GalaTime

• Bloomberg: ITC, Larsen Among Most Short-Sold Stocks by Funds, Sebi Says

Overseas investors using offshore derivatives to invest in Indian equities short-sold as many as 2.29 million shares of ITC Ltd., the nation’s biggest tobacco company, the nation’s market regulator said.

Foreign funds lent the shares abroad from Oct. 10 to 14, the Securities & Exchange Board of India said on its Web site today, citing data from 17 funds. 

Sales in the Indian stock markets by foreign investors and their sub-accounts are possible on account of the shares being lent by them abroad, the regulator said Oct. 15. Overseas funds have pulled out $11.6 billion from India equities since January.

• Market Watch: Those bullish gold timers

According to contrarian analysis, there’s been an excess of bullish sentiment in recent weeks and months, in effect forming the veritable golden slope of hope that makes it easier for the market to decline than advance.

It’s not an encouraging trend, according to contrarian analysis, when market timers become more bullish as the market declines. That suggests a significant amount of stubbornly-held bullishness, which is just the opposite of the kind of sentiment environment that supports sustainable rallies. See Oct. 5 column

Information is in the divergences.

• Portfolio: Hedge Fund Manager: Goodbye and F— You

The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades.

I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle.

Brutal.

After what seems like an eternity, FIIs were net buyers in the CM at NSE to the tune of Rs 900 crore. Heck, they even bought a lot of index futures yesterday.

Compare that to their relentless selling this month (SEBI data):

Phew. I guess we’re headed to 4200 then.

• Bespoke: S&P 500 and Oil

Correlations breaking down. At one point, SBI was up 4% while ICICI was down 19% yesterday - what happens to pair (stat-arb) trades?

• Naked Capitalism: Are Hedge Fund Margin Calls Leading to Stock Rout?

Margin rates as low as 15% for broker dealers were raised to 35%; hedge funds who had been used to operating on high leverage were told that they had to bring accounts up to a much larger percentage of equity.

. . . the first notice of these calls were issued on October 2nd and 3rd. There was something of a grace period to meet the calls, but funds realized they weren’t going to be able to meet them other than by selling stock. There are rumors that the most massive of the calls are due Monday (October 13th).

Net FII sales at the NSE were over Rs 2500 cr yesterday. Gross sales were over 6000 crore!

• BCA Research: Risky Assets Are Extremely Oversold, But…

  

Amidst all the doom & gloom worldwide (Nikkei down 5%, FTSE down 2%, oil down 4%, god knows what next in the US), the Indian markets closed up for the day, after gapping down 3.5% in the morning!

Someone is fairly bullish & voting with their wallets. Assuming the retail investor is still not quite recovered from the year-to-date ‘correction’, the place to look is DII & FII flows. Sure enough, it’s the DIIs who have been bullish over the past few weeks:

I’m not sure if this is because they believe in the great Indian growth story (despite 8% EPS growth last quarter), or if it is a case of having too much cash on hand looking for a home. After all, if the markets drop another 10% from here on, there are no real repercussions for mutual fund managers, are there? The retail sheep will continue to plow money in, without too much attention to absolute (heck, even relative) performance. On the other hand, if the indices keep going up and some MFs haven’t deployed cash, they’ll lag the herd as well as the index. Asymmetric!

The FIIs on the other hand are too busy selling everything in sight  - see the rupee @ 47 now! They have bigger issues in life, such as CDS, FNM, FRE, M2M, AIG, LEH, MBS, [insert favorite 3-letter acronym here], …

PS: On a somewhat related note, ICICI ended down 5% (down almost 10% intraday) while SBI & Axis Bank closed up ~ 7%. I imagine that a few folks doing pairs trading (with 3-5x leverage) got their a$$ handed to them today.

• Wall Street Journal: Vulture Investors Won’t Have It Easy

Prof. Altman estimates that professional investors currently have assembled $350 billion to $400 billion to buy distressed securities. That is nearly double the amount available in 2001 to 2003, and far more than the early 1990s.

