May Facts

WITH Rs 8,247 crore (about 5%) pulled out of the system, May 2006 was immensely painful to most traders and investors. But the shenanigans of FIIs and mutual funds enabled interesting conclusions.

Until May 2006, FIIs had Rs 1,51,753 crore ($33 billion) invested in Indian equity and Indian mutual funds Rs 30,573 crore ($6.6 billion). This leads us to conclude that Indian mutual funds are 20% the size of FIIs. (1 USD = Rs 45.90)

The current exodus of funds was 5% which was easily absorbed by the Mutual Funds.
The question now is what happens if FIIs decide to move out anyway, and Mutual funds face redemption pressure.

Historically, there has been no pattern to FII and Mutual fund behavior in May, as the table shows, so to draw any conclusion would be difficult, however, in the last 4 years:

1. From 2004-2006, FIIs have always had sales in May
2. From 2003-2004 mutual funds have always had net purchases in May
3. In May 2000, the FII and MF investments were almost on par

In all likelihood May 2004 has been the worst May ever, since the net sales has been the highest at Rs 2,246.36 crore. Compared to May 2004, net sales has been only Rs 674 crore this time.

Radio FM!

VOLATILITY in the Indian stock markets is mainly due to the shenanigans of FIIs and Mutual Funds. Even our Finance Minister, P. Chidambaram believes this, else why would he have kept harping on television that mutual funds have enough money to absorb any FII exits; and that retail investors who have a long-term view should stay invested, make informed investments, and if they cannot do this, shift to investing in MFs!

Our FM was giving directives to investors about long-term investing, without clarifying what was meant by long-term. After all, India’s fundamentals could change in 5 years, and mutual funds are subject to market risk, and then again, not all of them have performed in poor market conditions.

What would happen if in 2 years we have an election, and a new FM comes along and tinkers with the financial system, for better–or worse–for worse. Would companies attract the same PE despite better fundamentals?

Perhaps this is not for the FM to say, but our dear FM speaks suavely on all occasions except when it is most required. The right thing for him to do was to have quit smiling, and clarify the CBT’s circular on taxing the FIIs, during market hours. Alas, too little was said too late. But he never stopped sheepishly smiling.

That our FM bleats such statements displays how immature we in the Indian stock markets are. You would rarely, if never, hear the Japanese finance minister, or the US Federal Reserve making such childish statements. They talk economy, fiscal deficit, inflation, interest rates and other such indicators. It isn’t that the US and Japanese markets there not driven by emotions; they are, but not by sentiments, and herein lies the difference.

May 2006: Butcher's Paradise

May 2006 was an awful month, with the Sensex falling 22% in 12 days, from 12658 to 9826, and the Nifty, the NSE index, slipping 23%, from 3772 to 2894. They subsequently recovered, but the fall marked an important change in the unbridled run of the Indian stock markets.

Characteristically of secular bull runs, the corrective fall was rapid and, for the agape bulls, without respite. Millions watched as their capital eroded, and disappeared especially those leveraged long in the stock futures and options segments. For the first time, in the last 2 years, was an intra-day circuit brought in to play, since the indices fell 10%–the maximum limit they are allowed to–and trading was suspended for 1 hour. The last time this happened was May 17, 2004, when the Congress-led UPA government came in to power.

Just a few days ago, everything about India was glowing, and within a week it appeared as if nothing was right. Every bit of positive news was ignored. Theories abound that the fall was anticipated because the index had run ahead of fundamentals or were linked to FIIs moving out of emerging markets.

When it was all over and done with, some important ideas came to fore:

1. No matter how good the fundamentals, markets will always fall
2. Indian markets are purely liquidity driven
3. Indian markets are now inextricably linked to the owners of this liquidity–FIIs–and since most of them originate in the US, the developments in the US economy will have a strong bearing on their behavior in India.
4. How the government of India taxes these FIIs would drive the Indian markets
5. FIIs are now not just investors but also traders (hedge funds)

Quite emphatically, the Indian markets are directly linked to the larger fate of the US markets.
Fundamentals are good up to a point, but beyond this, it is all about hot money chasing hot stocks, and hot money originates in the US.

