Bulls, Bears and Other Beasts

by Santosh Nair

  In a desperate measure to staunch the huge outflow of FII money, SEBI reversed the restrictions it had put on P-notes the previous October. But FIIs were in no mood to invest fresh money in Indian equities, and the freedom to take up positions through P-notes made no difference to their outlook.

  SEBI then tried some strong-arm measures. It asked FIIs to disclose shares borrowed from P-note accounts for short-selling. This was to send a subtle signal to the FIIs that short-selling was not welcome. The smarter among the FIIs took the hint and immediately stopped short sales. Some others persisted. Within a week, SEBI had banned FIIs from short-selling using borrowed shares. But this measure too had little effect. In the net, FIIs sold over Rs 14,000 crore’s worth of shares in October 2008

  It turned out to be a rough month for domestic mutual funds too. Strangely, it was not the equity portion of the business that was causing them a headache, though stock prices were in a free fall. As was the case in the US, money market funds in India too witnessed massive redemptions beginning mid-September and extending all the way up to end-October 2008 In all, corporates and HNIs pulled out Rs 71,000 crore during this period.

  Many investors in money market mutual funds shifted their funds to banks, which were offering much better interest rates, besides being safer. Money market funds invest in certificates of deposit of companies, in debentures and in commercial papers (unsecured short-term borrowings by companies with a high credit rating). Swamped with redemption requests from investors, money market funds tried to sell their assets. To their dismay, they found no takers for those securities. They tried borrowing from banks to pay off their unitholders, but banks were stingy in honouring their credit lines to the stricken mutual funds. For a long time now, banks had been nursing a grudge against mutual funds as their (mutual funds) debt market schemes were direct competitors to the fixed deposits they offered. And while banks may have had sound reasons for not lending too much to mutual funds in the current situation, they secretly enjoyed the spot mutual funds were finding themselves in, and were now legitimately extracting their pound of flesh.

  Banks charged mutual funds anywhere between 11 per cent and 24 per cent, and there were a few cases where some fund houses were charged 39-46 per cent interest for two- or three-day loans. Banks were also refusing to accept the Certificates of Deposit (CDs) of private banks as collateral for loans. RBI had to intervene with an emergency lending window at concessional rates, and the finance ministry had to prevail on banks to lend money to mutual funds at reasonable rates and to accept CDs of private banks as collateral.

  Another notable incident in October was the near run on ICICI Bank, which became the centre of nasty rumours following the demise of Lehman Brothers. The stock tanked from Rs 450 to Rs 305 in three trading sessions on market chatter that its foreign subsidiaries had suffered massive losses as a result of a sizeable exposure to securities issued by Lehman Brothers. I have little doubt that the rumour was a well-planned operation by a cartel, which hoped to profit from an ensuing crash in the stock price.

  The overall environment was such that people were willing to believe the worst. And a falling stock price would definitely lend credibility to the tittle-tattle that something was wrong with the bank. As speculation about the bank’s financial health spread, panicky investors lined up at ICICI Bank branches to withdraw their money. This was the second time that ICICI Bank had to face such a situation, the first time being in April 2003, when its branches in south Gujarat faced massive withdrawals.

  I was tempted to join the mob in bashing the stock when I first heard the rumours, but checked myself. If I decided to go short on the stock, the size of my position would have to be big enough to give me a decent profit. Inevitably, there would be a probe later on, and all the big sellers would be investigated. I would then have to waste time explaining to investigators that there were no ulterior motives behind my trade. I decided it was not worth the headache that was likely to follow.

  I had an unbelievable winning streak right from January all the way till April. My performance the following months, up to September, was average, as I lost money on some positions betting on a rebound. But then, one can never be right all the time, and I was perfectly content to yield to the law of averages without my ego getting in the way.

  Most of the stocks I had shorted were purely my own calls. Then there were stocks in which I traded as part of a group – hunting for prey in packs, as I loved to call it. Our favourite targets were stocks in which promoters themselves were known to dabble heavily. The strategy was simple; together we would hammer the prices of the stock futures. As the price of the futures fell, the stock price too would move lower in tandem, in turn triggering stop loss limits and margin calls, aggravating pressure on the stock as weaker players started selling out. Stocks favoured by short-term players like hedge funds too fitted the bill. However, even as a group we were not able to influence the price of a large-cap stock beyond a point. But with a little bit of planning, we could call the shots in many of the mid-cap stocks.

  Sometime in October, GB suggested that we go after this energy player, which was a darling of fund managers at the peak of the bull market. This stock too had taken a pounding in the market downtrend. But there were additional factors weighing down the stock. Some ill-conceived acquisitions and glitches in the company’s products had soured sentiment for the stock, and by mid-September, its price had nearly halved from its record high. By early October, the stock price had fallen below Rs 100, which was when GB suggested the stock as a potential target for a bear raid.

  I looked at its price chart and told GB that it did not look very appealing to me.

  ‘The stock is already reduced to one-fourth of what it was at the start of the year; assuming there is still some downside left, how much lower can it go?’ I asked GB.

