Inside Insider Information

If someone told you that technical analysis is the reason you can earn 10+% in a day, then they were WRONG.
The fact is that market information will get you places faster than any analysis by the best of technical analysts who try to time the stock. Take for example my experience yesterday. ACC was a stock which gave a bommer of return yesterday due to exceptional results. A good friend of mine had gathered ACC on Thursday morning and gave me the info that the stock would shoot up on Friday on back of beating market expectations. He had been gathering the stock for 2 or 3 days now so that just tells you that he had some information that most out there did not, and he had that way before others too.
So your consitant capitalization on returns would be a direct function of how strong your contact network in the market is and more importantly how reliable it is. People often use insider information to reap superior returns in the markets and most do it quietly. But in all honesty, i recommend not using the insider way to make money cause you more often will attract a lot of unwanted attantion if you do so.
Bet on fundamentals and invest for the long run. I know its difficult to do when you look at easy money but its worth it cause it comes without all the trouble a short cut can get you into.

Cartoon Taken From: http://www.cartoonstock.com/

Sensex 16000? A New Bull Run....

A lot of people of late have asked me where are the markets headed. The recent run of15000+ has left many disappointed since they could not participate in the rally. So was it really such a big loss? Not really.

In terms of a risk reward approach, the chances of the Sensex moving beyond 15000 was a lot less than it testing 12000 levels. Mere quarterly improvements in the growth of key sectors and market sentiments fed by the Prime Minister's guidance are not enough to sustain the current market levels. The improvement in industrial production, sectoral growth and increased demand have to be consistent for at least 2 successive quarters in order to start a pegging point for a long term bull run. Another reason that is feeding the current frenzy is that amongst BRIC nations, India and China are still the most attractive investment destinations due to the slack in Europe and USA. As the global economy recovers from its lurid state, the BRICS will benefit the most due to the robust growth that they are capable of sustaining.

Investor street is of the opinion that if the Sensex rallies beyond 16000 then fresh positions can be taken since the rally is then expected to continue for a while. But until the market breaks the 16000 mark, fresh positions are very risky and the market might test 13000 levels again. We remain bullish on Power and Infrastructure.

Investor Street Confidence Index (ISCI)

The Investor Street Confidence Index or the ISCI takes into account more than 40 parameters while analyzing and rating the top sectors in the country.

Based on this we have rated the following sectors for the near term outlook. The rating is on a scale of 5 where a higher rating signifies more investor confidence towards the sector. The findings of the ISCI are as follows:

Investor Street is overweight on Power & Infrastructure and these two sectors would be the front runners during the upswing. Post March 2010, Real Estate could witness the maximum inflow coming in and the economy is expected to be at the peak of the recovery mode post November 2010.
We advise investors to stay away from IT and Oil & Gas for the near term. Fresh positions in Power and Infrastructure can be taken with a horizon of 12-18 months.

Flaring Sentiments: Risky Avenue

Signalling might be a reflection of sentiments but it certainly isn't always the rational thing to do. The recent rally in the Sensex and the push to 14000+ does not mean that we have beaten recession and things will be OK overnight.

This sentiment is a mere reflection of the modjo built up around the election results that met street expectations. If you have already not been a part of this rally, now is certainly not the time to enter and take fresh positions. Even if you were a part of the rally before it started, we suggest that you book profits and exit or keep a minimal exposure. The markets are expected to be range bound between 12000 to 14000 though there are chances that it may scale 15000+ for a very short duration.

We suggest that you remain invested at least for 18 months if you are taking fresh positions in stocks that have recently shot up by more than 20%. One can expect a return between 22-27 percent for a period of 18 months.

Market Cartels

How capital markets are inherently a great ball of fire with millions of brains working at random and still finding a structure, has always amazed me. So in this random uncontrollable act of decisions, can a few people shape the market? As crazy as it may sound, it is true. It is very real for a set of people to play a stock and such cartels are operational and active.

These cartels usually act in groups of 4-6 or more with an average holding of Rs 30-40 crore in cash and are usually from different parts of the country. They use Demat accounts of family members (12 or more) to systematically ride a stock and when the demand is spiked, they sell and get out.

Think of it as you buying something worth Rs 100 crore and in the process generating a demand for Rs 200 crore and thus shooting up the price. When the time is right, you sell your share and get out, making a lot of money in the process. Realistically speaking, what these guys do is just buy and sell and no one can stop them from doing that. If someone is willing to sell a stock worth Rs100 crores then why should they be stopped from buying, after all they are paying the fair price, aren't they?

The topic is debatable but the fact is that the Capital Markets are not a place for a low income earner with small savings, unless he decides to remain invested for 5 years or more. The odds otherwise are always stacked against him. In the ocean, the Big fish eat the Small ones.