FIIs have about $35 billion invested in India, and point to note is the current fall was a result of a mere $1.8 billion moving out. Now imagine if $5 billion did!

With this in mind, it has thus become important for Indian investors to watch inflation and short-term interest rates in the US. A buzzing US economy is good, but too much of the buzz would drive up inflation due to rising real estate, commodity and energy prices. Real estate is already slowing down, but oil and energy continues to be high.

In so far, the Fed has increased interest rates 16 times in a row, taking it to 5% in May, 2006, however recent numbers indicate that the US economy could be halting. The possibility of rates being hiked once again in June to 5.25%, has raised its ugly head sending investors scampering.

The reason such small indicators are lapped up eagerly is because the Fed has said that it is unsure of what to do in the current scenario, and its policy makers are watching the economic numbers just like everyone else. So, cues in the Consumer Price Index (CPI), the Department of Labor’s Job Report and the Weekly Unemployment Insurance Claims are watched closely, and interpreted to show where the US economy stands.

May’s 5% freefall in the Dow and Nasdaq was a result of the CPI report showing an increase of 0.6% in April 2006. What halted the further slide was the DoL’s Jobs report which said 75,000 new jobs were created–a figure that was lower than expectations–indicating that the US economy was slowing down. However it has now brought in a new demon: Fears that an economic downturn is in the offing!

With this in mind, June 2006 would be an extremely important month for investors in India.

Gas Guzzlers Are Out! Good Morning America

If this year's May figures for auto sales was any indication in the US, it showed Americans don't prefer their sporty SUVs any more. Demand for these gas guzzlers along with trucks, is on the wane.

General Motors released a 16% lower sales figure for May as compared to 2005. Similarly Ford and Chrysler's May sales declined.

For years, pampered with cheap fuel, the US is slowly becoming sensitive to rising fuel costs and taking steps to reduce its dependence on it. This obviously has impacted the US's biggest vehicle manufacturers.

For those interested in the auto industry, it may be interesting to note that GM posted an average loss of $2,496 on every vehicle it sold in North America in 2005, while Ford lost $590, according to a report by the independent auto research firm Harbor Consulting.

The losses reflected a variety of factors, including the large difference in health-care and pension costs, as well as rebates and low interest rate financing, the report said.

Chrysler was the lone Detroit-based automaker to turn a pretax profit on the average vehicle, estimated at $223, Harbor said.

By contrast, Nissan, Toyota and Honda each earned a pretax profit of more than $1,200 on every vehicle they sold in North America last year, the report said.

Source: Reuters www.reuters.com

FIIs Are Buying Mutual Funds Units

FII top Net sales of Rs 7,352.20 crore in May

Read this article carefully. It could provide you with a perspective you never imagined before.

The purpose of this hypothesis is not to define how markets will move tomorrow or the day after, but to highlight a possibility that belies the current state of the market: Things are not quite as menacing as they seem.

Perhaps Chidambaram is right; the Indian economy is on track, nothing has changed in the fundamentals, but somehow I suspect that the Finance Minister is not disclosing everything. Behind the obvious calm face is a machiavellian mind devising a scheme whose goal is as yet not known. One would suspect aggrandizement for the party with a view to elections in 2 years.

Why are FIIs selling so heavily?

According to Sebi, FIIs sold Rs 7,354.20 crore in May, roughly $1.6 billon. Looking at past behavior and also the quantum of investments made in 2005 in to the Indian markst, about $1 billion is normal and expected to move out.

However, the discrepancy between NSE and Sebi figures belies the muted optimism that exists under this whole panic situation.

NSE figures for FIIs, derived mainly out of orders punched in by brokers on NSE and BSE terminals, show that on May 29, 2006, FII clocked net sales of Rs 116.42 crore, while Sebi figures indicate Rs 81 crore. For May 30, 2006, NSE shows net sales of Rs 262 crore, while Sebi shows net sales of Rs 8 crore.

My view is that FIIs have turned to some other equity investments in India, not necessarily in the purview of the stock markets. Just read what Sebi means by FII figures:

“Data pertains to all the activities undertaken by FIIs in Indian Securities Market, including trades done in secondary market, primary market and activities involved in right/bonus issues, private placement, merger & acquisition etc.”