  ‘You forget one of the market truisms I told you long back, Lala: bull markets have no tops and bear markets have no bottoms,’ he retorted.

  ‘I haven’t forgotten any of your teachings, Govindbhai. The charts are telling me that there is a desperate attempt to keep the stock price above Rs 100. And I am told the promoter is well networked with fund managers and other investors to be able to defend his stock price in a crisis situation,’ I countered.

  ‘That makes the game all the more interesting, doesn’t it?’ GB said.

  ‘Maybe. But there are other, easier stocks to make money off, so why get into this one?’ I said, trying to reason with him.

  I was beginning to suspect that he may have a personal reason for going after this stock. ‘Never let your ego affect your judgement’ is one of the cardinal rules of stock trading. Some players have come to grief violating this rule, but I have also known traders who would, once in a while, indulge their egos and even get away with it.

  ‘Trust me on this one, Lala, there is some good money to be made here,’ GB persisted.

  I was now beginning to feel that he may know something the rest of the market probably did not.

  ‘I am in. So what’s the inside dope, then?’ I asked.

  ‘Ah, Lala, since you are being too nosy and I trust you enough, let me tell you this: Old Fox feels the stock is ripe to be taken down,’ GB said.

  Old Fox was the code name for one of the most astute players on Dalal Street who had few equals when it came to both trading and investing. I trusted Old Fox’s judgement, but not so much as to blindly follow him into a trade. Still, I was ready to be a part of this operation because I was curious to see how much lower this stock could be beaten down.

  We kept hammering away, and the stock once again fell below Rs 100. The overall downtrend in the market helped our cause. The stock kept dropping a few percentage points every day. But to make big profits, you needed that one round of panic selling that would help you cover your positions without sending the prices shooting up.

  We were waiting for that one big break, but it seemed to be taking forever, despite the weakness in both the stock and the
overall market. We suspected that the promoter was doing his best to defend the stock price. The settlement of the current F&O series was barely a week away. We were wondering whether to move in for the kill and risk a loss or cover up our positions for a modest profit.

  We finally got the break we were waiting for. GB got to know from a company insider that the promoter was taking a morning flight to Germany on Friday to meet some investors over the weekend in connection with the company’s fund-raising plans. Old Fox proposed that on Friday morning we hammer the stock’s futures with all our might.

  ‘This could be our best shot at breaking the price; I don’t think there is anybody in his absence to organize a fightback if the price falls sharply. And even if there is, I doubt that person will be as effective as Mr T (the promoter) himself,’ Old Fox told GB.

  As soon as the market opened on Friday, we fell on the stock futures like a pack of wild dogs. And then, we had our second stroke of luck which made me feel the gods were on our side that day. The company had been facing trouble over the quality of its products exported to international markets. Just the previous day, there had been a major problem with its products at the location of one of its US clients. This news was flashed by a foreign newswire service around noon. After that the stock price went into a free fall accompanied by heavy volumes. It finally ended the day around 40 per cent below its previous day’s closing price. We covered our positions almost entirely in that fall.

  ‘So, Lala, are you now convinced that the stock still has enough room to go down, even after having fallen 75 per cent from its peak?’ Old Fox asked me the following day, when we all met for lunch at his place. I understood that GB had filled him in on my initial reluctance to participate in the operation.

  ‘Maybe or maybe not, but I guess the bulls would have been demoralized the moment they realized that it was Old Fox that they were up against,’ I replied.

  Old Fox laughed. I knew he was secretly flattered.

  28

  The Turn of the Bulls

  Relentless selling by FIIs had dragged the Sensex below 9,000 and the Nifty below 3,000 by the last week of October 2008. It was the bleakest Diwali in six years. Every single support level for the indices was crumbling under the weight of panic selling, which in turn sparked off more panic selling. After the first wave of sell-off in January, it looked as if the Sensex would stabilize around 15,000 after a nearly 30 per cent drop from its peak. When that level gave way, investors thought 12,000 was the bottom. When that too was breached, they felt 10,000 was inviolable, no matter what. But the Sensex fell below 10,000 and then below 9,000 too in just two trading sessions. The Nifty dropped as low 2,252. The climate of fear made it appear that no target on the downside was unimaginable.

  Stocks which had been touted as blue chips and world beaters in the making had been smashed out of shape, and their high-profile promoters had turned recluses. Last year during this time, the mood everywhere had been euphoric. And now the pendulum had swung to the other extreme – there was intense despair all around and some were even talking about the imminent demise of equity investment. Many witty SMS’s did the rounds, rubbing salt into the wounds of those who were hit so badly they could not see the humour in them.

  ‘Now showing on Dalal Street: Saare Zameen Par’, went one of them, taking off on the Aamir Khan hit of that year Taare Zameen Par.

  ‘Full form of NIFTY: No Income For This Year’, went another.

