The Trading Diaries

IPOs in India: Worth The Hype?

2011-05-01T05:27:00.000-07:00

This is the first in series of write ups which I shall be writing over the coming few weeks on Personal Finance. They won't be dealing with the whole gamut of things which fall under the topic, but only the stuff which is material to people like me (working, with decent savings for investment purposes).

The first and foremost topic that comes to mind is the stock market, and more specifically the IPOs. In India, one should always follow this thumb rule for IPOs - Never ever put money in an IPO, more so if its from private sector.

The reasons are pretty simple. The rational for IPO in an ideal world is for new and relatively small companies to fund their expansion, and hence offering relatively good growth potential compared with matured companies. In India, however, most promoters access the primary markets to offload their stakes, and only after the company has either already grown decently, or hasn't started as yet. There are very few of the actual IPO-worthy stocks. And, to make matters worse, the pricing of the IPOs are done pretty aggressively, and there is usually nothing left on the table.

Little wonder most of the IPOs list in deep discounts in India, and they only tend to do well in absolute bubble scenarios. One exception could be the public sector companies which would be divested one by one - there the owner is government, and they do not have a 'personal' incentive to suck the last penny out from the investors. And secondly, they tend to offer some good discount to the retail investors as well.

So, my mantra is, never go for an IPO in the first place. And if you must, because your neighbor's son is making millions in IPOs, then just limit yourself to the public sector divestment offerings only. As for the private sectors ones, if you can wait for a few months, you may have them for a good 15%-20% discount.

2011: As I See It

2011-01-19T05:23:00.000-08:00

It was always a game of confidence - all the dovish and/or hawkish comments are nothing but a way of conveying optimism to the markets. When the inflation concerns rise, the tone is hawkish, and when things heat up, they get dovish. There is never anything more to it - like most people Central Banks are also shooting in the dark. Its like a physicist's prescription - most of the time its hit and trial method.

All that QE was intended to do was to create abundant liquidity, and confidence. That no matter what happens, the Central Bank would do anything and everything it can do. And it seems to be working. Money is flowing back to USA, and S&P is almost at its highest level in post-crisis period. Same is true for quite a few other major markets. Its a game of chicken everyone is playing - the underlying economy is still fragile, and there are lot of skeletons hidden in Eurozone as well. However, if 'somehow' governments succeed in keeping the confidence up that we will tide over the crisis, we eventually will. There is a difference between 2008 and 2011 - it was banks then, and its sovereigns now. The difference is that unlike banks, sovereigns can change the rules of the game, if need be. And thats a very big difference. Its not one Mexico defaulting, or one Argentina defaulting. Its a global scare, and any actions on the part of big sovereigns would certainly have endorsements from others. The issue of 'Wikileaks' is a case in point - if they don't like your actions, they would frame you under 'anything'. And George Soros of the world may have broken the bank of england, but it takes much more to break the Bank of the World. There are still chances of we plunging back into recession, but its just a 10% probability (though if it happens, they all hell will break loose), and best bet would be a 60%-70% Put.

The second part of the debate is EM vs DM - where do we see money flowing to. I think it would again be EM this year, in spite of all the talks about DM coming back in vogue. EM countries still have very low allocations of global capital, and that is out of sync now with their share in world's GDP. There would an irreversible flow of capital to some of the larger EM nations just to get them to parity. A little of it happened in 2010, and I expect it to continue in 2011 as well.

Apple reported some 70% growth in its revenues last quarter - well thats not an economy in recession. It just shows that the consumer confidence is back, and its high time financial markets also start displaying that confidence.

Nifty View

2010-12-17T21:31:00.000-08:00

Nifty has broken below its recent highs, and is trading below its key level of 6000. Market has been bogged down by the spate of bad news and controversies, and if they do not clear in time, we may be in for pretty bad times.

However, my view is, we are still very much in the bull phase, and will keep going up smoothly. Breaking the old high is just a matter of time, and we would very soon be into unchartered territories. Unlike developed countries, where the growth rates are pretty low, India has progressed over the past few years. So, the earnings and balance sheet are now much stronger than in was in the last bull run. So, purely from the incremental progress made in the past 3 years, we should be at least crossing the previous peak soon - may be in 2010 itself.

I would be a buyer below 6000, and only when market breaks below 5600 I would change my views. Above 5600, I'm bullish on India.

Stock Futures Arbitrage

2010-10-23T22:54:00.000-07:00

Setting up Stock Futures Arbitrage Business

1. Broker Empaneling: Need to em-panel 8-10 brokers for the business (flow very important)

2. Margin Account Funding: Pre-funding of cash margin account needed to the tune of USD 5-7 MM to account for any short fall or emergency requirement. In addition, need an FD for say USD 10 MM for meeting the derivatives margin requirement.

3. Transactions: For buy stock transaction, we need to buy INR Spot, sell INR DF, and buy Stock. For client P-Note trade, needn't sell the DF as client taking INR risk as well (ADR style).

4. Trasaction Costs: Overall round trip transaction cost for cash futures arbitrage would be 50-52 bps (stamp duty 12.5 bps on each side for cash, an another 30 bps overall cost).

5. DF/NDF: Very important to track the DF and NDF points of a regular basis. These can affect the funding in a big way, and hence we need to track them to capture the best levels.

6. Basis History: Need to be prepared with the basis history for almost all the stocks in the F&O list. There are stocks which always present the intra-month churning opportunity. Need to classify all the stocks into the broad segment.

Market View: Bullish Break-Out

2010-09-25T00:35:00.001-07:00

Markers world over have broken out on the upside, and looks good to rally further up from here. Nifty is already in the bullish zone for some time, whereas the big global indices seems to have joined the party now.

S&P broke above its 50% retracement level of 1130-1140, and looks good to make another attempt at 1220. If it break that, then we are all set for the re-test of previous high of 1600.

FTSE is showing more bullish signal having already broken its 61.8% retracements level. Its poised to test the 5950 levels, and then go all the way to 6750 levels.

Among the Asian indices, only HSI seems to be sharing the global bullish overtone, whereas both Nikkei and Shanghai Comp appear weak. HSI is almost in the same state as S&P, having moved above the 50% retracement level, and making another go at the 61.8% level.

And finally, the big daddy of this bull market (apart from Indonesia, Philippines, and Turkey), Nifty seems to have broken all the resistance levels. It making an aim at the all time high of 6300. The strength of the rally suggests that it would be broken soon.

Company Profile: Mahindra & Mahindra

2010-09-24T21:35:00.001-07:00

Company Profile

Mahindra & Mahindra is India’s leading SUV and tractor manufacturer. Over the years, it has diversified into sectors as diverse as Real Estate, IT, Financial services, logistics and defense services. It has been acquiring companies and growing into new areas, with some of the recent acquisitions being Punjab Tractors, Satyam Computers and Ssangyong.

It is 26% owned by the promoters, and has a large FII holding (25%) as well.

Market Segment

M&M’s core business comprises utility vehicles, three-wheelers, mini vans and tractors. These segments are witnessing a demand upswing and M&M has a dominant position in these segments.

Its product range includes Bolero, Xylo and Scorpio (in UV range) – and it enjoys a 56% market share. In the farm equipment segment, M&M commands a 40% market share. Post the acquisition of Punjab tractors, M&M now has products catering to lower as well as upper end of the tractor segment.

M&M aims to become an international player in tractors and SUV – and has acquired Chinese tractor companies as well as Korean SUV maker Ssangyong. Currently, total exports are just 4.4% of sales, and expected to move up.

Financials

M&M stock has value unlocking potential from a number of subsidiaries – Defense, Logistics, Systec, IT and Holidays.

Market View: Chasing Growth

2010-09-24T08:49:00.000-07:00

First things first - we are in a bull market. Anyone who says otherwise is someone who has missed the rally, and is desperately waiting for a correction to enter the market. Or, had invested at the bottom, only to cash out at the first up tick. Any market which moves more than 100% is certainly a bull market (check any text book if you may)- irrespective of the underlying reasons. It doesn't matter how much money the fed is printing, it doesn't matter where the inflation is. Price is king, and you made money if you were long. Else, the so called sucker rally has sucked you in it.

The world has seen decoupling in the past couple of years - decoupling of the economy from the markets. Economy is still broken, and thats why Roubinis of the world still make ominous projections about the world. Yes, there are good chances of a double dip, and good chances of world falling back into the abyss. Unemployment may remain at 10% for prolonged periods, emerging markets may see super-inflation. But, the Dow is not going back to 7000, and 666 would remain the magical S&P number for our generation. Markets have taken off, and by the time this liquidity is sucked, we would be out of recession.

There was much more quantitative easing than anyone imagined. How could one explain the lifetime high of Gold, Silver, Nifty, and thousand other uncorrelated securities at the same time. Add to it the super-inflation, and lifetime high of iPad/iPod/iPhone sales. We may be in deep shit, but we aren't out of purchasing power yet. In India, auto sales are an all time high, and we now have the second largest mobile subscriber base in the world. These are not signs of a bear market, but far from it. We have entered the next big bull run, and sooner we realize, the better it is.

Investors the world over are chasing for yield. Following the QE, their currency is poised to depreciate, and offers paltry interest rates. It natural that the money would flow to emerging markets - which offer appreciating currencies, as well as higher yields. This is what is happening all around - with funds flowing from developed economies to the emerging markets. The big question is - is this flow sustainable? And the bigger question is - what would reverse this situation?

As long as US is in recession, this flow would continue. And by no means, I foresee US coming out of slowdown over the next 12 months. To reverse this flow, we need either an over-heated emerging markets, or fast recovery in US/EU. The former is more likely, but for that happen, the sucker sitting on the sideline has to jump into it. Till now, even the mutual funds haven't jumped into it, forget the retail guy.

Company Profile: Tata Motors

2010-09-23T02:55:00.000-07:00

Company Profile

Tata Motors is the most global of Indian auto companies, and its product portfolio includes passenger/goods carriers, passenger cars, and utility vehicles. It is India’s largest auto company by volume and 4^th largest truck manufacturer globally.

Over the years, it has acquired Daewoo’s Korean CV plant, and Jaguar Land Rover in UK. Its manufacturing facilities are located in Jamshedpur, Pune, Lucknow, Patna, Sanand and Dharwad.

Market Segmentation and Volumes

Tata Motors is present across almost all the segments (except 2W). Its JLR unit sells ~200k vehicles per year.

In the CV segment, overall sales are ~500k, and it has a dominant market share there. In the private vehicles segment, Nano has revived the overall sales number for the company, and it now sells ~200k units there. Its market share in private cars is 10% (compared with 50% for Maruti).

Its EPS is very volatile over the years due to large acquisitions, and huge debt on the books. However, the debt concerns are easing now, and D/E has come down from 6 to 2 from 2007 to 2010. Its projected EPS for 2011 is ~100.

Company Profile: Maruti Suzuki

2010-09-22T23:39:00.001-07:00

Company Profile

Maruti is the market leader in small car and compact car segments in India. It was set up as a JV between the government of India, and Suzuki Motors. Government subsequently divested part of its stake, and currently Suzuki is the majority stake-holder.

Maruti is the oldest car manufacturer (among the current ones), and has one of the most trusted brands in the nation. It has the widest network, and has good presence in tier 2 towns as well.

The management team has been stable over the years – Shinzo Nakanishi is the CEO and MD. Over the past years, it has witnessed a volume growth of 14% CAGR, and revenue growth of 25%.

Market Segmentation

Maruti is the market leader in small and compact car segment, and has an overall market share of 50%. In the coming years, it is expected to lose some of the market shares to the new entrants, though it is still expected to be the leader with ~40-45% share.

Currently, Maruti sells around 100k cars per month, or 1.2mm cars a year. Bulk of the volume is from the domestic market sales, with exports accounting for only 10-12% of the volumes. Going ahead, its going to be a capacity constrained market, and Maruti has been adding capacity aggressively.

Cash EPS per share is INR 110, and at price of 1200, the stock is attractive.

Company Profile: Ashok Leyland

2010-09-20T05:32:00.001-07:00

Company Profile

Ashok Leyland is the 2^nd largest commercial vehicle manufacturer in India, and offers wide range of carriers across all sizes. It is the flagship company of the Hinduja group. Earlier it was limited to the southern markets, but over the past few years has widened its network. It’s the best pure play on the commercial vehicles segment in the country.

40% of the company is owned by the promoters and around 14-15% by FIIs.

Segmentation

Ashok Leyland is a core CV player, and it benefits from higher industrial activities. During business cycles, the volatility in sales for CV is higher than that of passenger vehicles. It has started exporting to a few of the neighboring countries – Sri Lanka, Bangladesh, Middle East. Overall, about 10% of the sales come from exports.

On an overall basis, AL manufactures 60k-80k vehicles annually. The new plant at Uttarakhand is expected to produce 20,000 units from 2010.

For 2010, EPS is INR 3, and stock is trading very rich to its historical valuations.

Company Profile: TVS Motors

2010-09-19T04:41:00.001-07:00

Company Profile

TVS Motors is one of the smaller players in the 2W (and 3W) segment, and market leader in mopeds. Its key products are Apache, Star, Jive, Flame (all motorclycles), Scooty, and XL Super (moped). As a part of its plan to tap the overseas market, it has commissioned a plant in Indonesia.

It is part of the Sundaram Group, and current MD Venu Srinivasan holds 61% of the company. 7% shares are held by FIIs, and rest is held domestically.

Segmentation

Bulk of the sales for the company comes from the motorcycle segment (which is the largest segment as well). In addition, the company is fairly big in mopeds as well. Motorcycles and Mopeds each contribute roughly 40% of the overall sales (in units). Rest is made up by scooters and 3-wheelers.

The company is focusing on exports going ahead, and has a plant in Indonesia.

Financials

Its product mix is inferior to the top players, and it is present in a lot of low-margin segments (scooters as well as mopeds make up 50% of its total volume). As a result, its operating margins are lower than the industry, EBITDA levels as 7-8% (as against 15% for the top players).

The company has a core EPS of INR 2.5, and is trading at PE of 30. Its balance sheet is much smaller than HH and Bajaj, and it also lacks the resources to counter the competition.

Company Profile: Bajaj Auto

2010-09-19T04:14:00.001-07:00

Company Profile

Bajaj Auto is the 2^nd largest 2-wheeler company in India, and has a diversified product portfolio. In addition to catering to the local markets, exports are also a good chunk of the overall volumes.

Bajaj is India’s largest exporter of 2W and 3W vehicles, and it currently exports to Africa, Latin America and Asian markets. Currently it is exporting 25% of its overall sales.

In 2008, the earlier combined entity was split up between the brothers, and Bajaj Auto was formed. It is being headed by Rajiv Bajaj – who owns 49% of the company. Another 20% is owned by FIIs, and rest is held domestically.

Segmentation

Bajaj remains a market leader in the premium segment of motorcycles, with its Pulsar being the highest selling bike in the segment. Also, it has Discover catering to the largest segment (deluxe), and Platina in the entry level segment. Over the years, Bajaj has rationalized its offering, and now has a much leaner product portfolio.

The company was a dominant player in the scooter business, but it has now exited the business (as it had become unprofitable).

In the 3W segment, company is a market leader, and currently ~10% of the sales are derived from this segment.

Financials

Bajaj Auto is expected to exceed the industry growth rate in the coming years, and is expected to grow sales at 17-18% in coming years.

On an average, it is expected to sell over 4M vehicles in 2011 (60% in domestic 2W segment, 30% in exports, and 10% in 3W). EPS for 2010 is INR 60, and company is trading at a PE of 25.

Company Profile: Hero Honda

2010-09-17T05:55:00.001-07:00

Company Profile

Hero Honda is India’s largest 2W manufacturer, with strong brand value and dealer network. Over the years, it has generated higher than industry growth rates in the segment. Hero Honda has the most widespread network, and has good rural reach as well. Among all the players, it has the highest rural reach, one of the reasons why it was insulated in the crisis (not much financing based sales in rural areas, mostly cash sales).

It’s a joint venture between Honda Corp Japan and Munjal Family (each of them owning 26%) that began in 1984. It has 3 production sites – Gurgaon, Dharuhera and Haridwar, and together they have a capacity of 5.2 million vehicles per year.

Segmentation

Hero Honda has a tight grip over the deluxe (middle) segment of the market. Its 3 largest selling motorcycle are Splendor, Passion and CD Deluxe. Exports are still a small proportion of overall sales – with company exporting 100k vehicles last year. This compares with the overall sales figure of 4 million.

Financials

Industry long term volume growth rate has been 12-14%, whereas the same for Hero Honda has been 15-16%. Industry growth rate is expected to spike up in future, and expected to be in 18-19% range over the next few years.

On an average Hero Honda has been selling more than a million vehicles per quarter. On a per month basis, it has been exceeding 400k mark for a few months now. EBITDA margins are 15-18% for the company, and bulk of the cost is input raw materials cost. PAT margin is 12-14%.

EPS for 2010 is INR 110, and company has a good dividend yield of 2%. And company doesn’t have any debt on the books, with good free cash flows.

India Market Wrap: September 15

2010-09-15T22:18:00.001-07:00

India

NIFTY: 5860.95 (+65 points / +1.13%)

Sensex: 19,502.11 (+155 points / +0.80%)

Cash Market Turnover: USD 3.72 Bn

Futures Turnover: USD 9.49 Bn

Options Turnover: USD 19.85 Bn

Foreign inflows continue to take the markets up for the 7^th consecutive days. Foreign Institutions have bought more than USD 2.2 Bn of stocks this month, and an overall of USD 15 Bn for 2010. Volumes have also picked up lately, and markets are now trading at the highest levels since January 2008, within 5% of the all-time peak.

The continued inflow from foreign players has ensured the volatility is down to almost historic lows (and also lowest in the region). However, mutual funds have been barred from using options in their portfolio, and we may see some upside in coming days.

