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By Rama Krishna Vadlamudi, MUMBAI October 19th, 2009

The world’s financial markets are on a sweet pot, except the value of US dollar,
which has been on the back foot for quite some time now. Though the earnings
from the US have, so far, been a mixed bag, for the third quarter; investors have
been quite sanguine about the direction of stock markets the world over. As a
result, all the major stock indices, including the Dow, FTSE 100, India’s Sensex,
DAX, Nikkei 225 and Hang Seng have all been pushing to their one-year high
levels. This piece of article analyses the various issues involved here and the
outlook for world markets in a brief and lucid manner.

THIRD QUARTER PROFITS ARE A MIXED BAG

Sept 2009 Quarterly profits in USD million

3,600
4000 3,200
2,500
3000
1,900
1,640
2000
US D m illion

1000 101

-1000 Bank of Citigroup Goldman Sachs JP Morgan General Electric Google Intel

-2000 America

-3000 (2,200)
As depicted above, the important first results of American companies are a mixed
bag. While Bank of America has made a net loss of USD 2.2 billion for the third
quarter of this year, Citigroup made a modest profit of USD 100 million. On the
contrary, Goldman Sachs, JP Morgan and Google have surprised the markets
with their better-than-expected earnings and net income for the third quarter.
Tech kingpins, Intel and IBM have surpassed Wall Street’s estimates. As a result,
the Dow has reacted extremely positively to the earnings/net income and the
Dow has tested 10,000 and it reached its yearly high of 10,100 on Monday close.

One common thread that runs through these results is this: Banks have shown
resurgent profits, not due to any increase in their core businesses, but as a result
of strong showing in their investment desks, led by rallies in the commodities and
stock prices the world over. Banks that relied more on consumer finance have
suffered with severe write offs being effected by them as shown below:
Bank of America:
It reported a loss of USD 2.2 billion for the quarter. The loss is after dividends are
paid to preference shareholders. It set aside USD 11.7 billion for credit losses
during this quarter and made losses in credit cards, mortgages and insurance
biz; while the global markets division, which includes ex-Merrill Lynch business,
made good profits.
Citigroup:
It is much more exposed to consumer loans and naturally it could show a profit of
only USD 100 million. It has written off USD 8 billion of credit losses in third
quarter.
Goldman Sachs: Investment Banking is the biggest contributor to profits.
JP Morgan: Strong performance in investment banking division.
General Electric:
Net profit fell by 44% y-o-y while revenues were down 20%. The conglomerate is
seen as a barometer of the US economy and is the only co to have continued in
the Dow Jones for more than a century. It's a microcosm of the S&P 500 INDEX.
Google:
Profits are up 27% y-o-y. Google has no competition as of now. The internet ad
industry is beginning to show signs of strength and Google is the biggest
beneficiary of that.
Intel: Profit is down 5% year on year.

Apple: Latest media reports suggest that Apple has made good profits at USD
1.7 billion, nibbling away at market share of giants, like, Microsoft and Nokia with
its Mac computers and smarter iPhones. Moreover, Steve Jobs is back at Apple.

Rama Krishna Vadlamudi, BKC, MUMBAI October 19th, 2009 Page 2 of 8


THE DOW BALLOONED ABOVE 10,000

Powered by some good corporate results as shown above, for the first time in a
year, the Dow (DJIA 30) has pushed above 10,000 last week and has closed a
tad below 10,100 Monday.

The Dow has ballooned above


10,000 last week for the first time in
a year and is now quoting around
10,100 on Monday close. It is
astounding to note that the Dow
has touched 10,000 for the first
time in its history more than 10
years back in March 1999-which
means the Dow has not shown any
progress in the last 10 years, which
is quite a revelation to many
investors. Its life-time high was
around 14,100 achieved on October
9th, 2007. Its lowest this year was
around 6,450 on March 9th - which
means from its nadir of March
2009, the Dow gained more than 55
per cent.

This week is going to be an important week for the US markets as more than
130 companies, which are part of the broader S&P 500 index, will report
results during this week, which include 13 Dow components. The standouts
are: American Express, 3M, Microsoft, Merck, Pfizer, Coca-Cola, Yahoo,
Wells Fargo, Amazon.com and eBay.