The etcetera is not defined or stated. Sebi needs to clarify this to all investors.

The difference between the Sebi and NSE figures, means FIIs pumped Rs 772 crore in the last two days in to primary markets–how about the DLF IPO?–or did private placements or M&As.

So, where did this money go? Could the FIIs have considered the FM’s penchant for mutual funds, and poured money in there? I would not know if this is a wise move for FIIs, but the FII FAQs on Sebi.com clearly state that FIIs can in fact invest in units of Mutual funds.

Finally, the sell-off could also be the precedent to the opening up of FDI in retail and real estate. Money has gone out back to the original backers of these FIIs, and could re-enter as FDI in the country. A lot of FIIs would want to give profits back to their investors, and then encourage them to invest in another fund that does FDI investments. While this possibility does not work in favor of the bourses, it certainly does in favor of the Indian economy.

Where did the Rs 772 crore go?

The markets did bungee jumping today, down over 6% this morning with rumors that a 10% circuit would be visible during the day.

FIIs were reportedly selling Indian equity in the secondary markets and the general view given the dollar’s massive rise against the rupee is that FIIs are sending money packing back to the US, just 2-3 years after they discovered India to be a long-term bull market.

Then comes the Finance Minister, P. Chidambaram, on television soothing nerves, making positive noises, egging on retail investors do direct their funds to mutual funds.
All this against the cacophony of Communist leader Sitaram Yechury demanding the reintroduction of long-term, capital gains, Commerce minister Kamal Nath asking cement companies to reduce cements prices (subsequently keeping quiet and completely disappearing off the horizon). Now, we have Ram Vilas Paswan saying drug companies need to be controlled.

These ministerial speakouts happily precede FIIs rotating their portfolios, like a tango dance amid a circus of statements. Surely, the ministers are collecting funds for the elections 2 years from now.

Nonetheless, I am now going to unveil a secret that will amuse you if not amaze you. In the last couple of days, we have seen some really gut-wrenching market turns, and mainly falls, with screams of FIIs leaving the shores of this land. Even data from the last few days showed–albeit smaller–in FII sales.

My belief is that FIIs have been net buyers in the last two days, except that this money did not come in to the Indian stock markets–NSE or BSE.

More tomorrow….

FIIs Shave Indian Bourses of $2.36 billion

The shaving and haircut continues....

With another Rs 212 crore pulled out yesterday, the FII figures have reached an all-time record. In the month of May, they have in so far pulled out $2.36 billion or Rs 10,907.7 crore . In the last 11 days, they have only been selling, sucking out over $2.53 billion or 11,693.6 crore. (1USD=Rs 46.15)

Never before have they pulled out so much in a month. Not October 2005, not May 2004. In history, May 2006 could get recorded as the stealthiest wipe-out of a bull psychosis.

Yesterday the Dow and Nasdaq spread gloom as if to reflect the deluge of rain in Mumbai. Uncharacteristically it arrived early and at 10 p.m. and continued ceaselessly until 2.30 a.m. this morning, about the time that US markets closed.

While the dollar fell against the euro and yen, it continues to make new highs against the rupee. This is not very heartening. While the usual answere being dished out is that importers are adding pressure it is clear that such steep and consistent slide can only come from heavy demand, which is from the FIIs, corroborated with the fact that they are pulling out money from the Indian stock markets.

Oil prices are impacting the US economy, and hence stock prices there, but since ONGC has a heavy weightage Indian investors are fooled in to believeing that gains for ONGC is gains for all companies.

Oil prices have a direct correlation to ONGC but an indirect correlation to everything else. Sooner or later India will be on a path to higher inflation, and to contain this the RBI will be forced to hike interest rate hikes. This is going to spell a lot worse for Indian corporate sector.

Good new is rains have arrived earlier so the farm sector would be bouyant, with tractors and fertilizer companies looking up. If the rains sustain well, then we can see the consumer goods companies leading the charge.

FII Outflow is Trickling to a Stop

Some interesting points of observation. The Nifty has been doing rangebound activity, and the bias is down. The US dollar has surged contrary to expectations as compared to the rupee. It touched Rs 46 to a dollar, and even breached this barrier.

