I’m relocating from Bangalore to Navi Mumbai later this week, and blogging will be on hold until further notice. Getting a broadband connection doesn’t seem to be all that easy in NM, so I’ve my fingers crossed. Meanwhile, check out Moneyoga.com.
Mr. Thorp: In the last 15 years or so, there has been a large flow of capital into the hedge-fund world, from $100 billion in the early 1990s to $2 trillion now. But the amount of available investing opportunities hasn’t increased that much. That has led to the over-betting phenomenon Bill and I were talking about, or gambler’s ruin.
Hedge funds started using a great deal of leverage to increase returns. But you can get wiped out if you bet too aggressively. A classic example is Long-Term Capital Management [the huge hedge fund that blew up in 1998]. We’ll probably be seeing more of that now.
Banks and hedge funds employ mathematicians with no financial-market experience to build models that no one is testing scientifically for use in situations where they were not intended by traders who don’t understand them.
CONVEXITY WILL BE MISSED: One of the more common reasons for losing money is assuming something to be known when it isn’t. Option theory tells us that convexity plus randomness equals value.
RISK MANAGEMENT WILL FAIL: Risk managers have no incentive to limit risk. If the traders don’t take risks and make money, the risk managers won’t make money.
The very purpose of sharp corrections during major bull markets is to transfer ownership from weak to strong hands, thereby preparing for the next leg up. And a contrarian analysis of current sentiment among gold timing newsletters points to gold’s recent plunge as just a correction.
Before the correction begins, bullishness must not have reached excessive levels; and once the decline is underway, there must be an eagerness to jump on the bearish bandwagon. Both of these hallmarks were present during the May 2006 correction, leading contrarians at the time to be bullish. ( Read June 2, 2006, column.) At least one of these hallmarks exists today, furthermore, and the jury is out on the second.
In 2006, India’s HNI population, or people whose wealth is more than a million dollars, crossed 100,000, which made it the second-fastest growing HNI segment in the world, after Singapore, where the growth was 21%.
The burden of handling administrative tasks can take up to two-thirds of a wealth manager’s time . . . For TCS, wealth management is one of the focus areas among the top four high growth areas in the financial sector for the next three-four years. “While the market is still nascent, we are expecting that this segment will make us grow at 30-40 per cent but that is because the base is small.”
The dollar traded at the highest level in at least three weeks against currencies of commodity- producing nations from Australia to Norway after prices of raw materials tumbled on speculation the global economy is slowing.
Commodities’ tumble and the dollar’s rebound gained momentum after the Federal Reserve on March 18 cut interest rates by 0.75% to 2.25%. The move was less than the full-point cut some traders expected, sapping demand for oil and gold as a hedge against quicker inflation.
Gold posted its biggest weekly drop since 1990, falling from a record $1,032.70 an ounce on March 17. Oil has dropped 8.9% from a record this week, and copper had its biggest weekly slide in 10 months.
March is the season for FMPs as investors seek ‘double indexation benefit’, which will lower their capital gains tax liability . . . thanks to the income-tax rules, it is possible for an FMP investor to earn indexation benefit for two years (as investments are spread over two financial years) on capital gains. This is despite investment tenure being only 13 or 14 months.
. . . around Rs 80,000 crore of assets are in the form of FMPs. And anywhere from 5-15 basis points (0.05-0.15%) is what the asset management company is making from it annually. In contrast, asset management fees are as high as 1.25% for equity assets. Yet, the fund house seems to be launching FMPs back-to-back, as it boosts their overall assets under management.
India’s capital markets regulator said individual and institutional investors will be able to start short-selling stocks, lifting a six-year ban, on April 21.
Investors will initially be allowed to short sell shares trading in the derivatives market.
The regulator also said that funds will need to start paying margins upfront along with other investors, modifying a Feb. 23, 2005 circular that had specified the risk management framework for the cash market.
If strong economic growth is not the explanation for the large increases since 2001 in prices of virtually all mineral and agricultural commodities, then what is? . . . the developments of the last six months provided added support for a theory I have long favored: real interest rates are an important determinant of real commodity prices.
A decrease in real interest rates has the opposite effect, lowering the cost of carrying inventories, and raising commodity prices, as happened in the 1970s, and again during 2001-2004. It’s the original “carry trade.”
As economic growth has slowed sharply, both in the US and globally, the Fed has reduced interest rates, both nominal and real. Firms and investors have responded by shifting into commodities, not out. This is why commodity prices have resumed their upward march over the last six months, rather than reversing it.
A confidential memo obtained by Wikileaks shows that not only has the U.S. Securities and Exchange Commission created an insider trading loophole big enough to drive a truck through, but that Wall Street is taking full advantage of it, establishing ‘how-to’ programs and even client service divisions to help well-heeled clients circumvent insider trading regulations.
Here’s how it works:
1. An insider client transfers all or a portion of their company stock into a JP Morgan Securities Inc. brokerage account.
2. The insider then develops, in conjunction with the 10b5-1 team, a ‘phased, pre-planned sales program to be executed at either market or specified prices’.