ASIAN & EUROPEAN MARKETS TOO ARE ON A ROLL

Stocks across the globe, right from Australia, Asia Pacific, South Asia to Europe
have been on a roll on Monday with optimism abounding about the so-called
‘Road to Recovery’ in world’s financial markets. The Hang Seng is hovering
around 22,200; Sensex at more than 17,300 (Mumbai had a trade holiday on
Monday); the FTSE 100 at close to 5,300; France’s CAC at 3,900 and Germany’s
DAX at around 5,850. The world is awash with liquidity and the stock markets are
currently reflecting that optimism. Japan’s Nikkei 225 is also on a roll due to good
earnings from exporters, such as, Honda Motors, Mitsubishi UFJ Financials and
other banks.

Rama Krishna Vadlamudi, BKC, MUMBAI October 19th, 2009 Page 3 of 8


COMMODITIES ARE AT ONE-YEAR HIGHS and
THE US DOLLAR IS ON THE BACK FOOT

Led by the stock market surge in the US and other countries, crude oil has
jumped from a level of USD 65 a barrel a few weeks back to nearly USD 80 on
Nymex on Monday. The optimism about the prospect of a strong economic
recovery across the globe has helped boost sentiments in the oil market. The oil
price is also at one-year highs. A weak dollar also has helped the rise in prices of
commodities to some extent. Even Gold prices are more than USD 1,050 an
ounce.

The US Dollar Index (USDX), which is an average of the value of US dollar


against six major currencies, like, Euro, Pound Sterling and Japanese Yen is also
weak at around 75.26 with its continuous fall from levels of 80 in June 2009.

Even stock market volatility, represented by CBOE Vix, is also showing signs of
some stability with the CBOE Vix at 21.50 (during the height of the global
financial crisis, the CBOE Vix touched all-time high of around 80 in November
2008). CBOE Vix is a key measure of the market expectations of near-term
volatility conveyed by stock option prices in the S&P 500.

EURO-US DOLLAR ONE YEAR CHART:

GBP-USD ONE YEAR CHART:

Rama Krishna Vadlamudi, BKC, MUMBAI October 19th, 2009 Page 4 of 8


COPPER PRICES FROM NOV. 08 TILL OCT.09 (USD per m tonne):

WEST TEXAS INTL. CRUDE OIL PRICES (USD per barrel):

GOLD PRICES ONE-YEAR CHART (USD per ounce)

GOLD

Rama Krishna Vadlamudi, BKC, MUMBAI October 19th, 2009 Page 5 of 8


THE ECONOMIC INDICATORS ARE MIXED

Unemployment rate in the US is nearly at 10 per cent. The unemployment rate in


the UK is close to 8 per cent, though it has remained stable at that point since
May this year. However, consumer spending in the US is up at this point of time.
It is hoped that this trend will continue for some time. With the Christmas Season
round the corner, the strong growth in consumer spending may continue till the
end of this year. Global trade is severely down in the last two years or so which
had a devastating impact on export-oriented countries, like, China, Japan, South
Korea and others. The capacity utilization across industries and sectors is said to
be quite low at this point of time, which gives an indication that the optimism
about a V-shaped recovery needs to be tempered a little bit.

THE RUPEE BREACHED 46, BUT SETTLED ABOVE 46

Indian Rupee has strengthened a lot against the US dollar in the last 10 days
with the rupee gaining more than 150 paise from a level of 48 to 46.25. The
rupee appreciation is led by strong inflows from Foreign Institutional Investors
(FIIs) which have pumped in more than USD 13 billion this year alone in to Indian
stock markets with the benchmark-Sensex rising by more than 100 per cent in
the last six months to the present level of 17,300. And the fact that India has
been showing a GDP growth of six to seven per cent amidst a wall of worries for
the developed world, like, the US and other big European countries.

OUTLOOK and SUMMARY


The world markets led by the Dow have been showing tremendous signs of
optimism underpinning investors’ exuberance about the economic recovery
though there are still some signs of weakness, especially, weak world trade and
high unemployment rates in the US, the UK and some European countries. The
same ebullience is shown in the commodities prices also. With the oil hovering
near USD-80 mark a barrel on the Nymex, the surging commodity prices may
have some dampening impact on certain industries, which are heavy users of
commodities, like the auto industry and others.

