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Revenge or Stupidity? - Views on News from Equitymaster
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  • Mar 30, 2001

    Revenge or Stupidity?

    A March 29th headline in the internet version of the Economic Times reads: “Government claims evidence of short-selling by bears” and the article goes on to describe how the recent raids on a few prominent bears (presumably acting as a cartel) acted on “inside information” and took advantage of the market downturn to make money. The “inside information” being referred to here is not specific news of about a company but, rather, (and here I quote) “The investigators are looking for evidence that could prove that a group of brokers made speculative sales of shares in the market at high prices in the euphoria after the Budget and then capitalised on the subsequent payments and political crisis to cover up their speculative positions, making huge gains in the process at the cost of small investors.”

    I could die with laughter at the stupidity of this statement but, first, lets analyse this statement carried by the Economic Times so that we can all laugh together and enjoy atleast a few moment of respite from an otherwise brutal stock market (or cry at the fact that we have such intelligent people running our country!).

    “The investigators are looking for evidence”….. Great, that is the job of any investigator, no problems with that.

    “that could prove that a group of brokers made speculative sale of shares in the market at high prices in the euphoria after the Budget”….what is wrong with selling shares or going short on the share market? Some people may not have thought that the Budget presented by Finance Minister Sinha is worth much and decided that they were bearish on the market for whatever reasons. Just as an aside, while the Indian business community was going ga-ga over the Budget and giving it scores of 9 on 10 and 9.1 on 10, my personal view was that this Budget was a 5 on 10. Not because I don’t like the Finance Minister or his views but, in my humble opinion, the Budget was based on the ability of the government to sell shares of PSUs to raise money (there have been various promises like this in the past but the actual result has been dismal) and the only real expenditure cut was on the interest rate side by reducing interest rates on small savings and hurting a class of investors (see that reference to “small investor” above) that have little ability to fight back. Not the kind of stuff that gets 9 on 10 in my humble opinion. Before the government watchdogs come after me, I must declare that I am a bottom-up, value investor and believe there are a lot of undervalued shares that people should be buying to add to their long-term portfolios. At the same time there are quite a few shares that are still to be avoided. This general statement is true for any stock market anywhere in the world at any given point in time – no exceptions.

    “and then capitalized on the subsequent payments and political crises to cover up their speculative positions, making huge gains at the cost of small investors”…well, if I have sold something at a high price, with an expectation to buy it back when the price is low then I make a gain and achieve the objective I set for myself. That is what “cover up” means as opposed to a darker meaning of “cover-up” like a government trying to “cover-up” a problem in the way defence deals are done, etc. In any case there is nothing wrong with that – people take views and sometimes they buy stocks and sometimes they sell stocks. Now, there is something wrong if I as investor or speculator helped create the political crises or payments crises by funding whatever caused the crises to bring the stock market down. There are various factors that have caused the Indian share markets to sink some of which are:

    1. The NASDAQ technology bubble, now being deflated by earnings disappointments and more rational thinking by a breed of overpaid people called “equity analysts”,

    2. The global equity market bubble, now being deflated by a recession in USA, political numbness in Japan, and lack of leadership in Europe,

    3. A desire of investors to stay away from emerging markets given a fear that a USA slowdown will cause another Thailand, Russia, or Korea collapse (Turkey is already bust, and Argentina looks ready to sink),

    4. The Indian Budget which, in my view, gets 9 out of 10 for diction and language but 5 out of 10 for content and proposed action, may have not inspired the bulls to go out charging and buy shares once they read the fine print,

    5. The fact that we have corruption in our government machinery (true for presumably most governments we have had since Independence) as most recently exposed in the scam exposed by www.tehelka.com (I love that last line they have which says…”and what if we were the ISI?” how does any member of a government that claims to represent Hindutva read that line and not feel ashamed and embarrassed?)

    6. And, on a more specific note, the newspapers have reported for some time that new-age bulls have been buying shares of these high-flying technology companies, many of which have now collapsed in valuation due to the effects of point one above. These new-age bulls include some of the people raided, and many of the finest fund management companies we have in this country including the government-controlled Unit Trust of India and many new funds that have been launched to invest in TMT stocks. Some of these bulls have been borrowing money from banks to pay for these stocks and, since the prices of these shares had collapsed, were defaulting on their payments which – in turn – forced the banks to sell the shares and get their money back When the number of sellers is greater than the number of buyers, share prices decline.

    So, if the government investigators can prove that this bear cartel managed to influence all these 6 factors listed above they have a strong case to punish those involved (another JPC? Ho, hum…. wake me up when the folks responsible for the 1992 scam and the 1994 scam are punished). To be fair, the Economic Times does talk about the work that the investigators have to do…“While the fact that there was huge short-selling has been established, the investigators will have to prove a couple of things to clinch the issue -— one, that the bears acted in concert and with inside information, and two, that they short-sold select scrips to generate a larger momentum.” (By the way, when you are bullish or bearish, you do tend to buy the more liquid and well-traded names as the cost of buying and selling these more liquid names is less so that last phrase about “larger momentum” actually exhibits the ignorance of the way markets function as opposed to some diabolical conspiracy.)

    In the meantime, while all these investigations continue the jury is out on the following:

    1. Is this an act of revenge by a government upset that a budget that received a 9 on 10 from its fans should result in a stock market collapse and a loss of thousands of crores to “small investors”? (by the way, the small investors have lost many more thousands of crores from the cut in interest rates announced by the government in the Budget),

    2. Is this an act or revenge by a government that has just been stripped of its Hindutva garb and has seen its “we are for India” plank demolished by a machinery that for nearly 50 years, and irrespective of which party is in power, has worked against the interests of the country?

    3. Is our bear cartel so powerful that it can influence the collapse of the global stock markets and ensure that corruption is followed by many people in India (in the government and outside the government)?

    4. Is our bull cartel so powerful that when stock markets increase and the money of the “small investor” is used to buy junk that there are never any investigations because a rising stock market is seen as an endorsement of government policies?



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