Short Call | F&O warning signs, rate worries, Vedanta and paint stocks

FIIs are now 85 percent net short on Nifty futures, meaning 85 out of 100 open contracts on Nifty futures held by FIIs are a bet on the index heading lower

 

Shares fell for the eighth day in a row on Tuesday, the longest losing streak in years. The slide has shaved Rs 25 trillion off the BSE’s market capitalisation, the fastest ever in the first two months of a calendar. The GDP growth moderated to 4.4 percent in Q3, adding to the overall trickle of bad news. Foreign investors continue to dump stocks, and domestic institutions continue to buy

Warning signs

FIIs are now 85 percent net short on Nifty futures, meaning 85 out of 100 open contracts on Nifty futures held by FIIs are a bet on the index heading lower. In the last many months, such a high level of FII short positions has often ended in a rally fuelled by short positions. But two things are different this time: overall news flow is negative, and local bulls are in a much weaker position financially.

Another sign of worry is the spike in long positions held by retail traders in single stock futures. As of yesterday, retail traders were 87 percent net long, compared to the usual average of 65-70 percent. Odds are that more weak hands could be forced to exit their positions shorts.

The bigger worry

Yesterday, we mentioned rising pessimism among retail investors. Deepak Shenoy of Capitalmind feels the pessimism is only natural in current market conditions, but may also have been overdone.

“Pessimism is justified when earnings growth is by and large weak, not when the median earnings growth of Nifty is 18 percent. So this may be a good time to be scouring for bargains,” he says.

The real culprit

But there are still other reasons to worry about in the short term, Shenoy adds. “Spreads between (1-year) government bonds and corporate bonds are widening… They have moved up from as low as 10 bps to about 75 bps now,” says Shenoy.

In other words, only a couple of weeks back, the best rated companies just needed to pay 10 basis points more than the government of India to borrow money. Now they need to bay 75 basis points more. It gets even more expensive for companies lower down the ratings table.

No relief

And money is only likely to become tighter.

“As the RBI withdraws the Covid stimulus, liquidity in the system will get tighter and the spreads will widen more. That’s bad news for companies with a lot of debt,” says Shenoy.

A bright spot

Paint stocks were surprise gainers on Tuesday. Investors have been wary of the sector of late on worries that Grasim’s entry could spell bad news for everybody’s profit margins. So why the sudden interest?

Berger Paints boss Abhijit Roy told CNBC TV-18 a couple of days back that volume and value growth for the current quarter is expected to be in double digits, and that semi urban and rural pockets are doing better in February. Market appears to extrapolating that as a good sign for the industry in general. At the same time, investors won’t overpay in this market. High PE stocks like Asian Paints may not have it easy in the near term.

Better safe than sorry

Vedanta’s clarification that it is well placed to repay around $900 million of debt maturing over the next six months, and that only 6.8 percent of its Hindustan Zinc holdings were pledged, failed to calm the market. The stock ended close to 7 percent lower as the market is keenly watching the company’s fund raising plans.

Either the market is on to something, or it may just be a case of investors adopting a ‘better-safe-than-sorry’ approach in an uncertain market

Rates casualty

Asset management firm Pimco is in hot water with its 2021 acquisition of Columbia Property Trust Inc, which owned 19 offices across key US cities. Columbia has now defaulted on more than $1.7 billion of debt backed by seven of its buildings, reports WSJ.

From the report:

The default marks the latest sign that a meltdown is unfolding in the office market as more high-profile landlords default on debt or engage lenders in restructuring discussions. Even with the job growth of the last two years, vacancy has soared as businesses have adopted hybrid and remote workplace strategies.

Inspiring

After roughly 70 years in the business, actor James Hong, 94, earned his first Screen Actors Guild Award Sunday. Hong’s legendary career has 700 film, television and video game credits, including “Chinatown,” “Blade Runner,” “Kung Fu Panda,” “Seinfeld” and many more.

Hong doesn’t plan to stop working anytime soon. “Something inside me, inside of James Hong, wants to keep on going and do more movies and progress … I’m going to do other movies until I can’t walk anymore and can’t talk anymore.

 

The following information has been taken from other reuters. shriramtradersclub.com and it’s management will not responsible for any kind of wrong information. consider with your financial advisor before takeing any disicion.

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