Investors around the world are trying to gauge the moment when the world’s major central banks begin to push interest rates back up from historic lows. Which country rises first and fastest may set the tone for the global tightening of liquidity.

Effects of an Increase in rates:
When the RBI increases the funds rate, it does not have an immediate impact on the stock market. But afterwards it becomes more expensive for banks to borrow money from the RBI. However, increases in the discount rate also cause a ripple effect, and factors that influence both individuals and businesses are affected.

The first indirect effect of an increased funds rate is that banks increase the rates that they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if they carry a variable interest rate. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay the bills, and when those bills become more expensive, households are left with less disposable income. This means that people will spend less money, which will affect businesses’ top and bottom lines (that is, revenues and profits).
Therefore, businesses are also indirectly affected by an increase in the funds rate as a result of the actions of individual consumers. But businesses are affected in a more direct way as well. They, too, borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, companies might not borrow as much and will pay a higher rate of interest on their loans. Less business spending can slow down the growth of a company, resulting in decreases in profit.

Stock Price Affects
Clearly, changes in the funds rate affect the behavior of consumers and business, but the stock market is also affected. Remember that one method of valuing a company is to take the sum of all the expected future cash flows from that company discounted back to the present. To arrive at a stock’s price, take the sum of the future discounted cash flow and divide it by the number of shares available. This price fluctuates as a result of the different expectations that people have about the company at different times. Because of those differences, they are willing to buy or sell shares at different prices. If a company is seen as cutting back on its growth spending or is making less profit - either through higher debt expenses or less revenue from consumers - then the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company’s stock. If enough companies experience a decline in their stock prices, the whole market, or the indexes that many people equate with the market, will go down.

Investment Effects
For many investors, a declining market or stock price is not a desirable outcome. Investors wish to see their invested money increase in value. Such gains come from stock price appreciation, the payment of dividends - or both. With a lowered expectation in the growth and future cash flows of the company, investors will not get as much growth from stock price appreciation, making stock ownership less desirable.
Furthermore, investing in stocks can be viewed as too risky compared to other investments. When the RBI raises the funds rate, newly offered government securities are often viewed as the safest investments and will usually experience a corresponding increase in interest rates. In other words, the “risk-free” rate of return goes up, making these investments more desirable. When people invest in stocks, they need to be compensated for taking on the additional risk involved in such an investment, or a premium above the risk-free rate. The desired return for investing in stocks is the sum of the risk-free rate and the risk premium. Of course, different people have different risk premiums, depending on their own tolerance for risk and the company they are buying. However, in general, as the risk-free rate goes up, the total return required for investing in stocks also increases. Therefore, if the required risk premium decreases while the potential return remains the same or becomes lower, investors might feel that stocks have become too risky, and will put their money elsewhere.  

Interest Rates Affect but Don’t Determine the Stock Market
The interest rate, commonly bandied about by the media, has a wide and varied impact upon the economy. When it is raised, the general effect is to lessen the amount of money in circulation, which works to keep inflation low. It also makes borrowing money more expensive, which affects how consumers and businesses spend their money; this increases expenses for companies, lowering earnings somewhat for those with debt to pay. Finally, it tends to make the stock market a slightly less attractive place to investment.

Keep in mind, however, that these factors and results are all interrelated. What we described above are very broad interactions, which can play out in innumerable ways. Interest rates are not the only determinant of stock prices and there are many considerations that go into stock prices and the general trend of the market - an increased interest rate is only one of them. Therefore, one can never say with confidence that an interest rate hike by the RBI will have an overall negative effect on stock prices.

Bharti and MTN have decided to uncouple from their discussions when the exclusivity period ends on September 30, 2009. Here we have official statement from Airtel.

The alliance planned between Bharti and MTN was a vision based on solid fundamentals, which had the potential of creating an emerging markets telecom giant and the third largest telecom company in the world. Substantial synergies could have been captured with this proposed transaction.

The broad structure being discussed by the two sides had taken into account the sensibilities and sensitivities of both companies and both their countries. Bharti and MTN are national champions and the proposed deal structure took into account their leadership in their respective geographies to ensure continuity of business - including listing, tax residencies, management, brand etc. This transaction would have been the single largest Foreign Direct Investment into South Africa and one of the largest outbound FDIs from India. The deal would have been a significant step in promoting South-South cooperation - a vision of the two countries.

This structure needed an approval from the government of South Africa, which has expressed its inability to accept it in the current form. In view of this, both companies have taken the decision to disengage from discussion.

Bharti has enjoyed its engagement with the MTN management and its Board; and wishes them continued success. We hope the South African government will review its position in the future and allow both companies an opportunity to re-engage.

