Short Call | VIX fear index scaring traders; no money in US bond funds; Vedanta, Eicher, Yes Bank in focus

We now have bearish global sentiment, sustained selling by foreign funds and more shares flooding the system. Can the bulls weather this storm?

“In investing, you’re good if right six times out of ten. You’re never going to be right nine times out of ten.” – Peter Lynch

The mood in global markets is worsening and getting to a point where even the most die-hard bulls of the India growth story cannot ignore it. In addition to promoter and private equity selling, the number of qualified institutional placements is on the rise. So you now have bearish global sentiment, sustained selling by foreign funds and more shares flooding the system. Can the bulls weather this storm?

Eicher Motors

The stock fell close to 3 percent on Tuesday. F&O data indicates a build-up of short positions. The stock has never really recovered from the hammering in July when Bajaj Auto and Hero MotoCorp announced their forays in the premium bike segment. Eicher faithfuls say that the new entrants have yet to demonstrate that they can scale up quickly to the point to be able to snatch meaningful market share. But the stock price indicates that the disbelievers are in greater force right now.

Who owns them?

In a bull market, it is usually the operators who make the most money in any sector that is a big hit with investors. The chatter in trader circles is that none of the big names on Dalal Street have been able to profit from the scorching rally in defence and railway stocks. On the other hand, many of the retail investors appear to have had better luck, as they chose to overlook the risks usually associated with PSU stocks. As the saying goes, sometimes ignorance is truly bliss.

Yes Bank

It may be among the poorly performing bank stocks, but in one key operational parameter, it has managed to fare better than many of its peers. The bank’s deposits grew almost twice as fast (17.5 percent) as its loan book (9.5 percent) year-on-year, according to the bank’s second-quarter update. Quarter-on-quarter, deposit growth of 6.8 percent outpaced the loan book growth of 5.2 percent. Can that make a serious difference to the bank’s net interest margin is what remains to be seen

APL Apollo Tubes

Quarterly sales volumes were up 12 percent year-on-year to a record 6,74,761 tons, according to the company’s business update. But has the good news already been factored in? The stock has rallied 63 percent between late May to early September and come off since. Far from cheap at over 60 times trailing 12-month earnings, but the valuation seems to indicate there are plenty of believers in the story. One positive for the company in recent times is that the acquisition of an NBFC will shorten the working capital cycle as distributors can now be given through the NBFC arm.

Vedanta

Tepid second quarter business update, with total aluminium production up 2 percent year-on-year and mined metal production down 1 percent. The view among most analysts remains cautious, but outstanding short positions in the securities lending and borrowing window has shrunk dramatically over the last month and a half from around 2.41 crore shares to just around 15 lakh shares. For a long time, Vedanta was among the top two shares with the most short positions in absolute terms. It is now number 8 on the list.

Short Call

Avenue Supermart

At the time of the first quarter business update, analysts’ quibble was that the share of general merchandise and apparel sales in overall sales was not growing fast enough to boost profit margins. The same gripe seems to hold for the second quarter as well. And given expensive stock valuations, the Street is much more demanding. Citi has retained its sell call on the stock citing ‘inferior product mix’, meaning low-margin goods like provisions selling more than the high-margin ones.

VIX

Globally, the rise in VIX, commonly known as the fear index, is unnerving traders. The Cboe Volatility Index surged 2.2 points to 19.80, pushing the spot price above its three-month futures for the first time since the turmoil in US lenders in March, reports Reuters. This inversion has occurred twice in the past year and both instances heralded market bottoms. Back home, no signs of panic among options traders even as the India VIX has been inching higher.

Rate cut or rate hike?

Wall Street is betting on the Fed cutting rates at some point in 2024. But bond investors are not so sure. That partly explains why money is not pouring into bond funds at the rate at which it ideally should have, given that bond yields are at decadal highs. “Relentless losses in the bond market have spooked investors who appear hesitant to jump in until they feel more confident that rates have peaked,” reports WSJ. There is a saying among veteran investors that when the bond market and equity market say two different things, always trust the bond market.

Resurgent yen

The yen surged from a 52-week low versus the dollar amid speculation that Japanese officials were acting to slow the currency’s slide, reports Bloomberg. Japan’s currency reached 150.16 per dollar on Tuesday in New York trading, its cheapest since multidecade lows set in October 2022. A strong yen is bad news for practitioners of carry trade, who borrow in yen, convert them into dollars and invest that money in other markets for better return. If the yen appreciates, it means carry trader will need more dollars for the same amount of yen at the time of repayment.

Mortgage rates

The average rate on the popular 30-year fixed mortgage in the US rose to a 23-year high of 7.72 percent on Tuesday, reporst CNBC, quoting data by Mortgage News Daily. To put that in perspective, for a borrower purchasing a $400,000 home with a 20 percent down payment on a 30-year fixed loan, the monthly payment today is about $930 more than it was when rates were at 3 percent during the height of the Covid-19 pandemic.