Ashu Dutt’s 'THE BOOM & BUST JOURNAL' - July 2009 Edition from www.ashudutt.com

You can access all Research Reports on Equities, Commodities, Currencies, Real Estate at http://www.ashudutt.com/

Ashu Dutt’s 'THE BOOM & BUST JOURNAL' - July 2009 Edition from www.ashudutt.com

July, 2009

VOLUME XXVII

Published this 1st day of July, 2009

Price: US$ 10

CONTENTS

The “Call”

The Big Picture

Technicals

Smoke Signals

The Good, The Bad, The Ugly

Investment Themes

Directional Spotting

Random Moorings

THE CALL

What are the odds for an upside of 20% in 12 months? I’d say about 50%. What are the odds for an upside of 30% in 12 months? I’d say, that’s a tall order. Say about 5%. Now what are the odds, we may see a 20% drop in the next 3 months. High. Very high infact. Perhaps 70%. That does’nt add up, does it? Well it just may. You see, Indian markets lack the diversity of investor thought processes (and I don’t mean they lack investors) that is so critical to correctly price markets. In that sense, the “skew” in the markets is in the extremes. The whole market either tilts to optimism or to pessimism. And at the moment, it has gone into a sense of extreme optimism. Nothing wrong with that. Only issue is do you want to be in stocks where the stocks are running ahead of the businesses they represent or in stocks that are running behind the businesses they represent. From an investment perspective, it absolutely makes sense to be on stocks that may be running behind the prospects of the business they represent. From that angle, we may not have the kind of upside that would excite me. Such markets also expose themselves to severe downsides on relatively flimsy news (and the current situation seems to fit this scenario).

There are also signs of “bubble” like behaviour specially in power. While the prospects for power are undeniably good, the kind of capital being raised draws parallels to investor behaviour at the time of the dot com boom or previous booms in India like the construction of steel plants etc. The end result will be much the same. Easy capital, riff raff issues (for the most part) and large losses on IPO investments. That’s not a good thing at all. In the next 2-3 years, it is not just China but the US which will be competing for capital for infrastructure. If India takes investors for a ride now, capital will be very very difficult to come across. I don’t have much factual data to say otherwise. Most foreign investors who got in through GDRs, FCCBs etc have eventually ended up making nothing (check out the deep discounts on FCCBs etc). Only there is no shortage of the next lot of investors ready to be made suckers out of.

THE BIG PICTURE

India is severely undervalued and Indian stocks are overvalued. You see the India that is emerging will be filled with “innovation” companies in technology and pharmaceuticals. Those who innovate and come up with “destructive technologies”. Yet, India’s stock markets are filled with archaic relics of the past that should be valued like relics. There is no reason why power companies, oil & gas companies should be valued at even half of their current valuation. And that’s precisely where they will head. As we go forward, global companies will crowd to India (as their own markets offer little growth prospects), taking a lot of Indian companies to deliver mediocre returns.

TECHNICALS

The probabilities I am looking at right now are as follows:

- Short Term Trend (7-30 days) – Bullish. The Odds are

o +10% gain: 60%

o +5 % gain: 20%

o -5% loss: 20%

- Intermediate Trend (30-90 days) – Bullish

o +15% gain: 40%

o +10% gain: 40%

o +5% loss: 20%

- Long Term Trend (90 days +) – Bearish

o -20% loss: 30%

o -15%loss: 50%

o -10% loss: 20%

Trying a short in the immediate term may be downright dangerous. As I add up the put and call writing data, it seems highly unlikely the markets will keep below 4000. Closing out the shorts makes sense. I know it is counter intuitive to all the views you hear but then that’s the way I see it.

The likely scenario is a rise to 4400-4500 levels (and that could happen within the next 90 days) and then a 15-20% fall. So a “counter intuitive” strategy may make sense i.e going against the current thinking and staying long now (even perhaps be in a buying mode) and then closing out and perhaps even a short should we see 4500s (ofcourse, we need to look at the momentum as we reach that point but I can’t see any chance of a level beyond 4600).

