Expect to see a Black Friday today

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Global meltdown: What are analysts saying? US subprime haunts market: Wait for stability ALSO READ See what other CNBC-TV18 anchors have to say Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Get ready for Black Friday; that's what it looks like sitting here in the morning be prepared for some serious bloodbath in the markets today. We do not know how bad it will get but look at what's been happening globally will tell you that this is not going to be a good day at all for the markets.

Big-big sell offs globally, it started with Europe last afternoon, America sold off after that and this morning the cracks in Asia are very sharp; an average fall of 3% across the board in the Asian markets this is serious stuff. More importantly not just the day's trade but also some of the signals which are coming in from across the world, are very disturbing.

So if the last couple of days if the market has told you that the worst is over is not this a problem which maybe little bigger and more durable than we thought at first glance and its spreading all over the world.

Don't want to sound very terribly bearish but its not looking good this morning and it looks like this global volatility will stay for a while. So Black Friday seems to be on the cards for sure.      

No place to hide:

There is no place to hide and more importantly we have had these 2%-3% kind of falls in the global markets. All other macro indicators of how this problem is playing out are not very comforting and that is the bigger take away.

I think traders who will probably look at today as just another 3% fall and then the 3% bounce back etc, that is not the key takeaway from all that has happened in the last twelve-eighteen hours. I think the bigger takeaways that this problem is deeper, bigger than what most people have thought to begin with, most people have admitted to begin with and the way it is spreading, it is not very comforting.

The biggest signal for me yesterday was not how much the European market fell or how much the US market fell but the first sense of panic from a Central Bank. Central Bank say one thing but their actions should always be read more carefully and the way the European banks threw money at the money market yesterday was a sign that they are extremely cautious and careful and worried about the situation on the ground and that more than any Fed statement, which came in two days back should tell you that the situation is not very good out there globally.

So this is a problem, we do not know what the magnitude is and it is easy to talk about LTCM, Long-Term Capital Management etc but this is a different problem. We do not know the magnitude of it, we started by saying it is USD 250 billion-USD 300 billion but the way it is progressing we do not know how it will blow up in your face. I think there are very negative signs, which have come in over the last twenty-four hours and as an investor, you need to take that on board. This is not one passing bad day in the market or a couple of bad days, this is the first time in the last one year where we have had a proper situation on our hands and we now need to learn to deal with it.

Snowball effect:

The sequence the way it is panning out; May 2006 was very different and before you knew it the markets was down, it was circuit down market, and you cannot deal with such kind of situation. In just a few days bottom fell out of the market, it gave you great opportunity, it looked very ugly, lot of people, I don't think still have recovered from that shock and then the market started recovering.

This is not that kind of a fall. There is lot of hope built into this fall and people have been spoiled because every time the market has fallen its bounced back immediately to claim new highs once again and when you have many months of that kind of trading pattern then you don't believe a dip at all - you say no this is a good dip to buy market will always get back which is what's been playing out globally.

You have a fall the bounce back is very smart, you have a fall again the market bounces back once again then you have a fall again at some point people will say that guys we misreading the situation this is not just a trading correction, this maybe something bigger because there are macro ramifications which we are not understanding and then the fall might be much bigger.

I do not know whether that  starts today. You could have a situation where we fall and sell off for the next couple of days and bounce back again. But at some point if the situation is as bad as its beginning to look then one of those dips will not be a buy in dips will not recover so easily and you will get a much deeper more meaningful correction. I do not know whether its starts today because at every point, every time the market refusing to carryon with that bounce and falling I think the confidence is getting eroded and yesterday you saw sense of panic creeping into the midcap side of the market which is a benchmark for sentiment. So I may little apprehensive of how things are panning out.

On a morning like this, it's easy to get very bearish and to talk about a doomsday scenario and eventually things will resolve it. So it's not like this problem will probably carryon for two years and we are getting into a big bear market at least from here it does not look like that but we need to recognize that this is a genuine problem out there which is now beginning to assume larger proportions and to just wish it away under the carpet may not be a prudent thing to do because people are bullish and they have made a lot of money in last few weeks and months.
 
Our markets:

It will be very bad this morning and I do not know whether it will be 400 points, 500 points or 4,400 on the Nifty, we get pegged back to 4,300 or sub 4,300 straightaway but that is not the real story. I do not think this is a market as we have been saying; it is not a technical level market, no levels matter in a situation that we are in.

