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With a Little Help From My Friends... - Views on News from Equitymaster
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  • Jun 17, 1997

    With a Little Help From My Friends...

    And God said let there be light. And so there was light. And then he gave us a bolt of lightning only to leave us blinded by its brilliance and enveloped in its darkness. Let's test the following hypotheses to check the validity of the bull run: someone is playing god and wants the market to go up and is doing whatever they can to make it go up. FII buying is not new..

    This episode of the bull phase is supposedly sponsored by an aggressive "let's get our India weightings higher" buying by foreign institutional investors before they went off on their Chinese New Year holidays. The belief that the US markets are peaking is causing many funds to buy into emerging markets while booking profits in the more mature markets. This rush of money is being witnessed by other Asian markets like Hong Kong, Malaysia, and Thailand. But despite all the recent fanfare about FII purchases, the fact is that although FIIs bought a net amount of Rs 1,422 crores over the last 3 months, the BSE-30 Index actually declined by 641 points over the same period (see table). FII buying may have sapped excess floating stock from willing sellers (the Indian mutual funds), but it had not put Dalal Street on fire. Maybe, then, it is not the buying by the FII that has created this rapid-fire rally but, rather, a shortage of sellers.

    Investors were chained..

    The shock of seeing the stock market collapse by 15% in 15 trading days in November prompted someone somewhere to issue a "security specific margin" on 29 shares. According to this safety net, any sale of shares by an investor was to be accompanied by a payment of 15% of the value of the sale even if the sale was for delivery. Under this rather ridiculous rule, an investor who wanted to sell 500 shares of Tisco (total value about Rs 1 lakh) was actually supposed to send a cheque of Rs 15,000 to his broker and then wait for 2 weeks to get his money back! Shares are supposed to be liquid investments and imposing a margin on people who are prepared to physically deliver shares is absurd. In their desire to curb speculation, the authorities actually hurt people who needed money and could it be that, because of this rule, selling pressure was reduced? The graph certainly suggests that the decline in the Index was successfully arrested after the introduction of this margin.

    North Block heads West..

    And then we come to the on-the-spot visit of Ministry of Finance officials to Bombay to understand why the stock markets are behaving the way they are and why captains of Indian industry are making all this fuss about tight money. The government has classified this "tight money" as the elusive unicorn and all their indicators (lowest inflation in 6 years, highest rate of industrial production in 5 years, highest foreign exchange reserves ever) do not point to a falling stock market. Normally, economists do not quite worry about what stock markets do but this is election time and economists, as we have now realised, can quite easily become politicians. To complete this circle we must not forget about the industrialists who, despite the presence of the Jain diaries, still have to fund politicians. However, with stock markets in the doldrums, such funding is difficult. Since the inflation and GDP numbers have already been doctored to help the election campaign, a little more nudging here and there can only help the greater cause.

    Now you see me, now you don't..

    Meanwhile, the Unit Trust of India which has been a net seller of shares over the past 6 months has had a change of command. And changes in any organisation generally means that the new man needs time to absorb his new job, his responsibilities, and learn how to go about doing it. So there was relative inaction from the biggest seller of shares at a time when the market was rising. There were also rumours about a potentially large auction in shares of Reliance. Knowledgeable marketmen and newspaper reporters put that figure at 44 lakh shares (value about Rs 88 crores). Bears, fearing the worst, scrambled to cover up their positions in speculative counters and the stock market zoomed. Well, the actual auction was less than 4 lakh shares or 10% of the rumoured amount. Surprise, surprise.

    A Valentine gift..

    On February 9 there was another visit by the Ministry of Finance people from New Delhi. Probably happy with what they saw (a stock market up by 20% in 10 days and foreigners on the prowl), they figured it was time to be nice to the small investor again. On February 14, the authorities were gracious enough to give us a Valentine Day's gift and scrapped this strange animal called "security specific margin". Now I am free to call my broker and tell him to sell my shares. And, for a change, HE will be giving ME a cheque for something that I am selling. Aaah, these visits to the wonderful world of Regulatory Wonderland are good once in a while because they remind us of how easily we can be fooled into believing anything.

    Hand signals..

    It takes two hands to clap, but only one to spank (or should that be rap?). My gut feel is that if UTI begins to sell again and we investors get wise to what has happened, no amount of foreign buying or government prodding can keep markets from going where they are supposed to. What we have witnessed may have been blatant direction-giving by the powers that be to a stock market that is being seen as a gauge of funding levels for the elections.

    Do I have a backing for this hypotheses or is it, like this market leap, all air? No, I have no proof as to what happened in all these high level meetings and, sadly, the government does not release the minutes of the meetings (as the Federal Reserve does with a time lag), but looking at the way the Indian currency has suddenly strengthened against the US Dollar I would not put it past anyone to have a few winks going around the table with their tea and sandwiches as they discussed this funny thing called a bearish market.

    The bears, economists, and analysts may be right about the tight money conditions, high interest rates, rising fiscal deficits, increasing infrastructural bottlenecks, and other such gloomy events but betting careers and reputations by giving predictions on Index movements is dangerous stuff (as I, too, have learnt). Particularly when Humpty Dumpty is being helped by a bag full of dirty tricks. Floor trading may have been replaced by computer terminals but someone was gesticulating wildly as to which way they wanted the markets to go. (Sorry, no free tickets to the World Cup finals for guessing the identity or the direction!).



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