-100% is overbought.

(The actual calculations of '%K' and '%D' are slightly complicated, and I don't want to confuse any maths-shy readers unnecessarily. One can use the oscillator without understanding the underlying maths - much like driving a car without any idea of the function of the carburettor. Those who are maths-happy, and love to know the gory details, can email me.)

In Nov '08, Balrampur's stock price was well below the 20 day EMA, which in turn was below the 50 day EMA. The 50 day EMA was significantly below the 200 day EMA and all three EMAs were moving down. The bear grip on the stock was strong.

Look what happened in early Dec '08. The stock had a 'reversal day' (i.e. a lower low at Rs 30 and a higher close) and spurted up on small volumes. The '%K' (blue) line first moved above the '%D' (red) line, and then both lines moved up above the 'oversold' zone. That was a 'buy' signal, much before the stock moved above its 20 day EMA to confirm a 'buy'.

When the stock moved above its 50 day EMA in end-Dec '08, the stochastic oscillator was already in the 'overbought' zone. Before the big market correction came due to the Satyam scam news in Jan '09 (that caused all stocks, including Balrampur, to fall) the stochastic oscillator made an early downward break from the 'overbought' zone.

In Feb '09, the Balrampur stock was making new highs and getting resisted by the 200 day EMA. The stochastic oscillator had a lower high, indicating a negative divergence and a 'sell' signal. A 30% correction followed.

In Mar '09, the stock was consolidating sideways when the stochastic oscillator gave an early 'buy' signal by moving up from the 'oversold' zone. The stock price nearly doubled within a month.

In May '09, the stock made a new high above Rs 80 but the stochastic oscillator made a lower high - again a negative divergence and a 'sell' signal. A price correction should follow.

In the example above the 'slow' stochastic oscillator - that uses a 3 day average of the %K - has been used. I find it more useful than the 'fast' stochastic which tends to fluctuate more, giving false signals.

For timing entry/exit there are few technical indicators that can provide such 'leading' (i.e. early) indications. But I must reiterate that technical indicators work best when several of them are used together to determine trends.

In future posts, I plan to write about two other useful technical indicators - the MACD and the RSI.

Stock Market News, Financial News - Mar 27, 2009

Heavy borrowing could pressure rates - officials

By Rajesh Kumar Singh and Manoj Kumar

NEW DELHI (Reuters) - India could overshoot its annual borrowing target in the 2009/10 fiscal year if more fiscal stimulus is rolled out to revive a slowing economy, and this will put pressure on interest rates, senior officials said on Friday.

Policy advisers also said the economy will fare significantly worse in 2009 than in the previous year, and more doses of fiscal and monetary policy may be needed to boost demand and lift growth.  (More ...)

Will Satyam be an albatross around Larsen's neck?

By Sumeet Chatterjee

BANGALORE (Reuters) - Larsen & Toubro is seen as the front-runner to acquire fraud-tainted outsourcer Satyam Computer Services Ltd but a potential purchase could bring more pain than gain.

Not only will the acquisition be a tricky one due to uncertainty about Satyam's accounts and potential legal liabilities from U.S. lawsuits but also it would distract Larsen from its main engineering and construction business.  (More ...)

Reliance signs gas deal with fertiliser firms

NEW DELHI (Reuters) - Reliance Industries on Friday signed deals with 12 fertiliser firms to sell about 15 million standard cubic metres a day (mmscmd) of gas from its block off the country's east coast. Supplies will start from mid-April, Reliance said. 

The firms will pay Reliance a marketing margin of 13.5 cents per million British thermal units (mmBTU) for the gas, said Satish Chander, Director General of Fertiliser Association of India. The margin is in addition to the government-set price of $4.2 per mmBTU for the gas.       (More ...)

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ADVFN World Daily Markets Bulletin (excerpts)

US Market

Stocks Moving Lower As Traders Cash In On Recent Gains

Stocks are showing notable weakness during mid-morning trading on Friday, as investors take profits from the recent rally and digest some mixed economic news. With the decline, the Nasdaq has once again slipped below the unchanged line for the year-to-date period.

On the economic front, the Commerce Department released its report on personal income and spending in the month of February. While the report showed an increase in spending that came in line with estimates, income fell by a little more than expected.

The report showed that personal spending rose 0.2 percent in February following an upwardly revised 1.0 percent increase in January. The modest increase in spending came in line with the expectations of economists.

At the same time, the Commerce Department said that personal income edged down 0.2 in February after a downwardly revised 0.2 percent increase in the previous month. Economists had been expecting a slightly more modest 0.1 percent decrease.

The final reading of the Reuters University of Michigan's consumer sentiment index for March was also released earlier, showing a revised reading of 57.3. Economists had expected the consumer sentiment index to be lifted to 56.8 from the mid-month reading of 56.6.

In other news, President Barack Obama is meeting today with the CEOs of JP Morgan, Citigroup, Goldman Sachs and other banks, as well as executives from industry associations, to discuss the economy and the administration's proposals to increase regulation of the financial system.

