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Commentary

Whoa What Just Happened?

My goodness, what a bearish day! The Nifty tanked about 280 points to close at the 4600 levels, and the bottom seems to have dropped out of the market. I don’t like this one bit but there are some global factors to it.

First, Carlyle Capital is going bust. From Reuters:

Carlyle Capital Corp , an affiliate of private equity firm Carlyle Group, said late on Wednesday its lenders are likely to take possession of its remaining assets after it was unable to reach a mutually beneficial agreement to stabilize its financing.

Carlyle Cap leveraged about $600 million to $20 billion or so, a 32 times leverage which is basically like playing russian roulette with a gun that has five chambers full instead of one. One of these days you’re going to die.

Worse news, in the same article:

In Asia, the iTRAXX Asia ex-Japan investment grade index which is dominated by banking credits, was sold off.

It blew out by 10 basis points (bps) to 213 bps on the Carlyle news, market sources said.

From the index definition, some Indian companies (ICICI Bank, BOI, RIL, Tata Motors) are in the index. Now I don’t know how it affects them, but typically debt spreads increase meaning cost of debt will go up. It means more MTM losses for those that have exposure to credit derivatives to this index.

In other news, the Yen has appreciated to 100 to a dollar. This signals the end of carry trade as we know it. Banks and Hedge funds borrow at obscenely low rates on the yen, covert to dollars and invest around the world, including India. Even ICICI bank seems to have done that. Now when they have to pay back, yen appreciation means they will get fewer yen for their dollars, and a rapid increase – like the 6 month move from 114 to 100 – just kills every profitable opportunity.

How? Because people leverage their dollars, say 10 times, and get 10x for all the money. In return they invest in instruments they can place as collateral, like bonds, MBSes, CDOs and all that. These things, in good times, give like 6-10% returns. Today it’s very much negative. Even with 6%, the 14% yen appreciation results in a negative return!

With hedge funds getting calls from Mr. Margin, the credit indices for Asia also breaking down and the yen going to glory, the world credit markets are due for a fantastic collapse, coming soon to a theater near you.

What happened today, in my opinion, is that investors (some local, some FIIs) are spooked by these developments and yanking out their money when they can. Is it overdone? I don’t know. My personal point is that the Nifty is really oversold only below 4000 – till then we are still over-optimistic.

I think we’re in for a see-saw time. Disclosure: I have a straddle on the index today – a put and a call.