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News and views (28 Aug 2007)

U.S. housing data isn’t encouraging
The US markets are down on bad housing data. With house sales reducing every month (y-o-y) for the last five months, things look ominously bad. How does it affect us? Well, no home sales means defaults in loans. Loans are given by banks, packaged as mortgage based securities, and in turn sold to hedge funds. Hedge funds have fingers in every pie, including India. They may sell their profitable positions like India to make up for the housing losses.

This situation isn’t improving anytime soon, even if the Fed cuts rates. There is simply too much silly lending that has happened to let it not affect us.

Dollar moves
The dollar’s up to 41. Time to buy exporters? Not quite. In the face of the falling dollar, hedges were shored up to one quarters revenues in July, and as you might realise, the quarter still has a month to go. We’ll have to see if the rupee slide is for real or temporary, but the going up indicates that FIIs are moving out (or at least, aren’t coming in with gusto). But would you buy Infy and IGate? Not unless you read:

IGate and Infy hurt by subprime

So Infy and IGate fell prey to the subprime situation by losing a customer – Greenpoint. Not a very big deal for Infy, but could be for IGate. The P/Es of these companies are still 25 or so – fully valued for the near term if the dollar stays at this level.

The dollar upmove has another implication:

Forex gains of ECB holders to reverse
Tata Steel, Bharti Airtel, Reliance Communications etc. showed large forex gains (500 cr. types) in their Q1 results. With a fall in the rupee, the gains will reverse to a certain extent – and perhaps make their results less attractive in comparison. Airtel, without its forex gains, would have made just a 33% gain in profit over last year – high, but not as much as the 100% it did show. Again, for a company with a P/E of 40, even 33% growth isn’t all that much.

There are other factors that may affect the market very soon: At the end of this month, hedge fund data will show us what kind of redemption pressure is around in the US. While all of this may sound bad, here’s a few positive notes:

On a bullish front, US S&P 500 Puts are being bought by the dozen – a move that is bound to cause the market to rise because when a lot of people bet on the market falling, it usually rises.

In India, judging from just the sentiment on the TV channels, there seems to be an extremely high rate of caution. When people are cautious, the market rarely falls very much – as has been proved in the last month. Perhaps it’s time to figure out what to buy; some candidates are in the small and mid cap spaces which have been battered much more than the top guys.

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