3. Depending on the information available to the insider (but not the public), the insider can decide whether to execute the sale or not.
Interesting.
The Market Vectors - Chinese Renminbi/USD ETN (NYSE Arca: CNY) and Market Vectors - Indian Rupee/USD ETN (NYSE Arca: INR) are the first exchange-traded products to offer exposure to those two currencies. They launched today on NYSE Arca.
The notes are designed to go up in value when the named currency appreciates against the U.S. dollar, and down when the dollar strengthens. The ETNs are underwritten by Morgan Stanley, and Van Eck is the marketing agent. The notes charge 0.55% in annual fees.
. . . unlike most currency products, they earn interest based on the U.S. Federal Funds interest rate … not local interest rates.
Launched near an intermediate bottom in the USD?
India’s commercial capital Mumbai failed to sell all plots at a land auction today for the first time since 1995 as slumping global markets deterred buyers. The metropolitan authority will raise 13.2 billion rupees ($326 million) from the auction after two out of five blocks on offer failed to attract any bids . . .
Jet Airways paid 344,448 rupees a square meter in today’s auction. The reserve price, or the minimum developers were asked to pay, was 300,000 rupees a square meter for the office properties and a block designated for a club house and sports facilities that failed to sell.
The metropolitan authority still has another 20 hectares (49 acres) in the Bandra-Kurla area yet to be sold.
Latest indications suggest advance tax collections, which are paid on the basis of internal estimates of profits, are likely to be over Rs 50,000 crore in the fourth quarter till March 15 this financial year across India.
Finance ministry sources said the trend shows that advance tax collections have grown at a similar pace as overall direct tax collections, which have grown over 40% so far this fiscal.
. . . advance tax figures showed that banks, hospitality and software are doing better than sectors like automobiles and cement.
The $2 a share offer is simply to keep Bear from having to declare bankruptcy which would mean a long, drawn out process and would have precipitated a crisis of unimaginable proportions. Cue the lawyers.
As I understand this morning, JP Morgan will take a $6 billion write down, which is essentially what they are paying for Bear. The Fed is taking $30 billion dollars in a variety of assets. They may ultimately take a loss of a few billion dollars over time, although they may actually make a profit.
The stock market would have crashed by 20% or more, maybe a lot more. It would have made Black Monday in 1987 look like a picnic. We would have seen tens of trillions of dollars wiped out in equity holdings all over the world.
Bulk deals data on NSE indicate that BSMA (the FII arm of Bear Stearns that is registered with Sebi) sold shares worth more than Rs 1,000 crore on Friday and Monday to different entities, including Deutsche Securities, Citigroup, Merrill Lynch and Goldman Sachs Investments.
Bear Stearns holds tiny stakes in close to 120 listed Indian companies, with the largest holding in JP Associates (at $150 million) and significant stakes in Jindal Steel & Power ($88 million). It also holds shares worth $28 million in Opto Circuits and Madhucon Projects.
Several companies that have issued foreign currency convertible bonds (FCCBs) face the prospect of not having these bonds converted into equity unless the stock markets stage a strong comeback. This implies that these corporations may have to pay back the amounts they borrowed together with the interest.
What could compound the problem is that many of these firms do not account for the debt. In other words, they are not providing for the borrowings on an annual basis over the life of the instrument. According to a study by a leading brokerage, accounting for the loan and the interest would, on an average, knock off at least 12% of the profits in FY09 and about 10% in FY10.
It was less than 6 months ago that FCCBs were helping these fine folks make a bunch of moolah. So, make profits on the way up, and dont account for it on the way down. Nice deal if you can get it!
The meltdown in the equity markets has taken its toll on the capital raising plans of Indian firms. Investment bankers estimate that at least 13 Indian companies have stalled plans of raising nearly Rs25,000 crore from the equity markets and say this could just be the beginning of the trend.”
Most of the Indian firms that have scrapped their plans were planning qualified institutional placement (QIP)—a kind of private placement that listed companies can make to a set of institutional buyers such as banks, mutual funds, insurance companies, foreign investors and venture capital funds.
The cost of borrowing for Indian firms has gone up from 100 basis points over the six-month London inter-bank offered rate (Libor) to 400-500 basis points over Libor over the past six months.
There is a clear-cut demarcation in the earlier bull phases of 1992 and 2000 and the current bull phase. The earlier bull phases were more or less driven by a handful of market operators who eventually got crushed under their huge outstanding positions.
The age-old concepts of stock valuation have become more or less redundant in view of the structural changes in the market mechanism. As long as the flow of funds remains intact and the settlement in derivative segment continues to be “cash settled”, there is no threat whatsoever to the ongoing bull phase.
This time, its different. Cash flows don’t matter. Valuations dont matter. Common sense is useless!
This would be a good time to do a reality check on stock market predictions. As of market open, the Sensex is at 15200 and the Nifty is at 4550. What is the probability of them meeting these July ‘08 targets?
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DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments. |