Archive for January, 2008

Now I'm getting off the soap box to tell you what I did. I drove from Bangalore to Mumbai, where I am today. I drove on Friday the 19th, and on the way, near Hubli I got an SMS from a friend saying, "If you can see this message, note that Nifty has crashed 200 points or so". It was 3 PM, and I felt good about the four positions I had - 100 short Mini Nifty at 5940, 100 of Nifty 5800 put at Rs. 60, and two ICICI bank puts around the 1260/1290 levels for about 20 Rs. a piece. I'd held these for a while, keeping things thin as I had no intention of extending myself over my transfer.

I decided to hold on to the short positions and not trade (I could tele-trade if I wanted to) and later, wrote a blog post in the hotel room at Hubli, saying that my advise was to sell, regardless. If anyone felt really bad about selling, they might wait for a rally instead.

On Monday as the packers were moving our stuff in, I had no time to look at the markets, until around 3 PM, when I saw the 1000 point + drop on the Sensex. The Nifty was now at 5400. Fantastic, I thought - I just made my trip cost in one days move! I was long nearly nothing, with most of my portfolio being sold before I left - I had the puts to cover my mutual fund investments and some other shares I owned.

Tuesday was a murder for the markets. After opening circuit down and trading halted for the day, the Nifty moved to 4500 before moving back up. By Tuesday evening the positions I had were partly covered, and I was up with a profit of over 1.5 lakhs. On a net short investment of about 1.2 lakhs or so. I had to put on a few other positions to cover profits. Since the ICICI options were thinly traded and I didn't want to exercise, I could book the profit by simply buying a future at a good point, say 1170, which effectively resulted in about 35K of profits for an investment of about Rs. 6,000. But the Reliance Money site was so slow, and my connection was also quite horrendous, which resulted in huge slippages and basically bad fills on the orders. Anyways, the profit was so wide I wasn't unhappy.

I eventually covered all shorts at around the 5,000-5,100 levels on the Nifty, and netted my profits like so:
100 Mini Nifty Short sell: Sold at 5940, bought around 5100, profits of 80K or so for an investment of about 80K.
100 Nifty 5800 put: Bought at 60, Sold around 700, a 70K profit for a net investment of 6,000.
350 ICICI Put: Bought at Rs. 20, sold at Rs. 100 (net sell with a future offset), profit of around 28K for an investment of 7K.

There were about two trades I haven't mentioned here, which resulted in a 10K loss or so, but the net result was about 1.6 lakhs in profit.

While this was good, you should consider that this does not happen every week (although nowadays it seems to!) and you can lose heavily if you are on the other side of the move. But it indicates one thing - falls can be sudden and far deeper than you imagine.

Buying deep-out-of-the-money puts can be immensely profitable in such situations. I bought the Nifty 5800 put when the index was at 6200, for Rs. 60. I sold them at over Rs. 700. That means if I had bought a 8% cover-put (meaning a put that covers me beyond an 8% drop) every month I would have broken even if there was a crash every 12 months! And as we have seen, there have been at least two-three such crashes every year - meaning that buying deep-otm puts have been profitable. (Not to say that they will *remain* profitable, because the landscape has now changed, and the premiums for such options has gone up considerably)

Where option premiums are ridiculously high, it may be better to write options (sell them) than to buy them. For instance, today is expiry day, and yesterday the Nifty closed around 5160. The 5300 call was priced at Rs. 30, and the 5000 put at Rs. 40 - this has some phenomenally high implied volatility! Which means, if you wrote both these options, you would be covered for ONE day range of 4930 to 5370. And the max profit (between 5000 to 5300) would be Rs. 70 - that is Rs. 7,000 for a 120K investment if you sold 2 contracts each way. But the point is - it's for ONE DAY. If you're willing to foot the risk (which is actually a lot lesser than it seems) this could be quite profitable. (Heck, let me wait and see the end of today if things did pan out to be profitable!)

(Note: Do not try this at home. This is purely information and you should consider it fiction.)

This has been an incredible 10 days. I watched as things unfolded slowly but surely, in the downward direction. To be honest, it wasn't unhappiness - I was net short the market - but it was quite fascinating to watch as people on TV and the newspapers pointed fingers to each other, the NSE, the government, the "foreign hand" and all sorts of things.

Firstly let me say this. This is the stock market. There are ups and downs. If you can be happy with the rapid upside, you should learn to live with the downside (and perhaps profit from it as well). There is no "hidden force" that controls the market. Everyone likes to think there is a set of people who are so clued in that they can move the market when they want. There are no such individuals or entities. The market moves because of collective sentiment, and some people can help drum up sentiment, but the large part of the movement is by other people - people like us.

