GalaTime

• Economic Times: How derivatives were sold and bought

Banks made unsolicited offers to their clients and corporates eagerly bought these products with insufficient understanding. State-owned banks bought exotic products from foreign banks which were not appropriate for their customers. Some of the foreign banks are now moving away from selling these products to state-owned banks since the treasurers in these banks do not understand the complexity.

“In general I find clarity on the subject of risk reduction (i.e. hedging) and cost reduction lacking even in banks. The definition of speculation is deliberately taking risks to profit from price movements. How many CFOs understand the difference between hedging and speculation? There is no clarity in corporate and bank treasuries on strategies to reduce risk. With all due respects, CFOs of these companies did not understand what they were getting into,”

• Economic Times: NCDEX may see a 20% fall in turnover due to commodities ban

“The ban on four commodities announced by the Government is a big setback for us. It is a cause of concern as chana and soyoil contributes 20 per cent of our turnover. The volume of futures trading in rubber and potato is not very significant,” NCDEX’s Managing Director and CEO, R Ramaseshan, said in his first interaction with the media here.

The exchange daily volume is estimated at Rs 2,000 crore and chana and soyoil contributes around Rs 400-500 crore worth turnover.

• Bloomberg: Shipbuilding Torpedoed by Subprime Leads to Freight Cost Surge

The biggest shipbuilding boom in history collided with the largest credit-market losses ever, undermining forecasts for a plunge in freight rates. As much as $14 billion in ship orders is threatened by cancellations and delays, equal to 94 percent of annual revenue at Hyundai Heavy Industries Co., the largest shipbuilder.

The loss or delay in deliveries of about 250 cargo ships, or 10 percent of orders, will tighten the supply of vessels and support rates when demand from China and India for everything from soybeans to coal has never been greater. Based on the current orders for 2,561 new cargo ships, shipping rates are expected to decline 56% during the next three years, futures markets show.

The Baltic Dry Index, a measure of rates, has risen 58% in the last year as an index tracking the number of cargo ships under construction has fallen 21% in that time.

Note the recent relative strength of stocks in this sector: GT Offshore, Mundra Port, GE Shipping, Concor, etc.

• Hindu Business Line: Indian mutual funds shop globally to woo locally

• Business Standard: Brokers carry forward losses

A good number of non-banking financial companies (NBFCs) belonging to big brokerages are keeping themselves from announcing a one-time hit by losses arising out of margin funding following the market meltdown in the early part of this calendar. Instead, the broking houses are carrying forward these huge losses as loans under recovery, and announcing only minuscule bad debts.

Through this move, say experts, these broking firms can avoid making huge provisions for losses and, to a great extent, neutralise a possible negative impact on their share prices. Stock prices normally take a hit if a company’s provisioning or writedowns is huge, they say.

“However, when the market crashed, the entire system collapsed like a pack of cards, leaving the broking houses with piles of bad debts,” explains a dealer, while stressing that the margin-funding business is now down by over 60%.

Ah, the wonders of accounting!

• Sucheta Dalal: Anti-investor Moves

Corporate India has lobbied to scrap RBB ever since it was introduced. No company wants retail investors to have a say in its decisions. Investors, on the other hand, are dead against such a move. Corporate India alleges that a handful of investors can form a cartel and dictate the price because SEBI rules do not mandate minimum shareholder participation. This is debatable. There is nothing to stop companies from making an effort to ensure shareholder participation. In any case, companies make an RBB offer only when they have mopped up 90% of the floating stock.

• Bespoke: Baltic Dry Index Almost Back to Record Highs

  

• Big Picture / CNBC: Video: David Einhorn, Greenlight Capital, William Ackman, Pershing Square Capital

Bunch of excellent videos thanks to Barry; can’t embed them here unfortunately.

• John Mauldin: Why Investors Fail
  

Past performance is pretty much worthless when it comes to trying to figure out the future. The best use of past performance is to determine how a manager behaved in a particular set of prior circumstances.

Statistically and mathematically all these tools—stochastics, RSI, chart patterns, Elliot Wave, and so on—just don’t work. If you code any of these rigorously into a computer and test them they produce no statistical basis for making money; they’re just wishful thinking. But I did find one thing that worked. In fact almost all technical analysis can be reduced to this one thing, though most people don’t realize it: the distributions of returns are not normal; they are skewed and have “fat tails.” In other words, markets do produce profitable trends.”

Must read for any investor / trader / speculator!

