The tale of Hindenburg Omen

Word on the Wall Street is that the Hindenburg Omen has reappeared. The phenomenon was reported to have appeared on Tuesday and than again on Thursday last week. For the uninitiated, Hindenburg Omen is a technical analysis pattern that is said to portend a stock market crash. It is named after the Hindenburg disaster of May 6, 1937, during which the German zeppelin Hindenburg was destroyed.

While Leap of Faith would not give it too much importance, it is interesting to see that kind of buzz this has created on the Street. The talk of impending gloom and doom with US going into a double dip has resumed with a vengeance. Comparisons with the great Depression and Japanese style deflationary cycle are back in vogue. While there are clear signals of US economy slowing down, Leap of Faith does not envisage a Lehman like event happening, at least for now and would use any panic driven Global market sell-off to buy more.

Back Home, Indian equities made their fresh 2010 high during the last week, as FIIs continued their buying spree. The good show by the banking industry continued with surprisingly positive numbers from State Bank of India. The 20% growth in earnings was way above the consensus expectations and was led by lower than anticipated provisioning. A closer look at numbers reveals that close of 20% of the restructured assets have slipped into NPLs and would require accelerated provisioning in the next nine months. Leap of Faith would maintain a cautious stance on asset quality of public sector banks and prefer private sector names in the medium term.

The week saw yet another foreign acquisition by an Indian automobile player with Mahindra & Mahindra emerging as the preferred bidder for the acquisition of a majority stake in South Korean SUV maker Ssangyong Motor Company. The deal gives M&M not only a strong foothold in Korea, but also a definite push towards becoming a global player in utility vehicle space. Ssangyong has over 1300 dealers outside Korea particularly in Western Europe and Russia which could be leveraged to sell the existing M&M products. Apart from distribution, Ssangyong allows M&M to extend its product line-up and apply Ssangyong’s engine technology. With an earnings growth in excess of 25%, M&M remains highly leveraged to the booming Indian automobile growth story and Leap of Faith is adding it to the model portfolio.

Over the last couple of weeks, Mumbai has seen some very aggressive land auctions. Indiabulls winning bids of Rs1.8bn/acre for the two adjoining mill land parcels in Central Mumbai has set new benchmarks for land price. These closely fought mill auctions betray the optimistic view that the developers currently have about real estate prices in the medium to long term. Despite concerns on high prices, transaction volumes have held on quite well in the last six months. IT industry is giving generous salary hikes to employees and is expected to add more than one lakh people this year which would give a big boost to residential estate demand. The funding scenario has also become easier. With prices on a clear uptrend, Leap of Faith would continue to be positive on Tier I Real estate developers.

The WPI inflation for July came in at 9.97%, lower than the consensus estimate of 10.4%. The food prices inflation is well off its highs and has almost halved from 20.04% in December to 10.29% in July led by the big fall in sugar prices. The prices of manufactured goods also fell on a sequential basis. While this is good news, the tightening cycle is far from over. Leap of Faith believes that demand side and cost push factors are still exerting pressures on price level and monetary tightening would continue though the pace could moderate to allow for soft landing.