RBI (Central Bank) has a policy meeting today, and may raise rates once again to tame inflation. Market is divided on whether RBI would raise it by 25 bps, or keep the status quo, and raise at the next policy meeting.

Market View: Debt Trap

2010-09-14T06:41:00.000-07:00

I will be changing the format of posts slightly - and instead of putting up the views, will rather put some facts and information. And based on them, would try to get the scenarios done. This would help put things into a better perspective, and also throw up likely if-else scenarios. Quite often, when the view goes wrong, I'm caught clueless about 'what to do now'.

The easiest way of starting this framework would be to state the simplest fact about the markets today - everyone is borrowing. Companies are raising equity as well as bonds (and all the fancy things that fall in between). Countries are raising debt from other countries, as well as their own citizens. Very soon, we would have a world with very high leverage, and very high debt servicing costs. Developed world is borrowing to maintain its consumption levels, whereas the developing countries are borrowing to spend on infrastructure and create capacity.

So, what will happen from here?

1. Banks would be the out-performers: More borrowings means more business. A world with a higher debt to GDP ratio also implies very high activity levels for the banks. Credit growth would be humongous, and margins would expand as well.

2. Companies with large free cash flows would do well: All the tech and IT companies with zero to little debt on the books would be best placed to ride over the situation. However, they would have to do with lower returns on their portfolio as long as rates are kept low. Telecom would have fallen under this category, but for the 3G auctions (and subsequent debt on the books of each of the operators).

3. All the companies with large capital requirements and long term projects would suffer: Capital goods and real estate being the top 2 sectors. At some point, interest servicing would rise to very high levels, and any fall in business activity would squeeze them. They might do well if global economy recovers, but if there is any slowdown, they would bleed badly.

4. ...

P.S. - Now I can slightly appreciate the consumerism in US and other developed economies. Irrespective of what the interest rate parity and fisher theorem says, people need an incentive to save money (for future consumption). And an interest rate of 1% or 2% on bank deposits is hardly any incentive to save. More so, when I can borrow also at very cheap levels. If the rates were 6% to 8%, one might give it a thought. But at 1%, no way.

Gamma Bleed

2010-09-09T10:08:00.001-07:00

World markets are going crazy, and traders all over are bleeding gamma. Volatility has dropped below long term historical levels in a lot of markets, and naturally, traders are sitting long Gamma/Vega.

Nifty seems to scaling new peaks everyday, and is currently trading at 5600+ levels – looking all set to conquer 6000 by the end of this year. The all time peak now appears well within the grasp of the market, and one last moment of euphoria could take us there. Coal India IPO in October would be the final decider – if it goes through, we would be in for a new peak, or else, we may come down from here.

The trade here seems to be going long a strangle – buying 5400 Put and 5800 Call for November/December expiry. Will check the prices in more details tomorrow on this, but if its within 150 INR, then seems like a good trade.

Trading View: August 13

2010-08-13T08:01:00.000-07:00

Markets haven't really been moving as per my views in the past few weeks - they have been exceptionally strong. FIIs continue to pump money into the Indian markets, making it the most stable markets even on global-down days. Downside volatility has almost disappeared from Nifty, and markets just seem to be inching up.

There are plenty of red flags, but for the moment its more like 'ignorance is bliss' once again. The results haven't really been exceptional - with only banks and autos surprising on the upside. Rest all have been a drag on the markets at best. Telecom is almost wiped out completely out of the rally, and so is Real Estate. IT and Metals, which led to the first leg of the rally from 5000 to 5300 levels seems to have gone quiet taking recessionary global cues. Now, for the next leg up, we need pure domestic sectors, and this is where banks and autos fit the bill. Indian banks are primarily a domestic story, with negligible global operations and exposure. And so is the auto sector - with most of the supply being absorbed by local demand. Only Hyundai exports a decent chunk of its production, but thats not listed in India anyways. Other domestic stories are FMCG, and Infrastructure. If we do have a next leg up, I would be betting on Infrastructure more than anything else.

In the coming weeks, would start making small investments in GMR group as well as GVKP. These two companies are a play on the airports in India - which have tremendous potential. Also, the Real Estate might be the next big story once again - with a line-up of IPOs waiting on the sidelines, we aren't far from seeing some action there. Might start building some stakes in DLF, Unitech and HDIL.

I'm not particularly bullish over the short term, though over the longer horizon I do believe that as a whole the India story is intact, at least for the next 3-4 years. We do have a case of over-heating and excessive inflation, but these are not big issues to worry about.

Market View: August 9

2010-08-09T11:27:00.000-07:00

This post assumes the reader has seen 'Inception'. In case you haven't, sorry for all the comparisons with the movie. Just to give you a rem/primer on the movie, its a new version of the Matrix trilogy - with more emphasis on the construction of matrix than on action and Trinity.

We are all dreaming. In fact, we have been dreaming for the past couple of years. The reality was bad, very bad for the human race to digest. The Americans and Europeans who had spent their lives living off their credit card debt were suddenly to be told that it was not the right way of existence. It would have led to widespread depression (not the economic variety), and panic. So, to save the world, Uncle Ben Nolan weaved this dream - that all was well again.

He injected massive amounts of penicillin in the system, and everyone went to dream. Whether we are in the first level of dreams or further down is anyone's guess. The only certainty is that no one would be able to get us out of it - neither crash landing, and nor any kicks on the back. The dream is much better than the real world - everything appears rosy, markets seem to be making a new high every day, gold is up, real estate prices are back to their peak levels and so are the markets. There are small-cap growth stories floating all around - and there are plenty of multi-baggers waiting to be discovered. Each new guy you meet has a secret of stocks that would become 4x in no time.

This is not the real world, and we all have been dreaming. In the real world, more than 10% of people are out of jobs. There is a massive oversupply in the real estate markets, and there are no buyers. Government debt has exceeded all their previous highs, and yet show no sign of abatement. Companies are issuing fresh equity/debt at a breath-taking pace, each one trying to go ahead of others.

Someone would need to start pulling the brakes. I just did.

Market View: July 28

2010-07-28T11:46:00.000-07:00

After being a bull for quite some time, I'm turning more and more bearish on the markets. Going back to my childhood, I used to feel very happy whenever I got a raise in my pocket money. However, in the end it never mattered, and I was left with same/no savings at the end of the month. The expenses always used to catch with the free money/increment. I guess the same is about to happen with the stimulus spendings - a lot of it has gone down the drain. In the end, people would be left no richer than they were without it - and thats not a happy state as they weren't very rich to start with.

We are coming close to end of 2010 - the time predicted for the Quantitative Easing to end. Almost three years have passed since the crisis started, and we are no where close to closing down the taps. The stimulus would continue for another year or so, and this isn't a very happy sign. Never mind the asset prices and the booming markets, its all in the dreams. Only, instead of Christopher Nolan its been designed by Ben Bernanke (and its awful).

Nifty has outperformed the global indices, and has scaled to a new 30 month high. Markets look all set to break new grounds, and may even tough the earlier highs. A lot of FII money withdrawn from the Euro area has entered our markets (with more than USD 2 Billion flow in July). However, do not thing this is a long term shift, but just a temporary parking space. And thats what makes it much more dangerous - we are moving towards the Asian crisis scenario. There aren't too many markets with good GDP growth, and hence it may end up over-heating the handful of markets which are growing now.

In India, the result season has been very good so far, with most of the top names not reporting any great positive surprises. Add to it RBI's firefighting with inflation, and we do have a possibility of good correction in the markets from here. I wouldn't be surprised if August and September turn out to be bad months for the Indian equities.

I'm currently short on the markets, and would continue to roll my positions until 5600 is broken on Nifty. Earnings haven't supported to the recent upmove, and markets may find it increasingly difficult to justify their premium to the region. DIIs have been sellers for quite some time now, and FII may very soon find India too overbought. Or worst of all, some one may kick Uncle Ben out of his dreams, and he would put an end to this whole messy maze.

Trading Positions: May 27

2010-05-27T12:22:00.000-07:00

Okay, now is time for me to slow down. I think I have made a mess of trading discipline over the past few weeks. So much so, that I do not remember all the positions that I have on the books. Need to get out of the mess by the end of June.

Last month, there were three trades for me:

1. Short Infosys (short 2800 Call)
2. Short Nifty (at 5305)
3. Long HLL (short 210 Put)

Made money in all these 3 positions, even though at some point each of them were under water. Got out of it at the correct time. However, on the Nifty, missed out on the big fall, and cut the position quite early at a mere 80 points fall. Markets then went into free-fall, and corrected by over 500 points.

May has been a complete mess for me - both because of the choice of stocks, as well as the sheer number of trades.

1. Long Reliance Communications (open - unrealized losses on long futures)
2. Long Bharti (open - realized profits 2.5k, unrealized losses on long futures, short 260P, short 300C)
3. Long Reliance Power (closed - 9k profits)
4. Short Axis Bank (closed - 23k profits)
5. Long ICICI (open - unrealized small profits on long futures, short 840C)
6. Long Nifty (open - unrealized profits on short Nifty Puts)

Europe: The Clouds of Worry

2010-05-25T07:17:00.000-07:00

The last time I talked about the markets, it was somewhere close to March, with the budget session grabbing the limelight. The current darling of the market seems to be Europe, and its deficit problems. Greece, Spain and Portugal, all seems to be in big trouble - and they may spell doom for the common currency. US may be breathing the sigh of relief, for two reasons - (a) Its banks are no longer under the spotlight, and relentless attacks from bears all over the world, and (b) USD would continue to be the De-facto reserve currency for the next decade at the least.

So we have US almost out of trouble from here - substantiated by economic data as well as the market sentiments there. Asia was never under direct trouble (except perhaps fears of bubble in China). Which leaves us with the Europe and all its worries. Markets worldwide are crashing everyday on some news from the region - be it the fresh debt issue cut-offs, or the actions from the Central Bank of Spain. However, in the larger scheme of things, does rest of Europe matter? Take out Germany, France and UK, we are left with a lot of small debt-ridden countries. As long as no one is seriously doubting the debt servicing ability of the big 3, I do not see Europe being too important. They were never the growth drivers in the world economy, and there is no reason why they would hamper it either. It would cause some panic, and spike up the volatility levels, but in all, it won't be catastrophic. People on the street still do not fear for their jobs the way they did in 2008, and this indicator works way better than all the volatility indices of the world to measure the panic levels.

I'm not saying that it would lead to nothing. There would be serious re-rating of the whole of the world. By no matrices, European nations deserve a better rating than the Asian ones. US and UK may not be as safe as they were 10 years back. It would be a slow and painful process, and every few months, some Euro-block country would be down-graded. However, it should not spook the markets, these nations are over-rated and it would get corrected soon. Very soon, some of the Asian economies might get upgraded - as early as next year.

In a nutshell, I remain bullish on the local markets. Even though the charts tell otherwise, and the world thinks otherwise. I think after the clouds clear over the European skies (pun intended), it would be smooth flying all around.

Food for Thought: Germany bans short-selling, and markets tank. Spain merges four of its banks and markets tank. Rumors of face-off between North Korea and South Korea, and markets tank. We live in a world where people trust one yellow metal more than anything else. All in a hope that when the world ends, there would be two guys left - me and the jeweler who would buy the metal from me.

Trading Positions: April 27

2010-04-27T07:45:00.000-07:00

I have been taking very few positions now a days, and this has worked in my favour. Unlike last year when the whole trading was all over the place, this year have stuck to one view till the expiry, and have made money on 3 out of 4 occasions.

This month, had sold some Infosys 2800-Calls, and covered the same close to the expiry. The stock was trading at 2800 when I entered the trade, and it went all the way up to 2850 before cooling down. Huge positions were created in the 2800C, and hence it was always likely to be a strong resistance level. Close to expiry, the stock continued to trade close to 2700-2750 levels, and the short call positions gained due to theta bleed everyday. Had sold the option at INR 75, and covered at INR 7. So, including the transaction costs, made a cool profit of INR 65 per share (on a total of 200 shares, giving the overall P&L of 13,000).

Still have a short position open in Nifty futures, and that is for May expiry. Markets continue to trade close to 5300 levels, and seems to be holding on to it. If it doesn't crack up in the next couple of days, I better square off the position.

The stocks where I'm looking to take the position for May expiry are M&M and Axis Bank. Axis Bank has rallied a lot in the last few months, and the stock looks like a good short. Same can be said for M&M, though it has corrected a little from its high. Still, both of them looks like good short currently, and would take a position on one or both of them before the expiry.

Trading Positions: March 25

2010-03-13T18:55:00.001-08:00

One of the better expiries for me, and finally made some money again in the markets. 2 out of 3 calls have been correct, and have unwound both the trades. The 3rd one is slightly out of the money, and if it continues to move against me, would cut it.

Bharti (BHATE): Had gone long the shares at a price of 280, and had sold some 290-strike calls on the name when the markets rallied. Overall, pocketed a handsome INR 22k from the trade. However, this trade came with a learning as well – stock options are American in nature, and when they get sufficiently deep in the money, the option buyer may exercise the same.

HLL (HINLEV): The stock had been badly hammered by the bears post the price wars with P&G, and it had fallen to 210 levels. Wrote a put with 210-strike, and unwound the same when the stock rallied. Overall, made a profit of INR 3k from the trade.

Infosys (INFTEC): Infosys has been trading close to its lifetime highs, and market looks overly bullish on the IT sector. Have sold a 2800-strike call on the name, and would hope for some correction. Also, there are quarterly result in April, and hence would look to unload the position if the stock cracks before that as well. The premium was INR 75 when I had sold it, and is currently trading at INR 83. Would look to exit the position at close to INR 50.

Technical Analysis 105: Important Tools - II

2010-02-20T23:17:00.001-08:00

Earlier posts of Technical Analysis:

There are numerous other tools which are used in Technical Analysis – (a) Oscillators, (b) Stochastics, (c) RSI, (d) Moving Average Convergence Divergence, and (e) Bollinger Bands, just to name a few. However, I do not think I would be able to follow so many of the tools, and have identified two additional tools which I believe I could track:

1. Relative Strength Indicator (RSI): Very simply put, it measures the relative strength of the overall market, and has readings between 0 and 100. Usually, it is computed as

RSI = 100 - {100 / (1 + RS)},

where RS = Average of N period’s up moves / Average of N period’s down moves

RSI would be more than 50 if the average up moves are greater than the down moves, and would reach 100 (theoretically) when all days are up-days. Usually N is taken as 13 or 14. An RSI value above 70 is considered signs of an over-bought market, and RSI value below 30 indicates oversold markets. However, one should also look at the price charts in addition. If the prices are forming a double top, whereas the RSI isn’t, then it may be a bearish signal. Similarly, in situation when RSI is making a double top, and prices aren’t,we might see an up-move in prices.

2. Bollinger Bands: These are bands placed 1.5 to 2 standard deviations up and below a simple moving average line. For example, if we are looking at a 20 DMA line, then its Bollinger band would be 2 sigma up and below the 20 DMA line. Usually, the prices would remain within the band, however, the breakout is a strong bullish/bearish signal. If a breakout happens on the upside, its a bullish sign. And only when it returns back to the band, its a sign of reversal.

Technical Analysis 104: Important Tools - I

2010-02-20T22:09:00.001-08:00

Earlier posts of Technical Analysis:

In this post, and the next one, I would discuss about some of most commonly used tools (indicators) in Technical Analysis:

1. Moving Averages: Perhaps the most important points on any price charts are the moving averages – and they can used both for short term as well as long term analysis. Usually, there are multiple ways of calculating the MA, but most commonly used is the Simple Moving Average, and hence I would be using this one.

The important moving averages which should always be kept in mind for the important securities are:

5 DMA
10 DMA
20 DMA
50 DMA
100 DMA
200 DMA

These are important levels on the charts, and act as strong support and resistance levels. In addition to the home markets, they should also be followed for the regional as well global markets. I would be following the levels on Nifty, Sensex (home markets), Hang Seng, Shanghai composite, Kospi, Nikkei (regional markets), S&P, Dow, DAX, and FTSE (global markets) – on a daily basis.

2. Relative Strength: In a trend, there are sectors which perform well, and there are sectors which are laggards. Its always profitable to identify the sectors (and within the sector, the stocks) which have the strongest relative strength, as well as those with the weakest relative strength. This coupled with the general market trend could result into good stock picking early in the cycles.

I would be following the sectors of the home market, and track their performance vis-a-vis Nifty on a weekly basis, and report on Friday.

3. Volume and Open Interest: There is great information hidden in the market volume, as well as open interest data. Very few people in the market are able to make sense of these, and due to added complexity due to options data, it becomes quite complicated to make any sense. However, would try to capture the data and their sense on a weekly basis – how have markets moved, volume during the week, and how has open interest changed. Would start with Nifty on this, and as I become more comfortable, might add a couple of other indices or stocks.

Technical Analysis 103: Trends and Channels

2010-02-20T00:16:00.001-08:00

Earlier Posts on Technical Analysis:

One of the principles on which technical analysis is based is that prices move in trends, and continue to do so for some time.

Trendlines: A trendline is simply a straight line connecting two or more points on a price graph. An uptrend line connects a series of bottoms, and a downtrend line connects a series of tops.

The more the number of points that form the line, the more important it is.
The longer the trendline holds (time period), the more significant it becomes.
The angle of the trendline is also very crucial, the lower the angle, the stronger is the trend (a very steep trend is very unlikely to persist).

Trendlines are broken when three criteria are met:

Extent of penetration: The trendline must be broken by atleast 2%-3% to be sure of a clear break, more valid for longer term lines. For short term trends, the extent of break would be lower to confirm the break-out.
Time Filter: The prices shouldn’t go back to trendline immediately after penetration, and should confirm the penetration by staying in the range for 2-3 days. Usually, intra-day breaks are discounted to confirm a break-out.
Volumes: If the penetration is followed by heavy volumes, then the breakout is much more credible, as against one with low volumes.

