The Perfidy Kings!

The stock markets always rise over the long term! So what, if a short term “correction” happens! Be the long term strategic investor rather than the daily punter!...

...And their vices
The murmur of an analyst with Angel Broking, fighting to keep back words, was quite striking to us, “A correction to an extent of 900-1,000 points in the market was on the cards, but this huge fall came as a surprise to us!” Surprise? Wouldn’t ‘terribly shocking’ have been a better description? After scaling a historic high of 21,206 on January 10, the Sensex touched a terrifying low of 15,322 in the opening session of January 22. No doubt, ‘Correction’ is an accepted corollary to a dramatic climb in a financial market. But what started as a mere correction turned out to be mayhem on the bourses. Investors lost over Rs.15,000 billion with major indices tumbling over 16%. As on January 24, the Sensex had thankfully crawled back to the 17,000 levels and around.
But why did this happen in the first place? B&E’s analysis threw up incisive answers and more questions... P.V. Jarolia, an analyst with the topline domestic brokerage firm Asit C Mehta, claimed, like other experts, “The correction was long overdue, what was awaited was a spark and the Reliance Power IPO just did that. Excess liquidity was soaked by the IPO.” Of course, the mega issue did make various indices fall due to a crunch in liquidity (a whopping $180 billion was sucked out of the market). But can only this be blamed? In fact, not at all! From January 15 (inaugural day of the Reliance Power issue, a Tuesday), till January 18 (closing day, Friday), the Sensex fell only by a relatively low daily average of 425 points.

Clearly, this was only a discounted normal correction. But what was never clearly reported was the fact that FIIs, who from January 1 till January 16 had net flows totalling a positive Rs.30.59 billion, started very shrewdly becoming net sellers on January 17 and 18, the last two days of the Reliance Power issue. Imagine this, the net FII status of these two days was a stupendous negative Rs.44.65 billion! And the moment this happened, on the opening day of the next week (January 21, Monday), a majority of retail investors were forced by their brokers to square off their over-leveraged positions immediately.

And how can brokers do that? Don’t retail investors have the right to hold on to their stocks over the long term? Not at all! Because of a small little issue called margin-trading. All stock brokers now in India entice their retail investors with the margin concept, which encourages investors to use only 20% of their own money to trade, added on to 80% of funds borrowed from brokers at 0% interest! How attractive, right? Except for the fine print, where brokers are allowed to automatically sell off their clients precious holdings to maintain liquidity levels.

By January 23, the aggregate of FII net flows since January 17 had reached an unbelievably huge negative of Rs.105.03 billion! And why did FIIs do this? “Clearly, fears of a recession in the US dealt a major blow to sentiments,” says R. K. Gupta, MD, Taurus Mutul Fund to B&E. Seriously? Was it really because of a fear of an impending US economy recession? Or of the long standing sub-prime crisis? Of course not! Read the next story to understand why news and effects of the US economy slowdown and sub-prime crisis have been in the know since the past three quarters. There is nothing dramatic that occurred in the past week to support an FII pull back theory. Even the Goldman Sachs ‘recession’ warning came almost a fortnight ago (January 9; just a day before the Sensex was at its historic highest, and when FIIs amusingly were amazing net buyers to the tune of Rs.10.53 billion on a single day)!

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Source : IIPM Editorial, 2008

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative
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