GalaTime

Inspite of the fast & furious bounce-back in Indian market indices, the IPO scene isn’t all that pretty. After the poor showing by Purvankara yesterday, today we have a withdrawal by IT People:

As you can see above, it was severely under-subscribed. This is a bit surprising though: if you look at August month IPOs, they have performed quite well, with double-digit gains on average.

Only 4 out of 13 IPOs are in the red - not bad given what the market went through this month.

BCA Research: U.S. Subprime Losses To Total /$200 Billion

About 60% of subprime mortgages carry an adjustable rate, and $650 billion will reset at a higher interest rate in the next 16 months. Even without factoring in a recession, we estimate that the losses on bad subprime and alt-A paper could amount to about $200 billion over the 2007-2011 period (1.5% of today’s GDP).

The Street: Dispelling the ‘Bin Laden’ Options Trades

The blogosphere and options trading desks have been rife with speculation about these trades, which are unusually large bets that the market will make a huge move in the next month. Some entity, or entities, has taken a large position on extremely deep in the money S&P 500 options, both puts and calls, that won’t pay off unless the market undergoes an extremely large price move between now and the options’ expiration on Sept. 21.

However, Dan Perper, a Partner at Peak 6, one of the largest option market makers and proprietary trading firms, has confirmed that the trades are part of a “box-spread trade.”

Economic Times: Traders in Nifty options can take a 250-pt position

The new strike price interval for September contracts will give market participants greater flexibility in taking a call on indices that have option contracts.

Starting Friday, traders in Nifty options will be able to take a 250-point position on either side of the previous day’s closing. The changes will benefit Nifty option traders the most, as the current strike price interval of 10, in a format of 9-1-9 (9 strikes of interval 10 on either sides of the previous closing level) allows traders a limited view on the index, which is one of the widely-traded contract in the futures and options segment of NSE.

Puravankara Projects Limited (NSE Symbol: PURVA) listed on the NSE this morning. To jog your memory, the correction in Indian markets forced Purvankara to extend its subscription from August 3 to August 8, and drop the price range from Rs 500-525 per share to Rs 400-450 per share. The stock is trading ~375 (versus the issue price of 400), thus unable to hand any gains whatsoever to investors in the IPO.

From 525 to 375: A significant re-adjustment of expectations!

On a related note, India Index Services and Products Limited (IISL) launched the CNX Realty Index, similar to that launched by the BSE last month.

The CNX Realty Index represents about 91.08% and 64.43% of the full market capitalization and aggregate turnover of the last one month for the period August 28, 2007 of the Real estate sector Universe respectively.

The average total traded value for the last six months of all CNX Realty Index constituents is approximately 6.51% of the traded value of all stocks on the NSE. CNX Realty Index constituents represent about 4.48% of the total market capitalization as on August 28, 2007.

Unless we see a bunch of mutual funds and/or ETFs linked to these indices, their use is limited to tracking overall sector performance.

• Financial Express: NSE becomes world’s 2nd fastest growing stock exchange

The National Stock Exchange has become the world’s second fastest-growing bourse in terms of number of listed companies, while Bombay Stock Exchange has consolidated its position as the biggest bourse.

NSE has seen a whopping surge of about 13-times in number of listed companies in nearly 13 years from about 100 firms in 1994-95.

Here’s a chart from the June 2007 NSE newsletter that illustrates this:

What’s really interesting is that the NSE had as many as 1400 listed companies in 1997; the number dropped all the way to 800 by mid-2003 but is now rapidly climbing back.

• Business Standard: Baer plans $250 mn hedge fund

Private equity player Baer Capital Partners plans to launch $ 250 million India-dedicated hedge fund by the year-end. Baer Capital is the first hedge fund to announce its India plans, after the recent proposal by the Securities and Exchange Board of India allowing direct entry of hedge funds.

It will be a long biased hedge fund using futures/derivatives to hedge itself against market decline. It will have more flexibility to stay in cash or take concentrated position and will be focused mainly on the mid-cap stocks across sectors.

If anyone knows of domestic hedge funds, do share the information. I don’t mean domestic arms of FIIs, but truly home-grown hedge funds - the Indian equivalent of firms such as Bridgewater Associates, D. E. Shaw, Citadel Investment Group, etc.

Tomorrow is expiration date for August month futures & options - given that, I found today’s trading to be subdued except for the early gap-down.

A quick note on the long Satyam Computers / short Mahindra Gesco trade:

Satyam August future: Buy - 462, Sell - 442, Net: -4.3%

Gescocorp August future: Sell - 560, Buy - 490, Net: +12.5%

Assuming equal position size for each, the combined trade would have resulted in +4% over a period of 50 days. Not too shabby in comparison - the Sensex was 15k on July 10th and is back there today. But on July 24th, when the real estate stocks peaked along with the BSE Realty index, the position was down over 5%.

Anyhow, I think there is merit in relative strength analysis and cross-sector trades.

Funds modify exit load

“In the case of equity funds, exit load is a desirable load since it acts as a deterrent to investors from treating the fund as a short term investment vehicle which may be detrimental to long term investors”. Funds would typically slash it because they face market pressure,” said Dhirendra Kumar, CEO of Value Research Online that tracks the mutual fund industry.

I’m sorry, but there is nothing ‘desirable’ about a 0.5-2% cut from my investment funds.

Home Safe Home

The past few months have stripped the sheen off a number of hot favourite sectors on the bourses like automobiles, capital goods, cement, commodities, information technology and the likes, which have a relatively higher sensitivity to changes in interest and exchange rates compared to other sectors.

On the other hand, sectors like banking and financial services, construction, consumer goods, media, power, real estate and telecommunications are largely driven by surging domestic demand, rising disposable incomes, low penetration and scarcity of supply within the country.

Business Week: Cleaning Up on the Meltdown

Narayanan had since founded his own fledging macro fund, the $100 million Trident Investment Management. Convinced that even a modest rise in interest rates would trigger a major downturn in the credit markets, Narayanan bet that the value of subprime mortgages traded in the financial markets would fall. He accomplished that by buying insurance polices on debt issued by subprime lenders and mortgage insurers. As the lenders and mortgage insurers were hit by rising default rates, the value of the insurance policies rose. He also employed the same strategy in the mortgage insurance market.

Now his fund is up 25% for the year as of the end of July, the last officially reported number. Through Aug. 24, Trident has returned 35% in 2007.

This is great, but I wonder how often one can find wildly mispriced assets and avenues to bet on them.

Parrot Trading Partners, a $10 million fund managed by father-and-son team Jes and Charlie Santaularia, is up about 15% for the year, thanks to sage bets in the options market. Anticipating a slowdown driven by a credit crunch, Parrot profited from falling asset prices and increased volatility by using complex, proprietary trading techniques.

Back in 2005, while I was trading & blogging about options in the US, I wrote a post on Parrot Trading Partners; check out their monthly newsletters here.

Third Avenue, a value investor with $29 billion in assets, likes real estate companies that don’t have exposure to weak subsectors such as residential mortgages and homebuilding. Commercial real estate may be attractively valued, as are companies that benefit from rising rental income as conditions for mortgages tighten. “We think there are terrific bargains in real estate for the first time in many years,” Jensen says.

Yet another bargain hunter.