Channels: Like trendlines, prices also tend to move in channels, with parallel support and resistance lines. There are traders who trade for price actions within the channel, buying near the support line, and selling near the resistance line, with stop-loss on other side of the lines. Some signals from channels:

If prices after being in a channel, fail to reach the top line or bottom line, then it might signal a break on the other side. For example, if prices fail to reach the top line repeatedly, then it might signal that prices would break the lower support line.

Support and Resistance: Support and Resistance are very important levels, and prices often bounce back from these levels. A support is the level where there is good demand for the stocks, and resistance are levels where there is a good supply of the stock.

If the prices touch a level repeatedly, then the level becomes more and more important – a long term support/resistance is much more important level, then short term levels.
After the level is broken, support becomes resistance and vice versa. And more the time stock has spent near the level (consolidation), more important is the level.

Retracements: Another important tool is retracements levels – after a trend reversal, the prices tend to retrace by a certain proportion before continuing the earlier trend. Often, prices will retrace from a minimum of 33% to a maximum of 67% of its previous move, before continuing in its earlier trend direction. 50% retracement is also a very important level, and is observed quite frequently. However, if the prices retrace by more than 67%, then the trend may be broken for good.

Cement Sector 101

2010-02-18T18:33:00.001-08:00

Cement sector is one of the promising sectors in any growing economy, and it’s the same in India as well. However, most of the analysts believe there would an over-capacity in the sector in the coming years, and hence are quite bearish on it.

Overall capacity is 180 Million Ton, and another 90 MT is in the pipeline (to be added over the next 5 years)

Important Factor:

Overall Capacity: This is again a purely volumes game, and the players are ranked as per capacity. There is as such no pricing power with any of the players, and is a relatively commodity business (except may be some premium or white cement segment).

Geography: There are two broad regions – North and South, and both have slightly different dynamics. Currently, all the infrastructure push is in the northern region, and hence the prices here are at a premium. Given the bulky nature of cement, usually its quite difficult and cost-ineffective to transport the same within regions.

Growth Rates: The industry growth rate is directly linked with the GDP growth rate, and more specifically, very closely with the Infrastructure growth. Currently, the cement demand growth is close to 12%.

Operating Efficiency: The industry operates at a high utilization rate of 85%, though going forward due to high capacity addition in 2010, this is expected to come down to 80%.

Coal Prices: Usually, coals are an important input to the process, and constitute a good amount of the total cost of materials. Roughly, a 1% rise in coal prices would lead to 35 bps fall in earnings.

Freight Cost: Cost of transportation is also an important cost as cement is a bulky good. And that indirectly would depend upon the oil prices.

Some of the big companies in the sector are as follows:

ACC: Currently trading at a market price of 900, the stock might be a good buy at lower levels (700). The EPS is estimated at INR 75-80 in 2009, though there may slight reduction in 2010 and 2011. High presence in the Northern markets, with a total capacity at 26 MT. It is the largest player in the Indian markets, and has a large presence in Eastern as well as Northern markets.

Ambuja Cement: Current market price of 100, and target price of 85. EPS is INR 7-8, whereas the capacity is ~24 MT. It’s a big player in north and western region, and usually is one of most richly valued stock in the sector.

Ultratech Cement: It’s the 2^nd largest cement company in India, and is being controlled by Aditya Birla group. Overall capacity of 23 MT, with presence in southern and western markets. Again, target buying level would be INR 800.

Grasim: This is also one of the largest companies in the sector, with an overall capacity of 25 MT. However, this is not a pure-play cement company, and has textile exposure as well. Again, this too is controlled by Aditya Birla group (along with UTCEM), and there are plans of merger between Grasim Cement and Ultratech.

India Cement: Has a good presence in south india, and buy target at INR 100. Current capacity is 14 MT, however, its present mostly in the southern region where there is substantial capacity addition plans. Also, they are the owners of the Chennai Super Kings, and a small part of their valuation comes from the IPL revenues as well (around INR 20-25 per share).

Automobiles Sector: 102

2010-02-18T18:24:00.001-08:00

Earlier Post: Automobiles Sector Basics: 101

Automobiles are again a relatively simpler sector, and the most important data to look forward to are monthly sales numbers, margins, sequential growth, dealer inventory (short term), demographics, penetration levels (long term).

A very brief look into each of the companies, and their monthly sales numbers:

Maruti: Sold 100,000 cars in Dec 2009, highest ever. Expected per month run rate is 70,000 to 90,000 going forward. The big growth driver is from the exports, which now account for close to 15% of the overall sales for Maruti. However, there are concerns with new global players eyeing the market in 2010, with some new models.

M&M: There are two separate divisions – (a) Automotive consisting of 3 and 4 wheelers, and (b) Tractors. Overall monthly numbers were 36,000 in the month of Dec 2009, and the about 1/3^rd is from Tractors. M&M has seen a very high volume growth over the past one year, and that should explain some of the gains in the stock price.

Tata Motors: Tata Motors too caters to too very distinct segments – (a) Commercial Vehicles, and (b) Passenger vehicles. The overall sales numbers in Dec 2009 were 51,000, and bulk of the sales is in the domestic market (with less than 5% exports). Also, the recently introduced Manza and Magic are receiving tremendous response.

Hero Honda: The Company is reporting rise in the vehicle sales month after month, and the current run rate stands very close to 400,000 units per month. Also, the company plans to introduce 3 new products/variants in the next 2 months. The company is currently operating very close to its total capacity, and hence a great uptick from these numbers is unlikely.

Bajaj Auto: Bajaj is fast catching up with Hero Honda, and has a good presence in the premium bike segments. The monthly sales numbers currently stands at 250,000, and these are mostly from bikes.

TVS Motors: A relatively smaller player in the sector, with monthly sales of 110,000 units (mostly bikes and other 2-wheelers)

Market View, February 12: The end of Neo-Colonialism?

2010-02-12T09:52:00.001-08:00

Our history books taught us that Colonialism and Imperialism ended sometime in the mid 20th century. Seems like, historians were wrong all along, and it continued for much longer after that. In fact, that continues even today – most of the US and European companies now no longer produce anything, and are just a brand name that exists on people’s mind. All their goods is being manufactured by someone in Asia/Africa, exported back to them for stamping, and then sent back with 3x-10x their price tag to be sold in Asia/Africa. This is no different from the definition of colonialism as defined in the history books – except may be the difference between overt and covert. Nokia is now just a brand name which is owned by Finland, and rest everything, from manufacturing to end consumption happens in emerging nations. And the parent company just earns a royalty for owning the name.

Well, one might argue that this is the crux of outsourcing, and this makes a company much more efficient. But then, it might become even more efficient if it was registered in India/China, instead of Finland – which is neither the biggest producer, nor the biggest consumer. The reason for this is plain and simple – those guys are really smart. For US, once you own the world’s reserve country (and the nukes), this ensures you directly or indirectly control the world (just make sure everyone signs CTBT). And European nations feared that since they didn’t have any pricing power in the world economy, they decided to form Euro. The only purpose Euro serves is, it gives more clout to all the Tom-Dick-&-Harry European nations, which otherwise have much worse economies than their Asian peers. And this makes me believe that we are about to enter the stage two of the credit crisis.

There are two standard tricks of financial alchemy for a listed firm – merger or demerger. Neither of these changes anything on the ground, but it does create an interest in the stock, and there are always either synergies or value being unlocked. As long as you can show that something can create money out of thin air, you are on track. This was the exact same thing done in the two different versions/stages of the credit crisis - (a) The US version, and (b) The European version. In the US version, or the first part, people were made to believe that slicing and dicing of tranches can create magic – and give AAA/AA rating to a large chunk of sh*t-pile (equivalent of demerger). There was value being un-locked by cutting the cake, and the sum of parts were more than the whole. This went on for a few years, and then it went bust (nice to outline and prophet-ize in hindsight). The problem was not the fact that pieces were cut and sold separately, but somehow the sum of the parts created were supposed to be more than the initial pie.

The European version, or the 2nd leg which is unfolding at the moment (it appears) is the exact opposite of this. There the core belief here is that if you combine a good thing and a bad thing, somehow you get something which is almost as good as the good thing. This was actually true in the initial stages when there were only 10 countries in the bloc, and all 10 were strong ones with good GDP and fiscal situations. Then Euro went on an expansion mode, and tried to include more and more countries – all the while maintaining its ‘good’ thing image. Here, somehow the whole was greater than the sum of parts, and it was assumed that addition of a country into Euro was net net a value-accretion exercise. This let the new country reduce its own risk (and cost of borrowing), and had no impact on the existing members. Its high time market call this bluff, I hope to see this bubble burst soon.

Markets globally traded a little weaker this week, and some of the Asian indices are below their 200 DMA. Usually, this is a strong bear-ish indicator, and I’m assuming that unless they prove its a false breakout (by closing above the level in the next week), markets are in for a ‘W’. I have been quite bullish for the past 5-6 months, but some how think that now we have reached the top of where ‘freedom to print’ can take us. Quite a few IPOs have bombed in US (as well as cancelled), and very few have made money in India as well. Most of the companies are now scared to market the issue, and NTPC might turn out to be the final nail in the coffin (unless Reliance Infratel is coming soon, which I haven’t heard). Another reason for the ‘top-has-been-made’ view is the fact that we are exiting the stimulus period, and most of the recovery was seen in those sectors only. China finds itself in a mess, and so does Europe. Germany is doing exactly what AIG did for Freddie and Fannie – writing blank cheques against tonnes of crap, and hoping no one notices it. ‘United we stand, divided we fall’ is quite true, but people are forgetting ‘one rotten apple spoils the whole basket’.

On Nifty, expect the market to re-test 4650 levels, and it might be broken by the budget. There is huge selling pressure from the FIIs, and once the tax-backed buying ends, the domestic institutions would also stop supporting the markets. By then, unless the FII trend reverses, we are in for the big ride.

Food for Thought: The big news out of India is that Hang Seng Index ETF is being launched from monday, and it would be traded after a couple of weeks of NFO period. I hope this provides some push towards more investor interest towards ETFs in general. Hang Seng might not be the most important market from an Indian investor’s perspective, but it is one of the very few non-restricted market which trades during our market hours. Once this one picks up, I guess S&P or FTSE might be next.

Technical Analysis 102: Nikhil’s Session

2010-02-07T08:33:00.001-08:00

Earlier Posts on Technical Analysis:

Technical Analysis 101

There are broadly two types of trading opportunities:

Event-based Trading
- View on rates
- View on FX
- FII Flows
Short Term Trading
- Chart Patterns
- Fundamentals – Industrial Production, Inflation, GDP, RBI announcements
- Derivatives Markets Information – PCR, SF Basis, SF OI, Nifty OI, Nifty Basis, Volatility, Options OI, Strike Distribution, Skew
- Institutional Activity – FII, DII
- Regional Markets, Global Markets
- Commodities
- Currencies

On Chart patterns, some specific averages are followed by a vast majority of technical analysts:

10 Min MA
10 HMA
10 DMA
10 WMA
30 MA
50 MA
200 MA
500 MA

Some specific points to keep in mind:

If the market opens gap-up, and immediately gets weak (selling starts), the day’s high may be made in the opening few minutes. In addition, markets usually close at day’s low.
If after opening gap-up, markets continue to trend up, then it might keep on going up over the day.
Gaps get filled 80-90% of the times, and hence there is a decent chance of market coming back to the gap levels.
If the stock futures basis is strong, it implies more speculators in the market. Any negative news would lead to large moves in the market.
If Index futures trading at a premium, then hedging activity with Nifty futures is very low. Again, any negative news could lead to large moves in the market.
If the stock futures OI increasing and premium is rising, then retail speculative interest is building up.
If one can’t roll the positions, the same is unwound in the cash market in the last 30 minutes on the expiry day. Stocks which have been trading at a discount (and hence have short stock, long SSF positions) would rise in the last 30 minutes.

Technical Analysis 101

2010-02-07T03:42:00.001-08:00

I have started reading a bit about Technical Analysis once again, and here I would note down all the important points so that I do not have to get back at the bulky books again and again for future reference.

Introduction

Technical Analysis is the study of patterns – price, volume or any other variable. And it is based on a few fundamental principals:

Everything is discounted and reflected in the market prices: All the knowledge about the specifics of the company and sector has been captured by the prices, and any movement is purely based on supply and demand of its stocks. Here, it implicitly differentiates between the underlying company (real world) and its stock. The stock price moves purely as a function of its demand and supply. In other words, Price is King.
Prices move in trends and trends persist: It means here that there is a trend in motion due to interplay between demand and supply. And once the trend is set, it continues for some time unless there is a clear reversal. It assumes here that not all people react at the same time, and hence once there is buying in a stock, it would go on for some time. As they say, ‘Trend is your Friend’.
Market Action is Repetitive: Certain patterns appear time and again on the charts, and it means that people behave in the same way as they have in the past. People react similarly in similar situations, and this can lead to identify major tops and bottoms.

Basics of Charting

The most important indicators are related to price, volume and open interest. While tracking prices, one should keep in mind that there are usually 4 prices which are important – Open, Close, High and Low (for each period). In terms of volume and open interest, they are usually read in conjunction with the price action, and independently do not signify anything.

Important Chart Patterns

Reversal Patterns
- Head and Shoulders Pattern
- Ascending and Descending Triangles
- Rectangles
- Double and Triple Tops/Bottoms
- Rising and Falling Wedges
Consolidation Patterns
- Flags
- Pennants (Triangles)
- Symmetric Triangles
- Head and Shoulders Continuation Patterns
Gaps
- Breakaway Gap
- Runaway Gap
- Exhaustion Gap
- Island Reversal

Later Posts on Technical Analysis:

Technical Analysis 102: Nikhil’s Session

20100207: The PIIGS are back!

2010-02-06T22:30:00.001-08:00

Everyone thought Swine Flu is history, or atleast not as threatening as it appeared to be initially. However, they are back, and this time in the form of PIIGS – Portugal, Italy, Ireland, Greece, Spain. They had the world markets go bollocks for the whole of last week, and the danger looms large even now.

Well, to me, it was no new news. Everyone knows that more than half of the Europe, and almost all of US riches are a giant Ponzi scheme, and the end payers are the unsuspecting tax-payers in China and India. None of those economies actually produce enough to feed themselves (this includes all the goods, not just food), and end up spending more than what they earn. Its not just the government which is at fault, but more so the common man on the street. The toughest task Obama has is to tell the Americans that their lifestyle needs to change, and they need to work harder. Till now, he has failed miserably there – and instead tried passing up more perks in the form of Health Bill.

Back to Europe, here the task is much more tougher as they do not run the USD printing press. These nations would ‘NEED’ to get back their deficits back down to respectable levels, and how they would do it (apart from some accounting jugglery) is not clear. Geo-political tensions would certainly rise in 2010, and we may have one of the hottest years in recent times (another fact that 2009 indeed was the hottest year in India even weather-wise). Google has been boo-ed out of China, and Toyota and Honda might face similar back-lash from the public (with government support) in US. China controls the triggers to the world relations now – in form of its huge UST reserves. Sooner or later they would start converting them into other hard assets (commodities), equity stakes (in foreign companies) or some other currency.

I do not think 2010 would be a very calm year in any of the markets, and there would be storms. We wouldn’t see smooth up-moves in the markets like 2009, and there could be periods of high volatility. There is high unemployment in the world, coupled with high inflation and free money. Sometime down the line, something would give away – this state can’t continue for long. Its a waiting game from here on, and I would rather be on the right side of the gamma.

In India, markets after trading around 5200 for more than 3 months finally broke on the downside. The RBI raised CRR by 75 bps, and signaled its intension to drive down inflation (raise rates). At least, they would not be increasing the stimulus for sure – so its only downhill from here. Same is the case in China, and it too is on a tightening path. Think this would bring the earnings down – from their record numbers last quarter. The worst affected may be Auto sector – this sector has seen phenomenon rise in volumes, and almost all the stocks are trading at their life-time highs. And whatever Livermore has to say about it, its very difficult mentally to buy the stocks at their lifetime highs – more so now as these are caused by fund flows and teaser rates. Real Estate seems to be the paradox to me here – the property rates and volume are also close their highs, whereas the stocks have been beaten down out of their lives. Either the rates would come down (and the volumes being reported are incorrect), or the stocks would move up. Banking seems to have corrected substantially after the RBI meet, and I would be over-weight on the same – lending is happening at a great pace, and the NPAs (which are a worry) would hit us with a lag. In the coming quarter, the results would show increased lending activities only (albeit at lower margins). One interesting sector I have added recently is cements, and would be posting on it next time – seems to be a relatively simple sector, with classic Economic and demand-supply factors at play.

I’m not quite clear now on the direction of the markets, and think there is a decent chance of either way movement. This is as good as saying something is either right or wrong, but that is the way I feel now. The only trade I can think of is buying OTM options (or rather strangles), but then, very rarely people make money that way. So, would give the markets a pass for this week, and wait for more clarity from here. The next action point locally is the budget – and as usual it would be a pro-people budget. STT might be the wild-card, and if abolished/reduced, could lead to another pop-up.

Food for Thought: Jesse Livermore is one of the most respected trader ever, and he has set down a few rules for trading. His fictional life story is a bible for all those who want to understand trading in a very informal way. Some of his most quoted sayings are as follows:

"There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."