Past supports and resistances are meaningless. Both were driven by “one time” events. The massive November/December 2008 fall by a global credit squeeze and the highs of June by a Congress victory. None represent where we are settling.

Looking at the momentum (and yes there is momentum because the markets seem to stay down only for short stints and rise at the slightest excuse), I would expect sharp spikes in the markets. Infact very sharp spikes should a significant short build up. This is a very likely scenario given that most chartists and other “influential” voices have dug themselves into a “short” position.

For a more detailed Technical Analysis, please see Ashu Dutt’s “THE CHARTIST’S ALMANAC”- July Edition

THE GOOD, BAD AND THE UGLY

THE GOOD

There is almost no chance of going back to 3100 type of levels. Markets at that point were facing a “credit seizure” situation with almost no clarity of how things were going to pan out. That is not the case anymore.

THE BAD

There are number of important variable we need to keep our eye on. One, I believe we are still in a wobbly economy. That may mean the markets have run ahead very fast in anticipation.

Many results look good because input costs are down and the benefits of a falling rupee (people were hedged thinking the rupee was heading to 40 to a dollar). Those benefits are gone while demand has not picked up that strongly.

THE UGLY

We are almost always making investment/trading decisions on incomplete information. That should not happen in times where we can look at a million opinions before deciding. It is not helpful to “swing” with the mood. Easier said but difficult to follow in an era of 24 hour news flow.

Moreover, business media has to look at volumes, size etc before bringing up stocks. By default that means that stocks will only appear on the radar when they have had their run. Buying stocks in this manner is a sure shot way to “mediocritize” returns.

INVESTMENT THEMES

US Infrastructure spending will be the world’s biggest infrastructure story in the next 3-5 years. Most US Infrastructure is now over 40 years old and in some ways archaic. That would mean a massive pull of capital away from world markets. And could also mean a high interest rate regime as competition for global capital becomes severe (primarily led by the US, India and China).

DIRECTION SPOTTING

In terms of returns, I would say real estate stocks, infrastructure stocks and hotel stocks should give some of the best returns in the next 1-2 years. Most of these stocks have reached levels which reflects little of their underlying asset value

I expect the markets to head back to around 16,000-18,000 levels (Sensex) in the next 2-3 months. Real estate stocks could get revalued double quick as they raise money from local and foreign markets include AIM/Singapore REITs. Real estate and infrastructure companies are cash starved. If markets don’t pickup, they will go back to where they came from. If they pick up, they will rise the fastest.

Hotels seems to be trading way below their net asset value. I find Hotel stocks in India enticing. With just 5 million tourists (compared to 15-17 million in countries like Thailand & Malaysia), Hotels may be India’s next big investment story.

It may make sense to invest in small caps (great value must be here)…because if they don’t have volume, no media will pick them up. Since media will pick up stocks with already strong volumes, chances that great values exist with small stocks is substantial.

RANDOM MOORINGS

The IT Boom as we know it may be over. I find absolutely no long term return value in Infosys, TCS, Wipro. While this may be an early call, these guys are vestiges of an era before the net. A structural downgrade is in order. With Google going in for “server” based OS and “cloud computing” a reality, I don’t see how these guys are going to move forward. As the amount of work on the top/head decreases, they may not be in a position to take on “long tail” work (small odd jobs but many of them). New companies will rise to take their place but these companies don’t deserve the valuations they have. I am not enthused by this sector.

Ashu Dutt’s 'THE CHARTIST’S ALMANAC' - July 2009 Edition from www.ashudutt.com

You can access all Research Reports on Equities, Commodities, Currencies, Real Estate at http://www.ashudutt.com/

Ashu Dutt’s THE CHARTIST’S ALMANAC

Edition: XXVII

Published this 10 th day of July, 2009

Price: US$200 for 24 Editions

BOTTOMLINE (updated)

- Short Term Trend (7-30 days) – Bullish. The Odds are

o +10% gain: 60%

o +5 % gain: 20%

o -5% loss: 20%

- Intermediate Trend (30-90 days) – Bullish

o +15% gain: 40%

o +10% gain: 40%

o +5% loss: 20%

- Long Term Trend (90 days +) – Bearish

o -20% loss: 30%

o -15%loss: 50%

o -10% loss: 20%

STRATEGY

- Trying a short in the immediate term may be downright dangerous. As I add up the put and call writing data, it seems highly unlikely the markets will keep below 4000. Closing out the shorts makes sense. I know it is counter intuitive to all the views you hear but then that’s the way I see it

