Doubts and faith

Doubt is a feeling too lonely to know that faith is its twin.

The quarterly numbers so far give faith that companies have done well not just by cutting costs but also by improving sales. Even as most numbers have beaten street expectations, skeptics have their doubts; they would rather wait till many more numbers are seen. The result season will switch into a higher gear even as the market awaits the RBI’s policy action.

Inflation has jumped quite a bit in recent times, especially on the food front. Though monetary policy has no direct impact on prices, the RBI is under pressure to reign in inflation expectations. A CRR hike has been discounted while a rate hike will definitely surprise the markets.

Today we expect a soft opening as most global markets are in the red. The sluggish market provides an opportunity to get out of weak counters and enter relatively stronger ones. Medium to long term outlook for India is upbeat. Immediate support for the Nifty is likely to kick in at 5180-5200. Below that the levels to watch are 5150 and 5100. On the way up, the Nifty may continue to find resistance at around 5300.

On the global front too, corporate results have started coming in and could have a bearing on sentiment in case of any nasty surprises. US stocks fell by 1% on Friday despite good results by JP Morgan Chase and Intel. In fact, Wall Street suffered its worst one-day fall in 2010. US markets are shut today on account of Martin Luther King Jr. day holiday.

European shares came under pressure after Societe Generale warned of further write-offs. Asian stock markets are mostly lower this morning, dragged by Friday's weakness on Wall Street, and with Tokyo suffering from yen strength.

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FIIs were net sellers in the cash segment on Friday at Rs9.3bn on a provisional basis. The local funds were net buyers of Rs6.8bn, according to figures published on the NSE's web site. In the F&O segment, the foreign funds were net buyers at Rs7.09bn. As per the SEBI figures, FIIs were net sellers of Rs1.36bn in the cash segment on Thursday.

US stocks ended lower on Friday, sending the Standard & Poor’s 500 Index to its biggest drop in a month, after JPMorgan Chase came out with weaker-than-expected revenue and a glum outlook. Shares of the second-largest US bank fell 2%, spreading pessimism to the rest of the sector, after it increased provisions for credit losses.

In addition, a consumer confidence report trailed forecasts and a stronger dollar weighed on commodity prices. A reading on consumer price inflation (CPI) was largely benign and a report on manufacturing was mostly in-line with estimates.

The S&P 500 lost 1.1% to 1,136.03 in New York, the biggest drop since Dec. 17. The Dow Jones Industrial Average tumbled 100.9 points, or 0.9%, to 10,609.65. The Nasdaq Composite index lost 29 points or 1.2%, to 2,287.99.

It was the worst daily performance by US stocks of 2010 so far.

About four stocks fell for each that gained on the New York Stock Exchange (NYSE).

US stocks managed gains on Thursday, with the Dow and the S&P 500 closing at the highest point since Oct. 1, 2008. The Nasdaq ended at the highest point since Sept. 3, 2008.

Gains so far this year have been slow for US stocks, following last year's spectacular rally. The Dow gained 19% in 2009, while the S&P 500 rose 23% and the Nasdaq advanced 44%. Stocks are likely to remain sideways as investors await more quarterly earnings and economic reports.

JP Morgan Chase reported a better-than-expected quarterly profit of US$3.3bn, trouncing estimates. But revenue missed forecasts, and its credit costs too remains high. It also set aside nearly US$2bn to cover consumer-loan losses. The bank's credit card write-offs were bigger than what Wall Street was expecting.

With unemployment still pretty high for now and the likelihood of a rate hike by the Federal Reserve at some point this year, investors are wondering if the credit losses are going to get worse for US banks going forward.

JP Morgan CEO James Dimon warned that the banking giant is cautious about the future, noting that consumer credit costs remain high, and weak employment and home prices persist. That message was the opposite of what traders have been hoping to hear since the start of the fourth-quarter reporting season.

The broad bank sector tumbled, with the KBW Bank index falling 2.2%.

Intel's better-than-expected fourth quarter results have some indications that high-tech demand on the corporate side may be making a comeback.

The Dow component reported quarterly results after the close of trade on Thursday. The chip giant said that it earned 40 cents per share in the fourth quarter on sales of US$10.6bn. Both earnings and sales beat estimates and marked a sharp improvement from the previous year. But shares slipped 3% on Friday.

However, analysts and investors are wondering whether there is still more room for the stock to climb after its most profitable quarter in history.

Johnson & Johnson slid 0.8% after the world’s largest maker of health-care products expanded its recall of items possibly tainted with a wood chemical to include Rolaids, Motrin, Children’s Tylenol and St. Joseph’s Aspirin.

Separately, the US said today in a lawsuit that Johnson & Johnson paid kickbacks to Omnicare Inc. to push prescriptions for its antipsychotic drug Risperdal for elderly patients.

Kraft Foods had the biggest gain in the Dow, rising 1.6%. William Ackman’s Pershing Square Capital Management LP bought a 2% stake in the food company and is urging management to pursue a bid for Cadbury Plc that minimizes the stock component of the offer.