Trading Rules:

Buy rising stocks and sell falling stocks.
Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it's rising you should be long, if it's falling you should be short.
Co-ordinate your trading activity with pivot points.
Only enter a trade after the action of the market confirms your opinion and then enter promptly.
Continue with trades that show you a profit, end trades that show a loss.
End trades when it is clear that the trend you are profiting from is over.
In any sector, trade the leading stock - the one showing the strongest trend.
Never average losses by, for example, buying more of a stock that has fallen.
Never meet a margin call - get out of the trade.
Go long when stocks reach a new high. Sell short when they reach a new low.
Don't become an involuntary investor by holding onto stocks whose price has fallen.
A stock is never too high to buy and never too low to short.
Markets are never wrong - opinions often are.
The highest profits are made in trades that show a profit right from the start.
No trading rules will deliver a profit 100 percent of the time.

Trading Positions: February 6

2010-02-05T22:22:00.001-08:00

Finally, made some money on the Nifty Options positions I was talking about in an earlier post. Nifty had been trading around 5200 for quite some time, and had tested both 5300 and 4900 umpteen number of times without success. However, that was in December, and hence the volumes were low. So, had put on positions with the belief that market would break it on either side in January. Finally, the global markets gave in, and everything fell. Not off the cliff as yet, but it was a decent correction in the markets.

This month, had shorted the markets (in time), and then covered after the EUR meltdown. To some extent, am still quite bearish on the whole recovery process, but didn’t want to take any chance (with the freedom to print). So, in all, a decent start to the new year.

However, on the stocks front, have been bleeding money day in and out – all the stocks have fallen to pretty low levels (even though the markets are only 10% off from their highs). Barring the Auto sector and the IT, most of the sectors have done pretty badly.

Real Estate surprisingly is very weak – on one side there is a huge spike in the property prices, and on the other side, the stocks continue to get hammered. The same is the case with the Telecom sector, and every TDH on the street has a ‘sell’ rating on it. Would stick with the positions, and might add some more Real Estate names going forward. Also, looking to add a couple of metal names and Infrastructure names as well.

Market View, January 15: Do No Evil

2010-01-15T21:31:00.001-08:00

Do No Evil – it says. And ironically, this was the logo on its main page a day after it decided to pull out of China (the logo is about the celebration Chinese culture).

The company which dreams of world domination, it surely would have been a very tough decision to pull out of the world’s most populated country. A country for which it even agreed to censor its search results (which had surprised many a people earlier as Google supposedly is a champion of online freedom), finally raised its hands, and said enough is enough. And its all ready to pack its bag, and move back to California. It even disclosed that there were more than 20 companies which were the target of security threats.

So how does this affect the markets? I think this takes us closer to a showdown between the US and China. For China to be considered a superpower, it needs to have atleast a few companies in the 10-20 biggest global companies. And currently barring a PetroChina, and one ICBC (both of which caters to domestic customers), they do not have anything to speak of. So, it was always likely that at some point of time, they would start pushing their own companies over the McDonalds of the world. This is just the beginning, and I expect more such cases to come to limelight in the coming days. The Google stock did take a beating after the news, and has fallen by over 4% this week (compared with 15% spike in Baidu, the biggest search engine in China).

Elsewhere in the world, there are fresh concerns over the ratings of a few EURO-zone economies, and sooner or later Greece is going to be downgraded to Junk. How that would impact the Euro is anyone’s guess. More than that, even Japan might be over-stretched, and all this is pointing to a Gold-rush once again. Gold would be the top-pick for me in 2010.

Indian markets continue to cling to 5200, neither wanting to go up, nor wanting to fall back. However, there are decent dispersion among the various sectors, with real estate leading the pack. In addition, the media stocks are also on fire lately, along with the sugar names. Banks are the wild-card here, and with the RBI policy meet due on the 29th, don’t think they are going to participate in any uptick from here in this expiry. Even though the results this quarter have been good, they haven’t been extraordinary, and with the tightening sword hanging, selling upside calls may not be a bad idea for the next couple of weeks.

Volatility continue to drift down, and seems like people are yet to come out the holiday mood. Nifty has spent full trading sessions within 20-point range, and seems like nothing is going to move it from here. I think the next couple of weeks could be crucial, with the results in US as well as local corporate due, and the RBI policy announcements. Also, the upcoming budget could add further spice to the sector diversions. I think infrastructure could see a big moral boost in the budget speech (as has been the case for innumerable years now) with finance minister paying lip-service to the need of increasing the infrastructure spends to xyz% of the GDP. But that still more than a month away, so would re-visit this another time.

Food for thought: I have been a fan of the Google logos over the year, and it really seems like someone out there really loves her job (who is deciding on these). Simple, and yet, perhaps the best way to connect to the global audience – Without Doing Any Evil.

Trading Positions – January 15

2010-01-15T20:57:00.001-08:00

The year didn’t start on a very auspicious note, and have lost some money on the Nifty options. Had expected the markets to break the 5000-5400 zone, but it continued to trade around 5200 for more than 2 weeks. I am still hopeful of a large movement on either side before the expiry, but would wait and see.

On the stocks front, telecom continue to underperform on the sector level, though RCOM did spike after SEBI cleared the IPO of Reliance Infratel. I think the stock should spike from here, and may be soon trading at 225 levels.

NHPC seems to be coming back to its IPO price, and has bounced a couple of times from there. Given the uptrend, would expect it to break the same in near future.

Real Estate has been doing good, and both DLF and Unitech have outperformed the market. Would expect a large movement in these stocks in the coming days.

I think would be unwinding some of the positions by end of February, and concentrate on the large cap names.

Market View, January 5: Give me some Sunshine

2010-01-05T10:55:00.001-08:00

“Give me some sunshine

Give me some rain

Give me another chance

I want to grow up once again”

How fast things change – exactly a year ago it was Armageddon all around the world. And markets worldwide pleaded the central banks for some respite from the relentless selling and lack of confidence. The central banks reacted the only way they knew – banning short selling (so that no one could sell), and printing money (so that atleast they had the money to buy the shares/mortgages/xyz).

Last week I was wondering about the fund flows in the emerging markets, and the final data for 2009 does confirm what I had suspected. That 2009 was indeed the year with perhaps the highest amount of capital flows into the Emerging markets. In the Indian Equity markets alone, FIIs pumped USD 18 Billion – slightly higher than the previous best of USD 17 Billion in 2007. This takes back the overall FII holdings in the overall market back to the highs of 19-20%, and hence there is very little room to grow further. Any incremental flows (which is very probable) would have to come from the promoters’ holding (via the IPO and FPO route). And this is indeed going to be the story of 2010 (if the run continues) – more than USD 10 billion worth of new issues could hit the markets. Another interesting recent change has been that the past few IPOs have got listed at a premium – a good change from mid-2009 when all the IPOs and QIPs were opening at a steep discount. Starting with Oil India, most of the recent IPOs have opened at good premium to the offer price – COX and Kings, JSW Energy and Godrej Properties.

On the markets, I continue to hold the bullish view, and think that unless budget is a real dampener, we are going all the way up (all the way bole to 6000). Yesterday, I was reading a very nice report which stated that past 2-3 years have been dominated by macro themes, and stock performance really didn’t matter. However, 2010 might be different, and we can already see vast difference in various sectors’ performance. Whereas the Autos and IT is trading at their lifetime highs, Real Estate and Telecom are closer to their lifetime lows. So, stock picking may be much more important this year than has been in the past couple of years.

INR seems to have turned around the corner, and am still expecting it to go all the way up to 42-44 zone. The flows have improved, and even though the trade balance continue to be USD -10 billion/month, the trump card could be the KG Basin and Cairn Energy’s fields. Whenever their production kicks in (some time in 2011), the Oil import bill would go down, and we may see strength in INR. So, unless the FII flows completely reverses, we may see continuously appreciating INR over the course of the year.

Food for thought: Everyone in the world believes that China and India would drive up the world growth in the coming days. And yet, Chinese markets have been quite subdued in recent times – in fact they have taken a beating couple of times on fears of bubble. So, this is slightly confusing – I would expect China to be the best performing market rather than Brazil or whosoever it was in 2009. Add to it the fact that the country would start trading Index Futures (till now there were no index futures!!!) in March 2010. Watch out for the Chinese market performance this year.

P.S.- Index Futures were introduced in India in 2000-01, and the markets almost quadrupled in the following 5-6 years. And much like India back then, China still is a locally driven market.

P.S.2: Really nice song from the movie ‘Ishqiya’: Dil to baccha hai re

Trading Positions – December 28

2009-12-28T09:12:00.001-08:00

There are 3 more trading sessions left in 2009, and I’m completely out of cash in my account. So, don’t think wouldn’t be putting a single trade this week, except may be to unwind some positions if the stocks run up high.

Current portfolio stand exactly as what it was last time, only now its in a tabular format. Looking to unwind the NHPC position soon.

Stock	Cost Price	Last Price	Target Price
NHPC	36.00	34.20	40.00
RELCOM	226.40	174.50	250.00
DLFLIM	383.19	370.30	500.00
GOLDEX	1,734.12	1,657.56	1,800.00
BENMUT	858.15	893.00	1,000.00
BALCHI	152.67	129.80	160.00
BHATE	366.05	320.90	500.00
RELCOM	185.23	174.50	250.00

Structured Products

2009-12-27T09:20:00.001-08:00

The various aspects of the structured products business:

A. Pricing Parameters

Volatility: Updating the volatility surfaces daily for Nifty, and weekly for single stocks. Can use Implied for short term, and historical for long term
Borrow Cost: To be tracked on a weekly basis, and not to be passed on completely. Most of the benefit here remains with the trading book as it is difficult to hedge frequently and perfectly. Can use different borrow costs to price and unwind (depending on the systems).
Correlation: Usually we take conservative approach to correlation, and can apply 0.30 lambda adjusted values.

B. Structure Do-ability

Underlying Liquidity
Underlying Volatility
Known news/strong rumors
Barrier and Gap Risk
Existing Positions and Risk
Futures Limit Availability

C. Risk Management

Initial Trade Day Delta Hedging
Gamma Trading
Hedging Volatility and Borrow Cost
Barrier Tracker
PV01 Risk Management
Careful with Averaging-In and Averaging-Out

D. Operations

Margin Account: Keep track of margin account balance requirement and utilization (atleast on a weekly basis).
Fixed Deposits: Ensure that 80-85% money is always in form of fixed deposits
Summary Sheet: Maintaining a summary sheet for all completed deals, and EV booked

E. General Gyaan

Vega Buckets: Vega for different expiries can’t be added together, as the volatility change would be different across tenor. Generally, the near term volatility tend to more a lot more compared with the longer tenor one – and hence the weight assigned to short tenor Vega is higher than that assigned to long tenor Vega.
Digital Options: Digital Options have a normally distributed Delta profile, and delta is symmetrical across the barrier. However, the Gamma profile is quite different, and they are long gamma below the barrier, and short gamma above it.
Price of Call (K-X) + Price of Call (K+X) >= 2 * Price of Call (K)

Trading Rule for 2010

2009-12-25T23:10:00.001-08:00

I think I need a set of Trading Rules which I should abide by at all times during the next year. I want to avoid big losses, and at the same time, want to make some good money as well.

Objective: To be able to consistently make money in the markets – the initial target is to be able to make INR 10,000 every month. Most of the gains should come from trading Nifty, and only a small part should come from stock positions.

Investment Instruments: Nifty futures, Nifty options, Single Stocks, ETFs, Single Stock futures, and Single Stock options

Single Stock Rules

1. Target gains for each of the position is 20% – whenever 20% is made, take atleast half the money out.

2. Re-think the position after the first 10% loss, and then after the next 20% loss. Double-up if the view remains the same, however, try to book some profit as soon as the stock comes back to the initial levels.

3. Avoid IPOs

4. Avoid futures on single stock, and use options minimally. Can use Call overwriting against the stock position, or can use Put overwriting if the stock is close to target acquisition price.

5. Get out of all small stocks, and invest only in large caps, and mid caps.

6. Never buy options on single stocks – they are very costly.

Nifty Rules

1. Never sell options on Nifty. Period.

2. Preferred choice is buying options – also given the low volatility, should be the way to trade the markets in 2010.

3. Never exceed 5 lots in open positions at any point of time.

Need to prepare an excel sheet with all the position details, and for easy tracking of portfolio P&L. Should be ready with it by the end of the year.

Market View: December 23

2009-12-23T06:36:00.000-08:00

Markets have been trading in a range now for more than 2 months, and everytime it tests the barrier at the end of its channel, it reverses back violently. Seems like it would stay within this range for eternity - but then, it appears this way most of times before the final break-out happens. The key question now is not whether the market would break-out, but when.

A lot of participants have lost hope of break-out this calender year, and believe that the next few days would be calm. The implied and realized volatility are both at their 1-year lows. Implieds went below 20 perhaps for the first time this year, and even the US VIX has taken a dip into the sub-20 ocean. Just for the point of comparison, the 20 year average for VIX has been 20, with high of 89, and low of 9. So, we are currently standing at the historical average level of volatility. I think this is a very good time to buy long term volatility (1-year) - just for the comparison, this is how the 1-year realized vols on Nifty has moved:

2001: 26%
2002: 17%
2003: 20%
2004: 29%
2005: 18%
2006: 27%
2007: 26%
2008: 45%
2009: 35%

I'm assuming the volatility next year should be somewhere around 30 (on the conservative side). Remember, most of these years have been bull market period with low volatility, so the current sub-30 volatility is indeed a very good buy.

My view on the markets is again back to bullish - too much of liquidity still waiting on the sidelines, and even though fundamentally valuations have got over-stretched and everything, I think we have steam left to go all the way upto 6000 on Nifty. Banks have become very aggressive on increasing their balance sheet, and this is after a pause of around 2 years. So, am assuming with increased lending, we would see economy coming back to higher growth levels, and corporates having access to easy liquidity in form of debt. All the corporates who have been running a tight leveraged scenario, and have taken a beating, might be the best performers over first half of next year. I think likes of Suzlon, Unitech, DLF, Idea, ICICI and Tata Group would be out-performers.

On the sectroal front, I think Autos have run out of steam as well as good news. Already sitting at the record sales numbers for the past 3 months, I guess its time for some correction. The vehicle sales would continue to surprise over the next 3-4 months, but most of that has already been factored into the current prices. I think market leaders such as Hero Honda and Maruti may be weak from here going forward, whereas Tata Motors may outperform relatively.

Banks would be the big sector next quarter, and whether they are able to take the shock from RBI measures would determine the market direction to a large extent. If the sector cracks (in case of hawkish measures), then we may see weakness in the whole market. However, my feel is that RBI won't be too aggressive in tightening, and we may see record loan growth over the next few quarters. I would go long the banks at the current levels, and review the position after the RBI policy announcements.

On Real Estate, I'm largely bullish, and think there would be huge upside in the sector over the next year. There is a huge pent-up demand, and I think the sector would return back to its glory days of 2006 and 2007. There would a sharp rise in housing activities, as well as trasnsactions happening.

And one last thing, am willing to bet on a break-out above 5200 if the bets are attractive enough. There are 3 possible scenarios for the next few days - (a) Markets trading inside the channel, (b) Break on the upside, and (c) Break on the downside. Can bet for a dinner treat (50% probability) on 5200 getting touched by 31st :)

Trading Positions - X

2009-12-16T07:43:00.000-08:00

Most of the positions continue to lose money over another month, and somehow I think I seem to be picking the wrong stocks at the wrong time. There can be no other justification for consistently losing money in the markets. In addition to the stock portfolio, tried to time the markets on the short as well the long side, and suffered badly on both of them. So, another month of losing money, and I’m coming to the end of 2009. Mostly, will round the year with no more short term positions, and would only take long term bets.

On the stock portfolio, the positions stand as follows:

RCOM: Bought the stocks at 255, and current price is 175. Might buy some more at this price, and add onto the positions.
Bharti: Bought the stock at 366, and the current price is 325. The stock has recovered from its low of 280, and if it goes back below 300 can add some more to the portfolio.
DLF: Entry price is 385, and currently the stock is trading at 380 – so flattish on this. Would add more at prices below 325.
NHPC: Bought at the IPO price of 36, and stock is now trading at 32. Would look the exit the positions at a price of 40 (and no addition).
Balrampur Chini: Bought at the price of 153, with current price of 135. Again, would look to exit at 160 (and no more addition to the portfolio).
Gold: Bought Gold at 1780 (and current price of 1695) – would add more at 1600 levels.
Bank Nifty: Bought at 860, CMP is 870 – can sell the positions at 1000, will add more below 800.

So, as of now, just looking to add Reliance Communication positions, and looking to cut down on NHPC and Balrampur Chini.

Mutual Funds Update

2009-12-14T03:51:00.001-08:00

Mutual Funds Update

Mutual funds were net sellers in equity markets in November 2009, and reduced their cash balance from 9% to 7%. This was the 3rd straight month when mutual funds had been sellers in the equity markets. The current cash balance of 7% is lowest in %age terms since December 2007!

So, going forward, any further redemptions from Mutual Funds would have to necessarily result into selling in the markets. Seems like 5200 might hold as the resistance for some more time then.

Credit Crisis and Banking Bonuses

2009-12-10T08:13:00.001-08:00

If last year it were the CEOs of large banks who were on the firing line, this time around its the banking community which is facing the backlash. And the worst part is, its the politicians who are meting out the punishment.

Yesterday, UK passed a special one time tax on 2009 year-end bonuses. This is in addition to the income tax payable by the employee. Somehow, the blame for the whole crisis has passed on to the banks, and more specifically to the bank employees. Which is as good as blaming Vijay Malaya for your the drinking habits of society, or the Casino owners for all the money lost by gamblers. Everyone is supporting the cause of middle-class which has been short-changed by the bankers. However, what everyone is conveniently ignoring is the underlying greed of effectively the whole world. Banks are responsible only to the extent of ‘selling dreams’ – they enabled people to buy houses and maintain lifestyles which they otherwise couldn’t afford. How on earth does one justify every T, D & H in the world buying 1 MM worth of houses?