- The likely scenario is a rise to 4400-4500 levels (and that could happen within the next 90 days) and then a 15-20% fall. So a “counter intuitive” strategy may make sense i.e going against the current thinking and staying long now (even perhaps be in a buying mode) and then closing out and perhaps even a short should we see 4500s (ofcourse, we need to look at the momentum as we reach that point but I can’t see any chance of a level beyond 4600)

KEY DRIVERS

- Past supports and resistances are meaningless. Both were driven by “one time” events. The massive November/December 2008 fall by a global credit squeeze and the highs of June by a Congress victory. None represent where we are settling

- Looking at the momentum (and yes there is momentum because the markets seem to stay down only for short stints and rise at the slightest excuse), I would expect sharp spikes in the markets. Infact very sharp spikes should a significant short build up. This is a very likely scenario given that most chartists and other “influential” voices have dug themselves into a “short” position

COMMENTARY – NIFTY & SENSEX

- The charts cannot be looked at without Options data. I would watch for Put and call writing data. When call writers are writing calls at 4,000 (which is what they are doing), its every likely traders will get trapped

- The put writers are writing puts at 3600 and 3700. That’s an amazingly conservative put writing strategy. And they would move up to put writing at 4,000 double quick if we see the slightest uptick. And call writers may move to 4400 – 4500 levels

- So what we really have are those who believe the markets will fall further (and thus give others the option to buy at 4,000) playing too close to current levels and those who believe the markets will stabilize at a certain level playing too far away from current levels. Signs that the market is overly pessimistic (always a sure shot sign for strong market spikes)

- I expect the markets to settle at around 4200 levels (i.e. support). I don’t agree with most analysts that we may go right back to 3600 (some even talk about 3100)

- Past levels of 3600 reflected a “credit seizure” environment with no real clarity at that time on which way things were headed

- The underlying strength in the market seems enough to drive it to around 4400-4500 levels

- Liquidity has eased considerably. Credit availability is not even a critical point. In this changed environment it is ridiculous to believe we will go anywhere close to 3100

COMMENTARY – MIDCAP

- If we see an upward trend, Midcaps may well deliver the best possible returns. Infact as high as 10-15% in a 30 day scenario

- There is not much of downside risk though (except if volumes were to disappear)

COMMENTARY – SMALL CAP

- Largely “riff raff” variety of stocks. Always a very risky group of stocks. In most cases, its not a market risk but a stupid risk to take. Difficult at best to look at any chart patterns

ABOUT Ashu Dutt’s “THE CHARTIST’S ALMANAC”

After years of wondering why the markets were doing something different than what logic or rationale would dictate, it became clear to me that markets will make their own calls and since humans trade in them, we will remain creatures of habit and of our behaviours.

In the long run, the markets must make peace with economics or the real economy. They don’t need to do this in the short term or the intermediate term. And in the short term and the intermediate term markets will do all kinds of things that can only be explained by behaviour and behaviour being repetitive gets well reflected on charts. Thats why charts may give decent indicators of where markets are headed.

Ofcourse, what you have to live with is the analyst’s bias. Different analysts can read the same charts and make different interpretations of what it means. I do the same. What I do try to avoid is getting stuck in esoteric technical analysis theories and stick to reading the parameters that I have found best fit my analysis.

