Short Call | It's about Federal Bank, Marico, volatile crude, and a turning point for lithium

Risks to the current rally could mainly arise from external factors.

“You lose money fast in the stock market. You can't make it fast.” - Peter Lynch

The market continues to be upbeat, and the massive foreign fund inflows means that bears are having second thoughts about going short even if the near-term picture looks hazy. At this point, risks to the current rally could mainly arise from external factors, market participants feel. The Federal Reserve said in its financial stability report on Monday the system overall remained stable, but flagged banking system pressures, real estate stress and persistent inflation.

Federal Bank

Net interest margin compression was the main worry about banking stocks, heading into this earning season. And Federal Bank is feeling the heat after its fourth quarter NIM dropped 18 basis points sequentially (up 15 basis points year-on-year). The stock stabilised on Monday after the brutal sell-off in the previous session, but investors appear to be trudging cautiously. The tepid reaction to the bank’s fourth quarter business update signalled that the market was not expecting a positive surprise, but neither an unpleasant one.

Federal Bank MD Shyam Srinivasan pointed to many good things that were happening in his bank, but the market right now appears to be fixated with NIMs. A long-time cheerleader for the stock, Morgan Stanley downgraded it to ‘equal-weight’, cut price target to Rs 145 from Rs 175 and also trimmed the earnings forecast. Valuations are cheap, but a rerating could get delayed now that margins may have plateaued for the time being, the broker feels.

Marico

Punters appear to have had a field day in the Marico stock, with the stock soaring over 7 percent on heavy volumes. So far, the big concern about Marico was the delayed recovery in rural market. Market reaction to the fourth-quarter business update was muted, and nothing in the fourth quarter numbers seem to suggest that things have changed for the better in

a big way. The company has said that it is passing on the benefits of falling raw material costs to consumers, is not looking to enter new categories, and will continue to consolidate brands and categories.

Short-sellers in the futures segment may have been forced to cover their positions, considering that open interest climbed by just 12 percent after such a huge spike in prices. Traders who had bough Marico calls of 540 and 530 strike made a killing as the premium surged 8 times overnight. Such huge upswings partly explain why options trading is such a big hit with recent entrants in the market.

China banking

Investor sentiment for Chinese banking stocks is in stark contrast to the gloomy outlook for their US counterparts. China’s CSI 300 Financials Index rose for the fifth successive session to a hit a 13-month high on Monday. What explains the frenzy?

From Bloomberg:

“Chinese investors are betting on a pledge by Beijing to let state-owned firms have access to more capital and play a bigger role. New guidelines on bond sales by SOEs (state owned enterprises) is seen as another step in the reform as President Xi Jinping reshapes the economy.” 

But the report also cautions that the rally could be sentiment driven more than anything else as the first quarter earnings showed signs of margin pressure and the trend could persist.

Minsky moment

In March, JP Morgan strategist Marko Kolanikov had warned of a Minsky moment, and now Allianz chief economist Ludovic Subran has voiced the same concern. A Minsky moment, named after economist Hyman Minsky, is a collapse in asset values at the end of the growth phase of a cycle in credit markets or business activity.

“Everybody’s problem now is the very abrupt tightening, but then there is an additional layer of wrong risk management,” he said in an interview to Bloomberg Television. “A new financial accident could come from the banking sector, it could come from some very specialized hedge funds in commercial real estate, but it could come from a mixture of those two.”

Volatile crude

Open interest in US crude oil futures is at its lowest in three years and this could set the stage for extreme volatility in the days ahead, writes Tsvetana Paraskova in oil price.com. Speculators—both oil bulls and bears—have been repeatedly wrong footed in the past two months, causing many to keep away for the time being. Crude prices have been under pressure of late, but analysts at Citi, ANZ and Goldman Sachs feel prices are close to their bottom, and could start firming up from the second half of 2023, according to this CNBC.com report.

Turning point

Financial services major Morgan Stanley believes lithium markets have hit a turning point after a near 70 percent drop in prices over the last five months. Falling inventories and slower-than-expected supply growth are the key factors that will improve sentiment for the battery metal, Morgan Stanley commodities strategist Marius van Straaten writes in his note. Music to the ears of miners, not so much for electric vehicle makers.

Quick trade

Some habits never change on Dalal Street, like some devious brokers looking to make quick buck off their clients at the first opportunity. When sellers fail to deliver shares of stocks that are in the trade-to-trade category, the transaction is closed out at a 20 percent premium to the price at which the deal had taken place. But not all brokers pass on the proceeds to the buying client. If the stock price is still around the same levels when the deal was done, the brokers buy the shares from the market, and credit them to their clients’ account the following day, pocketing the difference.

Face value

Do looks matter in the world of investing? On the face of it, no. But according to a study reported in the Wall Street Journal, male stock analysts with ‘dominant’ faces get more information from industry experts and analyst peers, which in turn translates into these dishy data-crunchers making more accurate earnings forecasts than their facially-challenged counterparts.

Further, the research says experts are less willing to share information with women analysts who are perceived as dominant-looking. Talk about double standards.

Interesting read

Banking credit growth is strong, but a lion’s share is going to retail borrowers. Banks are exercising a lot of caution on corporate loans and are probably limiting the exposure to top-quality big companies, writes my colleague and Moneycontrol Banking Editor Dinesh Unnikrishnan in this piece.

Abhishek Mukherjee contributed to this piece