Banks just earned their cut (which would be 1-2% in the whole transaction). What about all those property developers who sold their apartments at 200-500% premium to their pre-crisis levels. It is them who made the biggest profit out of this whole mess – and yet, no one is pointing any fingers at them. Banks have been caught napping, just like the rest of the world. And to a large extent, they are in the same boat as everyone – fooled by the crisis, and lost all their equity.

I’m not a supporter of complex financial instruments per se – but somehow I think its not the complexity that took the world down. It was simple plain vanilla naked Greed which caused all this mess.

Market View: December 9

2009-12-08T22:38:00.000-08:00

This was to be the year of surprises, and hence, it was apt that the last couple of months were also on a predictable trend – defying all the expectations and market views. There were people who were clamoring for a year-end rally (including myself), and then there were the Bears who thought sanity was just around the corner. However, it was not to be – nothing happened in the last few weeks.

Apart from the shocks of Dubai (where everyone over-reacted, and then quickly forgot all about it), and downgrade of Greece (which almost no one took notice of), nothing has really happened. All the central banks have continued to stand by their expansionary policies, giving their own sets of reasons. Gold crossed over its previous best, only to come down again (though might go up on another round of central bank purchases), and EUR also is getting closer to its highs. There is a high chance that this would be a quite year end – and a small chance of a small correction.

I’m not bullish on the markets anymore, and think the rate hikes would start earlier than most people anticipate. Inflation is going through the roof, and if the government has to even perform lip-service to the poor strata of the society, then they would need to at least try to bring them down. And whatever they may say, inflation is not totally a supply-side problem in India. Give them loans at 7-8% (which is the trend now), and you know that people would buy almost anything. Markets seem to be running out of steam (though this may be the December effect also with lot of money managers on vacation). Let’s see how this pans out – I would be shorting the market close to 5100 levels.

Telecom has been doing well in recent couple of days (finally, after abysmal performance in the last few weeks), trimming my overall portfolio losses. Bharti has done well recently, and hopefully it would recover further from its low. I think one thing everyone is missing is that going forward Telecom companies won’t just be about low-cost telecommunications. With India as the potential IT hub of the world, there would be intense demand for high value communication services – I don’t know what these would be in reality, but am quite convinced that race to the bottom of the pyramid is just a passé phase. Very soon, people will realize there is much more cream left at the top even now.

Gold Cross $1200: Way to Go

2009-12-01T22:57:00.000-08:00

An interesting milestone was reached today in the markets, and Gold finally broke through the USD 1200 barrier as well. With the Central Banks of China and India standing in queue to buy more and more Gold from IMF, I think this would go a long way up from these levels as well.

I would think even a level of $1500 is possible, and would buy gold at these levels also. Its common knowledge now that most of the reserve rich nations want to diversify out of USD, and in absence of any credible alternative, will stock up Gold for the time being. I think Gold would the thing for the next few years, and may see newer peaks in coming days.

Brain Drain: A Tale of Two Centuries

2009-11-29T12:59:00.001-08:00

Whenever we hear the term ‘Brain Drain’, we usually think in terms of migration of labor to developed economies. We associate it in terms of geographical movement of ‘brain’. However, equally important is the phenomenon of Brain Drain between industries, though it is much less talked about.

Automobile sector to IT sector

I remember receiving a chain mail long ago which compared the rate of innovation between the automobile industry and the IT industry. It went on to say that if the pace of innovation in automobile was as good as IT, then the current generation cars would be much better than what they are.

If automobile technology had improved at the same rate since 1960, a new car would cost less than an entry fee to the cinema hall, and we could drive through the length of our own country on less than a litre of petrol or diesel.

There was a huge shift in skilled labor from the automobile industry to the IT industry in the 1960s– and this led to the huge growth in technology over the past few decades. No other sector was able to match the rate of innovation, and companies came out with real surprises every now and then. However, now the IT industry finds itself in the shoes of automobile industry, and it too has been relegated to the ‘second choice’ employer status. Currently leading the pack are Goldman and the likes. And if we see the innovation across different sectors, we realize the impact of these changes.

IT sector to Finance sector

When I first learnt about the securitization business, I was dumbstruck. In the traditional model of banking, banks acted as the intermediaries between people with surplus cash, and people who needed cash. They used to take deposits from the public, and use the same to make loans. The sole purpose for the existence of banks was the match the source and need of funds – and they earned a margin for this. Also, they used to bear the counter-party risk in case of default, and the world largely was unaffected.

In the world of securitization, the banks sold-off these loans to institutions as well as public – in various forms (but lets not get into that). So, essentially, banks were accepting deposits as earlier, but not giving out loans in the same way. They used to give loans, but later sell them off to get the money which they further lent (and it went on and on). So, in the current scenario, banks weren’t matching those who had cash with those in need of it, but rather they redistributed everything. So, it was like a giant network where everything was connected to everything else. And banks were just acting as agents providing operational support to the whole system. In this system, everyone depended upon others, and if one link failed, the whole system would collapse. This was the ultimate dream for any bank – a vast ocean of people who lent money to each other, more directly than ever before – and these guys just controlled this massive spider web. In terms of IT sector, this is very close to the concept of Grid Computing. And whereas the concept is still in early stages in the IT industry, it has been done to death in the financial circles. And if the brain drain continues, very soon IT sector would also be left to the same fate as that of Automobile sector – and die a slow death.

Over the last few years, the financial industry has been the top choice for most of the fresh graduates and post-graduates. Hence, its no wonder that they have been miles ahead of other sectors in terms of innovation.

Market View: November 27, 2009

2009-11-29T01:44:00.001-08:00

Something Is Not Right!

Markets were spooked by the Dubai storm, and bears finally had their long awaited wish. Everything was falling, and people rushed to buy protection. Nifty futures were back to trading in discount, and it seemed like bear market was back.

Nifty opened close to 5100 on the expiry day (26th day), and traded in a range for most part of the day. However, towards the end, it succumbed to the global pressures, and went into sharp fall. Thankfully US has a Thanksgiving and so it didn't add anything to the fall. And today as well the markets continued to fall amidst higher fears on the Dubai default (which seems unlikely, and a clear case of over-reaction currently. Unless...). Nifty touched 4820 levels, but recovered soon after HK closed, and went on to regain most of the fall. It finally closed at 4940 levels - quite a rally from its intra-day lows.

As I write this, Europe has re-bounded, and is trading in green. However, I think even if Dubai is averted, there are others waiting to explode. Its a liquidity rally, and nothing more than that - and NOT A RECOVERY RALLY. We are still groping in the dark about the way forward. Spain is struggling, Ireland is close to default, and now Dubai joins the list.

I would be surprised if this party continues for another year. I would be happy to buy Nifty 5000P December 2010 at current levels. Something doesn't seem to be right in this rally - and I don't know what.

FRM Exam and Trading Book

2009-11-23T17:31:00.001-08:00

Have just taken the FRM examination this weekend, and it was really bad. This is really tough, compared with the CFA exam, and I had grossly under-estimated it :)

On my portfolio, have been losing money left right and center. Telecom is completely broken, and I think it would take another few months for it to recover. There has been panic selling in all the big names in the sector – Bharti, Reliance Communications and Idea. Seems like no one wants to be caught with these stocks in their portfolio, and there is huge re-distribution happening.

I’m still taking the contrarian view here, and think there is juice still left in the sector. Broadband services and DTH is just beginning to catch-up in the country, and where they might never get as big as the telecom, I think everyone is still underestimating the 3G potential. Lets see how this story unfolds – I am still very bullish on the sector.

Overall market wide, I have turned slightly bearish for the short term. Think we could have another round of correction here, and we may go till 4700 again. SSF activities have picked up, and this is ominous for the markets. The level of speculation is getting higher, and soon we may seen some big correction – it may be next few days, or next few weeks. Am buying a 5100 Put for December expiry (cost 150).

Year End Rally?

2009-11-06T20:00:00.001-08:00

Source: http://www.tradersnarrative.com/end-of-year-seasonality-after-10-gain-3203.html

Before presenting my latest seasonality study - which may be the most statistically significant - here is a short summary of the previous three studies that I have shared with you. Enjoy.

End of Year Positive Bias
Since 1950, the average annual return on the S&P 500 index has been 8.05%. Over half of that (4.25%) annual return has on average occurred in the three months, November to January.

(Abnormally) Positive Septembers
September is usually the weakest month of the year. But when September has a positive return, the last 3 months of the year have a strong positive bias (21-4) and an average gain of 4.84%. For full details, see: When September Flexes Its Muscle

Positive Septembers - Negative Octobers
If the a positive September is followed by a negative October, then the odds for the last two months of the year go to 10-1 with an average gain of 4.71%.

Seasonality When Jan-Oct Returns Are +10%
If the first ten months of the year provide a 10% or more return, then the final two months of the year are 21-3, with an average gain of 4.99% (see table to the left for details). Perhaps more interestingly, there was not a one percent loss in the the 24 observations.

If the end of the year rally doesn’t materialize with the tail wind of the above statistics at its back, it should be viewed as very bearish for the first quarter of 2010.

Market View: November 6

2009-11-06T19:43:00.001-08:00

Markets have been making a fool of bears for a long time now, and there was nothing new in its behavior over the past couple of weeks as well. Initially, it appeared that all the bulls have gone quiet taking a breather, and bears came out with their daggers. A week of fall in the markets, and we all thought ‘This is IT’ – a phrase which eventually got related to Michael Jackson more than the markets.

So, it wasn’t this time again, and the party continues. US has made it very clear that they aren’t going to raise the rates anytime sooner. Effectively, they would continue to write blank cheques, and the champagne would keep flowing.

With all the talks of rates hike marginalized, I go back to my bullish stance, and think that the round for correction is over. Now, we are back to listening to the Rally Monkey chants. Last year, there was no year end rally, but this time around, there may be one.

Food for Thought: Markets for the last couple of years (from when I have started observing) haven’t changed their trend in the months of November and December. In 2007, the party continued late into the night, and the music stopped early in January. Similarly, in 2008, the markets continued to fall down, and only recovered in March. So, in both the years, November and December just continued the overall annual trend of the market. And think it would be same this time around. If not a sharp rise, we shouldn’t end lower than the current levels.

Automobiles Sector Basics: 101

2009-11-06T19:42:00.001-08:00

Market Movers

This is not amongst the largest sector in the Index (~3% weight), and is affected by news flow.

1. Monthly numbers: Vehicle sales numbers are declared on 1st of every month
2. Interest Rates: Lower interest rates mean higher sales for the industry - as loans would be cheaper
3. Capacity Addition/Suspension: Affects the supply and competition in the industry
4. Economy: Related to economic growth as well, over the medium term

Reading the Statements

1. Auto-stocks are most sensitive to EBITDA margins (as volumes are known beforehand).
2. Primary costs are Raw Material expenses - 70-75% of net sales

Long Term Concerns/Factors

1. GDP Growth
2. Loan Growth - and interest rates
3. Tax Cuts - Income tax cuts would boost auto sales
4. Demographic - long term growth potential

Industry Structure

1. Two wheelers is highly consolidated industry with top 3 players (Hero Honda, Bajaj, and TVS) accounting for 80% market share.

2. Cars are also very much a consolidated markets, but there is a threat of increased competition going forward.

Banking Sector Basics

2009-11-06T19:39:00.001-08:00

Overall Picture

Banks have very high linkage to the overall macroeconomic environment, and have very standard practices across the globe (can be compared with global peers on different ratios). This being a very important sector, is very tightly controlled and highly regulated.

One key unique feature of the industry is that here equal emphasis is given to the balance sheet (along with Income statements).

Asset Liability Mix

The asset side of the balance sheet mainly consists of Loans and Advances (~60%) and Investments (~27%). Most of these investments are into G-Secs (meeting the SLR requirements), and very little investments in other assets.

On the liabilities front, bulk of it is from the customer deposits (~75%).

Competition

More than 75% of the loans are from Public sector banks, with SBI group alone having a 25% share. Private banks have only 25% of the market now, but are growing rapidly.

Market

India has amongst the lowest Loan/Deposit ratio in the world. And total loans are still ~50% of the GDP. Also, consumer loans are just 10% of the GDP, so there is a tremendous opportunity for growth.

A large chunk of household savings flow to Bank Deposits - more than 50%. Good opportunities in Wealth Management, and Insurance - private banks are well positioned to capitalize on these.

Historical growth rate has been high at 12-20%, and this seems sustainable for another decade. Penetration level has improved considerably, though still much below global standards. NPLs have continued to drift down.

Financial Services Opportunities

1. Brokerages
2. Wealth Management
3. Life Insurance

Key factors affecting Stocks

Loan Growth: Slowing down recently, from 30%+ levels in 2007 to ~17-18% now.
Earnings: Major contributors are Growth and Portfolio Gains (in falling rates scenario)
Interest Rates: Meaningful -ve correlation between stock prices and interest rates. However, key is the distinguish whether low rates are due to liquidity (positive for economy) or lack of loan demand (negative).
Asset Quality: This factor is quite passive, and is talked about only in cases of sharp asset deterioration

Stock Futures Basics

2009-11-06T19:35:00.001-08:00

Advantages of Stock Futures

Leverage
Lower Transaction Costs
Hedging/Shorting

Market Participants

Cash volumes are mainly generated by Long Only funds, DII and Retail participants. The volume in retail is fairly stable over time, compared with futures volume.

In Stock Futures, major participants are retail speculators and hedge funds – looking for high leverage.

Index Futures are mainly used for hedging purposes by institutional players – long only funds.

OI Information

Stock Futures OI largely are a function of speculative activities in the market. In periods of heavy bullishness (2007-end), there was huge OI build-up in the stock futures (and not much in Index Futures). However, that corrected after the crash, and came back to normal levels. Index Futures OI do not fluctuate too much as hedging requirements do not wildly fluctuate.

Important Indicators

Basis: Sign of pressure from longs or shorts
Open Interest: Amount of interest in the underlying
Price Change: Direction of the momentum in the underlying

Have to see these indicators together to make sense of the activities of the market participants – for example, when basis is strong, and OI is rising, a price rise indicates long side speculative activities.

Index Arbitrage

Nifty futures usually trade at a discount to the fair value (as it is used as a hedging instrument by the long only guys), and as a result, arbitrageurs put up positions in Long Nifty Futures and Short Stock (or SSF).

A large chunk of this position is sticky, in line with the fact that a large chunk of short Nifty (hedge) is also sticky. However, not all arbitrage players have access to the full 50 stocks at all times, and hence they usually have to short a few SSF also in the stock basket. Hence, some of the stock futures also trade at a discount due to this factor (mostly those whose inventory is not readily available). Most of the under-owned stocks trade at discounts (only Nifty stocks).

Futures Rolls

At expiry, investors have the following options:

Unwind
Expire
Rollover
Convert to Spot (buy/sell spot in VWAP)

Considerations during the expiry

Basis: If the futures have been trading in premium over the month, then there would pressure from the long side – rolls also might happen at a premium (the premium in near month would move to next month close to expiry)
Market Trend: A rising market would imply futures in premium – and hence rolls also might happen at a premium
OI with Price Action: A rising OI with price increase would also mean more and more pressure on the long side, and higher roll premiums.
Historical Rollover Ratio: The proportion of futures positions getting rolled every expiry also gives a good indication of the remaining interest in the counter.

Trading Positions - IX

2009-10-31T03:10:00.001-07:00

Another month of losses on the portfolio, and now I’m having second thoughts about the size of the bets I put. Would try for another 2 months, and if the result isn’t any better, might reduce the size and frequency of trades.

DLF turned out to be a nightmare, and lost quite some money on it. And all due to one small mistake.

When you sell options, cover as soon as the price move is good and there is profit on the table; market can turn against you any time.

Have added a few more stocks to the list, and now there is decent diversification – but again all the positions are at a loss.

Portfolio:

1. Long Reliance Communications stock: (Massive Red)

2. Long Bharti Stock: (Massive Red)

3. Long DLF Stock: (Red)

4. Long NHPC stock: (Red)

5. Long Balrampur Chini: (Red)

Positions Closed:

1. DLF Short Put: at a loss

2. RCOM Short Call: at a profit

Looking to hold on to these for some time, and add a few more over the next couple of months – from the Auto, Metals, and IT sectors.

Exit Point

2009-10-30T20:21:00.001-07:00

Why do all the trading literature concentrate so much on entering a trade? The successful exit strategy is as important as entry. And that would many a times make the difference between a profitable trade and an unprofitable one.

More on this later, when I finish some of the Technical Analysis books that I have got.

FRM Blues and Greens

2009-10-30T12:50:00.001-07:00

Get back to study, running late on the Modified schedule as well :(

When the party ends!

2009-10-28T13:44:00.001-07:00

Just when I thought that the Central Banks have nailed it through, and we might see a sustained bull run going forward, markets have taken a U-turn. And even though there are always pauses and breathers in the rally, somehow this looks slightly more than that.

I would hold back my views of year end rally, and not initiate any new positions. In fact, I might square-off some of the earlier ones as well. Markets appear quite heavy at these levels, and the results have been unexpectedly bad. I had expected the results to be decent or marginally be on the better side, but they have disappointed. May be, the analyst estimates had become too aggressive in recent times to catch up with the market.

Some of the sectors really look to be in trouble, and this is the first time since July that I could think of more than 3 reasons for markets to go down:

1. Real Estate: There has been some tightening over the sector, and as a result all the stocks have been very weak. Do not expect them to bounce back anytime soon, and the sector might remain under pressure. The prices have risen too high too fast (some of the properties quoting at more than the 2007-peak prices), and the actual scenario hasn’t improved that much (as reflected in weak housing data from US today).

2. Telecom: The companies, the regulators, and the Ministry, all are involved in some sort of battle. Fierce Competition, the impending 3G license issuance, the Spectrum allocation controversy– nothing seems to be happening right here. The subscribers growth numbers have moderated, and the pricing has become cut-throat. Do not expect any major upsides here as well, and the sector would remain a drag on the market.

