Money & Markets: Deflation strikes hard! What to do …

Total destruction of household wealth in the third quarter: $2.8 trillion, the worst in recorded history. That’s four times more than the government’s entire $700 billion bailout package (TARP).

Total destruction of household wealth in the last year: $7.2 trillion or over TEN times more than the $700 billion TARP package.

Wealth Bulletin: Cayman Islands hedge funds may suspend redemptions

Investors in Cayman Islands hedge funds may not be able to redeem their investments, after a landmark ruling was passed yesterday to allow directors of funds to suspend withdrawals, even for investors who have already had their redemption notice accepted.

For a decade the Cayman Islands have been the world’s domicile for offshore hedge and other alternative funds as well as a provider of administration and other services. Nearly 10,000 of the world’s Investment Funds are registered in the Cayman Islands.

Whoa. So much for safe (tax) havens. Poor rich folks.

TechCrunch: SEC Gives Social Investing Site kaChing Green Light To Take On Mutual Funds

KaChing, which is the most popular investing application on Facebook (previously called FSX), just took a major step in that direction by becoming a registered investment adviser with the SEC. Sometime in the second half of next year, it will allow its members to link their brokerage accounts to the portfolios of the elite managers on the site and automatically follow their trades.

Competing social investing sites such as Cake Financial (which launched at TechCrunch 40), Covestor, and PersonalRIA (which launched at TechCrunch 50) all have the same plan. All of these sites want to disrupt the current mutual fund industry by broadening the spectrum of potential money managers.

Carroll says that risk is taken away by forcing everybody to be open about their investment strategies and showing their entire holdings and each trade as it happens. In other words, the data doesn’t lie.

Very cool. Imagine something like that in India.  Well, we did think of (and even try to build) some parts of it at Moneyoga but ran across a whole range of issues: low Internet penetration and/or PC usage, less overlap between Internet users in India and traders/investors, data cost & accuracy, etc. But there are other sites (Khelostocks, MoneyVidya, etc.) attempting this stuff for Indian markets. 

The bigger point is how the success of this model will impact mutual fund managers. No more free rides on investors’ money?

• Business Standard: Advance tax collections send early warning signals

Strong signs of the economic slowdown were evident in preliminary advance tax collections for Mumbai, which accounts for 35 to 40 per cent of income tax collections. 

Barring mainly government-owned banks, private sector lenders and some of India’s largest companies headquartered in India’s financial capital have reported dips in advance tax payments for the October to December quarter.

Housing companies — HDFC and LIC housing Finance Company — have paid higher taxes despite the slowdown in the real estate sector. Official sources said that the collection for other real estate companies appear to be not so encouraging.

• Bloomberg: Indian Banks to Cap Small Home Mortgage Rate at 8.5% 

State-run banks will cap the interest rate for home loans of as much as 500,000 rupees at 8.5 percent . . . The rate will be limited to 9.25 percent for borrowers seeking loans of 500,000 rupees to 2 million rupees.

The interest rate will be set for five years, and people borrowing up to 500,000 rupees will be required to pay 10 percent of the value of the home loan as a down payment.

The 14-stock Realty Index of the Bombay Stock Exchange has tumbled 82 percent this year, steeper than the 52 percent decline in the benchmark Sensitive Index.

The focus needs to be on afforable prices - if prices are unjustifiably high, what’s the point of lower home loan rates? And the only thing that’ll bring prices back in line with fundamentals is the market. That will take a few years at least.

• BCA Research: Still A Bond Friendly World

Stratfor: Falling Fortunes, Rising Hopes and the Price of Oil

Venezuela and Iran top the losers list by far. Both are led by politicians who have lavished vast amounts of oil income on their populations to secure their respective political positions. But that public approval has come at its own price in terms of economic dislocation (why diversify the economy if strong oil prices bring in loads of cash?), low employment (the energy sector may be capital-intensive, but it certainly is not labor-intensive), and high inflation (high government spending has led to massive consumption and spurred rampant import of foreign goods to satiate that demand).