First the bad news. A falling rupee clearly indicates that the demand for dollars is high. The usual suspects are exporters, but even they have never been able to take the dollar to such highs. Clearly money is being taken out by the FIIs who have been selling Indian equity and have so far removed over Rs 7,700 crore.

The good news is that sales of Indian equity by FIIs halved yesterday, with only Rs 116 crore sold. This nonetheless brings sales to a May figure of Rs 8124 crore, that almost kisses $2 billion.

Yesterday was a holiday for US markets, so US cues are absent. It is likely we could see another flat day.

Rs 8,000 crore until last week

The tides and ebbs of FII money continues to rule. It appears like the bloodbath has stopped and the trickles are curdling. On May 26th, which was the last trading day of the week gone by, FII's took off just Rs 304 crore.

In total until the end of the week, 8,000 crore ($1.75 billion) has been swiped off. Clearly this surpasses all previous figures of exits, and has established a new record. However FIIs have also invested far more and have made more profits this year.

In all probablity a new upmove should begin this week.

So Far Rs 7702 Crore Exits!

Yesterday's figures (May 25th) were disheartening again. The FIIs pulled out another Rs 1,635 crore, bringing the May figures to Rs 7072 crore. This amounts to about $1.5 billion, which should end the selling spree. In fact, this day, (May 26th), the Nifty moved beyond the 3,256 mark but could not sustain above it. This means that 2,760 still holds and we can see this some time. When this would happen is difficult to predict but the 2-year low is still to be made.

Today's global indicators are showing that Dow and Nasdaq registered their first straight 3-day upmove. The FTSE and Nikkei were also up. The US economy appears to have cooled off if one went by the inflation figures which were lower than Fed estimates.

Monday (May 29th) would be interesting and many are awaiting it with great anticipation. The last hour closing was a doji and one learned friend says that this may be an indication of reversal.

Panic?—FIIs Pulled Out Rs 5,439 crore

Today's FNO expiry took the markets up. Distressing as it might seem, late-night data release showed that FIIs pulled out an additional Rs 1,935 crore on May 24, taking the net sales for May to Rs 5,439 crore.

Merrill-Lynch released a report today saying that it was normal for FIIs to withdraw about $1 billion each from emerging markets. China, Korea and Indonesia have shown commensurate slides, indicating this. It also correlates with the fact that demand for dollars has gone up–FIIs are sending money back home. The dollar today was about Rs 45.70 per unit.

Yesterday's post had said that FIIs have been known to pull out about $800-$900 million in previous years in one month, usually May or October. If this is to hold good this time, then over the next 3-4 trading sessions we would expect them to buy back heavily. Remember that this is mere conjecture.

Nonetheless, if it happens, it will set us a benchmark for future corrections, and also force us to be cautious in October.

Among other things, the Dow and Nasdaq have started moving up, having been flat yesterday. US GDP data shows that the economy has slowed down enough to contain inflation, and Fed chairman, Bernanke may pause interest rate hike.

Why Panic, It's Normal FII Activity

MAY comes to haunt once again. The bad news is that the Indian stock markets have had a hard knock and tumble. As usual fear grips with doomsday conversations doing the rounds that the FIIs have pulled out their money. This is however a fact. The good news, however, is that this is nothing unusual. FII pullouts have repeated at relatively predicitible points in the past.

The fact that I have woken up early to write this means it has been playing on my mind since last evening, and each time I have had such nagging ideas I have been absolutely correct. I say this rather humbly.

The total amount of money pulled out by FIIs this month is Rs 3,500 crore.The last time the index fell, in October 2005, FIIs had pulled out Rs 3,805 crore. At the time, Nifty index slumped to 2300.

So what makes it different this time. Despite all intelligent reasons attributed to it–rising US interest rates, metals meltdown–as of today, the FIIs have pulled out less than they did in October 2005. This is positive news.

There was another occassion, May 2004, when such a large sum was sucked out by the FIIs, again Rs 3,250 crore.

In my opinion, considering the large sums of monies involved, FIIIs would pull at most another 500 to 750 crore, taking the Nifty index lower by another 200 points to about 2,750. From this point onward we should see the markets start to move up.

Despite all the noise around, I continue to be very bullish. Yet I love and will embrace 2750 because it is an essential part of the great times ahead.