Archive for the 'Market Theory' Category

Market Matrix – Prevent markets from free fall in times of crisis

October 30, 2008


The beauty of the market is in its being free. The stock markets are supposed to be left free and here the flow of information is also supposed to be unhindered and made available to all. There are still some impediments in the free flow of information due to some technical difficulties and some obstructions deliberately put in place by the interested.

What ever the case be the markets should be left without intervention but is there a need to control the markets when prices tend to hugely deviate from the seemingly normal price for the day?

In my opinion the intervention by govt should never be by any such rule. There is ,however, an implied obligation on the part of govt to see that the market does not attack the price levels beyond the reasonable level in a short time. It is necessary from the point of view of not letting any body unduly suffer just because market condition coincides with ones requirement of withdrawing cash. It is also necessary from the angle of not making the risk capital pooling to difficult or too costly. The participants would account for higher risk in the pricing if such times come about in markets or may come. This is a cost best saved by having some mechanism by which the absurd pricing on the up or down side is prevented. If an economy can reduce the risk element in risk capital due to abnormal conditions, it will be a great economic service to the nation at far lower cost than by any other means. I think these should be the only purposes and none else while the govt does something to stabilise the market. I repeat that intervention in free trading by rules will be negative.

How can it be done? In India it is very easy to do. The state owned banks should have some pocket where they have stocks and funds ready for use in terms of their researcher’s advice. The second is that RBI can have sovereign fund allowed to be funded in times of such need by RBI’s large kitty at the shortest notice while its stocks related economic researchers should be updating the applicable action plan on a regular basis.

There is a further need of having a board which may order entry into market when need arises. Top secrecy should be maintained about the intended size of fund deployed for the purpose . It should best be done by wide speed buying rather than in a concentrated fashion.

Another point that would save the markets is that there should be no funding by the banks for share purchase. The risk capital should be from out of only the owned funds and not borrowed funds. On private basis people may do whatever. In fact promoters also should not be funded on the strength of share holding in their own companies, neither the shares should be accepted as security for other advances. This will bring a balance and put a premium on the shares. The present day world crisis is due to faulty home mortgages, what would have happened had there been large scale lending backed by stocks. Since there always is necessary liquidity available one should meet his short term need selling stocks and buying back when the funds are spare.

The leverage obtained in market in ‘F and O’ section is not based on financing by institutions and is mostly private arrangement through the mechanism and hence it is Okay. The lending and borrowing of shares for sale etc should also be restricted
to individuals and direct owners like corporates and not be done by institutions who are not direct owners of shares like MFs and other such entities.

In fact leverage is mostly a tool in the hands of organised cartels in markets who try and take advantage by manipulation. There scheming goes to the extent of either perishing themselves or perishing those on the other side.

The US Fed has reduced rate by 50 bps with assurance that more will be done if required. It was a unanimous decision.The US market has not reacted up as it was already a known thing. However, the Asian stocks have shown good jumps as every passing day the stability is returning. The interest rate cut is the best medicine for ailing stocks, it works at many levels about which I have explained earlier. With rate cut here, our economy can enter in fast lane overnight but the RBI always wants to be seen as an elephant taking turns slowly while if Indian economy has to be tiger like the RBI will behave in a tiger like fashion. I despise Reddy’s raising of CRR and had raised alarm then itself. If he had been slightly imaginative India would have maintained its edge on the world scene. The present chief should at least see the light of the day.

These outpourings may seem scholarly but in fact are just for the purpose of giving back ground idea to the young.

Krsna Khandelwal

BIRDINFO Stock Rx – A prescription for stock market


Market Theory – Interesting facts about Nifty

October 26, 2008


Please note the following interesting facts about Nifty (since Jan 1999) without yourself going in to turning huge data yourself:

-Nifty PE was lowest at 10.86 on 09/05/03 and at the same time it had P/BV ratio of 2.02 and the Dividend Yield of 3.18%.

-Nifty had the highest PE of 28.29 on 08/01/08 while P/BV then stood at 6.55 (this is highest since Jan 1999) and D/Yld at 0.82 (this is lowest since Jan ‘99)

-Nifty had the lowest P/BV of 1.92 on 21/09/01 while its PE was 12.30 and D/Yld at 1.75 %.

-Nifty has 10.99 PE , 2.17 P/BV, and 2.18% D/Yld on 24/10/08 when it stood at 2582 points.

Now what may be observed in these figures, if the Nifty stays at present level:

-if the earnigs progress the PE will breach its lowest point and this is making new history.

-if the earnings remain the same, the P/BV ratio will keep improving making it move towards breaching the historical low of 1.92 P/BV, again adding new chapter to history.

-if the dividend pay-outs improve due to stoppage of expansion plans of companies in view of lower demand (ie recession), the D/Yld will improve to breach the historical high of 3.18%.