3. Banking: The tightening on the NPA norms would affect the 20% credit growth expectation, and think we might see a ~15% number. All this should drag the sector down – especially after the recent run-up.

4. RIL-RNRL: The family feud isn’t helping the market much, and the lackluster show by RIL in recent days has been one of the primary reasons for the weak markets. If the issue isn’t resolved soon, the next up-leg could be difficult to come by.

The RBI has also stepped in with the SLR hike, and along with the rate hikes in Australia and Norway, seems the central banks would now reverse the gears. The economies have gone into over-heated mode, and unless the central bank wants to run the risk of inflation, we might see tightening pretty soon.

As I write this, the S&P futures have gone below 1040, and EUR has broken 1.47 levels. Oil and Gold have also come off marginally, and seems like the fall is broad-based (lending more credibility to the liquidity issues as only liquidity should make all the asset classes move in one direction). VIX is trading at 27.2%, and is much above its 10 DMA (at 20%).

Running the risk of being wrong for the third consecutive time this month, I think the party is over, and we are headed down. May be back to the 4600 levels. Damn, market timing should be renamed as Market-Mistiming.

FRM Book 1: Foundations of Risk Management

2009-10-25T08:53:00.001-07:00

Chapter 1: Need for Risk Management

1. There are two types of risk – Business Risk and Financial Risk
2. Business Risk – from daily operations, strategy, broad economy, macroeconomic
3. Deregulation and Globalization has led to increased risk to environment
4. Derivatives are always zero-sum game
5. Value at Risk (VaR) is maximum loss over a defined period at a stated confidence level
6. Major Financial Risks – (a) Market, (b) Liquidity, (c) Credit and (d) Operational

Chapter 2: Investors and Risk Management

1. Asset returns are normally distributed, and mean and SD are the only two variables needed
2. Portfolio return is weighted average returns from each component
3. Correlation is defined as (Covariance of A, B) / (SD of A x SD of B)
4. Portfolio Variance is less than weighted average variance of the components
5. Capital Market Line: All possible risk/return combinations along the line from risk free rate to efficient frontier.
6. Security Market Line: Expected return for a security plotted against beta
7. Reducing the diversifiable risk would not increase firm value
8. Financial transactions to reduce market risk won’t increase firm value – as the same option is available to investors as well. Only business transactions to reduce the Non-diversifiable risk would increase firm value (if the cost is low)

Chapter 3: Creating Value with Risk Management

This chapter talks about the risk management actions that would increase the firm value (those in the previous chapters were valid for perfect markets only):
1. Reduction in probability of Bankruptcy or Financial distress
2. Income smoothing – tax rates would be lower, and also time value of money works to advantage
3. Reducing the WACC – increasing the optimal D/E ratio as debt is cheaper
4. Reducing the diversifiable risk may attract large shareholders – increasing value
5. Improving management incentives
6. Reducing probability of debt overhang – and hence probability of taking up ‘lottery’ projects
7. Reducing information asymmetry – can reveal poor management clearly

Chapter 4: CAPM and Its Application

1. CAPM assumes a ‘Strong’ form of market efficiency
2. Beta of a stock is its (Covariance with the market) / (Variance of the market)
3. Risk premium is the price of the risk, and Beta is the quantity of the risk
4. Measures of performance (higher the better):
a. Treynor: (Risk Premium)/Beta
b. Sharpe: (Risk Premium)/S.D.
c. Jensen: Portfolio Return – Expected CAPM returns
5. If Treynor measure is high, but Sharpe is low, then the portfolio is not well diversified.
6. Information Ratio: (Mean of Alpha) / (S.D. of Alpha – also called tracking error)
7. Sortino Ratio: (Return – Lower limit) / MSD

Chapter 5: Expected Returns and APT

1. Statistical APT models: They find the factors using statistics
a. Principal Component Analysis
b. Maximum Likelihood Factor Analysis
c. Asymptotic Principal Components
2. Structural APT models: Assumes the natural relationship

a. Factor exposures are known, returns are forecasted
b. Factor returns are known, exposures are forecasted
c. Both are forecasted

3. Backcasting: Using historical data to forecast and develop model, very difficult to implement due to non-stationary nature

Chapter 6: Case Studies

1. Metallgesellschaft: Entered into long term contracts with its customers over heating Oil and Gasoline, and hedged them using short term contracts (rolling them every month). The losses on hedges were realized immediately, and there position was very big.
2. Sumitomo: Hamanaka (trader) entered into long copper futures, bought physical copper, and wrote put options – in an attempt to corner the copper market
3. LTCM: They traded relative value strategies – assuming spreads converge to means. However, over the short term, it may not hold.
4. Barings: Nick Leeson took speculative positions in Nikkei 225 to make for his losses, and an earthquake hit Kobe around the same time.

Chapter 7: Risk Management Failures

1. A large loss is not necessarily a risk management failure
2. Risk management failures are cause by
a. Ignoring a known risk
b. Failure to incorporate a risk into models
c. Not knowing the risk at all
3. Risk Metrics do not capture effect of firm’s actions on the market (liquidity issues due to large size), and behavior pattern such as Predatory trading

FRM Blues

2009-10-25T05:23:00.001-07:00

I have registered for the FRM exam to be held next month, but even after repeated reminders to myself, am not able to start with the studies. There is a vast syllabus to be covered, and there are 10 topics in total. Initially I thought it would be quite easy, but now with less than 4 weeks to examinations, I’m having second thoughts.

I would need much better planning, and much disciplined approach if I have to clear the examinations. So, let me prepare the schedule for the same. Currently, am done with 1 book, and am in the middle of the 2nd.

25th October: Complete Book 2

28th October: Complete Book 3

31th October: Complete Book 4

Let me keep this target for the time being, will revisit the timelines once am through with atleast 50% of the target.

Trading Positions - VIII

2009-10-24T00:41:00.001-07:00

As in the last month, the portfolio performance this month also hasn’t been really good. Realized the importance of diversification first hand, as all the Telecom stocks were hit badly.

Will look to add to Bharti position (to complete the 1 lot), and may cut NHPC position also. Next week is the expiry week, and hopefully all the options (which are in the money) would remain so.

Would look to add to Bharti, and may have decide about DLF. Since the stock rallied since the last expiry, couldn’t buy it at the target 400 levels.

My portfolio:

1. Long Reliance Communications Stock (Red)

2. Short Reliance Communication 320-strike Call (Green)

3. Short DLF 400-strike Puts (Green)

4. Long NHPC Stock (Red)

5. Long Bharti Stock (Red)

Reliance Communications has been a damper, and hopefully the stock would recover soon. The short call options should expiry worthless, and so does the short DLF put.

Market View: October 23

2009-10-23T23:16:00.001-07:00

Nifty Movements: Nifty lost some of its gains this week, and ended the week a shade below the mark of 5000. However, the market was quite strong, and despite the bad news from the RIL front, managed to close flat on today. Think the market would continue to hold over the short term, and may end the year at a high. Usually, markets do have a tendency of rallying close to the year ends, and if that happens, we may be in for another 10-15% up move from here.

Stocks: Telecom stocks have been very weak recently, and they continued to be under-performers. Real Estate also faced sell-off for a couple of days. However, the big under-performer has been RIL – marred in controversy and court battle, and then the Hardy pullout. IT companies surprisingly have held out well in spite of a stronger outlook on INR, though going forward we may see some weakness there. Another sector to watch out for could be the metals, with bad news expected from China.

Next Week Views: The main risk remains the Chinese markets, and if the news coming out of there about the overheated economy and inflation concerns indeed is true, then we may see weak markets. However, there is not much bad news coming out of West at the moment, and if the results continue to surprise, the markets may even accommodate modest bad news from China.

I think we are standing at some sort of an inflection point – there are people who believe markets would reach new highs, and there are people who believe we are in the middle of a ‘W’. And the rational from both the sides seems to make sense. May be, this is the way markets are designed to be – capturing all the present information, and standing well in balance. I haven’t seen a bull-run from a trading floor before, so am not sure how they appear. Were there equal number of skeptics way back in the bull markets of 2003-2007 as well?

Food for Thought: How do you think the consumption patterns would change in the next 10 years? What would be the next generation consume more, and what they would consume less? I think all the things traditional would be consumed less and less (in value terms adjusted for inflation). And people would consume more and more technology. Just like there has been a great shift in ‘Telecom’ consumption over the last decade, I think people would consume some technology a lot more than what they are consuming now. If I have to put a bet on different industries, this is how I would think:

IT wouldn’t remain an industry servicing large brick-mortar corporation. As more and more things start happening online, more and more IT services would be consumed by all organizations. And I would think there would be a drastic shift in the IT-related expenditure for all firms.
Telecom would continue its march, and might develop into the biggest industry. Most of the telecom companies would offer all sort of communication services – Television, Media, Broadband, and Telecommunications (they have already started). I think the opportunity here is huge, and we have just hit the tip of the ice-berg. The usage for the communications would increase greatly, and if somehow they manage to replace the credit cards as payment options, then it would be unprecedented. And I see nothing that a credit card offers which a mobile phone can’t do better.
Media/Entertainment: This is another industry which I would think would grow. Currently media is not being priced correctly, and most of time people make bundled payments (when paying for all the channels). With selective view-based pricing, and more and more cities coming under the multiplex chain, media revenues make take a quantum leap sometime in the next few years (with multiplexes opening just in the metros, the revenues from movies leapt from 10-20 Cr average to 50-60 Cr average).

Would be over-weight on these sectors on the long term portfolio – Infosys, TCS, Bharti, Reliance Communications, XXX (have to pick one from the media sector).

Rally Monkey: Still Playing At a Market Near You

2009-10-21T10:49:00.001-07:00

Nothing describes the current markets better than the Rally Monkey music. This one has to be played out loud in the office during the market hours (you will need to turn ON the sound on this page).

Disclaimer: The webpage actually has nothing to do with the markets, but all the investors indeed dance to similar tunes :)

The markets have been correcting for the past few sessions, and daggers are out on the sustainability of the rally. A growing number of people believe that the markets have run up too high, and are long overdue for a correction. Well, I’m not completely bearish even now, and think there are still a couple of legs to the rally. I might be wrong here, and might have to eat my words pretty soon (for October isn’t over yet), but I would still stick to the long view.

Oil is back at $80 levels, Gold is trading at record highs, EUR has gone back to 1.50 levels and Equities are almost at their early or mid-2007 valuations. But China is still 50% down from its peak. The country best placed to avert the crisis, inspite of all the steroid-led growth stories, hasn’t seen too much of a recovery. And even though it makes sense (as China’s growth is led by export to US), I don’t think US would remain with 10% unemployment numbers for a long time. And hence, there is a strong case of rise in Chinese stocks, adding another leg to the global rally.

The underlying rational for all my bullish thoughts is the assumption that US isn’t going to have a lost decade. Japan’s case was different – Yen wasn’t the world’s reserve currency. Here, US is the master of the world – and any holes in its economy would be plugged by Qatar or Singapore or anyone else. There is a strong queue waiting to bailout US, for its the safest asset in the world. And as US comes out of the crisis, the whole world would follow, sooner or later.

Food for thought: I got an answer to my long puzzling puzzle of why markets tend to go up more often that not. Money Supply growth is quite large compared with the World population growth, and hence, with each passing day, world is getting richer and richer. And there are only two avenues to use this money – consumption or investment. Inflation measures the rise in consumption demand, and rising markets measure the rise in investment demand. And since the marginal propensity to consume goes down as income increases, the rise in investment demand increases more than the inflation. And hence, the world markets are in perpetual bull runs.

Now I think its time for me to go to bed

Trading Positions - VII

2009-10-05T23:22:00.001-07:00

I generally avoid trading too frequently, but somehow the long leave, and lack of good movies in the cinema halls have made me trade too much. And as a result, have entered into wrong trades at the wrong time.

Just a day after I wrote about the low probability of a crash, markets have been moving lower – and one of the sectors have almost crashed (Telecom with all the stocks down ~10% on the back of per second billing rumors). I bought some Bharti stocks today, and immediately the position went into Red :(

The other positions are doing decent, though the DLF put is now very close to its strike price, and has been moving lower for two sessions now. Overall portfolio has now become decently complicated, and hopefully by the end of 2009, I would have 10 or more stocks there.

My portfolio:

1. Long Reliance Communications Stock (Green)

2. Short Reliance Communication 320-strike Call (Green)

3. Short DLF 400-strike Puts (Red)

4. Long NHPC Stock (Red)

5. Long Bharti Stock (Red)

As can see above, 3 out of 5 positions are now in Red, and this is not really a very good sign. Should be cutting NHPC and DLF Puts very soon.

Market View – October 5

2009-10-04T23:00:00.001-07:00

Oktoberfest has started in Germany, but the Oktobercrash is nowhere in sight. And with each passing day, I’m getting more and more pessimistic about the possibility of it (rather than sounding optimistic, I have tried to use a double negative here).

1. To start with, I don’t see too many companies posting very bad results. Most of the times before the crash happens, the results are really bad (like in 2008) – which though not the final trigger, but atleast contribute to the weak markets. This time around, with the lower expectations, results won’t be ‘exceptionally’ bad for most of the companies. Hence, one of the crucial requirements of a crash is missing.

2. Another factor which shoots down a possibility of a big crash is the fact that rarely have the markets crashed in two consecutive Octobers. Historically, we have had crashes separated by a decade or so (atleast in near history, with 1987 crash, followed by 1997 Asian crisis, and 2007 credit crisis). So, it might be too much to expect a crash in 2009. I would rather put my money on a 2017 crash here :).

3. Last year, there was a great uncertainty in the markets – job markets as well as asset markets. No one seemed to have any clue as to how many banks would go under, or who’s next, or whether one would be left with any jobs at the end of the year or not. There was panic everywhere, and people had put on hold all their investment plans – manifested in the falling property prices, no IPOs, decelerating loan growth, etc. Somehow, this time around, that fear is missing. Property prices have risen by 20-40% in Mumbai, people are no more ‘too’ concerned about their job prospects, and all the asset classes are booming. Somehow, the fear factor seems to be gone.

4. Relentless FII buying in India is in fact making me believe that we may be in for a big rally soon (even from these levels). FIIs have bought stocks worth USD 12-13 Billion this year, and this is inspite of the initial selling in the months of Jan and Feb. To put figure into perspective, in 2007, FII had bought stocks worth USD 17 billion, and in 2008, they sold worth USD 13 Billion. So, the buying this year is almost on a record scale, and won’t be surprised if the locals start jumping in anytime now. Post-diwali, I think there would be a queue of people trying to get into the markets, and that might take it another 10-20% from here.

So, I would stick with my year end estimate of 20,000 on the Sensex. This might sound ridiculous, but then, 2009 as a year has been exactly that.

Trading Positions – VI

2009-09-27T14:23:00.001-07:00

September turned out to be a bad month, and have paid for the fact that I had entered the positions against my market view. Its been more than a month now since I had a bullish bias on the markets, and yet had for some reason written calls against the Reliance Communications stock position. Even though my view has been more wrong than right, its really painful to make a loss this way.

I had written a 280 strike Call on Reliance Communications, and the stock ended at 305. So, net of cost, lost INR 15 for the month on the trade. The initial cost for the stock was INR 250, and the overall options P&L now stands at –5 (+10 for August, and –15 for September). Overall, the cost of my stock is now INR 255. In addition, have written a 320-strike Calls for October expiry – again against the market view, but just in case the ‘Oktobercrash’ does happen.

As mentioned earlier, was looking to enter into another position to add to the RCOM one. Am looking to add DLF to the portfolio, and would be looking at an entry price of <400. The stock was trading above 400, and hence have written Put options (Strike 400, October expiry, Premium 15).

My portfolio:

1. Long Reliance Communications Stock

2. Short Reliance Communication 320-strike Call

3. Short DLF 400-strike Puts

The Chase for Alpha

2009-09-22T19:09:00.001-07:00

Much has been written and publicized by the investment managers about their ability to generate Alpha – above market returns. Most of the Mutual Funds offer documents and advertisements talk about how the fund has consistently beaten the market over the past years. And surprisingly, using very carefully chosen time frame as well as parameters, most of them have data also to substantiate their claims.

So, does it mean that these managers actually beat the market? Well, very unlikely – and if one adds the entry load (1-2% for most schemes), management fees (~2% annually), and exit loads (0-1%), there is very very miniscule chance that an investor would be better off by investing in a fund as against directly in the market index. Assuming an average all-expenses of 3% for a fund, you need the manager to beat the market by more than 3% to be actually able to generate alpha to his end clients. Add to it the fact that alpha is strictly a zero-sum game, and for every manager who beats the market, there would be another one who has been beaten by the market.

I’m strictly against use of Mutual Funds, atleast by people who can understand the basic nuances of stock market, and have the resources/skills to invest directly in the market. Most of the time we are afraid of losing money in the market – a fact compounded by frauds like Satyam, and we always run the fear that we may be caught on the wrong foot. However, the reality is that the same is true for a professional fund manager as well, and in fact I would like to think that they would have a larger tendency to take risks. And most of the fund managers in reality were caught napping during the Satyam fiasco.

So where does this leave an average retail investor? There are two choices for generating the market returns - (a) Using Index Futures, and (b) Using ETFs. I tend to prefer the latter over the former as futures are by their very nature a short term betting instrument, and if one plans to have an investment horizon of atleast an year, then futures would entail rolling the contract at every expiry – a costly as well as cumbersome exercise. ETFs are nothing but essentially a basket of all the stocks in an index, and have a small ticket size (currently INR 500 for Nifty BeES). Much goes behind the scenes with regard to how they are structured, and how they are able to track the Index. However, for a small investor, it would be sufficient to understand that they would tend to trade very close to the actual index value, and the management fees are much lower (0.50% or so) for these funds. So, if one just wants to have a plain exposure to the market, ETFs present a much better option compared with the mutual funds.

