Readings: $7B rogue trade & US Fed, Wisdomtree India ETF, FIIs & Reverse Arbitrage
- Big Picture: Fed’s Folly: Fooled by Flawed Futures?
. . . it took only 2 days to learn just how ill-considered the Fed’s emergency market rescue plan was: To wit, a fraudulent series of losses led to a major European bank unwinding a huge trade: Societe Generale Reports EU4.9 Billion Trading Loss.
SG’s $7.1Billion dollar unwinding led to panicked futures selling on Monday and Tuesday.
Hence, we quickly learn what sheer folly and utter irresponsibility it is for the Fed to use its limited ammunition to intervene in equity prices. Their panicky rate cute were not to insure the smooth functioning of the markets, but rather, to guarantee prices.
Whoa! So that 20% drop in 2 days was for nothing? Do we see 20k+ on the Sensex soon? And here we were debating valutions, FII flows, margin calls & such!
- Seeking Alpha: WisdomTree Launches Broad-Based India Earnings ETF
In early February, WisdomTree Investments plans to launch the WisdomTree India Earnings ETF.
The ETF’s benchmark includes 150 locally listed companies. That compares to around 62 companies the MSCI Index tied to the iPath uses, . . .
The WisdomTree India Earnings Index also screens for profitability as a criteria. “We only include Indian companies that’ve been profitable in the last reported 12 months,” Lavine said.
Stocks are weighted in the index by “their contribution to the earnings stream of corporate India,” he added. “We look at trailing net income and work with S&P in those calculations.” The rival ETN is market-cap size weighted.
- Business Line: FIIs betting on reverse-arbitrage?
If you go by the SEBI figures for recent FII investments, then you may conclude that they are net sellers in the Indian equities. But it’s deceptive, say brokers and overseas fund managers.
“Foreign investors, particularly participatory notes holders, have adoted a reverse arbitrage strategy for 2 to 3% additional spread available because of dip in the futures prices compared with that in the cash segment.
. . . all the big investment outfits, who have large inventories of participatory notes, have been strong net sellers in the cash market in the last five sessions. However, as their trade figures in the derivatives market do not indicate whether they are ‘buy’ or ‘sell’, this strategy of reverse arbitrage is not in the public domain. Since the settlement is round the corner, the new investment tactic is likely to pay off huge dividend . . .
This is why first-level analysis of daily FII flows is usually insufficient. Simpliy looking at the SEBI net purchasese/sales by FIIs can lead to incorrect conclusions.
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