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Why the market is nervous

There is nothing as nervous as a highly overbought and slightly crazy stock market dominated by greedy small investors and day traders all out to squeeze a huge profit out of the present bull run.

Nothing demonstrates this better than the dip in the bell-weather Bombay Stock Exchange (BSE) sensitive index over two consecutive weekends. Last Friday it was a 200 point crash, this week the Sensex dipped a 100 points plus on Thursday and another 53 points on Friday.

The superficial explanation for the market's nervousness is that software companies, which dominated the rally, are not looking so hot anymore. The alleged reasons for the jitters are many. First, that software contracts were put on hold by international companies until the Y2K threat has passed.

Secondly, good software professionals in India now demand salaries which are on par with those in the US, or hefty stock options - in effect, the huge margins which were the very basis of the software boom may disappear and affect software company profits; or newer companies with lower costs may do better than the current glamour shares.

Thirdly, that the technical position of Infosys, the leading software scrip, indicates a sale and others are dipping in sympathy. Given the huge overvaluation of this stock, nervous punters could pull down prices in a big way. The fall in ITC (Rs 789 on Friday) and Hindustan Lever (Rs 2240) is cause for further unease.

Finally, operators are watching how the government handles the trucker's strike protesting the hike in diesel prices. Whether it gives in to the truckers or holds firm without a serious disruption in prices of essential commodities, will indicate whether this government is capable of taking tough decisions and provide clues to how fast we can expect the economy to grow.

But these are only the immediate reasons for the two-day drop in prices. The real reasons for the nervousness is the huge overbought position in the market. A big time market operator with a nationwide reach says that outstanding speculative position is around Rs 3,000 crores and there is an unofficial / illegal badla position of an almost identical amount - Rs 3,000 odd cores at Calcutta and other regional exchanges.

While trading volumes are huge, nearly Rs 4,000 crores of trades are simply rolled over between the National Stock Exchange and the Bombay Stock Exchange depending on their settlement dates. The trade guarantees on the major stock exchanges and the fairly rigorous margin collections makes the market safer than it was a few years ago. But it certainly has reason to be very worried and nervous - and it shows on weekends when punters do not want open positions in case there are any surprises during the sabbath.

Another reason to be nervous is that Foreign Institutional Investors (FIIs), continue to be out of the market and are net sellers for a couple of months. Indian mutual funds are still buying but that should give no satisfaction to small punters because they usually strike direct deals with large operators. In fact, big operators who are the glamour boys of the business press have already unloaded large chunks of their favourite stock to the large Indian funds and it is only the small time suckers who are holding up prices.

But do not worry. The overwhelming opinion of investors, brokers and fund managers remains that the Indian bull run will continue. The market continues to be manipulated by a few big operators, but there is no indication that any of them are in any immediate danger of going belly up. Even FIIs, who are on the sidelines, remain bullish and may resume buying but they could chase different scrips this time.

Now that we are done with the bigger picture, here are a few interesting developments worth keeping a vary eye on.

Big time broker gets into the mutual fund business

A really big broker, who has been moving and shaking scores of scrips and follows closely the modus operandi of the one time Big Bull, is buying into an Asset Management Company - but not directly. His close friend Vinay Maloo, Chairman of Himachal Futuristic Communications Ltd., has made an open offer to acquire the AMC which runs the Kothari-Pioneer Funds and our Big Broker will be a benami partner. At Rs 20 for the AMC shares which were languishing at much below par he should mop up everything he requires. Shyam Kothari (son-in-law of Dhirubhai Ambani), the main promoter has already agreed to flog his stake.

All that remains is the final application and clearance. Securities and Exchange Board of India (SEBI) executives say that the broker's name is nowhere on the initial papers submitted to them, and that there will be further scrutiny after the open offer closes and the final transfer of control is effected. But the fact is that the broker is not only in on the deal but is even driving it.

Disreputable FII's

There has been a thundering silence from SEBI as well as the Reserve Bank of India with regard to the complaint by Manubhai Shah, Managing Trustee, Consumer Education and Research Centre, against the registration as a Foreign Institutional Investor granted to Prudential Insurance Company of America.

The company with allegedly shady past has been convicted in the USA of deliberately training its agents to mislead, misrepresent and defraud insurance policy holders. It was accused of unjust enrichment to the tune of a whopping US $ 2 billion by duping 10.7 million policyholders over 13 years. It also paid up a fine of $ 35 million for misleading policyholders, to return $ 410 million collected unlawfully from them and to pay $ 1 million as a fine for destroying documents.

This raises two questions. Is the FII registration process so weak that a company like Prudential can get away with a registration? And, do we want FIIs such as these fooling around in the Indian market, where punishment and penalties are already notoriously slow? Do write in to share your views on whether Prudential's FII registration ought to be cancelled or not.

Going public

For those who are taking the route of initial public offerings, it is worth watching to see what are the kinds of disclosures that SEBI will insist on from Business India publications which, according to the Business Standard, is planning a public issue.

The group has been the talk of the media world for not paying its staff - editors as well as peons and clerks -- for over a year. Several journalists who have left in disgust have given up hopes of recovering their dues. There are many criminal cases for cheque bouncing against the Advani brothers, under the completely impotent Section 138 of the India Penal Code. Last month, the powerful Living Media group, which publishes India Today and Business Today, had even issued an advertisment in a leading national daily to announce that Hiroo Advani, one of the owners and the brother of publisher Ashok Advani was absconding and avoiding the serving of warrants.

Business India, which continues to be a leading business magazine publisher, is apparently being dragged down by its television venture, TVI. Since the group has already received a lot of funds from blue chip institutions in the housing industry and elsewhere, one wonders if the money raised from investors will go directly to payback its several hundred creditors.

And so it goes on in the mad world of investment and regulation.

Sucheta Dalal

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