• Washington Post: Slow Economy Puts Value Investing to the Test

Last year was an unusually bad one for value investors. Large-cap value funds gained just 1.42 percent, while large-cap growth funds rose 13.35 percent. This year has not been much better, with some of the largest value funds showing double-digit negative year-to-date returns.

Most value investors brush off that concern by saying you will eventually recoup your losses if you are willing to wait. But, said Sorrentino, “I would caution that you could go broke waiting for these investments to turn around. You can be right in the long run and go out of business in the short run.”

Even hard-core value investors acknowledge that some of their peers were too quick to jump on the financials bandwagon, which ended up being a sinking ship because of a spike in foreclosures and a tightening of credit.

• Hindu Business Line: Rising yields bring foreign investors back into debt market

FIIs invested around $897 million in the debt market in July, while in March, April, May and June, their investments have been negative. FIIs’ outflows between March and June were around $928 million.

“While the one-year Mumbai Interbank Forward Rate is 7 to 8 per cent, the yield on a one-year treasury bill is 9.25 to 9.5 per cent and a AAA-rated corporate bond earns a yield of 10 to 10.5 per cent. So there is a substantial arbitrage opportunity of at least 2 percentage points,”

4 key markets that must be open & liquid: equities, debt, currencies & commodities. We are slowly getting there.

• Business Standard: Rs 8,000 crore premium realty projects face delay

. . . the construction cost for large commercial projects was Rs 2,000 per square foot, on average . . . construction cost is growing 20 per cent every year and the developers are carrying a compounded interest burden of 30 to 40 per cent after three years.

By 2008-end, Mumbai and its suburbs will add 15.4 million square feet of office space.

“In Mumbai, developers need to obtain 56 approvals from environment and forest department, pollution control board and others. It takes over a year to get these approvals,”

• Hindu Business Line: Six sectoral indices hit year lows

. . . six key sectoral indices hit their 52-week lows on Monday as the Sensex fell another 2 per cent. The BSE PSU Index , Bankex, Realty, Auto, Power and Capital Goods were the indices that recorded their new 52-week lows on Monday.

. . . defensive sectors such as BSE Health Care and FMCG are trading close to their yearly highs. Market men say that these sectors are not affected much by an increase in interest rates or even the rising crude oil prices.

• DNA: FII unloading spree is worst to date

In May and June, institutions (FIIs +DIIs) have net sold equities worth Rs 11,472 crore. That tops the Rs 9,525 crore net sales by them in January. Despite high cash positions and new fund-offer collections, local institutions have not been shopping hard in the summer sale.

. . . even the long-term fund managers among the FIIs are pruning their India exposures faced with redemption pressures. India dedicated funds saw redemptions of $205 million during the week ending June 18, 2008.

The rupee has been consistently at just below 43, seems to be held back by RBI intervention.

• Bespoke: Bespoke’s Commodity Snapshot

• World Beta: Sharpe Ratios of Managers

Here is a good PowerPoint that shows some historical Sharpe Ratios for some very successful managers. (It is excerpted from the book Scenarios for Risk Management and Global Investment Strategies ). Ziemba’s point is that managers should not be penalized for upside volatility, only for their losses. So even though Berkshire did almost 25% a year over this time period, it has a lower Sharpe than the S&P500 that returned only 18%. (Great Ziemba PDF here.)

To gain a full understanding of a manager’s performance investors should use alternative metrics to evaluate managers, eg:

Sortino Ratio: uses the volatility of negative asset returns in the denominator (similar to Ziemba’s downside symmetric Sharpe Ratio)
Sterling Ratio: uses the average max drawdown in the denominator
MAR (or Calmar) Ratio: uses max drawdown in the denominator
Ulcer index: Measures the length and severity of drawdowns.