Additionally, President Obama will soon unveil the results of a federal examination of the restructuring plans from General Motors and Chrysler, a condition for the auto-makers to rece ive more government capital.

White House Press Secretary Robert Gibbs said the details would be announced before the President departs for the G20 Summit in London on Tuesday.

"The President, as part of viability plans from both GM and Chrysler, is required by the 31st to give an update on those plans and where our government sees them, and we'll be doing that also in the next few days," Gibbs said.

The major averages pulled back to new lows for the session in recent trading, but they have regained some ground since then. The Dow currently remains down 128.39 at 7,796.17, the Nasdaq is down 29.14 at 1,557.86 and the S&P 500 is down 13.55 at 819.31.

European Shares

Europe's top stocks have swung into the red in choppy trade on Friday, led lower by a weak energy sector. U.K.'s FTSE 100 Index is showing a loss of 0.9 percent, while the French CAC 40 Index and the German DAX Index are falling 2 percent and 2.1 percent, respectively.

Asia Markets

The Japanese stock market took a pause for breath Friday bringing to an end nine successive days of rises for the Topix index.
Nevertheless, the Nikkei 225 index reached its highest point since 9 January during the session before easing back to 8,626, down 9 points. Hong Kong's Hang Seng Index ended the day up 0.1 percent.

Commodities

Oil and gold rise after gloomy GDP data
The worst US GDP data for 26 years sent investors scurrying for the safety of gold, pushing the April futures contract up to $940, up $4.20 on the day.

US GDP fell by an annual rate of 6.3% in the final quarter of last year, worse than the initial read of 6.2% but better than consensus forecasts from economists of a 6.6% fall.

Meanwhile, the appeal of gold as a safe asset was further enhanced by news that the total number of US unemployed rose to a record 5.56m, although the dollar’s strength limited the extent of gold’s gains.

The oil price was also on the rise, with the April contract rising above $54 a barrel, reversing Wednesday’s losses when the Energy Information Administration revealed that crude inventories rose by 3.3m barrels last week.

Forex
Dollar dominant
US GDP data that was not as bad as feared prompted support for the greenback Thursday. Though US GDP fell by an annual rate of 6.3% in the final quarter of last year, worse than the initial read of 6.2%, it was still better than consensus forecasts from economists of a 6.6% fall.

Sentiment towards the dollar was also boosted by the relative success of the US Treasury’s auction of seven-year notes. The Treasury sold $24bn of notes at a yield of 2.384%.

The euro was out of favour after data from the European Central Bank (ECB) showed a slowdown in the growth of private sector lending. The aggregate value of loans was 4.2% higher in February than a year earlier, compared with a 5% year-on-year g ain in January. The figures are likely to add pressure to the ECB to cut interest rates some more this year, which will diminish the appeal of the euro.

Sterling also fell back in New York trading despite a good response to the sale of index-linked gilts due to mature in 2022, which was oversubscribed. The auction result came as a relief after the flop the previous day of the auction of 40-year gilts.

The pound fell back by almost a cent, to $1.4444 in New York, having earlier made headway in London trading, where it reached $1.4562. However, even in London the currency finished below its best levels of the day after UK retail sales data revealed a far bigger than expected 1.9% drop in sales from the previous month.

Stock Market News, Financial News - Mar 25, 2009

Oil nears $54 on Geithner comments

By Chris Baldwin

LONDON (Reuters) - Oil retraced early losses on Wednesday, rising to around $54 a barrel after the U.S. Treasury Secretary said he was "quite open" to recent Chinese suggestions on moving to a new global reserve currency.

Oil appeared little moved by data from the Energy Information Administration that showed U.S. weekly crude stocks rose last week to their highest since 1993.  (More ...)

Satyam value in peril over toxic liabilities

Hindustan Times

The government's silence on the provision of any amnesty or protection scheme to prospective buyers fraud-hit Satyam Computer Services is set to bring down the valuation of the IT firm significantly, say experts involved in the deal.

The issue will be raised by the shortlisted bidders in the course of the due diligence process. Bidders, who are not satisfied with the financial and legal data provided to them on the IT firm, could even back out at the final stage.  (More ...)

Dabur's Burman plans 200-strong eatery chain

Hindustan Times

From Ayurvedic medicines and consumer goods to fast food. Dabur's vice-chairman Amit Burman is now on an entrepreneurial drive to set up a chain of quick-service food outlets.

"We are going to invest Rs 200 crore towards 200 "Lite Bite" food joints to be set up soon all across India," Burman told reporters on the sidelines of the Food Forum of India industry seminar last week.  (More ...)

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ADVFN World Daily Markets Bulletin (excerpts)

US Stocks at a Glance

Major Averages Move Off Their Highs But Remain Firmly Positive

Stocks have shown a strong upward move over the course of morning trading on Wednesday, with the major averages offsetting the losses posted in the previous session. The rebound comes as traders react to some much better than expected economic data.

Earlier in the day, the Commerce Department released a report revealing that durable goods orders unexpectedly showed a substantial increase in the month of February after falling in each of the six previous months.

