• Naked Capitalism: Roubini Foresees Chinese Hard Landing

There is thus now a growing risk of a hard landing in China. Let us be clear what we mean by hard landing. In a country with the potential growth of China hard landing would occur if the growth rate of the economy were to slow down to 5-6% as China needs a growth rate of 9-10% to absorb about 24 million folks joining the labor force every year.

The decline in total orders has been even stronger than in export orders, thus suggesting a weakening in both domestic and export demand.

Chinese exports to the U.S. were growing at an annualized rate of over 20% a year ago; while the most recent bilateral trade data from the U.S. now show that this export growth has now fallen down to 0%.

• NY Times: In Modeling Risk, the Human Factor Was Left Out

“The price of an asset, like a house or a stock, reflects not only your beliefs about the future, but you’re also betting on other people’s beliefs,” he observed. “It’s these hierarchies of beliefs — these behavioral factors — that are so hard to model.”

The quantitative models typically have their origins in academia and often the physical sciences. In academia, the focus is on problems that can be solved, proved and published — not messy, intractable challenges. In science, the models derive from particle flows in a liquid or a gas, which conform to the neat, crisp laws of physics.

• VC Circle: Brokerages Feel The Heat; Q2 Profits Down By 57%

F&O turnover has been < 40,000 crores over the past few days. Margin calls & higher margin requirements have destroyed volumes.

US T-Bond rates, via Yahoo Finance:

Ted Spread @ Bloomberg

FII net sales Rs 1030 crore. DII net purchases Rs 670 crore. That’s not too helpful for bulls.

But, total CM turnover at NSE was very low at Rs 9748 crore. WTF? A drop of more than 5% in most indices, and we get the lowest volumes since August 27th! F&O turnover wasn’t high either - almost 44000 crore.

Where is everybody? Selling exhaustion? Buying exhaustion? Buy FDs & gold - let the stock market go to hell?

To get an idea of how illiquid our markets really are, look at the table below - it lists the stocks that constitute the Junior Nifty 50 index, in increasing order of turnover:

The least liquid stock today (Nirma) saw round-trip turnover of only Rs 6.64 lakhs! That’s a grand total of 6,485 shares traded. The 10th stock in this sorted list (Asian Paint) saw turnover of Rs 1.07 crore. This is horrible for everybody but the smallest retail trader.

And what about the Nifty-50 stocks?

The least liquid one (Ambuja Cements) saw turnover of Rs 6.9 crore. Makes me weep.

• 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…

  

• Bespoke: World Equity Market Declines: -$26,000,000,000,000

• Blog Maverick: I’m Going Long Right Now

I put 8 pct of my net worth in DIAmond puts at 11000, as a hedge, and just sold them at a very nice gain. Very nice. Now I’m short puts that I sold in not near as big a position, but nice. I’m going long.

My first stomping grounds are MLPs. They have been getting killed. KILLED. They build pipelines, ships, whatever, and they do contracts to provide service via those assets.  The assets are very long term, and the cash flows are very consistent. I am putting together a big porfolio that will pay me more than 10pct yield.

Why sell puts ? With market volatility (VIX) at an all time high, I wanted to take in some of the volatility premium in this bullish move.

This is Mark Cuban. 8% of NW is a big number in this case.

• DNA: Did hedge funds cause the plunge?

There were two rumours doing rounds explaining Wednesday’s bungee-jump by the stock markets. One was that there was a firesale by three India-focussed hedge funds.The second was that one of India’s big bulls, who has been sitting on big shorts for some months now, has been asked by New Delhi to cover positions and not to try and bring the market down. That there was significant short-covering is true because Nifty Futures volume hit an all-time high of 5.69 crore shares on Wednesday.

Rumours - the lifeblood of Indian stock markets?

Despite the 6-7% drop in most indices, the total turnover in the cash segment at the NSE was only Rs 10,367 crores. Moreover, even the F&O turnover dropped to Rs 46,853 crore. Seems like there’s only delivery-based selling, not much day-trading. What’s even strange is that the turnover for RELIANCE alone was Rs 1,025 crore - that’s almost 10% of the CM turnover!

FIIs sold stocks worth Rs 1169 crore (on top of Rs 1660 cr on Friday). 

I would like to think that this is a sign that the selling will soon abate. But then again, I went long today - so I’m biased.

• Bloomberg: Indian Rupee’s `Unprecedented’ Decline Not Over, Treasurers Say

India’s rupee may extend yesterday’s drop to a five-year low as the trade deficit swells and overseas investors dump local shares.

The rupee has dropped 16 percent this year, heading for its worst annual performance since 1991, when India devalued the currency as a balance-of-payments crisis forced it to pawn gold from its reserves.

The Reserve Bank of India will stem rupee losses and may halt the currency’s slide at about 47 per dollar, according to Larsen’s Deosthalee and Essar’s Paramasivam. A steeper drop would draw speculators, possibly causing the rupee to spiral down into a “bottomless pit,”

• Business Standard: 1,000 stocks hit 52-week lows

Over 1,000 actively-traded stocks hit their 52-week lows during intra-day trades on Monday.. . . as many as nine Sensex components — ICICI Bank, TCS, Tata Steel, DLF, Reliance Communications, Satyam Computer Services, Ranbaxy Laboratories, Jaiprakash Associates and Hindalco — closed the day at their 52-week lows.

Real-estate and infrastructure stocks such as HDIL, Parsvnath Developers, Gammon India, Unitech, Indiabulls Real Estate and Jaiprakash Associates have not only closed at 52-week lows, but have also declined by over 80 per cent from their respective 52-week highs.

I guess this will continue today with most Asian markets down ~ 4%.

• Bespoke: Corporate Bonds Worse Than Equities

Hard to imagine something worse than the 8 -9% drop in major US indices!

• Wall Street Journal: Investment Banks, By the Numbers

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.

This is something I’ve been wondering about, and Paul Kedrosky gives some context: Data Factoid: Securities Industry Employment

Post a short-term bearish phase in India, I think this is a huge opportunity for financial services KPO firms!

PS, via Reuters: Lehman and Merrill to pound already bloody job market

Headhunters and consultants said the U.S. financial services sector, already suffering from a glut of unemployed talent after shedding more than 100,000 jobs this year, must now brace for up to 50,000 more.

The two firms’ probable disappearance would also squeeze New York City, which relies heavily on the financial services industry. Each financial-sector worker is believed to create as many as four other New York jobs, due to their high salaries.