Bharti is grateful to the various Indian government authorities, in particular the Minister of Finance, the Minister of Commerce and Industry and the Minister of Corporate Affairs. We express our profound gratitude to the Hon’ble Prime Minister of India for his strong support to what could have been a transformational partnership.

Bharti will continue to explore international expansion opportunities that are consistent with its vision and bring value to its shareholders.

The much-awaited deal between Bharti and South Africa’s MTN that expected to merge the two telecom giant has failed yet again. The doubtful issue of dual listing proved to be the deal breaker.

Bharti, in a statement, said, the company has decided to uncouple itself from the deal. “We hope the South African government will review its position in the future and allow both the companies an opportunity to re-engage.” The statement further said that the South African government had expressed its inability to accept it in the current form. Also, it stated, Bharti would continue to explore international expansion opportunity.

South African mobile phone operator MTN declined to comment on a statement by India’s Bharti Airtel that tie-up talks have been called off, saying it will issue a statement later. “We will send out a statement later on,” MTN spokeswoman Nozipho January-Bardill said.

While due to deal failure South African rand declined almost a half a percentage.

As for the Indian markets, the BSE-Sensex lost around 170 points during the week, largely on the back of selling in metals and oil & gas stocks. Smallcap stocks however bucked the trend as their benchmark BSE-Smallcap index rose by almost 1% during the week. This index is now up 125% since its lows of March, as against a rise of just around 87% in the Sensex. 

Crude oil was the highest gainer this week among several asset classes. It moved up by almost 10% over last week’s close. In while Asian stock markets felt the pinch of a sell-off in China (which was down almost 3%), the US markets were among the few gainers. Gold prices were marginally up.

U.S. stocks opened positive on Monday, pushing major indexes up 1 percent as investor’s cheered fresh data pointed to signs of economic stabilization.

Market sentiment was underpinned by reassuring bank results from Europe, and the S&P 500 flirted with the key 1,000 level. Earlier it rose as high as 999.65, a nine-month high

The Institute for Supply Management reported its gauge of manufacturing activity rose to 48.9 in July from 44.8 in June. Economists had expected a reading of 46.5. A measure of new orders jumped to 55.3, an encouraging indication of future activity as anything over 50 indicates expansion.

US government report shows the economy sank at a pace of just 1 percent in the second quarter of the year. It was a better-than-expected showing that provided the strongest signal yet that the longest recession since World War II is finally winding down.

The Commerce Department says the dip in gross domestic product for the April to June period comes after the economy was in a free fall, tumbling at 6.4 percent pace in the first three months of this year. That was the sharpest downhill slide in nearly three decades.

Many economists were predicting a slightly bigger 1.5 percent annualized contraction in second-quarter GDP. It’s the total value of all goods and services produced within the United States.

Yesterday: Indian Stock Market opened flat due to RIL’s bad result. It went up in early trading session but afterwards it was quite volatile and closed flat. Yesterday the interesting thing was RIL has not melt up as it was expected and it was very surprising that most FII’s still maintain their Hold/Buy rating in RIL well of course this was because they increase their holding in RIL since last two month but technically as well as fundamentally RIL would be underperformer in the market and that’s for sure.

Today: Indian Stock Market is expected to open negative as we had a mix economic data of US which drag down the Asian market’s as well but all eye’s are now on RBI’s monetary policy and if RBI would declare rate cut or increase economy outlook than one has to watch out for public sector banks but technically market would be volatile.

Note: Stocks to trade for intraday, short-term delivery, long term delivery, short selling and Futures and when to exit those stocks would be sent to paid subscribers live during the market hours through SMS.

BSE Sensex: (15375) The support for the Sensex is 15000 and the resistance to the up move is at 15500.

NSE Nifty: (4570) The support for the Nifty is at 4450 and the resistance to the up move is at 4605.

F&O Cues: FII were net buyers of 90 crore in Index Future and sellers of 100 crore in stock futures.

Results to be declared today: REC, Hind Uni, Bajaj Hind, Birla Copper, GVKPIL, Guj Gas, Grasim, GMDC, GNFC, GSPL.

Sales of previously owned homes in the United States increased at a faster-than-expected annual pace in June, in the third straight month of gains.

The National Association of Realtors said sales rose 3.6 percent to an annual rate of 4.89 million units from a downwardly revised 4.72 million pace in May. June’s reading compared with forecasts for a 4.84 million unit annual pace.

The NAR said it was the first time the industry had experienced three straight months of gain since early 2004, providing some hope the higher data indicate an underlying trend.

U.S. stocks briefly extended gains after the housing data, while U.S. government debt prices turned lower.

The inventory of existing homes for sale declined 0.7 percent to 3.82 million in June. The median national home price fell 15.4 percent to $181,800 from the same period a year ago.