• Mint: FIIs take a different stance

Between 18 March and 31 March, when the large purchases were made, the currency exchange rate hovered around Rs40 to a dollar. Few people expected the rupee to depreciate sharply then. In fact, for even much of April, the exchange rate was around 40 and FIIs took net long positions worth Rs3,834 crore in both the cash and futures segments. The sharp depreciation in the rupee since May, however, seemed to have caused a change in strategy. In May, they were net sellers of Rs9,296 crore in both segments.

Funds tracked by research firm EPFR Global have seen outflows in each of the Asia-Pacific markets in the week till 11 June. On the other hand, these funds saw strong inflows in the late March and early April. Last week’s outflows in Asia ex-Japan funds were the worst since January, while inflows in early April were at a 19-week high.

Very important to understand global money flows. Look for articles for record inflows into ‘emerging market’ funds ~ December 2007 / January 2008 - signs of a top.

If you were watching the market yesterday (especially after 2pm), you can’t have missed the vertical drop in the Nifty index (and Nifty May futures, but NOT Nifty June futures) at 3pm, followed by a super quick reversal. That’s what this article seeks to explain.

• Economic Times: FIIs let short positions expire in May

Being net short in Nifty May futures and 2 crore contracts still outstanding going into the settlement day, FIIs had a simple choice to make.

With no pressure of a short squeeze, they (FIIs) could either have rolled over these short positions into June or had let them expire in May itself. Since rolling over such huge short positions into June was a bit tricky, they decided to let them expire in May. But, how about making a bit of money before these shorts expire?

The Nifty fell like a stone in the consequential last half hour making an intra day swing of over 3%. No wonder, Thursday’s provisional figure revealed that FIIs were net sellers of Indian equities to the tune of a whopping Rs 1,277 crore. On the other hand, Nifty future contracts expiring in June added a 68 lakh shares in open interest to end the day at a huge premium of 23.35 points as compared to a mild discount on Wednesday.

• Mint: Costs, subsidy delays make going tough for fertilizer cos

Subsidy payments have skyrocketed in the past four years from Rs15,779 crore in 2004-05 to an estimated Rs95,000 crore in 2008-09, or 1.9% of the gross domestic product. Last year, the subsidy stood at Rs40,338 crore, which includes Rs7,500 crore paid through the first-ever issue of fertilizer bonds.

Fertilizer production requires natural gas, naphtha or furnace oil as feedstock, which account for 70% to 80% of the production cost. All feedstock variations are derivatives of crude petroleum and their prices vary with oil prices. In the past two years, the prices of liquefied natural gas, naphtha and furnace oil have increased by 198%, 50% and 71%, respectively. Out of the 28 functional urea plants in the country, 12 use naphtha or furnace oil as feedstock.

Similarly, the prices of crucial raw materials like phosphoric acid, sulphur and rock phosphate have gone up by 331%, 867% and 297%, respectively, in the past two years.

• Mauldin @ Investors Insight: The Geopolitics of $130 Oil

George and his team are calling the beginning of a new era of global competition. The weapons now won’t be the nukes of the Cold War or the suicide bombers of the post-9/11 world but rather exportable oil and food, and the huge piles of cash that come from exporting surpluses.

The real winners are countries that can export and generate cash in excess of what they need domestically. So countries such as Venezuela, Indonesia and Nigeria might benefit from higher prices, but they absorb all the wealth that is transferred to them. Countries such as Saudi Arabia do not need to use so much of their wealth for domestic needs.

The big losers are countries that not only have to import oil but also are heavily industrialized relative to their economy. Countries in which service makes up a larger sector than manufacturing obviously use less oil for critical economic functions than do countries that are heavily manufacturing-oriented.

The United States is an oil importer, but its relative vulnerability to high energy prices is nothing like it was in 1973, during the Arab oil embargo. De-industrialization has clearly had its upside. At the same time, the United States is a food exporter, along with Canada, Australia, Argentina and others.