Two-three things that you need to watch out for very carefully over the next couple of days. FIIs will be shorting the Nifty futures. So you will see the discount widening, Nifty futures coming under pain etc. The bigger problem is whether we see some serious liquidity withdrawals from emerging markets including India. We have not seen much of that, given that USD 6 billion came in including primary issues in July, we have seen about billion dollars go out little bit more than that, that is not huge. Are we going to deal with a situation where many participants who have been putting in money whether it is hedge funds or participatory notes etc need to now withdraw money from our markets or emerging markets.

As you will hear some of the experts saying August 15 is a bit of an important day not just because it is Independence Day but also because it is the day of reckoning for a lot of hedge funds across the world. It is pretty simple, as we understand it, every quarter when you start, if you have a problem and you want to withdraw money from hedge funds; you need to give a 45-day notice. For the July quarter, that notice first day that you can actually withdraw serious money from a hedge fund for this quarter it is August 15. So post August 15 my sense is that you will probably see people queuing up for redemptions in hedge funds and that may we do not know for sure, lead to a big cascading liquidity withdrawal syndrome across emerging markets. We have not seen that happening and if that happens then the stock prices can come to their knees.

So far what we have seen is a big sentiment problem, we have seen everybody being very fearful of what the global subprime situation is. We have not seen actually great withdrawal of money from the cash market yet. You have seen some shorting in the Nifty futures and I think that will continue this morning but what if from starting August 15, these problems lead to a lot of jitters in the overall hedge fund universe leading to contraction and pull out of liquidity from the participatory notes front in our market.

Are our markets liquid enough, deep enough to deal with, remember May 2006 and what happened when a little bit of money went out of our market, we went circuit down. So these concerns should be kept at the back of your mind because while we approach the market this morning there will be a lot of people saying every time it goes to 4,300, you need to buy, buy lots of good quality stocks that is a good thing to do or good approach to have any market, which is dipping but you need to understand how bad it could potentially get if the situation becomes worse globally and where you could get stock prices. So a little bit of reality check, let us not be very brave out here, this is a global situation and it calls for interesting trading and investment strategies. It is not the end of the world for sure but you need to take on board what is happening.

On liquidity, Hegde funds and Banks:

At this stage you do not think that the big banks will collapse or anything like that of course there is a problem but the Bear Stearns , the Lehman Brothers , the Macquaries and the BNP Paribas won't go burst because of it some hedge funds might go burst for sure and the problem maybe restricted to 50-60-70 entities. But if they suck out or need to suck out USD 100 billion from the market over a short period of time the resultant pain could be quite a bit and the bigger people who do not have such problems who are long only funds, stable long-term funds they may not rush in just yet because even they are waiting and watching the situation. I do not think the first fall will be bought with great alacrity in this kind of a global situation.

Right now it does not pay to be very brave; if you want to be brave you have to be brave very selectively and in a staggered manner but to say - I am going to buy the next 100 points in the Nifty because after that the Nifty is going back to 5,000; I am not sure that's a great strategy which will play out in the near-term this is a global situation and its not in our hands at all.

Just read the signs of what's been happening for the last couple of days see how jittery global markets have also got. So this could last for a few weeks at least and could scar us more than what we think at this point in time.    

Asian Indices

Welcome back scary falls across the world this is how Asia is dealing with it 4% down in Korea, Straits Times down 3.5% (three and a half percent), China is down 1.6%, Nikkei is down almost 400 points. Sharp cuts Hang Seng down 3%, Taiwan down 3%, Thailand down 1.6% and Indonesia down by 2.27% (two and a quarter percent).It is Friday morning and there is a serious blood bath in global markets. It is not a good day at all globally. The meltdown started with European markets, moved to the US markets, and now there are severe cracks emerging in Asian markets. They are down about 3%.

It is not just the trade that is disturbing but also the signals that are coming in. If there were analysts telling you that the worst is over, it is not. The signals seem to suggest that the problems there are durable and will last for some more time. I do not want to sound terribly bearish but I guess be will see signs of a black Friday.

On understanding global situation:

That's the point I have been trying to make and its been like banging your heads against a wall, you have heard a lot of opinion at the last ten-fifteen days and everybody from a small brokerage room in Malad to everybody seems to be an expert on the sub prime situation, we have had people coming and saying you know it's a localized problem it will pass, its only 2% of the market what are we getting worried about, everything will work out.