Over the next few weeks, I would try to trade some of the most liquid ETFs in the market - (a) Nifty BeEs, (b) Banking BeEs and (c) Gold BeEs.

Trading Positions - V

2009-09-16T11:51:00.001-07:00

The strategy seems to have gone wrong finally, and with the sharp rally, its time to just hold the stock and enjoy the ride. Both the things have gone wrong – the volatility has come down sharply and the markets have gone up. The low volatility regime makes it unattractive to keep writing calls (the premium would fall by 20-30% going forward, unless it spikes again). At the same time, in a continually rising bull market, writing calls is anyways never the smartest thing to do.

So, overall am changing my view of the range bound market this year now to a rising market, and would stop writing calls on the stock. Might sell some straddles if I really feel heroic enough to attempt at Alpha-generation. Though in all likelihood, given the current levels in the markets I won’t be doing anything like that.

Will calculate all my losses and gains at the end of this expiry, and would add another stock surely – somehow waiting for a correction now might keep me waiting for ever.

Trading Positions - IV

2009-09-04T19:51:00.001-07:00

Reliance Communications announced a tie-up with AIRCEL on tower sharing, and also hinted at IPO plans for Reliance Infratel. The news took the stock from 260 levels to 292 levels.

I think this is slightly overdone now, and the stock might come down to 270-280 range. I’m planning to write a 280-strike Call on this for the September expiry. Currently the premium would be close to INR 18-19, and that would mean a break-even level of 298-299 for this month.

Initial Cost Price: 250

Premium Earned in August: 10

Effective Cost: 240 (August End)

Trading Positions - III

2009-09-04T19:46:00.001-07:00

The first IPO which I tracked turned out to be a disappointment. NHPC listed on the exchanges on September 1, 2009 and not too many investors made money on it. The ticker did show the day’s high as 42, but that was just 1 trade or so. No body could make more than INR 1-2 on this one.

I unwound my position at the listing price itself, and hence there were no gains here.

IPO Scorecard

1. NHPC: Listing Price INR 36, Unwound at INR 36 – No gains

2. Oil India: This one would list on October 1 I think, and going by the recent records, don’t think there is too much money to be made here as well.

Why there is no word called ‘Bear-sh*t

2009-09-04T08:03:00.000-07:00

To start with, let me put the disclaimer first:

I have a very strong belief that most of the asset classes in the world always trade at a premium over their fundamental value – defining fundamental value as what people would earn if they indeed keep the asset till perpetuity. I have a term for it as well – the ADR phenomenon. It goes like this – any ADR can anytime be converted into the underlying stock, and hence the value of an ADR will seldom fall below whatever an investor can earn by buying the ADR and then immediately converting that into stock. So, ADRs most of the time trade at a premium to the intrinsic price of the underlying share. The price of the stock here is the ‘Opportunity Value’ of the ADR – which could be derived any time the investor wants to. The same rational goes for the stocks or any other asset class – they always trade at a premium over what people can earn by holding them to perpetuity (their “Opportunity Value’). Only in times of deep recessions and market crashes do they trade below their values. So, more than 80%-90% of the times there is a bubble in the market.

Now building on my belief about the perpetual asset bubble in the world, any rational person would most of the time expect the market to correct (looking deeper into the terminology here – market falls are called ‘correction’, while the rise in markets are given terms like ‘bubbles’, ‘frenzy’, and ‘euphoria’). So, there is an inherent bias in the market where more people always believe that markets should fall. Whether they expect the fall to happen immediately or later is where the opinion differs, but they are all united in their belief that they are over-valued. There seems to be slight sophistication in thinking ‘Bearish’ – anyone who thinks markets would keep on rising is termed a naive retail speculator, whereas anyone who can substantiate a market fall is an ‘Economist’ or a ‘Trader’. So much are the professionals in the field biased against the bulls that they have named the ultimate description of crap as ‘Bull-sh*t’.

So, little wonder that all the ‘E’s and ‘T’s of the world are united in terming the latest rally as overdone, and are predicting another crash to happen ‘any moment’. No one likes a rising market – anyone can make money there. The dumbest of people end up making the most mullah in a bull market – as they don’t have the slightest of fear about a market fall. If one was born in US in the last 1970s, and discovered their senses in mid-1980s, then he/she saw was an ever rising market. How on earth would someone explain him/her that markets could fall as well. They were living in a ‘fool’s paradise’. NNT also warned against the bull markets, and bought deep OTM options – in the full knowledge that markets one day would fall big, and he would make a killing. He did make it, but that came after years of painfully watching the market move up, and seeing all his options expiring worthless (he did get all his money back, but that was from the sale of his books, rather than from the markets). No one ever loses everything in the market – either you make money, or you learn.

In the end, everyone is right about it – but seems that if you do not think about it too much, you are right on more occasions than the rational thinkers. You might lose everything you made in just one bad year, but then, its the same with the other side as well. So next time an expert warns you against a crash, just tell him that you would rather lose money in a couple of crashes, than being worried about it for all your life. And for all the ‘bears’ in the world, there is one simple answer - ‘Ignorance is Bliss’.

Trading Positions - II

2009-08-28T09:42:00.001-07:00

The first month of the experiment has given good results, and I have pocketed an initial call option premium of INR 10 on the stock. Just to recap, I had bought Reliance Communication stock at an initial price of INR 250, and had written a 270-strike August expiry Call option against it.

So, after the expiry, the net cost of the stock stands at INR 240 for me, whereas the current trading price is close to INR 260. So, net-net, a good start to the strategy. For the month of September, am looking to write a 260-strike Call at an initial premium of INR 15+. I believe that markets would be headed lower by the end of this expiry. And hence would be writing the option to capitalize on the view. However, would be waiting for another week to put on the trade. The rational behind waiting for another week or so is due to low theta effect of option. For a 1-M option, the option premium would fall most in the last 2 weeks. So, the option which is priced at INR 20 with a month to expiry would still be priced at INR 13-14 with only 2 weeks to expiry. So, to save myself from the extremely sharp up-move in the market, I would be writing the option with only 2-weeks or so to expiry (to earn the maximum theta).

Also, would be looking to add another stock or two to the portfolio. However, the market has run up quite fast over the past week, and currently the valuations have reached obscene levels. Would wait for atleast a 10% correction in the market before taking a further plunge. Have a bearish-view for this expiry, and I think we may be very close to a global crash now.

Trading Positions - I

2009-08-14T22:51:00.001-07:00

I’m experimenting with another strategy for the next six months – Call Overwriting on high beta stocks. It starts with a basic assumption that we are not out of woods yet, and markets would remain range-bound/south-bound for the next few months atleast.

A high beta name would have high volatility, and hence the price of options on it would be higher than that on a low beta name. So, the plan is to identify 3-4 good high beta names (good in the sense that one should believe that the company would survive the next 5 years atleast). Then, I would be buying one lot equivalent of the stocks for each of these names at a reasonable price – the profit from the strategy would depend upon the entry point. Currently most of the stocks are grossly over-valued, and very few are a reasonable levels. Once we have bought 1-lot equivalent stocks, at the beginning of every month we would sell OTM Call on the underlying (say 105% OTM). I have estimated the price of the option to be close to 5% at the start of each expiry. Hence, even in worst scenario, we would have made 5% on the stock. Hence, barring a scenario of major crash (where the stock price would fall so much that 5% every month would be meaningless), we would be able to earn atleast 2-3% on our investment every month. Agreed that we would miss out on the major market moves, and certainly miss out on the bull-run if we continue to believe the markets to be range bound.

First stock that I have bought is Reliance Communication – bought 700 stocks @ 250. Also, for the month of August, have written a 270-strike Call option on the stock for an inflow of INR 10. The stock has slightly moved up over the past couple of days, and currently trades at close to INR 255. If it closes the August expiry above 270, then my short option would lose money, though I would have made INR 30 on my initial cost price - not a bad returns for 1-month. The biggest risk to this trade is if the market craps out, and the stock falls to 100-150, but then, one can’t hedge against all scenarios.

Lets see how this pans out over the next couple of weeks – 27th August 2009 is the expiry. Would add another stock close to the expiry – if the market corrects slightly. Am looking Reliance Infra/DLF/Suzlon/Tata Steel as the likely portfolio for this strategy going forward.

Mutual Funds Flow

2009-08-14T07:15:00.000-07:00

There was a lot of talk in recent past about the high level of cash the domestic mutual funds were sitting on, and how these once deployed into the markets would take them to new highs. Well, going by that rationale, the story seems to be over from that front.

Mutual Funds were sitting in cash to the tune of 18-20% around Febuary 2009. However, as the markets started moving northwards, a lot of this cash started getting deployed into the markets. Since march, Mutual Funds have bought stocks worth USD 1.5 Bn - and cash levels which were hovering around 20% levels have come down to 9% as of July end. So, on that front, we seem to have used up the bullet, and no more inflows should be expected from the mutual funds over the next few months. This might get interesting from here - and FII selling could really spook the markets.

Sector-wise, funds have increased exposure to IT, Telecom, Cement, Metals, Auto and FMCG. RIL is a big under-weight in most of the portfolios, and Bharti has also fallen in to the league.

Market View - August 13

2009-08-13T08:33:00.001-07:00

This is getting really interesting with the whole world now divided almost equally between the Bull and the Bear camps. Past two years we have seen people all over having similar views. 2007 was the year of the bulls, whereas 2008 was the peak of bearishness. This year has been a mixed bag for both the camps, and people have often changed their places.

The fight quarter truly belonged to the bears, and they kept sitting tight over the market. It was a classic range bound market between January and March, and Index almost finished flat at the close of the quarter. The second quarter belonged to the bulls with market seeing returns of 15% and 28% in April and May respectively. The bears were left too stunned and circuited to do anything about it.

As we moved into the 3rd quarter, the bulls have done well with momentum with them. However, lately they seems to be running out of the 'good news' fuel at their end. The markets are more than 75% up from their low, and still 33% away from their peak. However, the peak of 2007 was a result of exeberance where the word 'RISK' completely disappeared from the world. Whatever progress we have made over the past years, whereas it may be debated that we are out of depression zone, but certainly we are far far away from the exuberance period as well.

So, I'm turning a little cautious on the markets, and think that over the medium term, 4800 could well turn out to be the pivotal point for the markets. If they are able to cross it by the end of September, I would believe that we would end the year on a high. Else, we may be pulled into the deeper holes of recession once again. This rally is no doubt driven by liquidity, and one needs this ponzy scheme to keep feeding itself till the time the global economy recovers. However, if this thing falls flat, and the train is stopped too soon, we may be back to square one. The markets would need to keep going up to sustain the bull run - much like the space rockets. The printing press all over the world have injected fuel into the markets to move out of the recession zone, however, if the markets are stuck into a zone for even a month, and public confidence gets lower, we could all be into a big mess once again.

View on INR: Cautious now, but would still be a buyer at 48 levels.

Nifty Year End Closing Prediction: 4200

Bearishness Level: 7/10

Are IPOs Underpriced?

2009-08-08T22:25:00.001-07:00

In my B-School, I wanted to do a term paper on the Under-pricing of the IPOs. Sadly, the concerned professor had already been approached by many other students, and he rejected my application. And when I joined my job, the markets crashed within a short span, and IPOs almost dried up.

Now 2009 promises to be a good year for the IPOs, and I would expect at least 5 big offering to hit the market over the next few months. And I would really like to test the theory of under-pricing by actually subscribing to them. So, here is the plan – from now to Dec 2009, I would be subscribing to atleast 5 New Offering, and try to offload my stock in the first week of listing. Will see if I actually make any money after the commission and other transaction costs.

The first issue to hit the market is NHPC, and it has already opened. The price band is INR 30-36, and I would expect it to be over-subscribed by as much as 10 times at the least. This would be my first stock investment, and I’m really excited. Don’t really expect to make money out of it, but hopefully it would be a good learning. As Sachin put it, if you are not losing too much money in your initial times, then you are doing a really good job :)

Have we entered the Bull Market?

2009-07-19T10:37:00.001-07:00

I think Sougata put it very aptly in his weekly summary that bears have been badly burnt while trying to cool down the rally fire.

It initially started with disbelief, and people were laughing at any levels above 3000 for Nifty. Everyone though there was free money to be made by writing Calls, and people wrote OTM and even ATM calls in size. People blindly sold 3000C and 3100C, in the belief that we wouldn’t be seeing these levels in the whole of 2009. Once that was crossed, 3500-3600 become the TOP for the market, and people continued to write calls to cover for the losses they made on 3000-3100 Calls. Had it not been for the Knock-Out punch delivered by the election results, people might have foolishly continued to write calls even up to 4500 levels.

Now markets are flirting with 4500-4600 upper limits, and have been trading into a range between 4100 and 4500 for some time. I’m slowly turning quite bullish on the markets. While I will agree that valuations have turned quite costly, and rationally one should be selling the stocks at these levels. However, markets tend to move with a ‘herd mentality’, and there are legs to every rally/correction. This is due to the fact there are different classes of investors who invest at different points of a move. And where we are standing today, we still haven’t seen too much participation from ‘Long Only’ and ‘Private Equity’ guys. These guys are sitting with huge chunk of cash, and even though some of it has been deployed, the majority is still ‘all cash’. And the longer the market sustains at these levels, the more probable is this money flowing into the equities.

My overall sense of the market is that we won’t be seeing any more ‘crash’ in the market going forward. There would be issues on the loan books of the commercial banks, as well as concerns over the credit card defaults. However, I think these won’t escalate into very big problems, and would result into a couple of billions of charges and write-downs. Other potential triggers could be some Sovereign defaults, but again I think we won’t be seeing any major nations defaulting. Overall, I think we don’t have too many downside triggers for now (I repeat FOR NOW).

On the upside, the buying pressure from local Mutual Funds could pick up in the coming days. I think they would soon be launching new schemes, and public would come back to the markets after staying away for some time. Equity allocation has been close to a low in recent times, and I expect more and more people moving their debt funds into equities. Another upside shock could be the results – the results would surprise on the upside for most of the corporates.

On the volatility front, I have now changed my view. I now believe that we will have a low volatility period from July to September. Markets would trade in the range, and might slowly move up from here. Volatility might continue to drift down, and we may enter the sub-30 phase soon. That would also mean VIX entering a sub-20 phase, and when that happens, the funds would start flowing back into the markets.

On currencies, I think INR would appreciate from these levels, and we may touch 45 levels by the end of this year. I would be a seller of USD at any level close to 49 (currently).

Recession Over?

2009-06-27T08:12:00.001-07:00

I am completely clueless about the markets right now. However, am not sure which is better – being completely clueless about the market, or being totally wrong about it. I guess in most scenarios, the former follows the latter.

All over the world, the markets are rallying, and the bears can no longer the dismiss it as just another bear-market rally. Somewhere down the line, the bears became too bearish about their predictions, and people lost it in their gloomier and gloomier forecasts. I’m not saying that the current rally is indeed THE RALLY, and we are out of recession. Personally, I have a feeling that the worst is yet to come, though am too scared to put the view into positions.

In my personal opinion, what caused this rally is the fact that globally the central banks infused massive dollops of cash into the system. The printing press all over the world went into the over-time mode, and printed millions of green and blue backs. The cash was supposed to be used to plug the holes into the balance sheets of the banks (and other corporations essential for free money supply into the economy). However, all the cash went into investment assets, and led to the massive short squeeze. People jumped to buy everything available - junkier-the-bond, longer to queue of potential buyers. Risk became history, and all the high beta names sky-rocketed. This is where we find ourselves as of now.

There are two possible paths which the markets could take from here. If the central banks indeed didn’t screw-up big-time, then we may well have seen the bottom, and are unlikely to go there again. The markets would then become a buy-on-dips market, and we would see the mother of all rallies in the emerging nations. Considering the massive amounts of cash sitting with the domestic as well as global asset managers, the BRIC and other developing nations could well go past their past highs. And the buzzword succeeding ‘recession’ would be ‘de-coupling’ for the next few years.

The second scenario, which I think has slightly a lower probability at the moment (but higher payoff if it materializes), is that the central banks erred in their bailouts and packages. And instead of reaching the ones who needed it the most, it ended up just creating a mild bubble in the asset classes. When the tides goes down again, the quarterly results would come back to haunt everyone, and the governments world-wide would by then have run out of ammunitions. Given the high deficits being run by all the governments, we are close to using the full quota of bailout funds. And for some reason, this bubble dies, then we would be in a free-fall again.

Fig – Sitting on the edge

Lets see how things pan-out in the coming weeks. I think the picture would become clearer by the end of July as most of the corporates would announce their Q1 results. I’m expecting another quarter of record profits by the US banks, and if it happens, we could see the markets going into the stage 2 of this rally.

Rates View: Bullish on the long term yields, but don’t think there would be much change in the OIS in the next few months.

Currencies View: Bearish on EUR (target of 1.2), bearish on GBP (target of 1.3), and bullish on INR (target of 45).

Market View: June 20

2009-06-21T11:35:00.001-07:00

Markets have been trading in the range for the past few weeks. And surprisingly, have hold very well after the recent up move. One would have expected the correction to have come thick and fast, but the markets have refused to comply with the bear wishes. There are many people waiting for the market to fall, and as the reports claim, there is plenty of fund lying on the sidelines which has to be deployed.

I’ve become slightly bearish now on the markets, and think everything has moved up all too fast and too much. As for the markets holding up, I think its more of funds trying to play catch up, and investing late into the rally. We have seen good buying by the domestic funds in the past couple of weeks.