. . . while none of the Arab oil states are particularly thrilled with the direction — and in particular the speed — oil prices have gone, none of these governments faces a mortal danger at this time. What they are now missing is the ability to make a substantial impact on the world around them. At oil’s height the Gulf Arab oil producers were taking in US$2 billion a day in revenues — far more cash than they could ever hope to metabolize themselves. Bribes are powerful tools of foreign policy, and their income allowed them — particularly Saudi Arabia — to wield outsized influence in Iraq, Syria, Lebanon, and even in Beijing, London and Washington.

Deflation in political power.

Business Standard: ‘NSE action is against principles of natural justice’

Your software ODIN, the trading and risk management system, has an 80 per cent market share in India. There is a buzz that NSE is planning to approach the Competition Commission for monopolistic practices.

I am not aware of that as yet, but ODIN has been the trading platform of choice for several years powering over 830 leading brokerage houses with more than 80 per cent market share. The reason is simple: efficiency. It’s ridiculous to think that we can force people to use our product. People choose our software even though we charge almost double than our competitors.

With trading volumes less than half of the peak and the BSE sucking in terms of F&O turnover, the NSE is also almost a monopoly.

More from Mint: Sebi should break silence on the NSE-FTIL impasse

“If a technology distributor is purely a financial investor in an exchange, there is no problem. But if an exchange is promoted by a technology distributor, then there could be a perception of conflict of interest. Other exchanges could perceive that the distributor could put something in the design of the front-end technology which would give it an edge over competing exchanges.”

Here is the latest gimmick to extract more fees from investors: Economic Times - Broking firms offer PMS in MFs to retain HNI clients

Known widely as ‘managed mutual fund portfolio’, this product works on the same principles of highly-customised PMS schemes, exclusively for HNI clients. Under ‘managed MF portfolio’, the broking firm accepts a sizeable investment (generally ranging between Rs 30 lakh and Rs 50 lakh) from the investor, to be deployed in an array of schemes.

The broking firm charges anywhere between 1% and 2% of net investment, as annualised management charges. Some broking firms also stake claim to a small portion of
profits derived from investments.

“The application is placed directly with the fund house, there by eliminating a 2.25% entry load. The idea is to generate 30- 40% returns from investing in mutual funds; though it is a bit difficult at this point, it is possible by strategic churning of portfolios.”

The majority of mutual funds are correlated in terms of performance and never beet the market indices over the longer term. Add to that their high entry/exit loads and management fees, and you’re always a few steps behind. Now with this PMS non-sense, the brokers are trying to line their pockets even more. It’s all about sales & marketing, not about creating economic value for investors.

Well, here’s something new - I’ve managed to hack a Gujarati version of GalaTime. It won’t be a full-fledged blog with several posts a day; but instead a combination of more detailed articles along with short daily features such as ‘Chart of the Day’, etc.

This is all very new - I’m still working out the kinks in the process:

• Create content (I think in English)
• Translate (an uphill task given I’ve never learnt Gujarati officially, but only via speaking)
  • Bless the folks at Gujarati Lexicon . . .
• Type out the content using Unicode
  • . . . and the ones at QuillPad
• Fix typos, grammar, etc.

The site is up at http://www.galatime.com/gujarati/

Do bear with me while I fix the numerous typos asap. But I’ve launched it anyways since there is nothing like public committment to keep one motivated.

I have a request for those of you who care either about site design and/or understand Gujarati - do provide ‘no holds barred’ feedback since it’s easier to fix things earlier on.