The next time you hear someone tell you that "Big party is behind this stock they will take it up" - don't buy, because the big party is you. And a lot of people like you who listen, and buy the stock and by a self fulfilling prophesy, the stock price goes up. Surprised? Ask all the people who bought such stocks as they were going up and felt really good, and then never really sold the stock. Obviously it went down, but they don't blame anyone but themselves, saying that they "should" have sold at the top - unfortunately it was their own buying that took it to the top! The brokers quietly sold and told them later that they should have also sold, after all booking profit is good - and people are usually convinced. Not just that, they will take the NEXT tip also, and put more money and expect to get out earlier.

I got asked this yesterday - "Stock X was at 400 when I bought it on a tip, it went to 2200, and now it's at 1600. It is being controlled by The Big XYZ. Should I average?". The company has very little fundamentals, but the tip was good on the price - but why average now, it seems like a perfect setup for the 'bakra' to get in!

And while some investors have more money and some less, the big boys in the party cannot dictate prices of large cap stocks. The prices are controlled by a much larger entity, the market itself. Sometimes, like religion, we tend to find solace in the belief that "someone" can control our destiny in the markets. The marketplace has no divine entity, and is as agnostic as they get.

What am I really saying? This is the time to avoid tips, and learn a little more about the market. The days are gone when any stock would go up 30-40% in a year, from now on we must learn to earn. You will hear a lot of news, a lot of stories and a lot of pessimism - ignore everything. There is always money to be made in the markets. Whether it is to short when going down, or to find the few stocks that do well in a bear market, there are ample opportunities available, and you must educate yourself.

I've been involved in moving to Mumbai - so no posts for the last few days. Today I am in Hubli, and preparing for tomorrow's drive to Pune with my wife and 11 month old Varun. And I see that the market has crashed BIG time, and with my reliable Reliance Data Card I see how much I've lost (and gained!)

This looks pretty bad - Nifty at 5700, down from the 6300 levels just a few days back on Jan 8. A fall of 600 points in about 10 days, most of which happened in about three trading sessions.

I've maintained that the market has been overheated for the last three months - in fact I sold nearly all of my short-mid-term holdings in November, when the Index was around this level (5700 types). Still, this momentum was driven largely by retail and could have taken us anywhere, but it seems to have run out of steam now.

Is this the end? Will the index go down further or go back to earlier highs? I'll be honest: I don't know. It's going down, the primary trend is down, and I would follow the trend. There may be pullbacks - bear market rallys are sharp and fast - which can seem to be an uptrend again. Don't fall for it - I would use it as a place to get out at potentially lower losses on long trades.

My trades: My trailing stops have been triggered - Reliance for one (which I need to get out once I'm settled in Mumbai), Canara Bank (which I'm out of now) and some others, though I'm sticking with Pharma for now. The NiftyBEES which I hold is dangerously close to my exit point too.

I had also bought some 5800 puts (for Rs. 60) when the index was at 6200. Those seem to have helped - they are currently priced at 209+. I might choose to get out of them but only on a trend reversal. I have some short positions in ICICI which are doing quite well, and some more in the Mini Nifty contracts which is good because I can get out 20 at a time rather than 50 at a time. I've pretty much offset any long position losses against my short contracts.

If you asked me, I would simply say sell now. But I've been known to be wrong, so don't take my advise at face value. The warning signs are out there, and things are ominous.

Capital One, a credit card issuer in the US, cut earnings in a call today:

The company said it now expects charge-offs of about $5.9 billion in 2008 amid expectations that the U.S. economy will be weaker. That's up from the $4.9 billion to $5.5 billion Capital One predicted in November.

The warning comes on the heels of Countrywide Financial Corp.'s disclosure Wednesday that the percentage of borrowers who missed payments on home loans last month rose. The nation's biggest mortgage lender said some 6.96 percent of the loans in its servicing portfolio were delinquent last month, up from 5.02 percent in December 2006.

And to add to the glory, Merrill Lynch and Citibank are both looking for capital:

Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments.

Both Citi and Merrill are scrambling to nail down the details before they report earnings next week that are expected to include additional losses stemming from their exposure to mortgage-related investments. Together, these additional losses could reach as much as $25 billion.

Not very nice to hear, is it? And Ben Bernanke just announced he'll cut rates again. A rate cut for India soon then?

