Run When You See the Signal

I dont' care if the fundamentals are in place. The market is overrun by 29-year old hedge fund managers who know very little or it is being manipulated by a cartel of politicians and the large financial houses.

The next time I get a signal to sell, I will just exit the markets. Stocks always get 20-30% cheaper at one point in time, and are always 50% cheaper at some point in time in a 24-month period.

I had known in January that this fall would be worse than May 2006. The reason is the same conditions prevailed: the number of people becoming analysts increased, names like Martin Pring and Richard Swannel sweeping the country with seminars, and feeble voices that the "bear was indeed dead this time". (I must say though that this time though, noone made such a statement).

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.