-if the companies post lower earnings the PE will go up but it has room for going up as the historical high has been 28.29 but the P/BV will still improve making it breach its lowest point 0f 1.92 which is again creating new historical point.

-if we consider the D/Yld in light of real rate of returns, it is positive while real rate of return on 10 year Govt paper would be negative (interest @ 7.5% minus rate of inflation of 11.04% ie minus 2.54%). This will be the post tax return against taxable interest returns.

-if the interest rates are reduced further, as is a possibility too, the difference in return shown above will be still more.

-if inflation remains the assets (other than cash and receivables minus debt) will keep improving besides the already existing revaluation surplus which does not reflect in figures of balance sheets.

-if the companies raise further capital at current prices, the P/BV ratio will still improve and the additional cash will either lower interest out go or will improve capacities. In both cases the PE will go further down.

-if the companies decide to use the cash generated for the buy back of shares the floating stock will diminish and will put upward pressure on prices.

-if these conditions continue the promoters can only increase their holding by open market purchase as the preferential allotment will not be liked due to high average price for last six months. This will also make the absorption of floating stock.

-if the low stock prices continue there may be attempts of hostile take over of weaker companies, even otherwise the weaker players may be bought out and their outstanding stocks extinguished.

-if the profitability gets diminished the cash-flows of the companies will have lower impact because the tax payment would first bear the impact.

-if the markets do not improve there would be lesser number of IPOs and demand pressure on investible rupee will be lower which will find way in to secondary market.

-the ratio of holding by the retail investor is at a low point compared to last year, those who booked profits in the bull run will come back to acquire shares.

-those who missed bus in the last many years bull run will try their hand out this time.

-all asset prices are going down so there will be less aversion to equity investing at a safe point.

-no capital gain tax on long term holding will invite new investors who would not like to book profits mid way ie before one year holding period.

There are many more ponderables but above are enough for today’s food for thought.

It is not surprising therefore that the analysts are being asked for the list of stocks worth buying. The lay investors do not understand much but at least understand that when 80% of value has already gone, the rest twenty percent may not go entirely. This is sort of thumb rule for them.

Krsna Khandelwal

BIRDINFO Stock Rx – A prescription for stock market

Market Matrix – India saw one of the worst market downfall

October 24, 2008


RBI has not met expectations of markets and India saw one of the worst downfalls and Nifty closed down 359 at 2520 points. There was no further release of money into market by RBI while it was observed by RBI that Indian economy is on track. The other markets did not help either, after weak Asia and weak European advices the US markets have also tumbled down today. While there is no limit to up side down side should have some limit. How in the world would one sell assets worth much more, far cheaper, just because these assets happen to be marketable ie represented by equity shares.

I find govt lacking in its duty today, back in eighties and early nineties, the govt used to direct the institutions to come for support of market, when ever there was undue pressure. Mr Pherwani of UTI used to be called big bull. He had contributed a lot to the development of capital markets. Such directives from govt are missing today.

Govt should direct banks to pick up good quality stocks without hitch. Any enlargement of crisis will make matters worse for all finance sector entities. One reassuring sign is that there is no payment crisis in markets. The banks are doing business as usual and this is a great thing.

I was surprised last year at all asset classes going up simutaneously and deducted that the world would face some crisis. Today reverse is happening while all asset classes are going down. This may be due to the rewinding action and may be this would make world healthy again. Why should all this happen, is some thing that should be found an answer for. I maintain that the supply and contraction of money in hands of central banks is the cause of it.

In India, so far, the credit off take is normal, banks are lending. The crude is further down to 64 dollar/bbl, the inflation number in coming down and only gradually, the infrastructure funding is increasing.

There hasn’t been redemption of mutual funds on an alarming scale. FIIs have sold just Rs 1450 crs worth of equities today and under what design they are selling it so cheap is again a question. While picking stocks they were seen to be doing thorough home work and why while selling no home work is being done.

The cash rich companies should have announced their ‘buy back shares’ plan. They should have done it in hoards, a few have done to. Isn’t it just proper for every good management to postpone the expansion plans and utilise cash for the share buy back. This will reward the shareholder very handsomely. But it is not being done because may be the smart management are happy for the falling markets and would pick stock for themseleves at these prices.

If only the right things were done by right people at the right time,the world would be much more prosperous. Since this does not happen, the reverse is that some in position are out to profit at the cost of general public. It is a relief that India’s 80 pc population is still in traditional style exchanges and not entangled with the new age trading style.

The fall without a matching event taking place is surprising enough. How will the truth come out?. Since the abnormal times were in every body’s knowledge, the excessive trading is not there in any case to warrant such falls.

