Irrational exuberance again

SMARTSHARE

The markets have turned volatile and the day traders are beginning to feel the heat.

From April 2007 till October 18, in a period of six and a half months, there were just three swings of 5 per cent or more in the Sensex. From October 18, 2007 to date, a period of three months, the Sensex has registered nine swings of this or larger magnitude.

The quality of issues hitting the markets has deteriorated. The possibility of listings gains apart, there is no strong conviction why one should subscribe to some of these IPOs. These offerings are partly responsible for the current weakness of the markets as some investors have resorted to selling off existing stocks to prepare the war chest for the primary markets.

As we take stock on Thursday, the FIIs have turned net sellers for January (as they were in November and December too). The FIIs have been net sellers since October 26 when selective curbs on the issue of PNs were imposed. Is that mere coincidence?

FIIs had brought in close to Rs 36,500 crore in calendar year 2006. They had pumped in more than Rs 71,000 crore in calendar year 2007. Whatever amount they ultimately bring in, they would need at least Rs 25,000 crore to only subscribe to their share of the IPOs, where more than Rs 100,000 crore is waiting to be raised this year.

On the plus side, some of these IPOs-in-waiting, like Oil India, could help the markets re-rate a sector. Upstream oil and gas stocks should do well in the build-up to the actual issue which, given the way the indices are constituted, can help the markets climb a couple of stairs.

Some of these high decibel issues do yeoman service to the capital markets "" they attract a new crop of investors. Smaller issues, with their limited ad-spends, can hardly motivate a savings bank account holder to open a DP account.

This was true even in the past when issues were allowed to be branded like "Deepak Mahadhan" or "Reliance Khazana". When the size was small, creative juices made up for the lack of budget. You could have had a skimpily dressed Pooja Bhatt across the prospectus (West Coast Breweries) with no one complaining of "inadequate disclosure".

With prospectuses now being written by lawyers, they have become lengthier and the print smaller. Apart from acting as paperweights, they are ideal bedside reads to induce sleep. The forms have grown so large, they are more suitable as kites.

A lighter vein apart, it is essential that investors become choosy about public issues, and unless there is a comfortable margin of safety, it is better not to part with your money.

If the issue is attractive, it will be over-subscribed and accordingly you will be allotted fewer shares. Since you make money on allotted shares and not merely what you apply, your returns are not sky shaking.

Investors who are applying in an IPO only for listed gains are not fully conversant of the attendant risks. Between the issue application and listing, if the markets collapse, you don't get an exit in between. You will have to wait for the issue to be listed first. Such a fall could have been an opportunity to buy in the secondary market, provided you had the money.

Apply for only those stocks that would be value in the long run. In case you make large listing gains, you are at complete liberty to review your decision and sell if you deem fit.