We don't understand this situation, how many people understand the unraveling of the quant fund, which is happening I don't claim to. But you are getting an uncomfortable feeling in the pit of your stomach about the kind of news flow, which is coming out everyday, and this is increasingly beginning to resemble a can of worms. I don't protest to be an expert on these matters but we have seen some of these issues play out before; they start small and then begin becoming bigger and bigger and everyday you hear one more facet of the problem. Sometimes its quant funds and you will get a bank getting into problem because some sets are stuck somewhere and then the Central banks will get extremely worried about big malaise in the system and start throwing money, then some currencies will start getting haywire but this is typically how these big problems unravel globally.

One may not understand the exact nature of it but the symptoms are familiar; you know you have seen things like this in the past and that's how the sequence of events generally pan out. Right now you don't want to be very cute and say everything will pass its just a few hundred points in the Index and will get back and running it may be the case and all of us pray and hope that may be the case. But that's not a great wait to approach your investments for sure, so one needs to be a bit careful and you need to understand what's going on, who knows what's going to come from this global space and hit us over the next few days.

Present circumstances versus last summer:

It is just that there is one overwhelming similarity; it's that the market has had a fantastic run before that correction came in. There will always be a reason for the market to correct, you just cannot pinpoint what will be that reason; sometimes it's a plane going into a tower, sometimes its currency going somewhere else. The reason for a correction is always difficult to predict but you could see the way the markets were moving up. Many of the wise men have been telling us who have spent years in the market that of course your great story about emerging market is bought; the great story about fundamentals is bought. But people were getting too aggressive; lot of 29 year olds are running around with lot of cash in their bags throwing it around into whatever assets that they find and at some point this people will brought to the knees by the market. You never knew what would cause it but something was telling you at a pit of your stomach that it was getting too easy there globally and something had to change.

The set of factors, which are causing this correction, is very different from what happened in May 2006. What happened in 2000-2001 all the factors are different but one fact is similar that there is been lot of euphoria preceding this fall and at some point something would have gone wrong which would have pricked this bubble. Its not a big bubble like we had in the technology arena but we certainly had excess and the market will always make you pay for those excesses; it's just a reason, which it latches on to every time, which is very different.

There are essential differences with what happened in May 2006 but it is somewhat similar to what was happening with LTCM (Long Term Capital Management) in the previous correction so you do not know how it will pan out. I know we will be accused of being very circumspect and even bearish this morning that is not the point. The point is to point out the reality on the ground because people just tend to overlook it and then one day the markets down circuit and they bang their heads and say- we never saw it coming and nobody told us the situation on the ground might have been so rickety and was a pack of cards waiting to fall.

Just be a bit careful about you investments right now because we maybe in for a little bit more of a high jump than we thought at first.  

On leveraging:

It is not horribly extended like May 2006 because of the periodic shocks we have been getting for the last ten days, people have become a little bit better behaved than they were fortnight back. So you have got small electric shocks and every time we get a shock like that, you tend to recall a little bit and be less exuberant about your F&O positions. So this morning, at least we do not have a May 2006 kind of F&O positions. It is not light, make no mistake about it, and a fair amount of the market is already fairly short so to that extent, this is not a big surprise for a market, which is very long that suddenly hits you in the face. It is not like that but even having said that, positions are not exactly light and one's fear is not about the Nifty situation because the Nifty situation is well hedged maybe even short, the fears are bound on the stock futures side.

Yes, there has been some cut but if the market gets in a really harrowing kind of position then there is still a lot of pain, which could unfold on the stock futures front. You have seen a bit of that yesterday, Petronet LNGs, Neyvelis and PFCs and IFCIs, IDBIs started coming off a bit because I think heart of  hearts  traders is now beginning to feel that maybe something is afoot which they do not understand and they are beginning to take profits off.

If this becomes a much bigger global malaise over the next few days, I think you will see some pain in the liquid F&O midcaps. Maybe we have not seen enough of the pain out there but overall, is the market in an explosive technical situation, probably not and certainly not as bad as it was in May 2006. 

Yen Carry Trade:

You don't know what all will now move because as they say it never rains it only pours and many moving parts in this puzzle you don't know what the Yen is going to do next it had a move back to below or above I should say 118-117 and a bit and it went back to almost 120 and now its coming back to that level of 118.