Morgan Stanley, one of a key stock of Wall Street banking giant left more or less intact after the credit meltdown of the past two years, reported a second-quarter loss of $159 million that was significantly worse than analyst expectations.

Earnings were hurt by a charge from repaying government bailout money. Net Revenue fell 11 percent to $5.4 billion.

During the quarter, Morgan Stanley repaid $10 billion from the government’s Troubled Asset Relief Program, incurring a one-time charge of $850 million.

Citigroup announced its biggest management shake-up since the financial crisis began, replacing its chief financial officer and installing a new banking chief as it prepares to give the government a 34 percent equity stake.

The changes, announced on Thursday, come as Chief Executive Vikram Pandit faces intense pressure to improve performance, rebuild the executive ranks in consumer banking, and shed unwanted assets. Citigroup has lost $36 billion over six quarters and received a series of federal government bailouts.

Several analysts called the management changes encouraging, though it is unclear whether they will help Pandit keep his job and what they signify about the role the government will take in running the third-largest U.S. bank.

Edward “Ned” Kelly, who was named Citigroup CFO in March, will become a vice chairman focused on strategy and merger activity. His replacement is John Gerspach, who has been Citigroup’s controller and chief accounting officer. Gerspach is Citigroup’s fifth CFO in five years.

At Citibank, McQuade succeeds Bill Rhodes, a Citigroup senior vice chairman who will reduce his day-to-day responsibilities to focus on international operations, his specialty.

Separately, Gary Crittenden, chairman of Citi Holdings, which includes businesses that Citigroup wants to sell or wind down, will leave the bank and move to Utah to focus on family and business interests. He preceded Kelly as CFO.

“The senior management changes I am making today will further help in positioning our company for the future,” Pandit said in a statement.

G8 leaders believe the world economy still faces “significant risks” and may need further help, according to summit draft documents.

G8 summit began on Wednesday cautioned that “significant risks remain to economic and financial stability” while “exit strategies” from pro-growth packages should be unwound only “once recovery is assured.”

“Before there is talk of additional stimulus, I would urge all leaders to focus first on making sure the stimulus that has been announced actually gets delivered,” Canadian Prime Minister Stephen Harper said.

That chimed with comments from the International Monetary Fund, which said it believed the global economy was starting to pull out of recession but recovery would be sluggish and policies needed to remain supportive.

The Group of Eight — United States, Germany, Japan, France, Britain, Italy, Canada and Russia — kicked off with debate on the economic crisis, after what one analyst called a “reality check” in recent weeks on the prospects for rapid recovery.

G8 leaders badly underestimated the economic problems facing them when they met in Japan last year and were expected to focus on what must be done to prevent another meltdown.

“Although there have been signs of stability in the economy and the sentiment has improved, the real economy has not recovered yet with job and wage conditions still stagnant,” said Takao Hattori, senior strategist at Mitsubishi UFJ Securities.

But few big initiatives were expected as the G20, a broader forum that also includes the main emerging economies, is tasked with formulating a regulatory response to the crisis and meets in September in Pittsburgh after an April summit in London. U.S. President Barack Obama was expected to make his mark on his first G8 summit by chairing Thursday’s meeting in L’Aquila of the 17-nation Major Economies Forum

Global rating agency Standard and Poor’s on Wednesday said that India’s ratings may be lowered due to high fiscal, as high fiscal deficits may damage country growth.

“India’s high fiscal deficits are not sustainable in the medium term and if fiscal consolidation is delayed, there is a risk that the sovereign credit ratings on India (BBB-/Negative/A-3) may be lowered,” S&P said in a release.

S&P had cut its outlook on India’s long-run sovereign ratings from stable to negative on concerns of high fiscal deficit, which means that ratings are vulnerable to downgrade.

At present, the agency has assigned BBB negative ratings to India.

If India achieves fiscal consolidation in the next two to three years, the sovereign ratings on India could be maintained at ‘BBB-’ and the outlook revised to stable, S&P said.

Finance Minister Pranab Mukherjee had said yesterday that he would make every effort to bring down fiscal deficit from 6.8 per cent projected for the current fiscal to 5.5 per cent next fiscal and 4 per cent during 2011-12.

High Fiscal deficit would bring money out of the market which damages the investment flow in industries. So the growth of the private sector slows down & causes lower GDP.

U.S. private employers cut 473,000 jobs in June, more than expected but down from the 485,000 jobs lost in May, a report by a private employment service said on Wednesday. Though June’s job loss was the smallest since October 2008, the surprisingly large number of cuts deals a setback to those expecting the U.S. economy to recover soon.

After the report, U.S. stock index futures pared their gains. U.S. Treasury debt prices initially recovered some ground but were then hit by renewed selling. The U.S. dollar pared its losses versus the euro.

