Neither a crash nor a rally… for now, at least
I had labelled the recent decline that started on 15th April as a short-term top. That still looks valid. By 25th May, the Sensex had lost about 9%. In the previous issue, I had also said that if the market cannot stage a strong rally from here, we will face another downleg-towards 16,000. This is exactly what happened. The Sensex hit an intra-day low of 15,960 on 27th May. Short- and medium-term investors and traders would have benefited from this call. These market calls (daily, weekly and fortnightly) are now posted on our website almost the same day. You can log on to the site and read them. You can also subscribe to our emailed newsletter and get these calls in your mailbox.
Following that decline, we have just commenced what seems like a powerful rally. Over two days, the market has risen by more than 650 points. It would be a third day of the rally at the time of writing (Friday, 28th May) and markets all over the world seem strong. Where are we headed? As of now, nowhere.
What we are witnessing now is a short-term bounce that always happens after a sharp decline. It means nothing. Within a broad range of 5,300 and 4,800, there will be small rallies and declines. There will be days when the market appears certain to have started a fresh long rally like the one we saw after the Budget.
Don't be fooled by it. If you are sceptical about my views, you have been watching too many bullish forecasters on television. If so, here are some numbers. After all, there is nothing better than to turn to some numbers to sober us down.
On 27th May, the Sensex hit a low of 15,960. Guess what was the high on 12th June last year? It was 15,600. In short, between the high of 12th June 2009 and low of 27th May 2010, almost a year apart, the Sensex was up just 2%! So what happened to the great rally of last year?
Here is another set of numbers. The Sensex closed at 17,127 on 30th September 2009. On 28th May 2010, the close was 16,863. Over eight months, the market was down 1.5%. Don't believe it? Just mention this to an average investor and watch the disbelief on their faces.
The simple fact is that almost all the gains you see from the bear market low of 8,047 in early March 2009 have come in just three-and-a-half months-March 2009 to mid-June 2009. A year has gone by and the market has not gone anywhere, despite thousands of crores of investments by foreigners and domestic fund managers. It will continue to be a steep uphill climb for the market. The short-term trend is up; but the medium-term trend is neutral until we have more evidence.
The country’s largest stock exchange is introducing a revamped system for short-selling in an effort to lure investors to the bourse. However, it may not bring in the volumes immediately
In a bid to attract more liquidity, the National Stock Exchange (NSE) is modifying the existing structure for short-selling of securities, and plans to introduce the new system in a couple of weeks.
Until now, the exchange was offering a one-month window for investors to settle short-selling transactions. It will now extend the window to a full year, after the Securities and Exchange Board of India (SEBI) issued new guidelines to that effect earlier this year.
The NSE’s official spokesperson clarified that it is modifying the existing securities lending and borrowing mechanism according to the new guidelines by SEBI in January 2010. “The new system is being set in place and will take a few weeks to be implemented. We will now facilitate tenures of up to a year, instead of a month.
So someone who wants to borrow or short sell can return the security or money to the seller according to a predetermined contract which could be anything between a month and 12 months.”
Speaking about how the exchange hopes to draw trading onto the bourse and away from the over the counter (OTC) market, the spokesperson said, “This new system will help because it will provide more liquidity to the system, which will attract Indian and foreign institutional investors. SEBI has issued these new guidelines to allow more liquidity in the system and it's only after the system is set in place that the results will start showing.”
But will the revised structure succeed in drumming up volumes on the stock exchange? With this move, the exchange hopes to shift some of the action away from OTC markets to itself. Explaining the dominance of the OTC markets, Alok Churiwala, MD, Churiwala Securities Ltd said, “We need to understand why FIIs deal in OTC markets. Those markets are perceived to be efficient by the FIIs.
They are used to dealing there. They may also not be comfortable with an exchange’s regulatory and disclosure norms. The OTC markets have been functioning fairly efficiently for them to consider shifting to exchanges.”
Mr Churiwala is cautiously optimistic about the proposed new system. “The current system is not a very big hit as of now. The fact that it is being extended to one year may lead to greater liquidity. It is definitely a step in the right direction. But we should be cautiously optimistic in this regard. It will take some time for the new system to work out,” he observed.
For any participant, a one-month horizon is more determinable than a one-year horizon. The people who take a call for a year are mostly the large players and FIIs. But to make a market, you need all sorts of participants, including retail ones.
“What the longer period will do is reduce transaction costs. It does make sense for someone who wishes to take a long call, as he does not have to keep rolling the trade,” commented Mr Churiwala.
After a 4% rally in the Standard Chartered stock on the LSE yesterday, FIIs rush to cash in on a possible arbitrage opportunity
The Standard Chartered IDR issue, which was floundering with a negligible response from investors, was rescued by foreign institutional investors (FIIs) on the very last day. But it is likely that the FII interest had more to do with the arbitrage opportunity created by the stock’s rally on the London Stock Exchange (LSE).
FIIs have finally bid for 22.94 crore shares in the Standard Chartered IDR issue, after a 4% rally on the LSE yesterday. The stock was up 4.41% at £16.80 yesterday on the LSE.
At the time of writing, the Standard Chartered stock was trading at £16.62 on the LSE. In Indian currency, keeping in mind the stock movement on the LSE, one IDR is equivalent to Rs113. Ten IDRs represent one share. Sources say that FIIs have bid for the IDRs at Rs104. If the IDRs are listed at a premium, then it would be a double bonanza for them.
The retail investor quota was subscribed 0.13 times while the employee share was subscribed 0.12 times. The QIB portion was subscribed 4.14 times. Overall, the issue has been subscribed 2.20 times.
“Yesterday the market went up substantially in London. The Standard Chartered share rallied to Rs1,142.40 (in rupee terms). People were looking for arbitrage. A lot of FIIs came in, which no one was expecting. Since it’s a follow-on offer, FIIs take a call on the last day,” said a top official from an investment banking firm.
Retail investors have been given a 5% discount in this issue. The issue opened on 25 May 2010 and closed today. The IDRs will be listed on 11 June 2010. The IDR issue opened with a lukewarm response from investors. The issue was subscribed 11% yesterday.
The IDRs have a lock-in period of one year before they can be freely convertible into shares.
Life insurance companies are not allowed to invest in the IDR by IRDA.