Yet another unqiue perspective on oil.

• Morgan Stanley: Growth Cycle – At the Crossroads

Phase II – Acceleration to Overheating Zone (2004-07)

The timing of the acceleration in India’s GDP growth from 2004 coincided with a resurgence in the overall emerging markets growth trend. The positive trigger came in the form of an increase in global risk appetite from 2003 onward and an increase in capital inflows in emerging market economies. One of the key drivers of this phase was the prolonged low real interest rates in the US over mid-2001 through 2004 . . . total capital inflows into India increased to US$98 billion in 2007 from US$12 billion in 2002. We believe that these large capital inflows played a key role in boosting India’s growth cycle to above-sustainable levels.

Phase III – Reverting to Potential (1H08)

Policymakers allowed the phase of above-trend growth to last for a little longer despite early signs of overheating . . . The lagged impact of RBI’s monetary policy actions brought GDP growth down to an estimated 7.5% in 1Q08. Indeed, industrial production growth decelerated even more sharply to 5.8% during the quarter ended March 2008, from a peak of 13.6% during the quarter ended January 2007.

• Bloomberg: Time for Goldman to Add Indonesia to the BRICs

O’Neill says that if he were to sit down tomorrow and revise the BRICs, Indonesia would fare reasonably well. “Of them, we would rate Mexico as closer to a BRIC status than Indonesia, but it would not be far behind.”

. . . Indonesia isn’t an easy place in which to invest. It requires patience, disciplined research and a strong stomach given the lack of legal protection, the multitude of regional taxes and fickle politicians.

. . . it’s Indonesia’s potential and vast natural resources that are attracting interest from the likes of Reliance Power Ltd., the energy company controlled by billionaire Anil Ambani, and ArcelorMittal, the world’s largest steelmaker.

• Business Standard: FII stake in top companies back to June 2005 levels

FIIs trimmed their holding in the BSE 500 companies by nearly two percentage points to 17.8 per cent, bringing it back to June 2005 levels, according to a Citigroup report. FIIs pulled out shares worth $2.8 billion over the past quarter . . . The scenario is in quite in contrast to bull run of the last five years when FIIs pumped in more than $52 billion.

The drop in foreign ownership has been largely picked by promoters whose share of the market continues northward march. The uptrend continues even after accounting for public offerings where free-float is quite low.

Currently, they (FIIs) seem to be betting on industrials, telecom, consumer discretionary and materials.

Rupee at 43, FIIs back to ‘05 levels, EPS growth in single-digits . . . it’s as if everything is in reverse!

• Bespoke: Bespoke’s Commodity Snapshot

• InvestorsInsight: Let’s Get Real About Bear

The $2 a share offer is simply to keep Bear from having to declare bankruptcy which would mean a long, drawn out process and would have precipitated a crisis of unimaginable proportions. Cue the lawyers.

As I understand this morning, JP Morgan will take a $6 billion write down, which is essentially what they are paying for Bear. The Fed is taking $30 billion dollars in a variety of assets. They may ultimately take a loss of a few billion dollars over time, although they may actually make a profit.

The stock market would have crashed by 20% or more, maybe a lot more. It would have made Black Monday in 1987 look like a picnic. We would have seen tens of trillions of dollars wiped out in equity holdings all over the world.

• Economic Times: Bear Stearns sells local stocks worth Rs 1k cr

Bulk deals data on NSE indicate that BSMA (the FII arm of Bear Stearns that is registered with Sebi) sold shares worth more than Rs 1,000 crore on Friday and Monday to different entities, including Deutsche Securities, Citigroup, Merrill Lynch and Goldman Sachs Investments.

Bear Stearns holds tiny stakes in close to 120 listed Indian companies, with the largest holding in JP Associates (at $150 million) and significant stakes in Jindal Steel & Power ($88 million). It also holds shares worth $28 million in Opto Circuits and Madhucon Projects.