The report showed that durable goods orders jumped 3.4 percent in February after falling by a revised 7.3 percent in January. Economists had been expecting durable goods orders to fall by 2.5 percent compared to the 4.5 percent decrease that had been reported for the previous month.

The Commerce Department also released a separate report showing an unexpected in increase in new home sales in the month of February, continuing a recent string of better than expected housing market reports.

The report showed that new home sales rose 4.7 percent to an annual rate of 337,000 in February from an upwardly revised January rate of 322,000. The results surprised economists, who had been expecting sales to fall to 300,000 from the 309,000 originally reported for the previous month.

In recent trading, the major markets have moved well off their best levels of the day, although they are holding onto strong gains. The Dow is currently up 148.46 at 7,808.43, the Nasdaq is up 26.03 at 1,542.55 and the S&P 500 is up 15.07 at 821.32.

Canadian Market

Toronto Stocks Move Moderately Higher In Morning Trading

Toronto stocks have turned higher in Wednesday morning trading, recovering some of the losses seen yesterday. Gold-related stocks were among the big gainers as the precious metal rebounded on the Comex.

The S&P/TSX Composite Index has added 79.27 points or 0.89% to move at 8,928.66. A higher close would be the 10th in 12 sessions.

European Shares

FTSE struggles as miners fall
Market Movers
FTSE 100 3,866.48 -1.15%
techMARK 1,123.30 -0.37%
FTSE 250 6,319.36 -1.31%

For the second day in a row a bright start has been undermined by the mining sector.

Platinum is the problem today with Anglo American and Lonmin the worst performers, though Rio Tinto is also lower even though the Australian Competition & Consumer Commission opted not to block the increase of Chinalco’s stake to 18%.

Broker Evolution Securities observed that the controversial deal still has more difficult obstacles to overcome and suggests that the recent rally in the Rio share price presents a ‘strong selling opportunity’.

Asia Markets

Asian markets end mixed as investors take profits

The markets across the Asia-Pacific region ended mixed on Wednesday, as investors preferred profit taking following an extended relief rally. The markets, having shrugged off the early weakness following a weak closing by Wall Street stocks, could not maintain the momentum and the euphoria over a revival in global economic conditions seems to be losing steam for want of evidence that could instill confidence. Global demand continues to be weak as is evident from a report released earlier in the day by the Japanese government, which showed that exports plummeted by a record 49.9% year-over- year while imports fell 43.0% year-over-year to 3.443 trillion yen.

Commodities

Crude Oil Drops Ahead Of EIA Report

Oil prices dropped for a second straight day on Wednesday as traders looked ahead to the Energy Information Administration's weekly inventory report. The drop took crude further off its recently seen multi-month high.

Crude oil prices fell to $52.60, down $1.38 for the session. Prices touched as low as $52.08 in the early going.

Stock Market News, Financial News - Mar 16, 2009

Bharti to recast business in April '09

NEW DELHI (Reuters) - Bharti Airtel Ltd, India's top mobile operator, will restructure its businesses next month as it looks to expand beyond voice telephony, the Economic Times reported on Monday.

The newspaper said Bharti would expand its three divisions to nine to focus on mobile commerce, Internet, enterprise business and small and medium business.  (More ...)

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iGate says Satyam bid below current market price

MUMBAI (Reuters) - U.S.-based iGate Corp's bid for fraud-hit Satyam Computer Services will be well short of the current market price, its chief executive told a television channel on Monday.

"I mean what we have picked up in terms of the financial, I do believe our bid will be quite a bit south of the 90 cents a share, which is currently the market price of Satyam," Phaneesh Murthy said on CNBC-TV18.  (More ...)

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Rupee off 2-week high as importers buy dollars

MUMBAI (Reuters) - The rupee retreated after climbing to its strongest in more than two weeks early on Monday, as importers bought the U.S. dollar but gains in regional currencies and local shares should support.

At 10:20 a.m., the partially convertible rupee was at 51.60/62 per dollar, after touching 51.33, its highest since Feb. 27. It had closed at 51.48/50 on Friday.  (More ...)

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US recovery to begin in 2010: Bernanke

Federal Reserve Chairman Ben Bernanke suggested in a taped interview on Sunday that the US recession could last most of the year and said the biggest risk was that the political will needed to fix the fractured financial system could be lacking.

"This (economic) decline will begin to moderate and we'll begin to see a leveling off," Bernanke said when pressed during an interview on the CBS program "60 Minutes" about whether he sees the recession ending this year.  (More ...)

About Stock Market News and Insider Trading - the Bharti case

In a blog post on Feb 1, '09, some guidelines about how to disseminate stock market news and financial news into 'good', 'great', 'bad' and 'worse' categories were provided. I had also given suggestions about how to form buy or sell strategies using such categorisation.

One of the notable stock market news items last week (on Thursday, Feb 12, '09) was the announcement that Manoj Kohli, CEO and Joint MD of Bharti Airtel had disposed off his entire stock holding in the company, comprising some 123,000 shares worth more than Rs 7 Crores.

