Expect nothing, live frugally on surprise.

Friday, October 24, 2008

Economic Crisis : Is Your money Safe?

In the epic Mahabharata, King Yaksha asks Yudhishthir what he thinks is the most curious aspect of life. Yudhishthir replies, “Mortality is a fact of life, every day people see someone dying, yet they live as if they are immortal.” He could just as well have been speaking about investors and the stock market. On January 23, a day after the stock market registered the single biggest intraday crash, operators, punters and investors were back on the bourse to propagate optimism and push the Sensex up 875 points, beyond the 17,000 mark.
As with life, the stock market symbolises uncertainty and breeds optimism. Just a week before the crash, as investors jostled for a slice of the Rs 11,700-crore Reliance Power public issue, the IPO was subscribed in 58 seconds.
The issue was oversubscribed 73 times to net applications worth Rs 7,50,000 crore. Finance Minister P. Chidambaram, who was hosting an informal lunch to celebrate Pongal, described the success of the issue as vindication of the India story.
On January 22, the market crashed 2,200 points within minutes of opening. As Chidambaram advocated calm and reiterated his confidence in the economy, optimism seemed to evaporate as dire pessimism settled in. The India story suddenly seemed more like mythology.
In less than a week, as the market crashed to a low of 15,333, investors’ savings worth over Rs 18,00,000 crore—or what was the total market capitalisation in 2004—were wiped out.
Indeed, the crash made the rise of the Sensex over the past year, from 14,000 to 21,000, seem like a rope trick. Protesters gathered outside the BSE office on Dalal Street, and demanded that the three-tonne bronze replica of the bull installed at Green Park in New York be removed. The cause of the crash, they believed, was supernatural, not manmade. As Mumbai-based chartered accountant Bimal Parekh says, “The crash was utterly predictable and virtually inevitable. The only uncertain part was the timing.”
The market was abuzz with the valuation race between the Ambani brothers. If Mukesh Ambani-managed Reliance Petroleum notched a market cap of Rs 1,00,000 croreplus for his upcoming refinery, Anil Ambani structured an IPO that would—on listing —value his newly-formed Reliance Power at Rs 1,10,000 crore.
The exuberance was unmistakable. Companies with revenues of Rs 40 crore boasted of a market cap of Rs 8,000 crore, new banks boasted of 30-plus PE ratios, telecom companies added $1,000 to their market cap per subscriber with less than a third of earnings, asset management companies with profits of Rs 4 crore raised Rs 5,000 crore, media companies which would cumulatively have profits of less than Rs 1,000 crore had valuations of over Rs 75,000 crore.
As valuations propelled large-cap Sensex stocks to stratospheric levels, investors rushed to mid-cap stocks, some of which rose by an astounding 200 per cent in just 10 weeks.
Says Sanjeev Prasad, head of Research Kotak Institutional Broking, “A rally of 40 per cent in four months was not sustainable and it had to correct. Also at play were vested interests who wanted the markets to stay high as some high-profile IPOs were coming. Mid-caps, too, rallied way ahead of their fair valuations due to operator interest. This had to stop.”
Simply, the market at 20,000-plus was waiting for a trigger. It came in the form of new losses in the US subprime crisis and aggravated worries about the American economy.
The Indian market had arrogantly ignored global realities, rising even as global marts slid. When giants such as Citigroup began writing down billions of dollars, global markets plunged and Indian stocks shivered.
FIIs pulled out over Rs 10,500 crore in less than 10 days. Public offerings sucked over Rs 1,00,000 crore out of the market; the outstanding or bought positions in the highly-leveraged F&O market totalled Rs 1,30,000 crore, which is the highest ever, and brokers’ books were holding excessively leveraged positions in scrips.
Add a valuation race and markets ramped up by promoters who now don’t push just one company but use sectoral and Sensex stocks to push new issues.
As the market crashed high networth individuals (HNIs) approached SEBI for early allotment so that money locked in public issues could be freed and investors caught in the downturn were scrambling to withdraw applications either because of fear or to fork out money to their brokers.
What needs to be recognised here is that those who stay off Greed Street may be singed, but will find their investments safe in the long term—if the call is on fundamentals and not propped by tips.

Sense & Sensex

What to watch out for and factor in your calculations when you see the stock markets spiral.
Borrowed glory Most HNIs never put their own money upfront but borrow from banks or broking firms, corner a large chunk of the shares and sell on listing day. With the markets tanking, people who borrowed for IPOs lose substantial sums.
Leveraged indices The rise of the Sensex from 14,000 to 20,000 was driven not just by the India story and FII flows of $18 bn but also the ramping up of shares, thanks to a valuation race and the rush to raise money through high-priced IPOs. The outstandings of the F&O market were at Rs 1,30,000 crore. When markets started tanking, these retail investors started selling shares instead of coughing up more margin money.
Subprime fears The subprime crisis in the US is serious. When the housing market was booming there, banks sold loans to undeserving or subprime borrowers at higher rates. These loans were parcelled off as high return packets to willing investors who found themselves holding duds when the housing market tanked. This bad debt is estimated to be over $100 bn. Now if they are the investors who primed Indian stocks their problem if not fully at least partially is our problem.
Easy money Laws and norms are for the bunnies. Companies tied up with NBFCs for funding. Finance companies issued 15-day paper at P1 ratings and sold them to debt mutual funds. The money raised was then used to fund speculation or IPO investments which promised instant returns.
The FII factor FII inflows account for about a fourth of stocks and contributed to the fall when they pulled out $2.5 bn last week. The new PE ratioThe new PE is Price to Entrepreneur ratio. Prices of scrips and new offerings were determined not on fundamentals but on promoters’ ability to fund the market.
New values The Ambanis de-merged and doubled shareholder value. Within weeks it was the new mantra with analysts and speculators spouting jargon on “unlocking of values”. So everyone on deal street was “de-merging to unlock values” and it seemed front offices of corporate would be soon turned into SBUs. That mercifully didn’t happen.
Margin effect Typically punters pay only 25 per cent or Rs 25,000 say for shares worth Rs 1,00,000 while the rest is funded. But when the market tanks and the value of shares falls to say Rs 90,000, the punter has to fork out Rs 10,000 to make up. Often he can’t afford this and banks or financiers then sell the shares creating a cascade effect.


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