Ashu Dutt’s 'THE COMMODITY BOOM & BUST' - July 2009 Edition from www.ashudutt.com

You can access all Research Reports on Equities, Commodities, Currencies, Real Estate at http://www.ashudutt.com/

Ashu Dutt’s THE COMMODITY BOOM & BUST

Edition: XXVIII

Published this 15th day of July, 2009

Price: US$100 for 12 Editions

CRUDE

- Short Term Trend (30-90 days) – Bullish. The Odds are

o +10% gain: 50%

o +5 gain: 40%

o -2% loss: 10%

- Intermediate Trend (90-365 days) – Bullish

o +20% gain: 60%

o +15 % gain: 30%

o +10% gain: 10%

- Long Term Trend (365 days +) – Bullish

o +30% gain: 50%

o +25%gain: 40%

o +20% gain: 10%

STRATEGY

- Crude futures on the MCX may be your trading option (unless you have access to global trading in which case, NYMEX is perhaps a better option

KEY DRIVERS

- Crude prices should head to US$ 65-67 levels in the immediate term

- In a 12 month scenario, there is every likelihood for crude oil to head to US$80

- Most pointers indicate that we will see a big spike in oil prices. Increasing interest rates, speculative interest in oil etc

ALUMINIUM

- Short Term Trend (30-90 days) – Neutral. The Odds are

o +5% gain: 30%

o +2%gain: 40%

o – 5% loss: 30%

- Intermediate Trend (90-365 days) – Bullish

o +10% gain: 40%

o +5% gain: 50%

o +2% gain: 10%

- Long Term Trend (365 days +) – Bullish

o +20% gain: 50%

o +15% gain: 30%

o +10% gain: 20%

STRATEGY

- While the fundamentals in the immediate term don’t back this up, the technicals for aluminium remain strong

- A speculative buildup is very likely if economic demand looks like it is picking up

- A good indicator of where aluminium may go may be where the equity markets head. I know it sounds irrational but lately commodity prices have had more to do with the market’s gyrations as opposed to their own underlying fundamentals

KEY DRIVERS

- Aluminium stocks are currently at record levels above 4.5 million tonnes

- There has been a significant increase in supply over demand

- China represents over 40 percent of global demand for aluminium and stockpiling has kept prices from sliding further.

- The shutdown in aluminium production has also helped to stabilize prices. However China is the wild card.

- LME inventories of aluminium are rising and are around 10 weeks' consumption.

- Aluminium consumption over the first quarter was down 16.9% year on year at 7.924m tonnes

- European demand for aluminium is down by over 30%. German demand (the largest consumer of aluminium), demand is down by 45%

Ashu Dutt’s 'THE FOREIGN EXCHANGE REVIEW' - July 2009 Edition from www.ashudutt.com

You can access all Research Reports on Equities, Commodities, Currencies, Real Estate at http://www.ashudutt.com/

Ashu Dutt’s THE FOREIGN EXCHANGE REVIEW

Decision Tool for Forex Traders

Edition: XXVIII

July, 2009

Price: US$500 for 12 Editions

BOTTOMLINE

- Short Term Trend (7-30 days) – Bearish. The Odds are

o -2% loss: 50%

o -1 %loss: 30%

o +1 % gain: 20%

- Intermediate Trend (30-90 days) – Bearish

o -3% loss: 50%

o -2% loss: 40%

o – 1% loss 10%

- Long Term Trend (90 days +) – Bearish

o -4% loss: 20%

o -3%loss: 40%

o -2% loss: 40%

STRATEGY

- The rupee may head to Rs 49 – Rs 49.50 levels in the short term

- A level of around Rs 50-Rs 51 is likely in the intermediate term

- The long term trend remains bearish with a likely depreciation to around Rs 52

KEY DRIVERS

- I expect the markets to shed around 20% in the next 3-4 months. This is the premise of the fall in the rupee

- FDI inflows are not going to balance this out (at least not in the intermediate term)

- A strengthening of the dollar is very likely as the US recovers

- We may see in imports at a faster rate than exports as oil prices rise to US$ 75-80 (a very likely scenario in the next 3-4 months)

ABOUT Ashu Dutt’s “THE FOREIGN EXCHANGE REVIEW”

The Foreign Exchange Review l is meant for institutional investors, corporates, foreign exchange dealers who need to hedge/trade currencies. It specifically addresses the movement of Asian currencies against the US dollar and Euro

The key answer that everyone is searching is the direction of the currency. And that’s what this journal addresses. It may look at fundamentals, technicals, psychology or anything else that is relevant to make the call on the short, intermediate and long term direction of Asian currencies