What is Stock Rigging?

Stock rigging is a phenomenon that attempts to pump up a company's stock price by floating favorable news about the company's earnings or future prospects. It actually encompasses a number of activities rather than just one. So say that if an individual with enough contacts in the markets and resources wants to rig a stock X. he will first spread positive rumors about the stock, such as a huge merger or FDI investment or great future growth numbers etc. Then he would use analysts as a medium to extend positive recommendations about the stock. In the process he would create speculation in the market and the stock price would shoot up. This individual can be a part of a cartel of investors, may be a promoter or some other entity.

This is why you would notice that there are certain stocks which only move on news or at the end of every quarter when strong numbers are posted or a positive guidance is set by the management of the company.

A Good Time to Buy

"A well positioned investor has real assets, usually in the form of real estate, for protection against inflation, cash for emergency purposes and living for at least six months without a job, fixed income, both short and long term, weighted for the investor's perspective on interest rates as well as need, and stocks, with stocks consistently providing the best return over a long period of time."

That's what Ted Allrich had to say about a practical diversified investment portfolio. An investor needs to understand that this portfolio is not built overnight but is a gradual process. And what contributes the maximum to this portfolio? STOCKS...stocks that are well analyzed and based on strong long term fundamentals and are held on to as a mode of investment for years. Not stocks that are bought to make a quick buck. So right now when the P/Es for quite a few good stocks are at record lows along with a discount to the book value, it is safe to say that this is the best time to buy stocks as a mode of long term investment. If you were to invest in an Index stock for at least 5 years, then your yearly average return would be at least 10% and if you think that stocks are a bit too much for you, then go for Systematic Periodic Investments in small sums in Mutual Funds.

ICICI Bank: Over Rs 3000 Crore Exposure in Maytas?

This is an SMS that I got from a VP of a top brokerage house in India:

"Banking sources say ICICI Bank has the largest exposure of over Rs 3000 crore mostly in guarantees for Maytas Infrastructure assuming timely completion of projects it bagged. Work on these projects is said to have come to a standstill for want of working capital. Take care if you hold ICICI."

If this is what a majority of the market gets to hear by Monday, then GOD help the ICICI stock. Only the next few days will tell whether this is a rumor or a fact.

Stocks You Should Cut Down On

Please be advised that the opinion expressed in this post is based on my personal understanding of the stocks and their analysis. Please conduct your own due diligence and check with your broker before acting on views expressed on this post.

Stocks downgraded to Underperformers:
IFCI
Hindalco
Jaipakash Associates
Grasim Industries
DLF
Sadbhav Engineering

Sectors Investorstreet is Bullish on:
FMCG
Pharma
Power
Telecom

Sectors Investorstreet is Neutral on:
Banking
Finance

Sectors Investorstreet is Bearish on:
Real Estate/Construction
IT/ITES
Aviation
Auto

Beat The Beta: Worst 5 Stocks of 2008

This is the first post in a 5 part series bringing to you the Worst 5 stocks of 2008.

Between 8th January 2008 and 10 October 2008, the key global indices on an average fell by 41% from their highs. The Sensex tanked to 10240 from a high of 21207. Every investor in the market bled including the ones who had remained invested for the past 6 years. But there were a few who happened to pay a little more than the others. Out of this lot, a majority consisted of investors who had picked high beta stocks and had invested in sectors such as Real Estate and IT.

So what's the big deal with Beta? During the Sensex crash of 2008, 91 of the worst hit stocks had all a beta of greater than 1.4 and combined, they constituted over 92% of the total market cap of BSE. Of these 91, the top 10 had four stocks from the Anil Dhirubhai Ambani Group. But I am here to talk about the worst of them all.

Had you invested in this stock in late 2007 or early 2008, then by the middle of October 2008, you would have lost over 92% of your investment. It was the worst hit stock of the 2008 crash and the one also with the highest beta of 2.08

HDIL (Housing Development and Infrastructure Limited) was the worst pick of 2008. A reduction in CRR meant that the cost of funding by the company kept increasing and this ate into the profitability. Rising inflation and interest cost meant that their current projects were unsaleable. The company was witnessing such a severe cash crunch that it borrowed money at a shocking 36-48% from the financiers. Worst of all, the company has a promoter stake of over 60% and still could not prevent the blood fest. I hope you did not buy this stock...

Beta at times of severe correction can be the worst measure to pick a stock. A stock with high beta will be the first one to be punished when a correction happens. So decrease dependence on beta as a decision making tool while picking up a stock.

RIGHT Answer

A mundane topic turned interesting all of a sudden today when understanding Rights Issue sparked up a thought. In October 2008, three of the biggest names of Corporate India came out with a rights issue especially when the markets were not doing well. So were they stupid? I don’t think so. If one were to think that people running multimillion dollar businesses came out with a Rights Issue just because they needed the money, then probably one might be underestimating their expertise a little too much.
Investopedia defines Rights Issue as “Issuing rights to a company's existing shareholders to buy a proportional number of additional securities at a given price (usually at a discount) within a fixed period”.

