Sucheta Dalal :The market has a mind of its own
Sucheta Dalal

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The market has a mind of its own  

October 30, 1999

Less than two weeks ago, I wrote about how I had run into a broker who is credited with getting the Bombay Stock Exchange Sensitive Index (Sensex) to swing to his command. He said that the market was going to move into a new orbit and we would see a bull run like never before.

Ever since, the market fell dramatically every weekend. This week it outdid itself and dropped a massive 372 points since Monday and a whopping 525 points since Thursday last. All the favourite scrips of the broker are down and there are unsubstantiated rumors about a business group trying to cut him down to size by hammering his scrips. There was even a strange report of a fake letter, purported to have been written by the Securities and Exchange Board of India (SEBI), asking brokers to wind down positions in specific scrips - mostly those plugged by the big broker.

On Friday I watched Shankar Sharm of First Global, a truly savvy Mumbai broker, on the idiot box. He too had been raging bullish for several months now; he was being bullish this Friday evening too but took the precaution of saying that prices could go down further before the rally resumed.

The truth is that market pundits are as clueless about why prices have tumbled so dramatically and continuously over the last 10 days. The market clearly has a mind of its own and savvy brokers, smart operators and big fund managers may control its direction sometimes but not always. I won't even venture to guess which way prices will be headed next week, but lets look at a few of the reasons attributed for the fall.

The new margin system

This partly explains the decline in the Sensex from 4816 on Monday to 4444.5 on Friday (October 29). Last week, SEBI asked stock exchanges to cut out their unique ways of interpreting the margin system so that they could collect the least margins from their members. The Bombay Stock Exchange (BSE), for instance, has been forced to include Friday's trades in the overall exposure limits for the subsequent week. This has forced brokers to cut their outstanding positions.

At Calcutta, there were several ways in which brokers managed to pay less margin than what was mandated by the regulator. SEBI's demand for a uniform interpretation of its rules forced many brokers to get clients to liquidate their outstanding purchase positions and move them to the huge illegal badla market which is estimated at well over Rs 1,500 crores.

Consequently, badla rates shot up to over 50 percent in the unofficial market and heightened fears of a few operators getting into trouble if the market did not correct itself soon.

The Foreign Institutional Investors

These guys have been quietly booking profits all through the elections and beyond and it is unlikely that they are going to be back as buyers in a big hurry. Remember Christmas is around the corner-- the time when fund managers are more interested in booking profits and ensuring that they are in line for a hefty bonus. For several years now stock prices have always been affected by the year-end blues. This year is no different. Usually, trading for the New Year begins with enthusiastic front-running by Indian brokers in anticipation of big buying by the FIIs after fresh asset allocations are complete. This year though, enthusiasm about the new millenium has been tempered by the Y2K bug. I am told that FIIs do not really believe the announcments of Y2K compliance by Indian companies.They would rather wait and watch what happens on January 1, 2000.

Some operators believe that if the FIIs stay away until the next year then prices could continue to drift downwards until then. After all retail investors would also want to cash in and watch developments. On the other hand, Mutual Funds are continuing to rake in a large amount of investments which is expected to translate into purchase decision once the market has bottomed out. It is also believed that Fridays' fall was partly due to short selling by operators who hope to make money on the drop in prices.

In a nutshell, it means that the market could resume its bull run next week or it could continue to slump. Nobody is quite sure what it will do because there are no significant reasons to direct its course either way. If the current slump seems unnerving, then the rally, if it happens, could be as mindless.

One can only say that Yashwant Sinha is a lucky guy. Had election happened in these couple of weeks the Opposition would have exploited the fall in the Sensex as they did the rise in onion prices.

Thought for the week

I often wonder about those television programmes where the anchor zeros in on one of the big brokers associated with large research outfits and asks something like: "So tell me Shankar, which stocks do you think look good over the next few days"? And he replies, "Well I'm bullish on Reliance, Digital, Tata Elexsi, Himachal Futuristic…"

Smart investors would check the price movement and discover that these scrips have, indeed, moved up very smartly and be tempted to put down their money on the scrips. But wait. A broker is not a social worker. So why would he be on a satellite channel handing out these free tips when he has pored over annual reports and employed some highly paid analysts to discover these under-priced gems for investment?

Methinks, that a broker, however good and savvy, will only speak about the stock that interest him after he has bought enough of shares already and is now in the process of booking profits.

If you are reading this and telling yourself that most people are as skeptical about television tips, then think again. Last week a lady wrote to say that she gave her broker Rs 35,000 to invest in some shares - she does not say which ones, and it now turns out that he is neither a broker nor a registered sub-broker. She has no receipts and the sub- broker has declared that all her money is gone because he made a loss on his investments .

Then there was this Brigadier who wrote in to say that his sub-broker (again not a registered one) tells him, ever so often, that his transactions could not be put through because he was logged out. Now a broker gets logged out only if he has crossed his exposure limits on the National Stock Exchange and has not been able to pay additional margin.

If you are a small investor, do take the basic precaution of going to a registered broker/sub-broker and getting receipts for your transactions. Or simply shrug you losses away as you would if you lost your shirt at a casino.

-- Sucheta Dalal