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Earnings only suggest downswing, not recession

Earnings only suggest downswing, not recession

A lot has changed in the financial world during the last two weeks—from the talks of the US economic recession to analysts seeking cues to judge that the slowdown in the US is not as severe as expected.

Just two weeks ago, analysts were busy calculating the downside of global economies led by the US. India, being one of the worst performers, was also seen with more and more of downside, though I completely disagreed with this argument through this column and reiterated at times that the worst was already over.

For the Indian markets, from a low of 14,809.49 touched on 17 March, the benchmark Sensex index of the Bombay Stock Exchange has risen nearly 2,800 points to Friday’s close of 17,600.12 in one-and-a-half months.

In the US, the Dow Jones Industrial Average, which had triggered the global meltdown, is once again above the 13,000 levels, and is only 221.34 points short of its highest level in 2008. The picture clearly suggests that investors need not worry unduly about the global economic turmoil, as the future remains bright for investments.

Good corporate results, not only in India but in the US as well, justify that the current economic situation is merely a downswing and not a recession. Though prolonged downswing may eventually result into a recession, with the latest US economic indicators such as better-than-expected April payrolls data and the gross domestic product figures in the US for the first quarter, the picture looks rather rosy for the US economy. However, this data alone can’t be taken as confirmation of a turnaround in the US, as it covers only a limited sphere of the economy. More confirmations would be needed for that in the form of sustainability of good corporate results, improvement in housing data, increased consumer spending and confidence, and better factory and services data.

After the debacle at Sun Microsystem Inc., the results of bellwether Cisco Systems Inc. would be watched keenly. Sun on Friday reported losses and a dismal earnings forecast, which were not on expected lines. The announcement sent shares of the company down 22.6% to close at $12.64.

Other than Cisco, major companies reporting earnings this week include Fannie Mae, D.R. Horton Inc., Walt Disney Co. and American International Group Inc.

This week is important for US economic data as well. On Monday, the Institute forSupply Management’s non-manufacturing index for April will be released, which will be followed by first-quarter productivity and costs, March pending home sales and March international trade later in the week.

More importantly, a speech by Federal Reserve chairman Ben Bernanke on mortgage delinquencies and foreclosures on Monday will be watched eagerly on critical clues on housing and the general economy.

As far as the Indian economy is concerned, high rate of inflation remains a big concern despite the fiscal measures taken by the Reserve Bank of India. Since its impact will be felt over a period of time, we will have to learn to live with high rates of inflation in the short term. Other than the inflation numbers, economic indicators such as monthly sales figures are looking good, which support the buoyancy in the stock market. Since the current optimism is well supported by quarterly results, there seems to be more positives in store for the Indian market.

Technically, the market is in a bullish grip and the Sensex is all set to test its key resistance level of 18,307 points. If the index closes above this level with rising volumes, then this would mean the resumption of a bullish phase. Prior to this level, there would be resistance levels at 17,785 points and 18,002. On its way down, the Sensex would test its first support at 17,160, following which the next support will come at around 16,931. If this support is broken, the short-term outlook of the market will turn negative with the next support level expected at around 16,593 points.

This week, technically, Suzlon Energy Ltd, Canara Bank Ltd and Adlabs Films Ltd look good. Suzlon Energy, at its last close of Rs288.95, has a target of Rs305 and a stop loss at Rs272. Canara Bank, at its last close of Rs240.75, has a target of Rs256 with a stop loss at Rs225. Adlabs Films, which last closed at Rs763.95, has a target of Rs781 and a stop loss at Rs739.

From Last week’s recommendations, Bajaj Hindustan Sugar and Industries Ltd almost met its target by rising to Rs251.25. Kotak Mahindra Bank Ltd touched a high of Rs834.90, well above its target of Rs784, while Steel Authority of India Ltd met its target of Rs187 comfortably.

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