53,000 shares were sold on Mar 6, '09 and 70,000 shares were sold on Mar 9, '09. By stock market standards, these are not huge numbers. Kohli's holdings represented less than 0.01% of Bharti Airtel's equity capital, and he isn't a founder-promoter of the company.

But the stock market took the news badly and the stock tanked by more than 6% on Thursday when the Sensex rose by more than 2%. The stock remained under pressure even on Friday and gained only 1.5% whereas the Sensex gained nearly 5%.

There were rumours of the CEO's imminent exit from Bharti, which Kohli denied. He also claimed that he held 180,000 stock options, some of which had already vested. But the near simultaneous announcement of the promotion of Sanjay Kapoor, from President - Mobile Services to a newly created post of Deputy CEO, only strengthened the rumour-mongers.

Chairman Sunil Mittal later wrote to the company's institutional investors clarifying that Kohli was very much an integral part of the Bharti top management; had taken Mittal's permission to sell his holdings; that ESOPs were meant to enrich employees; and top level reshuffles are routine affairs at Bharti.

Some analysts also pointed out that the reason for the stock's fall had less to do with Kohli's resignation and was more due to the announcement by TRAI about reduction in termination charges that telecom providers pay each other for local calls to 20 paisa (from 30 paisa earlier).

With a user base of 90 million plus, Bharti's top line may get affected by about 4% and EPS by 1% if they do not reduce their tariffs proportionately. If Bharti reduces tariffs proportionately, top line may go down by 8% and EPS by 11% (as per estimates of Macquarie Securities).

So what should investors and potential investors do? To answer that question, we must first analyse the issues in 'insider trading'.

Insider trading means buying or selling of a company's shares or debentures or bonds by individuals who may have privileged information about the company before such information is made public. In many countries, including India, it is perfectly legal for company insiders like executives and directors to buy or sell  company securities as long as it isn't done based on non-public information.

How can investors find out if any insider trading is above board or not?  A simple thumb rule is to look at the quantum of sale. (We will only discuss about insider selling. Insider buying is usually a positive, particularly in a bear market, because it demonstrates faith in the future of the company.)

National Stock Exchange records reveal that Bharti Airtel director Akhil Gupta has sold more than 90,000 shares over the past three months. Company Secretary Vijaya Sampat sold 16000 shares in Dec '08. But such information didn't affect Bharti's stock price in a major way.

Why so? Because 16000 shares is considered 'normal' profit booking. What about 90,000 shares - which is not much less than Kohli's 123,000? This is where it gets interesting.

After selling 90,000 shares, Akhil Gupta's balance holding is nearly 11 lakh shares! That means he sold less than 10% of his holdings. Whereas, after selling 123,000 shares, Kohli's remaining balance holding is zero (well, 180,000 of mostly unvested stock options).

There was also a rumour that Kohli wants to move out of Gurgaon and buy property in New Delhi. In which case, he could have sold a smaller amount that would have been enough for a down payment.

Inspite of Kohli's and Mittal's denials, there seems to be more here than meets the eye. So is this bad news or worse news? Only time will reveal that.

Bear markets have this ability of inducing reticence among promoters who are otherwise ready to blab away about their company's brilliant outlook. Bad news gets revealed in dribs and drabs.

My hunch is that there may be worse news to follow. Kohli may have done what Satyam top executives did in Dec '08. Bail out before the really bad news hits the market. I don't expect that Bharti Airtel is involved in any Satyam-like fraud. But isn't it better to be safe than sorry?

My advice to potential investors is to wait for the Bharti Airtel stock to get derated. Alternatively, if every thing turns out hunky-dory, enter when the market shows signs of turning around.

Existing investors can hold on with a stop loss at 480. If 480 doesn't hold, Bharti can go to 420.

Stock Market News, Financial News - Mar 9, 2009

L&T says to go ahead with bid for Satyam

MUMBAI (Reuters) - Larsen & Toubro Ltd will go ahead with a bid for beleagured software firm Satyam Computer Services Ltd, a Larsen spokesman said on Monday.

"We expect to go ahead with the bid," spokesman D. Morada told Reuters.  "The bid price has no relation to the market price," he said, when asked about the basis for valuation of the bid.  (More ...)

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GLOBAL MARKETS - Asia stocks spooked by U.S. woes, dollar dips

By Eric Burroughs

HONG KONG (Reuters) - Asian stocks dipped on Monday on worries about the fate of U.S. automakers and banks, while the dollar retreated as market players booked profits on the rise to a three-year peak last week.

Markets sent mixed signals at the start of the week, with the safe-haven dollar and government bonds losing ground even as financial shares dragged down most stock indexes. Oil prices jumped for a second day on hopes for more OPEC supply cuts. (More ...)

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Global economy will shrink in 2009: WB

Financial Express

The World Bank said that the global economy will shrink this year for the first time since World War II and that the global financial crisis will make it tougher for poor and developing nations to access needed financing.

Trade is forecast to fall to its lowest point in 80 years in 2009, as economic hardship ripples across the globe, the bank said. The most drastic trade slowdowns are expected in East Asia, where growth had been robust, the bank said in a paper prepared for a meeting of finance ministers and central bank officials next week. (More ...)