I'm moving to Mumbai soon, and have just returned from a family trip to Mumbai and Delhi, back to Bangalore. This post is not going to talk about investing per se, but about what I feel is the future.

The traffic in Bangalore is horrendous. I live near the city center and even then, driving to a place less than a kilometer away can take half an hour. Mumbai seemed to be the same - the roads are wide, but traffic jams are heavy and huge. Delhi has even wider roads, fantastic infrastructure and great flyovers. Yet, one day we were stuck on a road where there were at least 8 cars squeezed between the median and the pavement. The other side, hapless passengers returning from the airport were stuck in a massive flyover jam which lasted more than 2 kilometers as far as I could see.

We don't really need wider roads. Bangalore, I thought, was screwed because of its lousy infrastructure, and still, improving the infrastructure is not going to be about widening roads, or building a metro. No, people who take trains are different from those that take cars - see Mumbai for an example. It's not even about our population - we have a lot of people all right, but the problem is that they crowd into our cities and the countryside is barely populated.

Yet, we have places like Boston, London and New York where despite large populations, the mass transit systems and the mega size of the cities (London is perhaps quadruple Delhi's size) makes a difference. But I don't think it's just that - after all, there were times when New York was crowded and dirty (and parts of it still are), London's Tube was horrendously crowded and so on. These cities moved past those challenges by focussing on building their infrastructure and creating big suburbs, large sub-cities and so on.

Now that's what the SEZs are about, that's what mega-townships like Dwarka and Navi Mumbai are about. (In fact, Mumbai and Delhi are the only cities that have a reasonable plan to expand their borders - among the big ones. The rest are doing piecemeal work) Yet, the transition does not happen in a short time - it is a long, slow process that needs serious political and corporate will. Companies need to move. The local municipalities need to provide for roads, power, water and sewage, at the very least, and create by-laws and layout specs so that growth is not hampered. (Dwarka is an example) We have to urbanise our countryside, and not attract more into our cities.

But these things will take time. Companies won't move unless they see that their employees CAN move, meaning there should be something in terms of housing, power, water etc. Gone are the times when BHEL would build a massive township, with employee quarters, at the city's borders, and provide for power, water and road infrastructure themselves.

Municipalities will not do anything unless a fire is lit under them. Lack of funds is one example, and the government needs to free up and open the municipal bond schemes to a much larger level, and allow for bond insurance. The municipalities must then be encouraged to profit and provide bonuses to their staff based on performance. A huge change, again, not something that will happen overnight.

What's to happen of our cities till then? The pace of these changes are way way slower than the pace of our growth. And given that we cannot rapidly progress the infrastructure development, only one thing results: we will slow down.

We *have* to slow down. So that our infrastructure catches up, so that our cities become liveable again.

But we can't slow down in a market driven economy. It's like water flowing downhill - you can't stop it by putting small hurdles or bumps. It has to hit a trough, collect and then move on. Hitting a trough, in the economy, is going to have to be abrupt.

Why abrupt? Because any attempt to slow things down will result in job losses, lost profits and in general, tears and blood. Look at the dollar/rupee - as pressure sees it come to a 39 level, it's already apparent that profits are hit hard, and if it keeps going this way we'll see lakhs of unemployed rushing out of apparel exports, and perhaps even software and BPO exports. Slowing down anything else - like bank branch licensing, airline rollouts etc. have only seen reversals because it hurts a few people who then complain that they are left behind.

So we'll have a sudden fall. Some external trigger or something we haven't even thought about may induce the fall - and eventually all the stuff built on shaky foundations will come right down. For the first time, I am beginning to think it will be a good thing. Our companies will have time to consolidate. Some companies will go down the drain, as they must, because failure is as important to a mature economy as success.

Today, we are at phenomenal peaks in terms of market growth, earnings, and profits. We'll continue to grow, no doubt about that, but not at the same frantic pace. We have to learn to live with lowered expectations, if only for a while.

To the investor this is horrible. Slowing down usually results in a sharp cut in valuations, despite the fact that it is a required thing. Money goes to what is hot, and we'll probably start looking for those 10% fixed deposits again.

Now, don't take what I say to happen overnight. I don't know when it will happen, or how. I don't know if it will happen this year. All I know is that I'm not scared of it any longer. It will result in a sharp cut in my own money since I'm invested - but big deal, it will ensure that the markets are still there tomorrow.

And I think we need a recession. We're burning out in terms of everything - work, traffic, markets and even cricket. Everyone needs a little break.