Market reaction to Fed statement idiotic, says Samir Arora

Warren Buffett is right and we are all idiots to over analyze everything — even things, which are nearly laid down in stone. That's what fund manager Samir Arora of Helios Capital thinks of the market reaction to Chairman Ben Bernanke statement that Fed will start slowing the pace of its bond purchases later this year and bring them to a halt around mid-2014.

"We in the finance industry are more a bunch of overpaid, underworked people who are all very intellectually superior but have forgotten the original purpose of finance," he remarks in an interview to CNBC-TV18.

US stocks fell sharply, the dollar rose and US bond prices fell, lifting the yield on the benchmark 10-year Treasury note to levels not seen since March 2012, as traders saw Bernanke's remarks and the policy panel's statement as a clear step toward a reduction in the central bank's bond buying.

Arora says all the reports so far broadly expected the Fed tapering to happen by year-end or early next year, but not one report said it will never happen. "For it to be brought forward to September just means that you’ve brought something (early) which was more or less done," he says. 

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Last we spoke you were feeling a bit more positive about the market. Have things changed with the course of developments through yesterday?

A: I am not feeling bearish, in fact I am feeling a bit disgusted. We in the finance industry are more a bunch of overpaid, underworked people who are all really intellectually superior but have forgotten the original purpose of finance.

According to all the reports I read today morning from Goldman Sachs, UBS, Nomura and Bank of Singapore - they all are broadly say that they thought that the tapering would happen in December quarter or in December. And maybe one of them said it will happen in February but not a single guy said that it will never happen. In fact one of them says that the policy path is exactly as he thought before the meeting except that he did not think that it would be laid down so clearly by the chairman Ben Bernanke.

So, the point is everybody thought the tapering will be done may be from December in most cases to may be January or February and for it to be brought forward to September just means that you brought something which was anyway more or less done.

However, if one looks at it differently; a few months ago we learnt a new word call ‘sequestration’ and before that we learned ‘fiscal cliff’ and before that we had to worry about ‘Spanish bond auctions’, ‘Italian bond auctions’. Before that somebody told us that please look at the euro-dollar, it should not cross 1.30 because if it goes below 1.30 then this and that will happen.

So, the point is Warren Buffet is right and we are all idiots to over analyse everything. Some things which are nearly laid down in stone but only change their time by a few months - the over analysis on that is because we are all underworked in this industry these days.

Q: Where does it leave emerging markets (EMs) where the mood has not been great in any case for the last few weeks? Currencies have been under pressure, stocks in EMs have not been doing well. Do you see that trend continuing for whatever reason?

A: It may continue for one-two months, I don't care. The point is I don't think that anybody has said it right - that it is an either/or. There is too much money in the world for it to be an either/or. Very simply what would somebody put today? When you are making a pension fund portfolio in which you have to have a present value of your actual liabilities and your actuarial value of your assets. In that you will assume ‘X’ percent for fixed income return, which today you will assume 3 percent may be if at all anybody can even assume so much for US markets, or for EMs. That will never end. It will change by USD 5 billion here and USD 10 billion there but it will not end because nobody in this world has the guts to say all or none on any strategy.

Anybody who has tried all or none, we know what happened to Paulson's Gold Fund which is down 55 percent year-to-date. I own gold but it is not an all or none therefore I don't feel so bad. The point is nobody will do an all or none.

Even this year if you look at it, ultimately whatever we may say about easing and monetary easing and printing of money; we have got USD 15 billion from US investors in stock market. So, how much of that could have come without this much - may be USD 10 billion. Therefore, in a global sense and for a market USD 5 billion here or there, does not matter. So on our side we have to do things right, which we are not doing and therefore it is not that you go and buy today.

However, this over analysis of everything, I am basically giving up and I have given up for sometime because I know that the same guys wrote about sequestration and about fiscal cliff less than three-four months ago. And few months before that they told me that euro is going away and before that this whole world including me had gold in Futures and in everything else, because this monetary easing is supposed to lead to gold - the point is nothing is so off that it is an all or none situation, and therefore we move along and after some days it will be okay, you may underperform in other market.

However, one, I don't think separately that India has done so badly in local terms and two, currency at any point of time I am not thinking that it is a blowout like 1998. So at any point whether right or wrong, I will think it is another 3-4 percent here or there. So how does it matter to an equity guy? It may be wrong but that is how the world will also think who are investing in the equity side of things.

Q: It is not about all or none, the USD 5 billion marginal number that you spoke about - does India have the depth of the market or appetite to absorb even a USD 5 billion outflow from Foreign Institutional Investors (FIIs) or could it scare stock prices much more than such a magnitude of pullout would warrant?

A: I don't think that India is going to have a USD 5 billion outflow. I am only thinking that if you read yesterday’s notes, not one guy said that he thought that this will not happen and therefore I am in a sense embarrassed to be part of this group of finance market, where there is no connection with what was the original purpose of capital allocation and choosing winners and losers. But it is whether it is two or three months here and there and whether he has now said ‘may be’, etc all that is over doing it. However USD 5 billion would be a big number if it happened in a month.

I meant in a philosophical sense, all we have got is USD 15 billion this year and may be we could have got USD 10 billion that is what I meant, not literally.

However in a bigger picture sense if you have got USD 3 billion all that means is that some of your excessive will not happen. And some of it will go down even more, what I mean is, unless you see it happening in a week it is not a big deal for anybody in this world.