So why did the companies come out with a rights issue despite knowing that the chances of it being a failure was very high. These aren’t your average mom n pop companies. We are talking about names such as Tata Motors and Chettinad Cements.

Rights issues are issues at a discount and this theoretically acts as an incentive for existing shareholders to buy the shares. But when times are bad and the markets are not doing well, investors might prefer staying away from additional investment in the markets and as a consequence not subscribe to the rights option they have. This in turn sends a bad signal to the market when existing shareholders are not willing to buy a stock and the stock might be sold as a result. So then why take the risk?

A rights issue tends to cost the company far less than a Follow On Public Offer and also gives the company an opportunity to test the pulse of the market. Companies also understand that existing investors work partly on emotion when buying the stock, especially when it has given them stable returns over a period of time. Even if the rights issue fails, it helps the company prevent the irreparable damage done from a failed FPO.

So if the company is planning to come out with an FPO in an year’s time or so and if the markets are not doing well, companies tend to go for a Rights Offer to gauge the market and accordingly plan for the FPO. This is the reason why one would see that companies with failed Rights Issues tend to come up with an FPO within the following 15 months.

Pump and Dump: Don't Fall for the Trap

The year 2008 was definitely not the best for most stocks and Penny Stocks are one of the worst hit. This post is to specifically warn my readers about a certain threat in 2009. Several large brokerages in India have lost millions in Penny stock holdings and I have come to know from my friends in the market that the year 2009 will witness widespread use of the Pump and Dump strategy to trap investors.

"Pump and Dump is a form of microcap fraud that involves artificially inflating the price of a stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price". (Source: Wikipedia)

So don't fall for a call or an e-mail by your broker this year if he claims to have some inside information on a stock or assures you very high short term returns. You just might fall victim to an oversold stock while your brokerage house mints money in the process.

Be Informed. Be Safe. Be Smart

Things You Should Know about Hedge Funds

Ironically enough, one of the questions that went unanswered recently was whether Hedge Funds would wise-up and become a little more conservative after the global financial bloodbath. To my surprise, the funds did not ease up their activities or change aggressive strategies, as per a report by Wharton.

So what makes the rules of the market not apply to them and what creates these special exceptions?

Hedge Funds can be defined as "privately owned financial firms that raise money from large investors, including individuals, pension funds and charities, for the purpose of increasing the value of the investment". The fact that they are so loosely regulated and have no obligation for disclosure of mode of investments and where they invest, gives them immense flexibility and decision making power. This kind of power is lethal when you consider that globally, Hedge Fund Managers manage more than $1.9 trillion in assets and generally keep 2% of invested assets and 20% of the profits, known as the "two and twenty rule."

With the financial heat worldwide, such funds are keeping a buffer of $400 billion as a backup for a worst case scenario, in spite of redemption pressure from investors and lenders. Now let us see what gives them this immense power:

Firstly, most hedge funds require a minimum investor amount of $1 million. Secondly, they usually keep a lock-up condition on the amount invested, which means that the investment (principal) cannot be withdrawn for 5 years or more. Thirdly, at any given point of time, there is a cap of withdrawing 20% of the profits and this cap may be reduced by them if required. Lastly, they are not required to file reports with SEBI or the SEC. This means that they most of the time withhold information even from their own investors. In fact, a few hedge fund managers in 2007 earned more that the salary of the top five CEOs of Wall Street combined. This is because irrespective of a loss or gain, hedge funds keep 2% of the assets invested and over 60% of their assets were invested in exotic derivative instruments between 1999 and 2006.

Hedge Funds make a little more sense now...I guess...

Leaders and Laggards

When Sensex was hitting life highs and shot up by more than 49% in a matter of 7 months, the biggest role to play was that of Reliance Industries which had a weightage of more than 14% on the index. RIL during the period shot up by more than 73% but when the Sensex started falling, RIL corrected by more than 66%. Just shows you the simple application of the 80/20 principle. What came as a surprise to me was that a stock like Binani Cement is down by 89% from its 52 week high and is trading at a dismal Rs30 odd. Similar is the story with Jaiprakash Associates, Suzlon, Tata Steel, DLF, ONGC and ITC. So, would you buy now?

Beware of Brokers

Please beware. Right now is the time when you want to check your d-mat accounts regularly. I received information about brokerages possibly rotating shares between customer accounts to keep the positions open and to maintain liquidity. Moreover, your broker will most likely try to lure you into buying stocks by providing you extensive credit for day trade and investments at very easy terms. This would be a common strategy for most brokerages in the country right now because retail customers are weary of fresh positions in futures and want to deal in cash to be safe. Such tactics will act as "sweeteners" for the customers to keep trading and pay brokerage to the brokers.