The May figure was revised from an originally reported loss of 532,000 jobs to 485,000 jobs.

The ADP data comes ahead of Thursday’s monthly non farm payrolls report from the government, which is much more comprehensive and includes both the public and private sectors.

Economists expect the payrolls report, which will be issued a day early due to the Independence Day holiday on Friday, to show a loss of 363,000 jobs in June and a rise in the unemployment rate to 9.6 percent from May’s 9.4 percent.

ADP follows another privately released report showing planned layoffs at U.S. firms fell for a fifth consecutive month in June, hitting the lowest since March 2008 and providing a hopeful sign as the U.S. economy struggles to end its worst recession in decades.

Billionaire investor George Soros Tuesday predicted a slower recovery for economy of the United States, saying fears of inflation will drive up interest rates and choke off growth. “As markets revive, fear of inflation will drive up interest rates, which will choke off recovery,” he said.

Rising U.S. Treasury yields have driven mortgage rates back up, threatening a recovery in the housing market and a refinancing boom that has helped preserve the still-fragile health of recession-weary households and the banks that lend to them. The rise in bond yields and mortgage rates may also act to check the huge recent rally in global stock markets of the past three months, with the Federal Reserve trying to end an 18-month recession and yet not spur inflation.

Soros went back into retirement earlier this year after leading his self-named firm through the 2008 crisis. He made about $1.1 billion last year, according to Institutional Investor’s Alpha Magazine.

Soros, who made his fortune targeting currencies in tightly controlled markets, said international financial markets need global regulation, even while being critical of regulators and calling for minimal government intervention.

“The idea of self-correcting markets is a misconception,” he said. What governments need to do, he said, is recognize they cannot prevent bubbles but instead try to control them from getting bigger.

“You cannot prevent bubbles from forming but prevent them from self-reinforcement,” Soros said. “The regulators will always be wrong,” he said. “They should interfere as little as possible.”

Regulators, he said, typically try to control money supply and then let free markets take care of everything else, but that is a fallacy.

By the same token, Soros said that efforts by regulators and governments to stop bubbles bursting for more than 25 years gave rise to the most recent “super bubble.”

Soros cautioned that the U.S. government may be making some serious missteps in dealing with the current credit crunch and recession. Massive stimulus spending and bank bailouts have pumped up the U.S. government’s own balance sheet.

He also warned that while the worst of the 2008 crisis is past, investors do not appear to have learned their lesson.

“People want to pretend the crisis never happened,” he said. “They want to go back to business as usual.”

Fundamentals of Stock Market: Tutorial-4

Introduction to technical analysis

Earlier as we mentioned there are two methods to determine the price of stock: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn’t care one bit about the “value” of a company or a commodity. Technical people are only interested in the price movements in the market.

Despite hundreds of tools, technical analysis just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.

In this tutorial, we’ll introduce you to the subject of technical analysis. It’s a big topic, so we’ll just cover the basics, providing you with the foundation you’ll need to understand more advanced concepts down the road.

Definition of technical analysis

Technical analysis is a method of evaluating securities by analyzing the data generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s fundamental value, but instead use charts and other tools to identify patterns that can suggest future activity.

Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns; others use technical indicators and oscillators, and most use some combination of the two. In any case, technical analysts’ exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don’t care whether a stock is undervalued - the only thing that matters is a security’s past trading data and what information this data can provide about where the security might move in the future.

The field of technical analysis is based on three assumptions:

1.     The market knows everything

2.     Price moves in trends.

3.     History tends to repeat itself.

4.     Market predicts the real economy before few months

1. The Market knows Everything

A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock’s price reflects everything that has or could affect the company - including fundamental factors. Which means market knows the fundamental of the companies also it knows what’s going on inside the company. Technical analysts believe that the company’s fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market.

2. Price Moves in Trends

In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

3. History tends to repeat itself

Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.

Not Just for Stocks Technical analysis can be used on any security with historical trading data, this includes stocks, futures and commodities, fixed-income securities, forex, etc. In this tutorial, we usually analyze stocks in our examples, but keep in mind that these concepts can be applied to any type of security. In fact, technical analysis is more frequently associated with commodities and forex, where the participants are predominantly traders. Nowadays Institutes are spending billions of dollars on mathematical modeling which use various math techniques like regression, Curve fitting n differential equations to predict the market movements. Mathematical models are the future of technical analysis.

Now that you understand the philosophy behind technical analysis, we’ll get into explaining how it really works. One of the best ways to understand what technical analysis is (and is not) is to compare it to fundamental analysis. We’ll do this in the next section.

Visit EP Knowledge Center to gain full knowledge about basics of Stock Market and Technical Analysis.