• DNA: Re’s 3-day plunge biggest in 12 yrs

The currency fell 2.8% from Monday’s closing of 40.61 per $1, ending Thursday at 41.74 per $1. The currency has suffered its biggest three-day loss since March 1996 this week, sliding a total of 5.4% this year.

The gap between India’s imports and exports also increased to $80.4 billion largely due to a 27% rise in imports to $236 billion in the year ended March 31, government figures said on May1.

The fact that the RBI hasn’t stepped in to defend the currency is goading the analysts to predict the short-term weakening. Rohan Lasrado, head of inter-bank foreign exchange at HDFC Bank, expects the RBI to protect the rupee only after it reaches 43:$1.

• CXOAG: Returns of High-Momentum Stocks Around Earnings Announcements

• Stocks in the top 1% of prior year returns generate an average market-adjusted return of +1.58% (-1.86%) during the five trading days before (after) earnings announcements, excluding trading frictions.
• within this set of high-fliers, stocks with earnings announcements unambiguously occurring outside of normal trading hours generate an average market-adjusted return of +3.09% (-3.05%) during the five trading days before (after) earnings announcements, including a significant close-to-open average return of +0.93% immediately after announcements as part of the pre-announcement return. In other words, going long these stocks five days before earnings announcements, closing the long positions at the first open after announcements and then shorting until the close five days later generates an average market-adjusted ten-day return of over 6%, excluding trading frictions.

• BeEarly/Barrons: A Rally With Serious Muscle

The 50% Principle, named by Schaefer, tells us that the primary trend of the market remains intact and bullish if the Dow doesn’t break below this midway point in the course of a pullback. Schaefer, who applied his studies to the Dow, emphasized that this tool should be used only in reference to major market movements, not short moves . . .

The findings of the 50% Principle are confirmed by other technical trends. The Dow made a closing low of 11,971.19 on Jan. 22, a session in which 1,114 stocks, or one out of three, hit new lows on the New York Stock Exchange. Since then, the new-lows list has contracted dramatically, which means stocks are pulling back on down days but not breaking support — an important difference.

Hmm.

• Paul Kedrosky: Oil Just Out-Bubbled the Tech Bubble

• Deutsche Bank: 2008 Alternative Investment Survey

Over 30% of investors are holding cash, and most commonly at levels somewhere between 5% and 10% of their own hedge fund portfolios. While we have seen investors take a “wait and see” approach to the hedge fund market over the last two quarters, 53% of investors holding cash now plan to eliminate their cash holdings by March 2009. This would suggest a renewed willingness to make allocations to hedge funds.

The Middle East/North Africa and Russia both appear as choices on the survey for the first time and investors expect them to perform well. Notably absent from the top are Asian regions, which were favored in our last two surveys.

For the first time on our survey we asked investors about their opinions on India-focused hedge funds. 25% of investors plan on increasing allocations to this space.

Economic Times

May 7: Gold sales may rise 40% this Akshaya Tritiya

This Akshaya Tritiya day, south India’s biggest gold buying festival, jewellers are expecting a whopping 35-40% growth in sales over last year’s all India sales of close to 780 tonnes. Industry experts attribute it to increasing popularity of the festival among the people and rising disposable incomes. Gold prices which have fallen after hitting an all time high in March is also expected to boost demand for the yellow metal.

May 8: There’s no big rush for gold on Akshaya Tritiya Day 1

The retail demand for gold on the auspicious event of Akshaya Tritiya in the Hindu calendar, that spans two days this year (May 7-8), is reportedly about 50% lower than the previous year, according to traders estimates.

Gold sales may cross around 5 tonne in the next two days, Mr Kothari said, though clear estimates would emerge once jewellers take stock of their inventories.

Predictions are tough, even one a 1-day time frame. Especially with ‘experts’ involved.

• Morgan Stanley: Dollar Smirks in Asia

When confronted with the choice between growth and inflation, most of Asia will choose to protect growth. As a result, the structural descent in USD/AXJ will likely be temporarily interrupted. For short-term players, this may be time to consider putting on tactical long-USD/Asia positions. For longer-term players, we advise patience in re-establishing short-USD/Asia positions. We stress that this is the first time in a long while that we are recommending that investors unwind short USD/Asia positions.

If we see inflation decelerating sequentially every quarter this year, which is possible as the global economy slows and commodity prices have already experienced sharp increases in 1Q of this year, policies will turn much less hawkish.