In the day's economic reports, the University of Michigan's consumer sentiment index rose to 72.8 in January from 72.5 in December. Economists had forecast a rise to 74.

CPI, a key measure of inflation, rose 0.1% in December versus forecasts for a rise of 0.2%. CPI rose 0.4% in the previous month. The so-called core CPI, which strips out volatile food and energy prices, rose 0.1%, meeting estimates. Core CPI was flat in the previous month.

Another report, the Empire Manufacturing index, showed that manufacturing activity in the New York area bounced back in December, rising to 15.9 from a revised 4.5 in the previous month. Economists thought it would climb to 12.

Industrial production in the US rose in December for the fifth time in past six months, propelled by a jump in utility use as temperatures turned unseasonably cold. Output at factories, mines and utilities climbed 0.6% for a second month, matching the median forecast of economists, figures from the Federal Reserve showed.

Manufacturing dropped 0.1% as losses in auto and mineral production overshadowed gains in business equipment.

Economists at JP Morgan raised their forecast for growth in US gross domestic product (GDP) for the fourth quarter to 5.7% from 4.5%. They anticipate that the world’s largest economy will grow at a 3% annual pace in the first three months of 2010.

The dollar gained versus the euro and fell versus the yen.

COMEX gold for February delivery fell US$12.50 to settle at US$1,130.50 an ounce. Gold closed at an all-time high of US$1,218.30 an ounce last month.

US light crude oil for February delivery fell US$1.39 to settle at US$78 a barrel on the New York Mercantile Exchange.

Treasury prices rallied in a classic bid-to-quality play, lowering the yield on the 10-year note to 3.67% from 3.73% late on Thursday.

The US market will be closed on Jan. 18 for Martin Luther King Jr. Day.

Friday's decline erased a weekly gain for the S&P 500 and left the benchmark index for US stocks down 0.8% over the last week. The index has surged 68% since March 9, closing at a 15-month high on Thursday.

CPI numbers gave an indication that the US economy is growing without stoking inflation. That means interest rates won’t be raised any time soon. But Wall Street still wants to see a classic corporate sales growth. If that doesn’t happen, it could turn out to be a big headwind for stocks.

While investors have welcomed improving corporate bottom lines in the last few quarters, improvements in revenue have been hard to come by. Market participants have concerns about valuations of the market as a whole following last year's huge run-up.

It is the start of two peak weeks of earnings, according to Thomson Reuters. By the end of it, investors should have a far better idea of whether companies are able to deliver expectations built into the steep rebound in stock prices since early March.

Some sign of increasing revenues will act as a breath of fresh air. Earnings are generally expected to show a fantastic recovery from the hard-hit fourth quarter of 2008. That is particularly true for banks.

In the week ahead, investors will get a new round of data on the housing sector in the form of housing starts and a homebuilders sentiment index. The Philadelphia Fed's January report on manufacturing in the mid-Atlantic region is expected to show a drop from the prior month.

Results from big banks, Google, and bellwethers such as GE will help determine if markets find a smoother path next week.

European shares finished lower on Friday due to profit booking after a cautious start to the US fourth-quarter earnings season. The pan-European Dow Jones Stoxx index lost 1.1% to 256.12, bringing weekly losses to 1.2%.

Germany's DAX index declined 1.9% to 5,875.97, the French CAC-40 index fell 1.5% to 3,954.38 and the UK's FTSE 100 index shed 0.8% to 5,455.37.

Key indices continued to trade in a narrow range this week despite Infosys’ stellar results and strong IIP numbers. Meanwhile, India’s inflation stood at 7.31% for December 2009 as compared to 4.78% for the previous month, putting pressure on RBI to suck out excess money from the system to control prices. Finally, the BSE 30-share Sensex ended flat at 17,554 and NSE Nifty also ended unchanged at 5,252 over the week.

On Friday, the BSE Sensex was down 31 points to end at 17,554 after touching a high of 17,639 and a low of 17,529. The Nifty was down 9 points to end at 5,252.

Equity markets in Asia ended mixed. The Nikkei in Japan was up 0.7%, while Australia's S&P/ASX ended flat. The Shanghai SE Composite was flat and Hang Seng index in Hong Kong was down 0.3%.

In Europe, stocks were trading higher. The DAX in Germany was up 0.4% and the CAC 40 index in France was up 0.6%. The FTSE in the UK was up 0.3%.

Coming back to India, among the BSE sectoral indices, the Oil & Gas index was the top loser, shedding 1%, followed by the Metal index that was down 0.6% and the BSE Capital Goods index was down 0.5%. The BSE Mid-Cap index edged higher 0.3% while BSE Small-Cap index added 0.2%.

Among the 30-components of Sensex, 18 stocks ended in the negative terrain and 12 ended in the green. Hindalco, Sun Pharma, M&M, ONGC and Reliance Industries were among the top losers.

On the other hand, RCom, ACC, ITC, Tata Motors and TCS were among the top gainers.

Outside the frontline indices, the big losers in the broader market were United Spirits, REI Agro, Apollo Hosp, IRB Infra and Canara Bank. On the other hand, gainers included Hindustan Copper, NMDC, RCF and UCO Bank.