GalaTime

• Naked Capitalism: Guest Post: “How Can No One See An Imminent Fall in Chinese GDP and a Secular Slowdown Thereafter?”

Power generation in developing economies where manufacturing is a high % of GDP should correlate well with GDP growth. China’s power generation declined more than 8% in November. In his FT.com Long Room posting, Joules Watt concludes that would correspond to a GDP growth of only 1.5% y-o-y based on his regression analysis of power generation vs. GDP growth.

Rare is an analyst willing to even contemplate low-digit growth rates for China in 2009, let alone NO GROWTH (Jim Walker from Asianomics (ex CLSA) predicts 0-4% growth). But, while history doesn’t repeat itself, it rhymes. During its first 30 years of recovery and industrialization after WW2, Japan experienced several “growth recessions” when its growth halved from the boom times. But in the mid 1970s recession, it got much worse. Industrial production growth went from +16% y-o-y throughout the first half of 1973 to -19% in February 1975! Real y-o-y GDP growth went from more than 10% to solidly negative for a few quarters in late 1974 and early 1975.

• Mint: First time in 11 years, FIIs turn net sellers; pull out $13 billion

Foreign institutional investors, or FIIs, the key drivers of the Indian stock market in the past few years, pulled out at least $13 billion (about Rs62,880 crore) in 2008, the most in 15 years.

FIIs have invested a net $50.59 billion in Indian equities since Sebi opened up the stock markets to them in 1993.

FII inflows had increased to about $140 billion, . . . the portfolio of FIIs has shrunk to about $70-80 billion, according to estimates provided by fund managers.

• DNA: Mid-year review hints at more rate cuts by RBI

The mid-year economic review, which was tabled in Parliament on Tuesday, has said that “an aggressive monetary policy may be necessary if the global economic depression continues to adversely affect manufacturing”, thereby indicating a further cut in interest rate.

On fiscal deficit, the target is likely to be missed by a wide margin. According to Virmani, India’s fiscal deficit would be at least 5% of the GDP this financial year, which means a 2% increase in the fiscal deficit.

peHUB: The Denominator Effect: A Good Problem To Have?

. . . the pension system’s actual allocation to alternative investments is now 40% higher than is its target allocation, despite making few new alternative asset commitments. The blame instead goes to plummeting values elsewhere in CalPERS’ portfolio (particularly public equities), which act as artificial growth hormones for longer-term, less volatile, illiquid alternative investments like commitments to venture capital and private equity funds.

What’s particularly interesting about the CalPERS documents, however, is that they show private equity continuing to outperform all other asset classes in the system’s portfolio. In fact, it’s the system’s only asset class to report positive returns (or at least carrying value), for the 10-month period ending October 31, 2008. It’s not black by much, but the 2.8% figure stands in stark contrast to -42.1% for global equities, -14.8% for real estate or -8.1% for global fixed income.

Wonder how many FIIs / hedge funds were impacted by this ‘target allocation’ mess. If you are required to hold at-least x% in Indian equities, and the Indian market craps out, how do you get the allocation percentages back in line? Dump the other stuff! Or vice versa.

Market Folly: November Hedge Fund Performance Numbers

Peter Thiel’s Clarium Capital was -5.4% for November and is now -8.1% for the year. You can view their most recent portfolio here. Even the global macro guys are finding it tough out there.Jim Simon’s Renaissance Technologies has had a pretty good year, all things considered. His flagship $8 billion Medallion fund is up 58% on the year, which makes its 5% management and 44% performance fees tolerable.

David Shaw’s D.E. Shaw & Co sees their Oculus fund up around 10% for the year, as they have profited from their global macro strategy. Their Composite fund, on the other hand, is -4% year to date, having pursued multiple strategies.

We’re in the midst of our hedge fund portfolio tracking series where we’re covering the 3rd quarter 2008 13F filings of various prominent hedge funds (including many listed above) in order to breakdown the changes they’ve made to their portfolios. You can view the portfolios of the funds we’ve analyzed thus far here.

The total AUM of the hedge fund industry is now ~ $1T. I guess the average leverage has also dropped by half.

As far as India is concerned, here is what I’ve noticed:

• FII selling has abated, and they even bought a good chunk yesterday
• The strong downtrend in the rupee has halted, it too has turned around
• RBI forex reserves actually went up last week
• Trading volumes were quite low last week, especially on down days (Never short a dull market?)

Seems to me that the hedgies are done with the majority of their selling here. We’ll probably see a few large sell orders in select stocks, but indiscrimate dumping of Indian equities is unlikely. Is there anyone left to capitulate? If not, this is not a good time to short. A monthly ‘rupee cost averaging’ using index ETFs and gilt funds looks like the best option for retail investors.

• 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.