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DoT asks BSNL, MTNL to stop 3G services

Financial Express

Acting upon the directions of the Intelligence Bureau (IB) the department of telecommunications (DoT) has asked the two state-owned telecom service providers, BSNL and MTNL to stop providing 3G services till call monitoring services are made available to the intelligence agencies.

The 3G services provide for high speed data and video streaming and are distinct from the plain voice-based 2G services.  (More ...)

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'India-China mutual investment to boost economy'

Indian Express Finance

Facing a slide in economic growth due to the global financial crisis, China has favoured an increased two-way investment with India to check the impact of the downturn.

Chinese ambassador Zhang Yan said the two economic powers should "go hand in hand" and enhance bilateral cooperation in economic field to send out a positive message and help the world economy also to a great extent. Seeking mutual investment in key sectors like infrastructure, Yan said both India and China have huge foreign exchange reserves which need to be utilised properly.  (More ...)

Stock Market News, Financial News - Mar 2, 2009

India manufacturing shrinks for fourth month in Feb

MUMBAI (Reuters) - Indian manufacturing activity shrank for a fourth straight month in February as the global downturn hurt demand and soured business sentiment, a survey showed on Monday.

The ABN AMRO Bank purchasing managers' index (PMI), based on a survey of 500 companies, rose to a seasonally adjusted 47.0 in February from January's 46.7.

A reading above 50 signals economic expansion while a figure below 50 suggests contraction. Manufacturing makes up about 16 percent of India's gross domestic product.  (More ... ) 

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ICAI hunts for skeletons in boards where independent directors quit

By JAYANT SINGH, Indian Express Finance

The sudden spate of independent directors quitting the boards of several listed companies following the Satyam Computer scam has sent warning signals buzzing at the Institute of Chartered Accountants of India (ICAI). Sensing a possibility of numerous skeletons in the closet, the apex regulatory body for accounting and auditing professionals has started dispatching letters to those companies where such directors have quit over the past one-and-a-half months, notifying them that the Institute will soon initiate investigation into their balance sheets.

"There has to be something wrong if so many independent directors quit suddenly after the Satyam issue came to light. It's for the best that we pre-empt the problem before another such case comes up," ICAI president Uttam Prakash Agarwal told The Indian Express. (More...)

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Drug Hits

Financial Express

The buzz emerging from the research laboratories of Indian pharmaceutical companies is hard to miss. Glenmark Pharmaceuticals is expected to launch its new molecule called Crofelemer for its anti-diarrhoea drug by 2010. Crofelemer, that was in-licensed by Glenmark in July 2006, was originally developed by the US-based Napo Pharmaceuticals. Currently, it is going through Phase III trials in the US.

Ranbaxy Laboratories achieved a significant landmark recently in its collaborative research programme with GlaxoSmithKline (GSK). It has commenced Phase I human clinical trials on the lead compound for treatment of respiratory inflammation. Ranbaxy could receive over $100 million in potential milestone payments for a product developed by it and subsequently launched by GSK in multiple indications and up to double digit royalties on worldwide net sales.

"Several research programmes are being pursued within the Ranbaxy-GSK alliance against anti-infective, respiratory and oncology indications," says Ramesh Adige, president, Ranbaxy Laboratories. Ranbaxy and Merck are also working together for discovery of antibiotics and antifungal drugs.  (More ... )

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Rupee extends drop on outflow concerns

MUMBAI (Reuters) - The rupee extended its drop to hit a record low of 52 against the dollar on Monday on heightened concerns of rising foreign funds outflows while arbitrage play between the onshore and offshore markets hurt.

At 9:51 a.m., the partially convertible rupee was at 51.76/79 per dollar. It had closed at 51.10/12 on Friday.

The rupee traded at 52 per dollar according to Reuters data, which dealers said was a miss hit and the deal could be reversed with the counter-party later in the day. They said the low was around 51.8 per dollar.

Stock Market News, Financial News - Feb 20, 2009

Nikkei touches Oct trough amid economy worries

TOKYO (Reuters) - Japan's Nikkei stock average was down 1.8 percent on Friday, after briefly touching its October bear market low, dented by bank shares on worries about their European peers, while exporters largely failed to benefit from a weak yen.

Jittery investors also pushed the broader Topix index to 741.42, a level that would mark its lowest close in 25 years.  (More ... )

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Rupee edges lower, strike affects volume

MUMBAI (Reuters) - The rupee dropped on Friday, weighed down by losses in the share market and a stronger dollar overseas, but volume was thin following a one-day strike by central bank employees.

At 10:20 a.m., the partially convertible rupee was at 49.87/88 per dollar, 0.5 percent weaker than Thursday's close of 49.62/63.

"The forex market is open but there is very thin trade, the strike has affected volumes," said a senior dealer with a private bank.

(More ... )

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L&T says studying Satyam decision

MUMBAI (Reuters) - Larsen & Toubro, the largest shareholder in Satyam Computer Services, said it will review a decision to allow the fraud-hit outsourcer to increase shares on issue and sell a stake before making its next move.