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Q: Do you see this as a risk for the currency because we saw about USD 3-3.5 billion go out very quickly from the Indian bond market, which put a lot of pressure on the rupee. This morning it seems like a repeat of that is happening, the rupee has gone back to almost 60?

A: If you are talking about today or tomorrow, there is no way I can say anything because if anybody were to even sell today, he does not get yesterdays prices. In many of these brokerage reports you see – a day before that is last night they would put a sell on government bonds, and they would have put yesterday night’s rate and said that we asked you to sell at this index, at this price, at this INR, but the reality is that it is to be done today.

So, we are not talking about what happened between last night and say today evening. I am saying one-two week’s later, one-two months later and not three-five years - I am saying in general the over reaction about this event becasue my frame of reference is what I read from people who today are saying it was much harsher, it was earlier than expected but read the second line that what did they themselves expect yesterday, therefore I say I don't know. I have not spoken to any US strategist. As of today, whatever I have read 5-7 reports they are all saying instead of September it should have been December.

Second, is that today the stock market has become like an economist said, like in a beauty context if you have to bet on the winner you don't bet on the person you like. You bet on what you think the judges will like because they may have a different view of beauty. It is the same thing here.

Today, it is no longer that anybody can justify fundamentally, between yesterday and today what is the mega shift. Not between one month ago, and today when he had not said anything, I am talking between yesterday and today, what is the shift which justifies a complete reversal of anybody’s thesis on EMs, on India, on CAD.

That is only because now we are in a room where somebody will panic. And in India’s case these fixed income guys will panic first because they are the last ones to enter, they have come-in in the last six-nine months and they are going away. I have always said that please respect the FII equity guys because they have been with India for 15 years, they don't normally panic except when they did in 2008. And unless you think it is like 2008, I don't think you are going to have massive outflows of FII money.

Q: Are you worried about the more lingering impact that could come through on individual stocks and their balance sheets, particularly those that have a large amount of dollar debt at this point? The quality of earnings may actually decelerate over the next couple of quarters with specific reference to this debt issue?

A: Absolutely, and one reason why we feel less pessimistic is because we are long short and we have many of these on the short side of our book and we have done quite well on the short side. However, this time I was saying separately from the long side that I don't feel so bad. But for me because we have short many of these stocks, and we think that there are many things which this market has ignored.

Therefore, it is not that only the global guys are ignoring, the Indian guys have also ignored every day, many of these things, we have had outright scams in India and people buy their qualified institutional placements (QIPs) because they come at two percent discount and because people think that they will get now banking licenses. So, it is not that it is only the US strategists who are over hyper; we have the same in our country. If anything moves we rationalise its movement in either direction.

However, clearly India will be affected and stocks will be affected. We hope they are affected because many of them we have on the short side. But independent of this, not to say that because I am short I like it better. I was talking that even on the long side I don't feel that this event per se, is to be taken to the proportion that they have taken because it was anticipated in its intensity except a few months here or there, in terms of its timing.

Also separately, if you look at India as an example, India announced last year that they will do tapering of their subsidies. In a sense they did the same thing that we will increase diesel prices by 50 paise per month and nobody knew how to exactly analyse it.

Now, you do it in reverse and you ask somebody - that if USD 80 billion becomes USD 65 billion for three months as what people are saying, the USD 15 billion for the world, how does it matter? Explain to me, -don’t tell me technical,  don't tell me piling on of trade, tell me what a USD 15 billion reduction in government buying changes anybody in this world. It is the same thing.

We could not understand - as in the politicians, the opposition, the economist, the public that 50 paise hike in diesel how does it matter and they kept doing it and it went through. In the same way ask somebody to rationally explain how USD 15 billion reduction in one month will matter. It will not in the end. This is all because you and we have to do something so we will also trade something short, something buy - with no real effect in the end.

Q: At this point if the market sees some more downside say 5-7 percent lower, you would go in and buy?

A: Actually, I have been very desperate to buy and I have bought a little bit but it is not a matter of 5 percent, it is just a matter of one-two days of it settling down. Just now, I saw on the Futures that US is down 0.5 percent. We have seen that if the Asian market is down so much, at that point of time for the US Futures to be down 0.5 percent doesn’t matter.

But one-two days if it stabilizes, whether India stabilise or not, I will buy more; I will either first reduce my shorts, and then buy more.

However right now for whatever reason I don't feel too bad in life because I feel that some part of our problems are also cyclical and not 100 percent is structural. Because government did not take this decision therefore nothing else can happen. Many things happen on their own with time and some things, they will do also. Don't buy those sectors where absolute policy is required but rest of it will move on.

We also know that other than 15-30 stocks, the rest are on average down 10-15 percent. Even HDFC for example the parent, is flat for seven months, it grows its earnings 20 or 18 percent per annum. So it is already 9-10 percent cheaper than December, plus as a foreigner you got another 8 percent because you can buy the same thing at lower dollar. So, there are so many stocks, wait another two months.

I don't think it is as bad as it used to be for us, in the past one-two years when these problems had just started, now we are at the end of those. Why are we forgetting that what Bernanke has said is that the US is strong, nobody is saying that. That means we are all admitting publically that this financial market does not really care about any fundamentals of anything, it only cares about the cost of its own leverage.

I don't think that is the way we should all be participants in this. We are all there, and I have enjoyed my 20 years and I will enjoy another 20, but I am not as proud of my community as I used to be many years ago.