If we look at the last two rounds of Fed rate cuts – the early-1990s (the FFR was 9.75% in April 1989 and 3.00% by September 1992) and early-2000s (the FFR was 6.50% in December 2000 and 1.00% by June 2003), we see that, in both episodes, the unweighted average USD/AXJ rose during the US slowdown and FFR rate cuts. This, in fact, is the essence of the ‘Dollar Smile’ theme, whereby a US slowdown hurts other currencies more than the dollar.

INR:USD at almost 41, CNX IT staged a massive turn-around at 3pm yesterday.

• Financial Times: Brics offer investors a varied harvest

Bric economies helped to push up the share of global exports from emerging markets from 20 per cent in 1970 to 42 per cent in 2006, according to Professional Wealth Management. At the same time, capital flows into the Brics and emerging markets have reached record levels, with the Institute of International Finance reporting that foreign direct investment jumped by more than 50 per cent from $167.4bn in 2006 to $255.6bn in 2007.

Barclays Wealth has a particular focus on infrastructure and real estate in India, and agriculture and infrastructure in Latin America. It also believes “tier two” cities in China look viable for real estate and infrastructure investment, and is monitoring opportunities.

• AFP: Asian nations agree to set up crisis fund

Finance ministers of 13 Asian nations agreed here on Sunday to set up a foreign exchange pool of at least 80 billion dollars (52 billion euros) to be used in the event of another regional financial crisis.China, Japan and South Korea will provide 80 percent of the funds, with the rest coming from the 10 members of ASEAN.

The creation of the pool is a big step towards the creation af an Asian equivalent of the Washington-based International Monetary Fund (IMF).

During the 1997-1998 Asian financial crisis Indonesia, Thailand and South Korea had to borrow heavily from the IMF to boost their finances as investors sold their currencies.

c

• Business Standard: Brokerages` fee-based income looks uncertain

Diversification in their revenue streams has helped broking houses tide over a drop in trading volumes, but fee-based sources of income may take a hit in the next quarter if the current market lull continues.

“Volatile markets are opportunities for retail broking companies to gain market share. Whenever markets are steadily gaining, traders find it difficult to move from the existing broker since they might lose out on the trading opportunities.

. . . , given the market condition, analysts feel that fee-based income may get affected in the first quarter of FY09. Thomson data indicates that investment banking fees are down 32.7 per cent till March 14, 2008, as compared to the same period last year.

• Economic Times: Bleak futures ahead, traders hit quit option

There is palpable nervousness in the futures market as vegetable oils and sugar traders rush to the nearest exit before the government bolts the door. Money flowing into the major cash commodities has ebbed to a trickle as hedgers and punters unwind their positions to avoid getting locked into losses.

The open interest in sugar has dropped to 1, 21,550 tonnes in April. That is down 43% since February. Since India is expected to produce 26 million tonnes sugar in 2007-08, current trading volumes show that negligible quantities are being hedged on the exchange.

“The volumes being traded are so low that there is no way futures market prices can influence the much-larger physical market. Since market players have little interest left in futures, nobody cares about the prices,”

Monumental governmental stupidity!

• Bloomberg: `Suckers’ Rally’ Signaled After S&P 500 April Surge

Implied volatility, the measure that calculates expected price swings of an underlying asset and is used as a barometer of options prices, shows that many investors are betting the U.S. stock market will falter.

The implied volatility on options that lock in gains if the S&P 500 drops at least 10 percent in three months reached 24.67 on April 30, Bloomberg data show. That compared with 15.1 for options that pay out if the index rises at least 10 percent.

The 63 percent difference indicates the highest demand for options insurance since at least 2005, according to data compiled by Bloomberg.

When everyone’s buying insurance, chances are they aren’t going to need it.

• Bloomberg: Frontier Investing Might Entice the Patient

Who’s on the frontier? Ukraine, Cyprus, Estonia, Kuwait, the United Arab Emirates, Ghana, Nigeria, Ivory Coast, Ecuador, Jamaica, Kazakhstan, Vietnam and perhaps two dozen more. Investment managers group them under acronyms: MENA, for Middle East North Africa; EMEA, for Europe (specifically, eastern Europe), Middle East and Africa.

Asset managers are pitching these markets as “uncorrelated” with those of the more developed world, meaning that stock prices there run on different tracks. They may rise when the more familiar markets are going down.

It’s an investment for crazies. But for money you’ll ignore for the next 15 years, well, why not?