"We are studying details of the Company Law Board order. Only after studying the details, we will take a decision," Chairman A. M. Naik told reporters on Friday.

L&T, India's leading engineering and construction firm, has a 12 percent stake in Satyam.  (More ... )

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IFCI for rejig of entire Maytas board, open to bigger role

By Financial Express Bureau

Development Financial Institution IFCI Ltd is favouring reconstitution of the existing board of Maytas Infrastructure as it lost the trust of one and all and cannot perform the duties with due importance and in a more transparent manner. While welcoming the Centre's move to refer the case to CLB, IFCI said that the company was 'overlooked' despite having 17.4% stake in Maytas Infra, said Atul Kumar Rai, chairman and managing director, IFCI.  (More ...)

Stock Market News, Financial News - Feb 18, 2009

Satyam buyer may emerge soon; govt moves on Maytas

By Manoj Kumar and Rajesh Kumar Singh

NEW DELHI (Reuters) - A buyer for fraud-hit Satyam Computer Services may emerge by the end of February, a board member said, while the government sought the removal of boards of two companies linked to Satyam's founder.

Satyam's government-appointed board will meet on Saturday to discuss client and staff issues, board member and veteran banker Deepak Parekh said in New Delhi.

Asked by reporters whether he saw any buyer coming forward for Satyam, he said: "Yes. By the end of this month."  (More ....)

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Instanex Skindia slips 7.5% on downturn

By Pradip Kumar Dey, Indian Express Finance

The Instanex Skindia DR Index bore the impact of the global economic downturn. During the first one and a half months of the calendar year 2009, the depository index slipped 99.01 points, or 7.5%.

The index was at 1,212.30 on February 16, down from 1,311.31 points on January 1, 2009. A sharp decrease in the price of depositary receipts (ADR/ GDR) pushed the index down.

Meanwhile, during the same period, the Sensex declined 598.01 points, or 6.01%. It was at 9,903.46 on January 1, and fell to 9,305.45 points on February 16, 2009.

Out of 15 companies that constitute the Instanex Skindia DR Index, 11 are listed on the Sensex. Among them, only five rose during the study period.  (More ...)

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Nikkei down 1.4 pct as recession worry deepens

TOKYO (Reuters) - Japan's Nikkei stock average slipped 1.4 percent on Wednesday, with Mizuho Financial Group falling amid growing worries that the U.S. recession is deepening and fears about European banks.

The Dow Jones index and S&P 500 each fell to their lowest levels since Nov. 20 on Tuesday, despite U.S. President Barack Obama signing into law a $787 billion stimulus package, as weak manufacturing data showed the recession is deepening.

The benchmark Nikkei shed 105.41 points to 7,540.10, while the broader Topix lost 1.2 percent to 747.75.

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Retail dream hits big bumps

Hindustan Times

Last August, global consulting firm McKinsey, in a tantalizingly titled report called, "The Great Indian Bazaar," said that by 2015, India's retail market would be worth $450 billion, roughly the current size of the Italian market.

Other consultants have different, but somewhat comparable numbers. A who's who of corporate names has jumped into the retail market pool: Reliance Industries Ltd , Bharti, Aditya Birla group, Future Group, Rahejas, Goenkas, Wadhwa group as well as smaller outfits such as Subhiksha and Vishal Retail.

Tesco and Wal-mart have forged ties with Tata and Bharti respectively, for their cash and carry business in India while Metro has also been active in India through its cash and carry outlets at multiple locations.

Big talk veered around the barriers to foreign direct investment (FDI) in the retail sector, with vehement opposition from those who feared this would lead to local shopkeepers going out of business. But suddenly, everything is in a phase of consolidation.

Subhiksha, which grew to over 1,000 outlets, is now in the middle of news over payment problems to employees. Debt-ridden retailers are struggling to meet capital needs for working capital purposes. The economic slowdown has hit both the demand outlook.

The economic slowdown, cues of which started appearing in October 2008, however took a toll on small fries such as Subhiksha and Vishal. Being debt ridden worsened their state as they struggled to get adequate working capital. Even big names like the Rahejas, the RPG Group and Reliance are busy tightening their belts, calling off partnerships or shutting down stores.

How to use Financial News

Corporate financial news is flowing thick and fast in the midst of Q3 '09 results season. Business channels and financial news media are busy reporting investment frauds, earnings downgrades, revised stock price targets, lower personal loan rates and mutual fund redemptions.

What should a small investor do with this information overload? How does one separate the wheat from the chaff? Which bit of financial news is important and can be used to one's benefit? What news can be discarded?

The answers lie in categorising each bit of news into one of four types - good, great, bad and worse.

Good news and bad news tend to have short term impact on market sentiment. Any effect on index levels and stock prices is typically limited to two or three days at most.

Great news and worse news have longer lasting impact on index levels, and more particularly on stock or fund prices.

So how does one categorise financial news? Here are some examples that may enable small investors to take informed buy/sell/hold decisions.

