‘Please stop it!’ is what the hedge funds said. These are the same folks who got trapped on the wrong side of Gamestop share price.
Let me briefly explain the situation.
Assume there are 100 shares issued by a company. Some big hedge fund comes and says: ‘Okay, I am ready to sell 140 shares of the company in future!’ Wait, what! How can somebody sell 140 shares of a particular company when the company has issued only 100?
This is exactly what happened with Gamestop.
A hedge fund named Melvin Capital took a position to sell 140% of the total shares of the company. This speculative activity of selling shares without holding them in your Demat account is termed as ‘short-selling’.
A smart group of traders took note of this and made a consortium. This consortium decided to give Melvin Capital a run for their money. How exactly did they do this?
Well, the consortium kept on buying shares from the open market. A time came when Melvin sensed a state of panic as they had short sold shares. In order to honour their commitment, various hedge funds started buying in a state of frenzy.
The party was joined by a few very big investors who decided to benefit from the helpless situation of short-sellers. The result? The share price of Gamestop jumped from $150 per share to more than $450 per share in a matter of 2 days.
This is a classic example of how powerful social media is today! A group of retail traders united by a Reddit thread took heavily on an established hedge fund.
All hail social collaboration!
Coming back home, Nifty 50 continued to remain jittery for almost the entire week. After 3 full months, the index has returned to its 50-day simple moving average. Indeed, a welcome sign for long term index investors, who wait patiently to buy at favourable average prices.
Image: Nifty50 Movement During the Week | Source: Google Finance
Is this correction for real, or are these mere budget jitters?
Let time tell the tale. However, the FII sell-off in India is a commonality with other emerging markets. Something to ponder upon: How long do you expect FIIs to resist the temptation of profit booking?
Almost all sectors gave in to the market’s mood and it was tough to find a tinge of green in an ocean of reds.
However, long term trends in pharma or metals are available near their important moving averages.
On the other hand, Grasim Industries has announced a big-bang plan of investing about Rs. 5,000 crores towards greenfield capacity. This time, they intend to enter the paints business. The business is a high margin one. Asian Paints, Berger Paints, Kansai Nerolac are some incumbents in the sector.
Undoubtedly, Asian Paints is the big daddy.
What impact will Grasim’s entry have on Asian Paints? Well, Grasim has an established network of 50,000+ cement & construction materials distributors through its subsidiary Ultratech Cement.
Incidentally, a vast majority of these dealers also deal in paints. How difficult will it be for Grasim to offer more favourable trade terms to these dealers? After all, the Aditya Birla empire has high hopes from their Cement & Aluminum business.
Image: Grasim Industries Share Price | Source: Google Finance
There are huge synergies to be realized by this expansion, and it may not be apt to term it as ‘bad diversification’ or ‘diversification’ (as Peter Lynch likes to call it).
Image: Impact of Grasim News on AP? | Source: Google Finance The literature on the latest economic survey is open to the public. An important point worthy of discussion is suggestions for a fresh round of asset quality review (QAR). As per the eco survey, RBI’s last round of QAR failed to detect evergreening of loans by banks.
Evergreening is a creative way used by banks to lend more money to existing borrowers. The existing borrowers pay back their earlier EMIs using the newly borrowed money.
Yes, is it a circle! The economic survey now insists on RBI carrying out a new round of QAR. The last QAR, carried under Governor Raghuram Rajan reported a significant increase in NPA recognition and witnessed lenders reporting quarterly losses.
Is something similar on its way? Well, if history is anything to go by, the possibility of troubled times for banks is high in the coming quarters.
Data to look for in the coming week
|01-Feb||Balance of trade||%-15.44bn||$-12bn|
|05-Feb||RBI interest rate decision||4%||4%|
Thank you, until next time – wish you a joyful & profitable next week!