  I had made my fortune going short on the market. But there are no winners really in a bear market. While most of the profit I had encashed was safe, the value of my portfolio had shrunk considerably. I had been careful, though, to stay away from the flavour-of-the-season mid-cap and small-cap shares, most of which turned out to be junk. Not that I did not invest in any second-line shares at all; but I had consciously kept them to less than 20 per cent of my portfolio. Having been around in the market for nearly three decades, I had seen plenty of upcoming blue chips vanish without a trace. The returns from the tried-and-tested frontline stocks may not be spectacular, but over a longer period of time they are both handsome as well as consistent. Trading profits are never consistent, however skilled a trader may be. And even the most disciplined of traders are known to suffer from the occasional attack of overconfidence, which can at times be fatal.

  Across the globe, central banks and governments had begun taking steps to halt the rapid slide in their respective economies. ‘Economic stimulus’ and ‘bailout package’ suddenly became the buzzwords as the unravelling crisis in financial markets threatened to push the real economy off the cliff.

  Back in India, many retail brokerages had started to lay off employees. The situation was to get worse in the coming months. In many cases, the brokerages themselves were to blame for the mess they had got into. In their pursuit of a higher valuation, many had embarked on a reckless expansion spree, adding branches and manpower. Private equity investors and foreign institutions, who were willing to pay exorbitant prices for a stake in broking firms not long ago, suddenly became choosy and tight-fisted. Owners of brokerages realized that they could no longer demand high valuations based merely on the number of branches they had. Brokerages knew that many of their clients had made such heavy losses that they were unlikely to return in a hurry. New clients showing up in the foreseeable future seemed altogether unlikely. The brokerages did not see the need for too many employees even at their profitable centres now.

  November brought its share of misery, the developments rattling the entire nation. On the evening of 26 November, a group of armed terrorists from Pakistan entered Mumbai by sea and went on a rampage, killing 166 people, including 28 foreigners, across key locations in South Mumbai. This was the most vicious terror attack on the city since the serial blasts in March 1993 that killed 350.

  Though the stock exchanges were closed for trading the following day, both the Sensex and the Nifty ended the day with modest gains when trading resumed on November 28. That the markets appeared unfazed may have been admirable, but it also revealed the merciless face of financial markets, which at the end of the day are only concerned about profits and losses that can be quantified. Calamities and deaths mean little to the markets unless it affects the economy and corporate earnings. And here lies the irony – the market moves on sentiment, and yet is unemotional. I do not really trust market reaction following a calamitous event of national or global import. My experience so far suggests that behind the market stoicism operates a desperate government, attempting to ensure that its markets send out an it’s-business-as-usual signal to the world.

  New Year celebrations were muted, given the losses suffered by so many. Few nursed positive hopes for the coming year. I was reminded about the conversation at the New Year party in Alibaug a year ago, where just about everybody present was emphatic that the market would continue its ascent. Where did those Japanese funds with sackfuls of cash disappear, I wondered as I replayed the discussion in my mind.

  The only headline-grabbing purchase by a Japanese player during the year was Daiichi Sankyo’s takeover of Ranbaxy. Daiichi bought out 34 per cent of the Ranbaxy’s promoters’ – the Singh brothers’ – stake in the company at Rs 737 per share and made an open offer to buy 20 per cent more from minority shareholders at the same price. Daiichi eventually sold Ranbaxy to Sun Pharma in 2014 for half the price it had paid to buy it. In the interim, there were a series of regulatory raps for the company and a $500 million settlement charge for exporting adulterated drugs to the US.

  I thought about the market operator who had hosted the party, and his prognosis of the coming doom because of the havoc in the sub-prime loan market. He had analysed the situation correctly, but had not acted on his own advice in time.

  Not many in the market would carry pleasant memories of this year, even though they were in the thick of action while history was being made.

  29

  Satyam’s Big Lie

  Year 2009 started on an upbeat note, with the Sensex
surging 256 points in the first trading session. It gained another 350 points over the next three days, and everything seemed to be looking up when disaster struck again. This time, it had nothing to do with the chaos in the global financial markets.

  On 7 January, before the market opened for trading, B. Ramalinga Raju, founder of Satyam Computer Services, wrote to SEBI and the stock exchanges confessing that he had been cooking the company’s books for the last few years by showing non-existent revenues and bank balances. His confession was the final nail in the coffin for the company, which had been in the eye of a shareholder storm when it floated a proposal to acquire stakes in Maytas Properties and Maytas Infra the month before.

  Raju’s admission sent the Satyam stock crashing by 83 per cent, to Rs 30, from the previous day’s closing price of Rs 179. Panicky investors dumped shares fearing that it was only a matter of time before the company would go belly up. The stock finally ended the day at Rs 40.

  There was a sense of vindication among fund managers who had always steered clear of the stock and among analysts who were forever bearish on it. For a long time now, this minority group had been of the view that the Satyam story would have a bad ending. Despite being the fourth largest IT services company in India, after TCS, Infosys and Wipro, Satyam had not quite been able to convince the market about its corporate governance and accounting standards. Its PE multiple was always lower than that of its peers. In other words, even those who bought Satyam shares were reluctant to value the company as richly as they did the other three. Still, there were enough takers for the stock because the company was able to demonstrate consistent growth in earnings, quarter after quarter.