MARKET VIEW FOR THE WEEK 31ST DEC 2012 TO 4TH JANUARY 2013

Indian Capital Markets in reaction to the global sentiments affected by the much said major issue of Fiscal Cliff in US. But the buzzing question is what is Fiscal Cliff and what will be the material impact in global as well as Indian markets.

Let us find what is "Fiscal Cliff" ?

The Fiscal Cliff Explained

“Fiscal cliff” is the popular shorthand term used to  

 describe the conundrum that the U.S. government will  

face at the end of 2012, when the terms of the Budget 

Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 

31, 2012, are the end of last year’s temporary payroll tax 

cuts (resulting in a 2% tax increase for workers), the end 

of certain tax breaks for businesses, shifts in the 

alternative minimum tax that would take a larger bite, a 

rollback of the "Bush tax cuts" from 2001-2003, and the 

beginning of taxes related to President Obama’s health 

care law. At the same time, the spending cuts agreed 

upon as part of the debt ceiling deal of 2011 will begin to 

go into effect. According to Barron's, over 1,000 

government programs - including the defense budget 

and Medicare are in line for "deep, automatic cuts."

In dealing with the fiscal cliff, U.S. lawmakers have a 

choice among three options, none of which are 

particularly attractive:

• They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit would fall significantly.
• They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States' debt will continue to grow.
• They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.

Can a Compromise be Reached?

The oncoming fiscal cliff is a concern for investors since 

the highly partisan nature of the current political 

environment could make a compromise difficult to reach.

 This problem isn't new, after all: lawmakers have had 

over a year to address this issue, but Congress – mired 

in political gridlock – has largely put off the search for a 

solution rather than seeking to solve the problem 

directly. In general, Republicans want to cut spending 

and avoid raising taxes, while Democrats are looking for 

a combination of spending cuts and tax increases. 

Although both parties want to avoid the fiscal cliff, 

compromise is seen as being difficult to achieve – 

particularly in an election year. Currently, it appears that

 a meaningful deal won't be reached until after the 

December 31 deadline.

The most likely outcome is another set of stop-gap 

measures that would delay a more permanent policy 

change. Still, the non-partisan Congressional Budget 

Office (CBO) estimates that if Congress takes the middle 

ground – extending the Bush-era tax cuts but cancelling 

the automatic spending cuts – the result, in the short 

term, would be modest growth but no major economic 

hit.

Possible Effects of the Fiscal Cliff

If the current laws slated for 2013 went into effect 

permanently, the impact on the economy would be 

dramatic. While the combination of higher taxes and 

spending cuts would reduce the deficit by an estimated 

$560 billion, the CBO also estimates that the policy would 

reduce gross domestic product (GDP) by four 

percentage points in 2013, sending the economy into a 

recession (i.e., negative growth). At the same time, it 

predicts unemployment would rise by almost a full 

percentage point, with a loss of about two million jobs.

A Wall St. Journal article from May 16, 2012 estimates the 

following impact in dollar terms: “In all, according to an 

analysis by J.P. Morgan economist Michael Feroli, $280 

billion would be pulled out of the economy by the 

sunsetting of the Bush tax cuts; $125 billion from the 

expiration of the Obama payroll-tax holiday; $40 billion 

from the expiration of emergency unemployment 

benefits; and $98 billion from Budget Control Act 

spending cuts. In all, the tax increases and spending 

cuts make up about 3.5% of GDP, with the Bush tax cuts 

making up about half of that, according to the J.P. 

Morgan report.” Amid an already-fragile recovery and 

elevated unemployment, the economy is not in a position 

to avoid this type of shock.

The Term "Cliff" is Misleading

It's important to keep in mind that while the term “cliff” 

indicates an immediate disaster at the beginning of 2013,

 this isn't a binary (two-outcome) event that will end in 

either a full solution or a total failure on December 31. 

There are two important reasons why this is the case:

1) If all of the laws went into effect as scheduled and 

stayed in effect, the result would undoubtedly be a return

 to recession. However, Congress continues to work 

toward a deal that will alleviate the effects in some form.

 The chances that such a deal won't be reached at some 

point are slim.

2) Even if the deal does not occur before December 31, 

as appears likely, Congress can - and almost certainly 

will - act to change the scheduled laws retroactively to 

January 1 after the deadline.

At he same time, even a solution isn't 

necessarily positive, since a compromise

will likely to involve higher taxes or 

reduced spending in some form- both of 

which would help reduce the debt but

would be negative for economic growth.

With this as background, it is important to

keep in mind that the concept of "going 

over the cliff" is largely a media creation 

since even a failure to reach a deal by

December 31st doesn't means that a 

recession and financial markets across the

globe will crash.....

Keeping this issue in consideration Nifty 

shall remain very volatile...........

On any adversity the outcome of the Fiscal

Cliff decision will have domino effect on

the global economy and markets...

No doubt the markets across the globe will

take a correction and the Indian markets

too... Nifty/Sensex could correct to 5% to 

10% ( Nifty could test 5300-5400) and in

 that case a best buying opportunity will 

be there.  Just as I am writing this analysis

 and projection many other analysts of 

much higher experience than me are ready

 to grab the opportunity.

CAUTION should be borne in mind that the

correction so triggered could have impact 

for 5-6 months in our markets too... Hence 

its advisable to reduce the leveraged

position(s) and hedge the portfolio for 

correction of 10% in Index and 25%-30% in

stocks, BUT that will be best buying

opportunity.

MY SOURCES SAY "Indian markets shall 

correct for at least 5% to 5600 levels...."

Fresh buying should be considered only 

after the event. Hence we are waiting for 

the same to come. Apart from this on the 

normal circumstances Nifty could touch to

 6100-6150 by the next 15-20 days of 

January 2013......

Consider the following Stocks to buy on 

any crash or deep correction:

ADITYA BIRLA NUVO, ABB, RELIANCE,

TRENT, DELTA CORP, JUBLIANT FOOD, 

BATA, CERA SANITARY, LUPIN, SBI, BOB,

SUN PHARMA, LIC HOUSING, L&T,

L&T FIN HOLD, 

Technically: The daily charts of Nifty is 

showing that it has been moving in the 

range of 5800 to 5975 since last one month.

 Analysts expect that this range bound 

movement will continue for some more 

time, until the clarity over the Fiscal Cliff 

appears.

If Nifty breaches 5800, it may further go 

down to 5730 and 5630 ( I fore see to 5400 

if the poor news comes...)

How ever on any relief from the heavy 

sentiment Nifty if able to sustain above 

5950, could rally to 6030 & 6080 levels, or 

even more to 6130-6150.

My View: Watch the developments and 

book profit near 6030 levels and keep cash. 

We could see 200-300 correction to start 

buying if there is negative news or we shall 

miss the rally of 100-150 points in Nifty and 

 buy the quality trading stocks..Hence I am 

not recommending any trading position for 

the this week...rather suggesting to buy 

aggressively for investment keeping 5-6 

months view as Nifty shall rise to 6500+++ 

gradually.......Stock news only after the 

events.....

Good Luck and Happy new Year...

Any one wishing to consult shall feel free to 

dial 09335 97 67 22.