Good news is when a company meets earnings expectations and maintains dividend during down turns, or exceeds expectations and increases dividends when the market is more conducive. News of receiving a large new order from an existing or new client is also good.

What is great news? It is news about some fundamental change in strategy or management that will have long-lasting favourable impact on corporate performance. L&T divesting its slow-moving cement business to Grasim a few years back was great news. A family owned business muddling along - like Zandu Pharma - joining hands with a more aggressive Emami is great news.

Bad news is a company missing earnings expectations and lowering dividend. Suzlon losing an export order because of technical problems in its rotor blades is bad news. A successful fund manager like Mihir Vora leaving HSBC Asset Management is also bad news.

Worse news is when a respected head of a successful company declares that he has been siphoning off funds for the past several years to satisfy his personal ambitions. (Lessons you can learn from the Satyam fraud were discussed in this post.)

Any short term up swing due to good news can be used to sell the stock; short term down swings due to bad news may provide an entry point.

It is slightly more difficult, and requires experience, to benefit from great news and worse news. The initial market reaction to either type of news is similar to good news or bad news. But a second, and more longer term, re-rating of the stock happens some time later after the market digests the news fully.

If you are able to recognise great news from good news, hold off the selling and buy into the dip that follows. If you recognise worse news from bad news, wait for the initial sell off to end and buy for short term profits, or sell into the next rise.

Many investors bought Satyam when it moved below Rs 100, only to see the price go down to Rs 10. A few bravehearts bought at Rs 20 and exited at Rs 50 for a tidy short term gain.

For long term investors, trading on good or bad news may not make much sense. But being able to recognise between good and great news (or bad and worse news) may considerably increase your ability to time entry and exit points.

A rectangular Sensex chart pattern

In a prior post on July 13, 2008 I had discussed about identifying stock market trends using moving averages. It is time to take a re-look at the current market trend.

After the prolonged bull market that started in May 2003 at about 2900 and took the Sensex all the way up to 21200 in Jan 2008, a  bear market reversal pulled the Sensex down to 7700 in Oct 2008.

We had a clear up trend for close to 5 years - interspersed with several bull market reactions, followed by a sharp down trend for 10 months - with a few bear market rallies.

After the Oct 2008 low of 7700, a swift rally took the Sensex to 10950. Thereafter, the Sensex seems to be meandering sideways with apparently no clearly visible up or down trend.

Let us take a look at the Sensex chart of the past 3 months.

The 200 day EMA is still moving down. The 50 day EMA and the Sensex are well below the 200 day EMA. So we are still firmly in a bear market.

But the Sensex is bouncing along sideways within a rectangular band between 7700 and 10950. Volume of transactions - given in the lower chart - are low. What does this indicate?

A rectangular chart pattern is a period of consolidation before the market makes up its mind where it wants to go. Such indecision amongst bulls and bears typically happens after a sharp move up or down.

A market consolidation - represented by a sideways rectangular chart pattern - can be of three types: accumulation, distribution or continuation.

At market tops the 'smart money', i.e. institutional and high net worth investors, sell. The 'weaker hands', i.e. retail investors and funds, buy. Shares are 'distributed' from stronger to weaker players.

At market bottoms, the opposite happens. The stronger hands 'accumulate' the shares from the weaker investors, who get tired of waiting for the market to move up.

In the middle of a clear up (or down) trend, a consolidation period is called a 'continuation', as the market pauses for breath before continuing the up ward (or down ward) journey.

Since we are not at a market top, this is not a distribution pattern. Is it then a period of accumulation at a market bottom or continuation for a further fall? There lies the conundrum.

The short answer is: we don't know. When and how will we know? Only when the market makes up its mind and decides to either move above 10950 or break below 7700.

Fundamentally, the macro economic situation is showing improvement. Inflation, as indicated by the WPI (Wholesale Price Index) is moving down. Oil prices have fallen drastically in the international market. Interest rates are also coming down.

We are now in the midst of the results season with companies declaring their Q3 or Q4 results for the period Sep to Dec 2008. Consensus amongst the experts is that most companies will declare awful results.

But the market is already expecting (i.e. 'discounting') that and unless there are more Satyam-like skeletons, it is unlikely that there will be a big fall below 7700.

On the day the Satyam scam broke, the volumes were very high and the market dropped 750 points but remained well within the rectangular pattern. The following two trading days also saw high volumes but much smaller falls. These are positives.

So, the scales look slightly tipped towards this pattern being an accumulation rather than a continuation. Why slightly? Because on some of the recent up days, the volume of transactions has been less than on down days. This goes against conventional wisdom of higher volume on up days and lower volume on down days.

If you are a patient investor, wait out this consolidation period. Such patterns can continue for a very long time - months, may be even years.

If you are itching for some action, start putting in small amounts of money in Nifty BeES or any good index fund. I would not rely on stock-picking skills at such a time.

Lessons from the Satyam scam

What started out as an aborted acquisition deal among family members has turned out to be the worst scam in the history of corporate India.