So don't fall for any candy offers your broker tries to give you. Be smart. Don't be stupid. That's easy if you don't be greedy.

Best Time to BUY

I happened to have the privilege of talking to Mr. Arpit Wadhwani today, who is a broker in BSE with more than 14 years in the market. The fall of Sensex to 11328 and Nifty reaching 3500 was something I had failed to see. At best I saw the Sensex falling to 12500 as this was a big support. I was surprised to hear what Mr. Wadhwani said.
"These are good times for me", he said. "For people who know the markets and are here to stay, this is the best time to buy, and buy more".

In fact, he told me that he sees a further downside as low as 9300-9700 levels. FIIs pulling money out of the markets and channeling it into the US markets will cause short term tremors, but the upside after these levels is huge. It will be much easier for the Sensex now to catch up to 15000 levels than it was a month ago.
That to me is some reassuring news from someone who knows the markets very well.

Guided "Free" Fall

Have you ever wondered why do analysts working for banks and brokerage firms provide stock recommendations and advise in newspapers? I mean they don't get paid for it and why pass such information on if it can make money?

A research paper on Reasons for Channeling Information listed the following 5 reasons for this:

First, the analyst employer have incomes based on transaction fees; an increased trading volume consequently leads to an increased income. Recommendations in the printed media will presumably lead to an increase in trading volume and thereby an increase in analysts' income.
Second, they may also have private clients who have recently taken, or are about to take, positions in certain securities; hence a 'helping-hand' phenomenon
may be a reason for analyst recommendations.
Third, they may also have, or be willing to get, the firm whose stock they recommend as a future client.
Fourth, it is an opinion driven factor wherein their beliefs on a particular stock are re enforced by them recommending the same stock.
Fifth, there may be a reputational aspect involved as well; analysts would
want to have a reputation as giving valuable and accurate recommendations
rather than the opposite.

Picking Stocks: Emotion Driven

The general understanding of making money in the stock market is that investments and trade calls should be based on some form of supporting facts i.e. the decision to trade or invest should be based on some analysis, be it fundamental or technical or a combination of the two.

But that is not what actually happens. A study by Andrew Willis in 2001 found that investors and traders across categories place a huge emphasis on emotions when picking a stock. This stands equally true for a retail investor with limited knowledge and resources and a professional portfolio manager. Chances are that if you ask your broker to manage your portfolio, then depending on the commission he gets, he will try and clone your portfolio with stocks his brokerage has positions in. The irony is that in periods of extreme volatility, brokers picks stocks with very high beta and the maximum range on intraday movement. So if IT stocks are booming, it would be very common to see traders, investors and brokers pick up positions in Satyam and Infosys with limited or no analysis.

And you thought that they spend hours analyzing a stock for you….

Information Bomb

Knowledge is power? I say "Information" is. And when you try to pay even little regard to the Lemons Principle and realize that information asymmetry is real, you accept that its a potential time bomb in the hands of the right kind of person.

Markets work on a simple fundamental that price differences give an opportunity to buy low and sell high or short the difference. This price difference is due to imperfect information dissemination, which can be for the company or the stock's intrinsic worth. But can the price difference be conditioned?

Have you ever asked yourself a question that how do traders take money in C category stocks? These aren't the kind of companies that would bang the next innovation so why trade in them? That's because smaller volumes when pushed to a certain direction (Buy or Sell) by a person or a group of people with a chunk of the holding, can condition the stock to shoot up or decline artificially. This is because of simple math. The promoters and traders who have chunk holdings, make the money and get out while the retail investors get stuck. Besides this, channelized information, if done through the right people can scare you into selling a stock or mislead you into buying one.

So the next time someone tells you something about a company's stock, do the following:

Go to at least 3 financial websites to check the news
Ask a second or a third broker and verify the information
Check the financials of the company

Uncertain Times: Bull Hunt

Bonds have always been a weapon of last resort for an investor who has been pushed against the wall by the markets. With Sensex hovering between 12500 and 13000, the next few weeks will continue to be volatile. The markets in Asia might see a stagnation in liquidity due to the same being channeled in US markets for the coming weeks. Keeping in mind India's high dependence on FII inflows, a subsequent fall of 500-1000 points in not unrealistic.

I feel that unless the 12500 level is broken with significant volumes and the fall continued with the same kind of volumes for 2 to 3 subsequent days, the markets will do just fine. Right now, many investors would step in for bottom wishing which could result in the market being pushed back above 14000 in the next 12 weeks.

But for risk diversification, right now is a good time to have some exposure to bonds and GETFs.