Of course, much depends on the earnings picture of the corporates around the
world with more 130 companies in the S&P 500 index dishing out their quarterly
results this week. Investors will be reacting wildly to the forthcoming
announcements – as we have seen on Friday, when US markets reacted
negatively to the high loss of Bank of America at USD 2.2 billion for the
September quarter. The same wild reaction may continue to happen this week
depending on the progress of the corporate announcements.

Rama Krishna Vadlamudi, BKC, MUMBAI October 19th, 2009 Page 6 of 8


Investors are also glued in to the actions of Central Bankers, which may take out
their easy money policy (or the so-called quantitative easing), in the next few
quarters. Some expect that the Central Bankers will continue with their benign
interest policies till late 2010 or early 2011. Of course, much will depend on the
GDP growth figures and other leading economic indicators in the world. As of
now, everything seems to be sunny and funny! And investors across the globe
have been enjoying this sunshine for the past six months. The sunshine will
definitely continue for some time till the Dow gains another 10 per cent or so and
attains a level of 11,500 or so. We shall revisit all the leading economic indicators
if and when the Dow breached that important mark again on the upside. Till then,
let us enjoy the shining movement.

What may, however, spook the markets may be some nasty announcement from
policy makers about taking out the excess liquidity in the system earlier than
anticipated or a resurgence of inflationary pressures led by surging commodity
prices. Australia raised its interest rates a week back, becoming the first G-20
country to do so in more than a year. Though the announcement was not wholly
unexpected, given the rising inflationary pressures in that country, markets are
beasts when it comes to the breaking of the consensus view. Markets usually do
not like their consensus view getting ruptured so easily.

With this all-round buoyancy, the swagger is back not only on the Wall Street, but
also on Dalal Street of what the author would like to call as Bombay, the
happening city. As a pointer to the expected things, JUST CONSIDER THIS!

And now with all-round optimism and surging investment-banking


dominated profits, nobody is complaining about huge bonuses being
dished out by Goldman Sachs and other banks which want to share
their booty with employees who have taken excess risks and made
some huge gains for their banks. May be, that’s how the world works!
Profits are private and losses are public, as the old adage goes!

Outlook for India:

With the global markets in a sweet spot, the Sensex is in a bullish mood, with the
Sensex level of 17,300 on Moorat trading day. There is still an upside for Sensex, which
may reach a target of around 19,000 by the end of this calendar year. Of course, we
need to watch the stance of RBI Governor toward the monetary policy when he presents
a half-year review of the Annual Policy at the end of this month. The consensus view is
that RBI may continue with its accommodative policy for some more time till the end of
this financial year. Amidst a sea of mediocrity as far as GDP growth is concerned, India
has attracted the investors around the world with a robust growth of six to seven per cent
this year. The surging rupee may impact different companies differently, depending on

Rama Krishna Vadlamudi, BKC, MUMBAI October 19th, 2009 Page 7 of 8


their hedges and the net foreign exchange inflow/outflow for each company. While
export-oriented companies’ earnings may be impacted adversely; the import-heavy
industries, like, oil & capital goods may have some positive impact on their profitability.
This is not to suggest that Tier-I Information Technology companies, like, Infosys, TCS
and Wipro will be impacted very much by the rupee’s strength. These companies enjoy
profit margins of between 30 to 35% and they are with deep pockets and as such they
may weather the rising rupee much better than companies with low margins, like, the
textiles, gems & jewellery, garments and leathers which suffer from low margins due to
heavy competition from other Asian countries, like, Bangladesh, Vietnam, Indonesia, etc.

One big concern for India could be the prospect of rising inflationary pressures and the
concomitant surge in interest rates amidst supply of huge paper from the Government
Securities market (huge government borrowing, which has already borrowed more than
Rs 3 lakh crore from the bond market this financial year alone) and in the form of
Qualified Institutional Placement (QIP) by several companies in the secondary capital
market. However, one soothing factor for the markets could be less than expected
growth (a meager five to six per cent at that) in credit off-take in India, which have given
some sort of a boost to bond markets in India in the last three to four weeks.

Chart and data courtesy: Financial news websites, newspapers and Google

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