Archive for June, 2008

This is breaking the back of inflation all right. In the 70s Paul Volcker did the same thing, but to really do it he had to take rates to 16%. It took the US two recessions (which means high unemployment) in the process. Will we follow? If inflation doesn't subside, there won't be much alternative. The idea behind an interest rate increase is sacrificing growth, but neither the RBI nor the Finance ministry was okay with that.

Till now. It's getting evident that for prices to drop, growth has to be moderated. We aren't going to see much more of "India grows at 10% GDP".

And why, as it seems on TV, are we surprised? This is the ONLY reaction possible, to inflation rates of 11%. My guess is that in tandem they will hit the dollar hard to push it below 40 again in the next few months, and inflation will look moderated.

The rate increase is bad for auto and real estate first, then banks. After that, everything else.

Disclosure: I am trading systems so I will be long or short some stocks based on our system, and I don't know the reason (it's a mathematical formula that figures it out, not my macro analysis). I will therefore have positions in the market regardless of my opinion.

That was 1996. The firm had just $900,000 in assets, more than half of which came from Einhorn’s parents back in Milwaukee. It was barely enough to rent an office—they made do with a single windowless room. Twelve years later, Greenlight has over $6 billion under management. Einhorn has hit many balls hard, and some of them have gone to the moon.

Though Allied tried to brand him in the public eye as a ruinous short seller, it is difficult to overstate Einhorn’s stature within the hedge-fund community. His peers respect him personally—“A super-high-quality human being,” says Bill Ackman of Pershing Square Capital, who has known him for about eight years—and more than that, they revere his acumen as an investor. He is, for the most part, an old-fashioned stock picker. Though he does engage in short selling, most of his positions are long, and they include companies like Microsoft and Target. Unlike other types of funds, Greenlight doesn’t use borrowed money, or leverage, to amplify small profit spreads, nor does the firm rack up huge trading volume. The nine analysts who work for Einhorn take weeks, if not months, to research companies, and when they find one that he likes—or doesn’t like—he tends to hold the position for a long time. Given this approach, Einhorn can’t afford to be wrong very often, and he hasn’t been. If you had given him $1,000 in 1996, he’d have turned it into $14,600 by now.

These are fundamental shorts - which, like fundamental buys, are based on facts, not price. All Einhorn did was decide that a company was in trouble and lying about it. He shorted Allied and Lehman on information that was publicly available - that you and I could have used to the same effect. People rebuke such short sellers, because they believe that no one should profit from a company's failure. Or that innocent other shareholders should not be paying for a shorter's profit. Or some such excuse. Even companies hate short sellers of their stock - the Enron CEO, Jeff Skilling, called one an "asshole" in a conference call prior to Enron's bankruptcy.

Jim Chanos was an open short on Enron. He went short and made his analysis public, so other people could also see what was wrong.

Recently, Bill Ackman shorted MBIA and Ambac and released an "open source model" showing how bad the situation is, with facts.

Shorts are essential to the ecosystem, as much as bulls. But you shouldn't be manipulative (i.e. short only to bring the market down) like some operators in India did.

Is there a case for a fundamental short in India? I'll leave that for you to think about.

The high of the day was 660! That's ridiculous, obviously but why did it go that high? Let's look at a 15 second chart.

It's off the chart, but the price was on a very low volume - look at the much higher volume bars after it, and probably was just one share transacted (don't have that much patience to investigate).

If a single share transacted could have been at this level, it could be a simple rigged transaction to "show" a price. Now if one could "show" such a price it would be very simple to do a bulk deal, no?

So everyone waiting for Ranbaxy to cross 700 might just see such a transaction, a single share traded at the open, above 700, and the bulk deal happens - and everyone else gets only much lower prices.

Be careful with Ranbaxy speculation. I know I said that the price ought to go up (more for fundamental reasons), but the last few days have seen dropping volumes with a rising share. And on such news this should not happen. The path of least resistance is now down - so any short term speculation on Ranbaxy's price going up may be disastrous.

On a different note this is horrible for us system traders - as our systems depend on the data. One random off point like this can hose us - and that's why we have to focus on removing such random data points from our systems (1 share traded etc.)

So if the Ranbaxy promoters need to do this transaction the price needs to go up; and if they save 1000 cr. would they not be incentivised to pay for a few more shares and push the price up? With the average daily traded value around 250 cr. a push to the price can easily be made with a few hundred crores. It may not happen immediately but it should be looked at carefully - huge volumes may indicate this activity. (Note: there's nothing wrong with doing this, as the intention to sell is public knowledge.)

My analysis: Heck, this is a deal and a half. The price should reach the 737 mark within a year, and if Pfizer settles on Lipitor it's a huge bonus for the company. I've liked Ranbaxy - personal reasons though. After my father passed away in 97, some Ranbaxy shares he bought moved to my mother's name - and today it is 20x of the 1997 value. In fact, today my mother receives as much dividend a year as Dad had paid for the shares in the first place. It's ensured a good living for at least one middle-class family; for that, I must thank the promoters and wish them the very best.

Is this profit booking? Lehman Brothers today announced that they would raise $6 billion in capital, and will likely have a $3bn loss. Lehman brothers has huge investments in India and is likely to be liquidating them enough to show a profit. And worse, others are probably pre-empting LB sales and trying to sell too, causing some panic.

Or is this an expected move? I have been bearish on the market and now my suspicions seem to be coming true. As of today the EPS growth of the Nifty is less than 12%, for a P/E, even now, of 18+. If were to have a P/E of 12, we'd get to the 3100 levels on the nifty - a further 30% drop from today (4500).

But this may not happen suddenly. Slow torture is what it looks like. Even shorting traders will find the going tough - bear market rallies are very very severe.

I've moved completely away from discretionary trading to a very system oriented approach. One system I use told me to be short since 4900 (friday before last, or the 30th of May) and I have been so. I booked profits today as it had reached a level where I couldn't squeeze it any more. Regardless of what the situation is, I will let my system tell me what to do - and in the process we're researching more systems. This is very tension free. When you trade, you don't think. When you think, you don't trade - you test.

In the current situation, the system's done about 4 trades since May 15, and given me a profit of around 8% already (post brokerage and all that). That is consistent with this year's set - from Jan to May it had returned 60%. I'm not going to reveal the system here - for obvious reasons - but suffice it to say that there are enough such systems that can be built, tested and traded. We have two, we are researching some more. The fantastic thing is: when we eventually have this thing set up we will probably need to trade only two hours a day, and we will even try to make that an automated process. Then it's either research or holiday. I hope it's the latter :)