PS: Why the focus on Gujjus? Well, if you already don’t know, these bits of information might help: 

• Candidates for the NSE Derivatives Dealers Module have the option to take the test in English, Gujarati and Hindi language.
• “It is not only market-savvy investors from Gujarat, but also lead managers of IPOs from Mumbai, Delhi and other parts of the country, who look at Ahmedabad’s grey-market premium rates as an indicator of the price at which the issue is likely to get listed.”
• 62.8% of the demat accounts are in the five states – Maharashtra, Gujarat, Delhi, Tamil Nadu and Karnataka
  • Gujarat has 18% share. And of Maharashtra’s 22% share, how much do you think is captured by Mumbai?
• My (’aati kya khandala’ class)  Hindi is even worse than my Gujarati.

Anyhow, this should be fun.

Bloomberg: Pakistan’s Stocks Mostly Untraded as Regulator Eases Limit

Pakistan stocks were mostly untraded as the removal of some trading curbs failed to persuade investors to reenter a market shuttered for almost four months following the ouster of the president and a slump in global equities.

Almost three-quarters of stocks on the Karachi 100 Index didn’t trade after the regulator ended restrictions preventing the measure from falling below its level of Aug. 27, shielding investors from a record plunge in equities. The regulator kept a rule preventing the gauge from falling more than 5 percent.

Pakistan will be removed from the MSCI Emerging Markets Index this month because of the restrictions on selling stock, MSCI Inc. said last week. The deletion will take effect at the close of trading on Dec. 31.

Baby steps on the way to 0.

• Mint: LIC MF gets mega bailout from parent
  

State-owned Life Insurance Corp. of India Ltd (LIC) may have bought illiquid debt paper, largely of real estate firms, worth at least Rs1,755 crore from its unit LIC Mutual Fund Asset Management Ltd (LIC MF) in October.

The acquired debt included bonds worth Rs650 crore sold by BPTP Ltd, Rs543 crore by Housing Development and Infrastructure Ltd, Rs195 crore by Unitech Ltd and Rs117 crore by Sobha Developers Ltd.

Housing Development Finance Corp. Ltd, India’s largest home loan company, and its partner Standard Life Plc. have taken a similar route. Standard Life holds a 40% stake in HDFC Asset Management Co. Ltd.

It’s so nice to have a sugar daddy around.

• Economist: Finding the gaps

WHEN will the arbitrageurs return? A look across the financial markets at the moment reveals all sorts of potential anomalies that are not being exploited.

So why don’t investors do this and eliminate the discrepancy? One reason may be that some risk would linger in such a trade: the risk that the swap counterparty might default at exactly the same time as the issuer of the corporate bond.

But the most important reason seems to be that arbitrage trades usually require borrowed money—leverage, in other words. Earning a percentage point over Treasury bonds is not enough for a hedge fund, especially considering the fees it charges (2% on an annual basis, even before the performance fee). At the moment, it is so difficult and so expensive for hedge funds to borrow money that the bond/CDS trade is not worth doing.

• Wall Street Journal: How Bernie Madoff Made Smart Folks Look Dumb

Mr. Madoff emphasized secrecy, lending his investment accounts a mysterious allure and sense of exclusivity. The initial marketing often was in the hands of what one source described as “a macher” (the Yiddish term for a big shot).

Robert Cialdini, a psychology professor at Arizona State University and author of “Influence: Science and Practice,” calls this strategy “a triple-threat combination.” The “murkiness” of a hedge fund, he says, makes investors feel that it is “the inherent domain of people who know more than we do.” This uncertainty leads us to look for social proof: evidence that other people we trust have already decided to invest. And by playing up how exclusive his funds were, Mr. Madoff shifted investors’ fears from the risk that they might lose money to the risk they might lose out on making money.

For a brief window in 2006, the Securities and Exchange Commission required hedge funds to file standardized disclosure forms. William Goetzmann, a finance professor at Yale School of Management, found that hedge funds disclosing legal or regulatory problems and conflicts of interest ended up with lower future performance. But the disclosure of these risks had no impact at all on how much money flowed into the hedge funds.

Greed. Incompetence. The Perfect Ponzi.