Krsna Khandelwal

BIRDINFO Stock Rx – A prescription for stock market

Market Matrix – Bailout Bill voted down by US Congress

September 30, 2008

By krsna Khandelwal – A veteran market analyst


The bailout bill presented for voting yesterday in US Congress has been voted down due to some Democrats voicing concerns about its use for the tax payers. The President has expressed his anguish at the failing of it which he sees as a must to the stressed American economy. Had it been in India that a finance bill presented for voting by treasury benches fails to get passed, the govt would have fallen. It may be put up for second time for voting and by that time Democrats may be convinced about its need. In any case if Bernenke is looking for its passing too, in case of its failure he can well help the matters by lowering interest rates etc.

The DOW got a very bad treatment in wake of these happenings and lost good seven percent to close at 10365. The Asian markets are down this morning but not too much for they had lost yesterday too. You can’t keep discounting some thing everyday by a greater margin which represents not only assets but also an input by way of managerial effort in organising businesses that make the assets owning companies value generating machines. This makes the asset acquisition through equity ownership more desirable than simply buying some assets here and there.

Also the equities’ returns are post tax where as the returns on dated securities are taxable. Thirdly, the inflation does not eat in to equity values but it may make the investment value go down over years very substantially in other case because the real rate of interest is lower in USA as it is in India and else where.

The great depression of 1930 was when gold standard prevalent. Today, there is scope of increasing money supply at will in the hands of govts and central banks. They are exercising their powers readily. Who on earth can afford to keep the equity market down. It is powerful and influential people who happen to own most stocks, so they may not shed tears for values lost due to inflation but would surely mind the decline in stock prices.

The bad conditions in stock market help as in such times the future competition is put off. Also when the speed of fall is great, the speed of rise would be great too. I reminded our people in govt to take stock of situation before its too long and keep a contingent plan ready. Those who are used to be vocal at drop of hat are silent and this is not understandable. Time has come to impart liquidity here also, the CRR as also SLR (if possible) should be reduced in October month exercise by RBI.

Let’s see what unfolds in next 24 hrs. Those who are not leveraged should have no worry, those who are should hedge.

The crude prices were first factor that had made market in India getting a beating,today it rules at just 96 dollar/bbl. This would at least see the oil under recoveries manageable and inflation under check.

The realty stocks have lost so much values that they are not capable of doing much damage by their poor performance. The IT scrips have lost excess values and now are near their value points. The auto stocks are again in the same category. The FMCG and Pharma stocks behave differently in any case. The infrastructure sector is saddled with a lot of orders to execute. The banking sector in India hardly has an affliction of the US kind. Steel and Cement have shown resilience as they had shed flab during the down ward times June/July. Sugar sector is behaving in an absurd manner but erratic behaviour at low point in price level lays foundation for the sudden upward move. Retailing is not yet a mature industry and I have been advising to keep out of it.

I have largely drawn a picture before you and now be your own master and take decisions. The result season has arrived and you would get post-result ‘panch-tattva points and strategy’ for most Nifty companies. You may individually ask for scrips of your choice.

Hari Om

BIRDINFO Stock Rx – A prescription for stock market

Market Matrix – Nifty lost 135 points

September 29, 2008

By krsna Khandelwal – A veteran market analyst


Our bench mark index Nifty lost 135 points to close the day at 3850. The DOW is trading at 10887 down 255 points at this hour today. In the mean time the bail out package has been okayed but the whole money will not come in a rush but in tranches. This is good in a way otherwise there would have been a rush kind of situation and the ammunition for future would have been missing. This way the speculators will have to watch step.

I may tell you that the problem arose because of the leveraging and parties held to positions in belief that they would get through at some point while others may suffer. All had to suffer because the counter parties were seen to shaky and could not be destabilised for fear of exposure earlier than necessary. The assets became worthless as no body could come forth to buy them up even at bargain prices because liquidity dried up.

The action by the FED and US govt. is in right direction. The common man does not understand the nuances and is afraid to do any thing trying to come to neutral ground. There is no question that liquidity injection would save the day and there after clamour for acquiring equities may ensue as has happened in case of bullion which is way up now than it was a fortnight back roughly +15%. In the mean time a British bank has been taken over by govt.

Our PM is in France and may sign nuke related agreement there. Our people in govt. should be coming forward to clear the atmosphere of uncertainty on a daily basis for the rumour may be spread by the interested parties and public may get mis-guided.

This time the best strategy for any body eyeing the investment in market would be to enter only with two way order ie if he buys stocks of choice he should buy Nifty put (out of money) so that the confidence is not lost. The panic strikes one who walks out without an umbrella while the sky is overcast.

I am sure that the rights and public issues would be now kept on hold so further supply of paper would not be there for some time to come. It will reduce demand for funds in markets. Freight rates are at lowest point for the year. Crude again is under 100 dollar mark. Cement and Steel shares were least affected today and hence it may be said value buying is on. Sugar shares were down in an excessive way and it would sow seeds of eventual big move in this sector. In times of flux I prefer to discuss things thread bare rather than fight shy of speaking what I must.

Hari Om

BIRDINFO Stock Rx – A prescription for stock market