It is no wonder that Buffett said: 'You only find out who is swimming naked when the tide goes out.' Economic and stock market downturns have a habit of revealing the naked swimmers.

Yes, the plural is intended. Satyam is unlikely to be the only one. Many companies which have been declaring bumper profits quarter on quarter during the bull run have probably been 'cooking' their accounts as well.

I would be particularly sceptical about the infrastructure and realty companies - specially those with negative operational cash flows. As the bear phase meanders along, be prepared for more skeletons tumbling out of different cupboards.

Here are a few lessons that not only need to be learned, but internalised as well, so that we can benefit from similar occurences in future.

1. "There is never just one cockroach in the kitchen". This stock market adage has been proven once again by Satyam. Management trickery is never a one-off deal. Satyam had been involved in several questionable deals over the years. The latest scam is the culmination of past transgressions. Once corporate integrity is in doubt, avoid that particular stock.

(In this blog post I had mentioned that Jagran Prakashan was my favourite among the newspaper stocks. I removed it from my 'buy' list when I found out that they had recently appointed several sons/nephews of the promoter group to top positions on fat salaries.)

2. Just because a stock looks cheap (because it has fallen a lot from its recent high) doesn't mean it can't get any cheaper. Satyam has dropped from above 400 to 180 to 40 and now 20. Quite a few small investors got excited and bought the stock when it dropped to 100 and then 40. That's throwing good money after bad.

3. Markets usually 'discount' good news and bad news in advance but have little clue about what Nassim Nicholas Taleb calls 'black swan events'. These are unexpected events that seem to happen out of the blue. But more so during distressed times. 9/11 was one such event - soon after the dot.com bust.

A good way to take advantage of such situations is to strictly follow an asset allocation discipline (discussed in this blog post).

4. As a small investor, stick to industry leaders. If you are interested in FMCG, don't look beyond HUL, ITC. If you like metals, TISCO, Hindalco should suffice. In financials, choose HDFC, SBI. Alternatively, invest in index funds. There is no point in chasing the no. 4 (like Satyam) or the no.20 in the hope of making a killing.

Why rely on Reliance?

The proposed Satyam-Maytas take over deal had recently brought the issue of corporate governance to the forefront. Shareholder resistance eventually aborted the deal. Otherwise a huge amount of cash from Satyam's coffer would have been transferred to the two debt-ridden Maytas companies, headed by the sons of Satyam Chairman Ramalinga Raju.

But Raju is a minor leaguer compared to the biggest flouter of all corporate governance norms - the Ambanis.  Many may think that I am a heretic, trying to run down the group that practically invented equity consciousness among Indian investors by selling company shares to the public at large.

Don't get me wrong. I have the greatest admiration for the late Dhirubhai - for his grand vision, foresight and sheer chutzpah that has made Reliance Industries the largest Indian private sector company by market capitalisation.

What a way to do it though! I won't get into how Dhirubhai learned the ropes of the synthetic yarn and petrochemicals businesses during his sojourn in Aden, and turned a textile trading business into the huge conglomerate that the Reliance group has become.

Neither do I want to discuss the veracity of the way he bent all the rules in the book by getting licences and clearances from various ministries through bribery and coercion that benefited the Reliance group at the cost of competitors.

But I still vividly remember the twin share issues of Reliance Polyethylene and Reliance Polypropylene back in the early 1990s. Huge snaking lines stretching for several hundred metres formed in front of banks accepting the IPO applications.

The prospectus had mentioned that neither company had acquired even the land for the projects, let alone any plant and machinery. Needless to say, a few years later both companies 'disappeared', sorry, merged with the parent group. Probably after all the tax breaks that could possibly be claimed had been claimed. To read more about how Companies Act rules were bent, read page 9 of this link.

Then there was the famous UTI deal. After alloting to themselves debentures convertible to shares at around Rs 150 per share - in a highly irregular deal - the Ambanis allotted the same debentures to UTI at convertible price of Rs 400 per share.

This deal caused huge controversy and eventually led to the ouster of UTI's chairman Mr Pherwani and the collapse of the first and most popular mutual fund of India, the US 64 scheme, that caused large losses to small investors. More details are available here and in this Sucheta Dalal column.

Worst of all is the case of Reliance Petroleum. Shares were first issued in 1993 with a promise of project completion within 36 months. The project was completed in 36 months - but in 1999. Absolutely nothing was done between 1993 and 1996 - other than enjoy the shareholders' cash! Two years later, RPL was merged with RIL after promising that the two companies will remain separate. Read why here.

Fast forward to 2006. There was another Reliance Petroleum share issue! How SEBI permitted this is beyond me. Read what the Hindu Business Line wrote about it here.

Now that the RPL Part II saga is coming to an end, is everything hunky-dory again for RIL? Isn't the current price attractive for entering this counter?

Far from it. Read this article in DNA Money. The next financial year, i.e. 2009-10 will be much worse for RIL. So, if I were you, I would stay away from any investment in RIL.

Personally, I stay away from any stock which has the word 'Reliance' in it. The Ambanis are just not trustworthy enough - not for my money any way.