Ashu Dutt’s “THE MUTUAL FUND REVIEW” - July 2009 Edition from www.ashudutt.com

You can access all Research Reports on Equities, Commodities, Currencies, Real Estate at http://www.ashudutt.com/

Ashu Dutt’s “THE MUTUAL FUND REVIEW” - July 2009 Edition

Investment Tool for Serious Mutual Fund Investors

EDITION II

Published this 7^th day of July, 2009

Subscription: Rs 4,800 for 12 issues

THE BROAD VIEW

Income Funds –

Equity Funds – “The stakes are high. The odds of getting higher returns are low. But extreme higher returns on this low probability are possible. The risk to principal at this point may not justify the returns. What I mean is that both returns and the loss of principal can be extreme should mutual funds be bought at this stage”

- June 2009 Issue of “The Mutual Fund Review”

A 20-25% return in a 12 month period is very likely. Specially in Midcap funds. I usually don’t like sector funds but any fund heavily weighted in Infrastructure or Real Estate may be a beneficiary of a 30% plus return in a 12 month scenario

AGGRESSIVE STRATEGY

Objective: Maximizing returns

Risk to Principal: Depends on the markets. Low in down and out markets and in markets running on exceedingly strong momentum. High in “shaky” markets

Current Scenario:

“Risk is high and the odds of losing principal are high. These are “shaky” markets. Anything can “shake them down” pretty severely. If you are not in as yet, you may want to remain “nimble” (i.e. make an exit if you see a fall of 10% or more). If you are not in and can wait, then wait”

- “The Mutual Fund Review”, June 2009 Issue

Current Return Expectations:

Big Cap/Blue Chip Funds

+15%: 30%

+10%: 70%

Midcap Funds

+25% gain: 30%

+20% gain: 50%

+15% gain: 20%

Sector Funds: Infrastructure Funds

+30% gain: 30%

+25% gain 50%

+ 20% gain 20%

Current Risk Expectations:

Very high: 80%

Medium: 80%

Mutual Fund Plays:

I like the Templeton Blue Chip Fund. It’s a conservative play with good fund managers. But I don’t particularly like their size. It is difficult to beat the averages with such a large corpus size

CONSERVATIVE STRATEGY

Objective: Keep principal intact and try and get above 3 year FD rates with the ability to withdraw anytime

Risk to Principal: Usually very low in all kinds of markets. But then you settle for mediocre returns

Current Scenario:

I’d say it make sense to go with equity funds even if the strategy is conservative. I am not sure Bond funds or Income funds are a sure shot bet currently. The chances that we will have strong swings in interest rates (and the chances are rates will spike up sharply). This is not good for NAVs of bond/income funds. Fact is downside risk in equity seems low and the upside seems more than likely

Current Return expectations (On Income Funds):

15%: 20% (if you can wait and invest when rates on GILTs go to 9-10%)

10%: 30%

7%: 20%

5%: 30% (if you are invested or invest immediately)

Current Risk expectations:

High: 80% - Interest rates will most likely spike up and reduce NAVs in income funds

Low: 20%

Mutual Fund Plays:

Sundaram BNP Paribas Growth Fund

FUND REVIEW

Fund Name: SUNDARAM BNP PARIBAS GROWTH FUND

Rating: *** (out of 5 stars)

Who should buy: Conservative. Expect a return of around 10-15% and don’t expect the fund to outperform the market

The fund may be volatile though with about 21% in Financial Services. That’s a mighty big percentage given that no one knows where interest rates, foreign currencies etc are headed

Review

The fund has been around for over a decade and returned over 20% annually for 10 years. Not bad (compare that to a 14% return on the index for a 10 year period). So the pedigree is right. But the fund’s got a new fund manager since January 2008 and I am not particularly impressed by his choice of stocks. I am also uncomfortable with its almost 6% holding in ICICI Bank

The portfolio has about 40 stocks. Most stocks are “run of the mill” (i.e the usual suspects). Why would I not just buy the index? The chances that they will continue to beat the index is low

Essentially, its not a fund where I can see the fund manager’s unique thought process. It s more a “maintenance” fund