• BCA Research: Brazil Makes The Grade

• Hindu Business Line: Public less enthusiastic to market-linked insurance plans

The sale of stock market investment-linked insurance policies has shown a sharp decline in growth in 2007-08. This has led to deceleration of growth of new business premium of the life insurance industry to 23 per cent last fiscal from 110 per cent in the earlier year.

The industry received Rs. 92,989 crore in new business premium in the fiscal currently ended.

The LIC Chairman said that in terms of the number of policies, ULIPs contributed 54 per cent of the business while traditional plans brought in the balance 45 per cent.

About time!

• Portfolio: Cudgel Over the Quants

Several months after he resigned, Falkenstein’s former employer, Telluride Asset Management in Minneapolis, sued him for stealing the firm’s trade secrets and violating its confidentiality agreement. Falkenstein had created trading algorithms for Telluride during his two and a half years on the job there, and the firm believed he was planning to use the same techniques to trade stocks for a fund he wanted to establish.

Trade-secret suits are difficult to follow in the public domain by their very nature: They’re based on secrets. Add to that the complexity of hedge fund trading algorithms, and you have all the necessary ingredients for an endless legal battle.

Right now, Telluride is examining 10 years’ worth of data from hard drives on Falkenstein’s personal computers for evidence of stolen trade secrets. “There’s nothing like a bunch of lawyers trying to figure out mean-variance optimization,” he says.

Heh.

• TradeTurqoise.com

Our nine founding members, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Société Généralé and UBS have invested in Turquoise to give traders freedom to choose among liquidity venues.

Designed to compete with incumbent exchanges and alternative venues, Turquoise will differentiate on technology, costs and the quality of its services.

Turquoise’s sophisticated trading system combines rich functionality with high performance. Its unique market model integrates a dark pool and visible order book, taking advantage of crossing opportunities between the two. With Turquoise, users can expect frequent price improvement for small orders and can trade large orders efficiently while minimising information leakage.

• Bloomberg: India’s Chidambaram Says May Suspend Some Food Futures Trading

“If rightly or wrongly people perceive that commodities- futures trading is contributing to a speculation-driven rise in prices, then in a democracy you will have to heed that voice,”

The government halted futures trading in wheat and rice last year and lentils in 2006 to check a surge in domestic prices of the commodities. “The pressure is to suspend a few more food articles,” Chidambaram said without identified the products.

Domestic traders and producing and consuming companies are the main participants in India’s commodity exchanges, compared with the 13 million individuals who invest in stocks. Overseas funds aren’t allowed to trade in India’s commodity futures.

PC: WTF?!

• Morgan Stanley: RBI Maintains Status Quo – Balancing Growth Concerns vs. Inflation Risks
  

While the increase in the CRR (50bp on April 17, 2008 and 25bp today) will cumulatively absorb about US$6.9 billion, FX reserves have increased by US$18.9 billion over the last eight weeks.

Most of the rise in inflation from the trough of 3.1% in November 2007 to 7.3% during the week ended April 12, 2008 has been driven by higher prices in base metals, fuel and food items.

. . . domestic demand is likely to slow further due to (a) the lagged impact of the current high level of prime lending rates; (b) increased risk aversion in the domestic banking system, as reflected in widening spreads for household loans other than mortgages; and (c) increased risk aversion in the global financial markets, which would reflect reduced access to foreign funding for small- and medium-sized Indian companies.

• Economic Times: Reliance MF first to cross Rs 1 lakh-crore AUM mark

Anil Ambani-promoted Reliance Mutual Fund — the number one mutual fund in the country in terms of assets under management — has added another feather to its cap. It has become the first mutual fund house in India whose AUM has topped the Rs 1 lakh crore-mark.

For the past year, Reliance’s AMC has been topping the AUM charts backed by strong inflows into equity schemes, as retail investors rushed to benefit from the booming stock market. Its Average Assets Under Management (AAUM) was in the order of Rs 90,938 crore for March, 2008. It also has one of the largest investor bases in the country with 66.87 lakh investors on its scrolls.

Hmm, let’s see - a 1% expense ratio on 1 lakh crore AUM works out to an annual income of Rs 1000 crore. Not bad - all you gotta do is track the indices, and keep AUM steady - life’s good!

• Kirk Report: Trading Lessons From Nicolas Darvas

There is a “follow-the-leader” style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader.

Most, if not all stocks, will follow the general trend of the market.

Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal.