The LIC Housing Finance scam: bigger than Satyam?

The scale of the LIC Housing Finance scam is possibly bigger than the Satyam scam. The amount involved hasn’t been revealed yet. But the simultaneous raids in several cities by the CBI and arrest of senior officials of PSU banks and financial institutions point to a significantly larger operation.

A few months back, when the Sensex was consolidating in a sideways channel, a stockbroker friend had made a surprising comment: “Bull markets require a nice scam to shoot up to new highs.”

A reader commented: “The markets have NEVER peaked out on scams.” My counter argument was: “The Sensex hit recent bull market tops because of the excess liquidity created by the scams. The scams were detected much later - after the scamsters sold out and made huge profits.”

No doubt that FII inflows have provided the major fuel for the bull market rise. But what caused the sudden jump out of the year-long trading channel to an all-time high close above the 21000 level? Could it be that the ill-gotten loans were channeled into the stock market? Only a detailed investigation by SEBI may reveal that. I won’t be a bit surprised if the real estate sharks were dabbling in the stock market to quickly recover the bribes they paid to the PSU officials to get the loans.

As with all such scams in India, the big fish will probably get away and most of the money will vanish into thin air (or into Swiss bank vaults). And who will bear the brunt of the fall in stock prices? Small investors like us.

I could only sympathise with a reader who wrote the following email:

‘I had been investing in LIC housing finance for some time now and sitting on decent returns. And just when all looked rosy, here comes a housing scam involving it and as a result the share tanks 20% :(

No respite for us poor retailers. Wonder whether there is any sense in becoming a long term investor at all ... its like waiting for some scam to happen n wipe off your money!’

My advice? Sell tomorrow or switch to HDFC. Small investors are better off regularly investing in index funds or index ETFs, rather than in individual stocks.

Now a quick look at the one year bar chart pattern of LIC Housing Finance:

After touching an all-time high of 1496 on Sep 29 ‘10, the stock has been making a bearish pattern of lower tops and bottoms and had fallen below both its 20 day and 50 day EMAs. It bounced off the 100 day EMA yesterday, only to find resistance from the falling 50 day EMA.

As of yesterday (Nov 23 ‘10), the technical indicators were all bearish. The MACD was negative and below the signal line. The ROC was also negative and below its 10 day MA. The RSI was below the 50% level. The slow stochastic was in the oversold zone.

While the news of the scam caused a high volume drop below the 200 day EMA today, the stock was already on a down trend. Higher volumes on down days had given ample indications to investors to book profits. Was it insider selling? Only SEBI can answer that.

Buying and holding fundamentally strong stocks for the long term is an excellent investment idea, but one makes money only by selling. Partial profit booking near all-time highs can save some pain if sudden calamity hits.

Bottomline? Unforeseen situations do happen in the stock market. No one rings a bell to warn investors. Partially eliminate blows to your portfolio by following disciplined investment strategies: Partial profit booking is one; buying only the best is another (HDFC instead of LIC Housing Finance, or TCS instead of Satyam); basic knowledge of technical analysis often provides clues.