Dangerous levels and this is another important bit of the puzzle if the Yen goes to 117 and shows even for a bit something between 116-117, there might be some real damage of unwinding but the sentimental damage in the context of what's happening because right now people are really running scared, its the first proper scare that we have, and the February was a bit of a scare but since May 2006 this is the first big scare. And everything, every straw, which is fluttering in the wind, which is potentially red in color, I think people, are running extremely scared.

The sentimental damage of the potential Yen carry trade unwind could be very devastating I think for emerging markets too. Keep watching the Yen as well very closely you are reaching that danger mark 117 and anything beyond that is going to be really hairy kind of a ground out there for the Yen.

One doesn't know there is sub prime, there is the Yen carry trade volatility is going up liquidity is being withdrawn hedge funds are getting into trouble its not a great situation but who knows if this is going to be a couple of days of blood bath and then this market has a strength to give you another pull back, at least an opportunity to adjust some of your positions.

Approach to the markets:

 

First the traders who are in the market they need to do some serious adjustments. The guy who is sitting on money is in a good position right now; I do not think he needs to worry too much, I do not think he needs to trade at all this kind of market. I know you will get support levels and resistance levels but do not trapped in that syndrome at all. This is not a market where you can successfully and make a lot of money; five people will do it but forget that.

 

For the guy who is running positions in the market, tough situation right now if you are long and I suspect you will have to unwind some of your positions. On the stock futures front if you have been running those IFCIs and IDBIs as I believe a lot of people are, you will have a bit of a situation on your hands hopefully you will get clean exits and then come and relook at the market at some later point. But there is enough evidence in the last ten days to tell you that you can't make money easily trading this market so you need to stay away.

 

I suspect that after today's volatility and if there is a lot of volatility over the next couple of days a lot of trading volumes might dip as people find out that it may look easy 400 up 400 down to make money but when you try and do it its not very easy at all. I think its not the time where you should go by trading opinion at all, whoever you respect I think most people will get it wrong on both sides trying to take short-term trading calls you need to be out for trading for sure. If I were a trader I would not go anywhere close to the market right now.  

 

Fear of unknown:

 

None of us know where this carnage will stop and how deep this cut will be. If it stops around 5% down from these kinds of levels, 14,500 then it is great. You would have bought a little bit of stock and you see the markets stabilizing there. My guess is since it is unknown and you do not know where this global situation will play out, on very bad days I think you need to put in no more than 10%-15% of your cash to work if you are not a fund.

 

If you are fund, the decision is taken for you, people go by the opinion of a lot of mutual fund managers and global fund managers, their job is very difficult, they have been given money to invest and they cannot take cash call so easily. So of course they will come in and say, "no, we will remain invested through this, long-term everything looks good and we will buy on dips etc, we should not move too much of our money to cash", but that is not how you should be approaching the money. When we talk about stocks in the morning, we are not talking to the fund managers out here, they do not need us they know what to do themselves.

 

One has to figure out what you want to do with your own money and in that your strategy should be very different from a mutual funds or any other fund managers, you do not have any compulsion to sit on stock, be invested, not take cash calls etc. Of course you should take cash calls with your own money.

 

I think the best way to approach this market is the fact that you tell yourself, I do not know what the situation is going to be. If it stops at 14,500 great, I would have bought 10%-15% and if the market bounces back, I will ride and average my holdings up.

However, can this market go to 14,000, can it go to 13,500, will I get a lot of good prices in the midcaps which I loved because when things start falling, midcaps fall 20% without blinking and sometimes they fall 40%. I do not know what the situation will be this time but maybe you make a nice little list of stocks and keep ticking, this is my ideal price for midcaps and who knows in this situation maybe my ideal price will come, which I thought would never come just a fortnight back and then slowly, gradually keep buying 10%-15% at every bad dip in the market.

 

So when this carnage is over as it will surely get over some day, you would look back and say, "I did not panic, I did not throw in my towel, I just approached it rationally and kept buying small quantities and I have got great average prices in great businesses and I will ride this next boom up and make a lot of money out of it."

 

I know people will panic and not do this but if we just look back in all the history of the correction, which we have had, it has paid to be brave in a measured kind of manner and buy slowly, selectively and come out feeling good. I know at some point it may get so scary that you would have bought and prices will still fall but that is the law of the market that you can never catch the bottom. So I think a cool mind will work very well because we are in for a few rough times out here in a next few days for sure.