There are plenty of things that could decide the market moves in the coming weeks. And given that the list is quite long, I would expect the volatility to move higher from the current levels.

1. Quarterly results of domestic companies: With the result season starting, we may have a few surprises. Already we have seen some patterns with the advance tax numbers (with banks posting good results, while manufacturing sector lagging), and we may see high dispersion between sectors in their results.

2. US Bank results: No longer the size they used to be a year or two back, the US bank results still are eagerly awaited. They had all posted very good numbers in the last quarter, and another good showing could really seal off the recession here. However, a set of bad numbers could really hurt badly as well.

3. Indian Budget: With budget coming in the first week of July, expectations are quite high with the dream team. However, as with the T20 World Cup, expectations may well have exceeded the upcoming reality.

4. Swine Flu: Markets have completely stopped reacting to any news on this front. With fresh cases being reported almost everyday now, it might surprise the markets on the downside.

5. Budget Deficits: With all the governments around the world facing huge and still mounting budget deficit, we may see rates rising through the roof. Already we have had a failed auction, and a couple more could be the trigger for this.

6. Oil: Oil has slowly moved from 40-something to 70s now, and its not far away from where it would start hurting India. A level above 80 in the next couple of weeks, and then we would start having pressure on the currency again.

7. FII Selling: FIIs have been sellers in the market over the last 1 month or so, and if the selling continues, we may well see both INR and Equity Markets falling back to the earlier lows.

The Inflection Point?

2009-05-29T22:51:00.000-07:00

The economists and traders around the world are engaged in the debate whether its a bear market rally, or the markets have actually turned around. The doom sayers are leaving no-stone to make everyone believe that their time under the sun hasn't finished. Whereas, the investors and money managers around are world are jumping to buy at every opportunity.

Its very difficult to say as of now which way the markets are headed. The short term momentum is certainly on the long side, but the valuations are getting costlier by the day. And unless the economy and earnings show a quick turnaround, we may see an over-heated stock market.

S&P has stayed close to 900 range for a few weeks now, and it has failed to break on the either side. There is good consolidation happening around this range, we may see a decisive move in either side very soon. If one is long vol, it may be a better idea to hedge less frequently as markets may be trending in one direction from here. I would expect S&P to be either below 800 levels or over 1000 levels by the end of June.

VIX also has been staying close to its 30 support levels, and even though it the breached it for a couple of days, it has failed to remain below the range for a longer period. We may see a gradual move up in volatility in the coming days, and I would rather be long vols at these levels.

Nifty has been playing around in the 4200-4500 range now, and contrary to all the initial expectations, markets haven't yet broken below the levels reached after the 'Super Monday'. Shorts have been cleared in the system, and the futures premium has jumped to high levels. Might seem silly to say, but I don't think markets are going to cross 4600-4700 range in the near term. With budget around the corner, long term investors would shy away from committing large funds.

EUR and GBP have been gaining against the USD, and last I saw, EUR was trading at 1.41 levels. Somehow, I am not very bullish on the Eurozone, and think the currency would depreciate. US economy in the shambles, and with General Motors filing for bankruptcy, another chapter in the US economic history comes to an end. However, I don't think EUR or GBP are the alternatives for the future.

Gold has been climbing for over a month now, and is trading close to 950 levels (mostly on the back of USD weakness). Oil has also been moving up, and is currently at 65. If the Oil keeps climbing, and moves into the 80+ zone, we may all be back to square one.

Market View: Gone in 60 secs

2009-05-19T08:55:00.000-07:00

Election results came out on the weekend, and all the remaining bears in the market were brutally squeezed by the rising euphoria. We saw the first ever up-circuit in the market, and in less than 60 seconds, BSE sensex had risen by more than 2100 points.

Everything has changed in the markets, and FII continues to pump in billions into the markets. As things stand, we may be in for a long up move. There is a big gap in the market, and a lot of people have completely missed this rally.

Like someone said, one shouldn't worry too much about a single day's move. The trick is just to survive to see another day.

Market View: May 2009

2009-05-14T08:03:00.000-07:00

Much has changed since I last wrote my views on this blog. My absence, however, is not due to that the fact that I have been terribly wrong in all my views.

Markets world-wide have seen the mother of all rallys in the past 7-8 weeks, and all across stocks have risen by anywhere between 30-100%. Nifty has moved from its 2700-2800 levels to 3600+ levels!!!

The big turnaround has been led by good financial results (in a system oozing with liquidity, that should have been expected), and some aggressive moves by the fed and treasury officials in US. Everyone could see the 'green shoots' in the economy in the form of falling unemploment numbers, rising output levels, rising retail sales, etc. And the result was an almost angry rally, wiping out all the 'nay-sayers'.

As we stand at the present, everything is up, and lot of people have shifted from the bear-camp to the bull-camp. March was scary as everyone (including me) was giving lower and lower target levels for the Nifty (with people quoting figures as low as 1200!!!). Now there is greater sanity in the market, and there is a suitable opposition to all the gloom-and-doom predicators.

S&P has been flirting with the 900 levels for whole of this week, and after breaking it, has come down again. If it breaks above 900 once more, a move towards 1000 is highly possible. However, if it fails to break it in in another week or so, then we may see the return of blood on the street.

Gold surprisingly has been going up even during this rally, and is currently at 925 levels. With all this bullishness, I would have expected gold to trade at sub-800 levels. So, there is a correction due in atleast one of the markets.

Credit markets have been improving, and JPM Emerging Market index is now at 500 levels. Still much above the pre-Lehman times, but this has improved considerably from its 800-levels seen in October'08.

My view on the Indian Market is that we may see this rally continue till 4000 levels. Unless something goes really wrong worldwide, we may see everything moving up. Elections, which have been the talk of the tinsel town over the past couple of months, may turn out to be a non-event. Either the NDA, or UPA could be making the parliament, and who amongst the two noone gives a damn.

EUR has surprisingly out-performed against USD, and has climbed to 1.35+ levels. However, I still believe its a ticking time-bomb, and might turn out to be very difficult to diffuse (unless the central banks round the world keep pumping liquidity into the system).

The best part of trading

2009-03-29T12:09:00.001-07:00

The best part about trading is that you just need to be good at something. One can spend all their lifetime trading just one stock, or one sector, and make good amount of money.

I am trying to understand a few of the stocks, and form views on them. Would be starting with a very small set (2 or 3). Over time, would increase the set to include about top 10 names in the market.

No more Mutual Funds!!!

2009-03-29T11:51:00.001-07:00

I’m now planning to look more deeply into specific sectors, and specific companies. I have decided that I wouldn’t be investing through Mutual Funds anymore. Not that I had any illusions about their ability to generate any alpha (above market returns), but the kind of returns they have generated is pathetic (in spite of the fact that they have the liberty of keeping money in cash, or overwrite options).

These funds operate in the most inefficient of manners, and charge exorbitant fees. Firstly, there is a high entry load (~2%, NIL if you invest directly). And after that, every year they charge 1.5%-2% management fees. This all is added to their ‘undisclosed’ portfolio, and its returns, and the end result is as uncorrelated with the actual market, as the score of a blind monkey throwing a dart on the number scale.

From now on, I would be investing directly into the individual stocks (for long term investments).

Put Call Ratio

2009-03-21T12:00:00.001-07:00

I was looking over the internet to find some interesting articles on the Put/Call Ratio based strategies.

As of now, have just found out one:

1. Put/Call ratio in themselves are not very helpful in predicting the market direction. However, extreme values (compared with say 50DMA) may indicate a rise/fall in market volatility.

Addendum (March 28, 2009):

Yesterday, on his presentation on ‘Option Markets Indicator’, Sachin mentioned briefly about the PC Ratios:

a. Usually Volume PCR is a more useful indicator during the day as it accurately reflects the ‘current’ market activity. OI PCR, on the other hand, is slightly out-dated, and may be skewed by long-tenor options as well as past trades (which may be deeply OTM/illiquid now).

b. PCR works as a contrarian indicator in the bear markets (when majority of the people are wrong). When the ratio reaches high levels, it indicates that there is already a lot of ‘protection bought’ by the market, and hence the chances of a crash are relatively lower. On the other hand, when the ratio becomes abnormally low, then it reflects the ‘euphoria’ and ‘complacency’ in the market.

It works exactly the reverse during the bull market (when majority is right). A low PCR indicates people expecting markets to go up, and it indicates that.

Market View: March 20

2009-03-19T23:40:00.001-07:00

I'm down with fever today, and hence am spending my day in home. Markets have rallied globally in the past couple of weeks, S&P has briefly flirted with 800 levels again (after falling from 800 to 680 in almost a single breath).

Going by the volatility in the market, trading has become extremely difficult. Markets have been moving 10-15% every couple of weeks. (Similar is the case with FX markets where we have seen lifetime highs and lows for a lot of currency pairs in the same year).

Expiry view has gone completely wrong, and now I believe that the down leg would start after the expiry. With impending results announcements, and the upcoming elections, there is plenty of bad news that could come out.

I'm still sticking with the negative view, and think that the markets are now in for a steep crash. With rising unemployment all over the world, a 20% rally is the last thing one would expect. We may see a 2400-2500 expiry range for the April and May expiry from here.

US Dollar: Inevitable Fall?

2009-03-19T23:29:00.001-07:00

In their latest policy action, Fed has started buying US Treasury Bills from the market. Finally, they have realized to the reality that they are running out of ammunitions. And this is the first indicator that US economy may be in much deeper sh*t than everyone thinks it is.

The Fed ran out of ammunition as the rates were already hovering around zero. And to provide more incentives to the market, they were left with one last option - printing money. So, on one hand, the government is running huge deficits, and is issuing bonds to finance them. On the other hand, it is printing more $ to repay the same. This is as blatant a misuse of their stock currency status as is possible.

The world markets have reacted sharply to the news, and USD is down against all the major currencies. GBP and EUR are currently trading at YTD highs of 1.44 and 1.36. Initially, I had a view that economies of UK and Europe are in shambles, and we may see massive devaluation of their currencies. Now it seems that USD has also joined the club.

I think we may see USD weakening a lot from here. China, the world's largest investor in the US treasury has openly expressed their concerns over their holding, and going forward I see more of their investments going into EUR, GBP, JPY, and Gold. In addition, they might prefer investing in commodities rather than US T-bonds. And once this process starts, USD may fall off a cliff, literally.

I would be short USDINR at levels of 51-52, with a year-end target of 47. We may see INR weakening to 53-54 levels in the short term (on the back of fiscal concerns, and election uncertainty), but I think the issues with USD are much serious and long term in nature.

Market View: March 13

2009-03-13T08:25:00.000-07:00

I have been wrong in my market views so far for this month. As against the initial expectations of market falling towards 2500-2600 band, we have seen major rally across the world for the last 2 days. S&P after moving from 800 to 680 levels in a week has bounced up sharply to 750 levels.

However, keeping the initial view intact, I still believe that we would be seeing a 2500-2600 expiry range. Nifty is currently trading at 2720 levels (which is a very strong resistance level now). I don't think we would gap open on the +ve side on monday (unless US moves by another 2-3% today, which seems unlikely).

This rally was also long overdue as markets had become over-sold. Nifty futures were trading at a discount of ~100 bps. And any gap-up opening was bound to cause huge short-covering - which is exactly what happened today. Now the Nifty futures discount have come down to 3 points, from 20-25 levels earlier. Now it seems that markets have over-reacted on the +ve side, and we would soon see a discount in the range of 10-12 points.

INR has remained flat at 51.5 levels, and going by the quantum of FII selling, I think we may even see 54 levels soon. Add to it the possibility of rate cuts.

Market View: March 3

2009-03-03T08:00:00.000-08:00

February expiry was a surprise of sorts for everyone, though market returned to their earlier levels on the first couple of days of march expiry. Nifty futures have broken below the 2600 levels, and unless there is a huge swing in the US in either direction, we may have an expiry close to 2600 levels.

In US, S&P has broken its 800 support, and has sunk to 700 levels. It might rest here for some time, and then go towards the 600 support. I guess 600 would be the target level for s&P for this year end, and we may reach there sooner than later.

Europe is in a complete mess, and its surprising how the currecy hasn't broken down completely. I won't be surprised to see the Euro break down to 1.0 levels, and GBP go down to 1.20 levels. Given the high vols in the currency markets, we may see huge swings in all the currencies.

Gold crossed the USD 1000 resistance briefly, and crossed INR 17000 level in India. However, it has returned to slightly saner levels at 900, and I think it might go all the way down to 700. I would be short the metal at these levels.

On the volatility front, we haven't seen too much volatility in the markets. Even though we are within breathing distance of the October lows, the market seems to be taking it very clamly. There is slow and steady drift in the markets, and this way, we might see 2200 levels in Nifty by June 2009. March-April results may the next big trigger for the world markets. And going by the trend, the results are going to come much below the consenses estimates.

Market View: February 17

2009-02-17T07:52:00.000-08:00

Its back to normal in the financial markets. After 2 weeks of fooling around at upper levels, markets are now back to their bearish moods, and we have seen large drops across all the markets.

Almost all the markets in Asia closed 2-3% down from their earlier levels. Even China which has been going up since the begining of this year lost 3% of its value. Nifty closed ~3% down.

As I write this, Europe and US are also all in red, with S&P fighting along the 800 support. If 800 is broken, we may see a large downmove soon. I think the 2600 levels of Nifty now appears more possible then it was looking yesterday. One more down day, and we could enter the 2600 zone tomorrow.

Volatility increased across the term structure today, and VIX currently is trading in the 49-50% range (after rising by 6 ppt). Going forward, I think there are bad days ahead, and this expiry could be really bad. Lets see how this pans out.

Gold is currently trading at USD 968 (INR 15k+), and exemplifies the panic mood of the market. However, I think the rally in Gold is overdone, and it may soon return to 800 levels.

Market View: February 16

2009-02-16T08:23:00.000-08:00

I had been away on leave for a couple of weeks, and joined back today. Markets unexpectedly had risen in the last coupole of weeks, and it was only today that sanity returned on the street.

Nifty is going to become a free-float weightted index, and as a result of this, a large number of stocks would have their weightages changed in the index. Stocks such as Infosys, ICICI, L&T, and RIL which have large free-float would see their weight increase in the index. Other stocks such as ONGC, Bharti, SAIL, TCS, Wipro which have a low free-float would reduce in weight.

Just as it was in Jan, I have a bearish view on the market. However, I don't think 2500 levels would be broken in the next couple of months. With elections around the corner, I don't think there would be huge movements in the market either way. A hung parliament may give the final downward push to the market, but that is still far away. In the near term, I expect the market to creep towards 2600 levels, and stay in the 2600-2700 range for some time.

On the volatility front, I think the volatility may remain low till april, and then shoot up. However, given the fragile state of the market, I would rather be long vols than short it. And at current levels, its quite attrative for longer tenors.

Market View: January 28

2009-01-28T07:29:00.000-08:00

Markets world-wide have been rallying for the past couple of days, and seems like that its going to continue for another day atleast. Nifty has moved from 2650 levels on friday to 2850 levels today, and we might see a 2900 expiry (though I would still like to believe that markets might still come below 2800 tomorrow).

World-wide markets have been moving up on renewed optimism, inspite of below expected earnings from a lot of major corporates. I think this rally has been caused due to short covering of the excessive short positions in the system, and might continue till tomorrow's expiry. We might see another downleg in the coming days, and market may touch its earlier bottoms.

2820-2840 was a good resistance band for Nifty futures, and it has broken through the band today. Tomorrow's opening might decide the day market movement. If it opens on the postive gap, we may see a run to 2900 or even 2950. A down gap opening however may take the markets below 2800 levels.

Nifty futures were trading at a discount throughout this month, and rolls happened at INR 5-6 absolute discount.

UK and its much talked about downgrade

2009-01-26T07:22:00.000-08:00

After Ireland and Spain, it might be UK's turn to be downgraded. A lot of speculation has been going on on whether UK would be able to maintain its AAA rating.

The most recent quarterly numbers shook everybody up, and GDP has contracted by 1.5% in a quarter. To get an idea of how bad this number is, none of the G-7 countries have contracted by more than 3% annualized in the last 50 years. In addition, there are talks doing round that GBP as such is an inflated currency, with nothing in real economy to justify its levels. UK as an economy is ruled by a few sectors: Energy, Financials and Tourism. And in the current year, all 3 have been badly affected.

While its much outside my knowledge to comment on whether GBP is inflated or not, I certainly feel that the path going ahead is not very rosy for the country. US is a much better placed than UK to contain its crisis. 2009 might see a massive devaluation of EUR as well as GBP. GBP has already fallen from its >2.0 levels to 1.40 levels, and there are reports doing rounds which predicts a rate of parity pretty soon. Same goes for EUR as well, which after trading above 1.60 earlier last year, is now down below 1.30 levels.

We might end up the year with EUR at 1.0, GBP at 1.20 and Yen close to 100 levels.

Market View: January 23

2009-01-23T06:17:00.000-08:00

Markets continued to move down on the back of bad news from all around. Companies around the globe are posting bad results, and latest to join the list are the electronics majors Samsung and Sony. Both of them reported record losses, and further outline the common belief now that the recession has expanded into the main street now.

UK economy offically shrank in the last quarter, and now the world growth targets really look far fetched. GBP has been hammered pretty badly, and currently trades at 1.37 (or 67.70/INR).

Back in India, markets broke their 2700 support levels, and traded below it for most part of the day. However, I have a feeling that we might see a small bounce from these levels in coming days. Not that I have a view that markets are going way up from these levels, but I do not expect too many incremental bad news coming out from India. All the large corporates which have announced their results haven't come out with any 'extraordinary' losses. Results of all the big names like Reliance, Infosys, Bharti, Wipro have been 'not-too-bad'. So, I have a feeling that market may remain range bound at these levels for some time now (in absence of a major worldwide shock).

Strangely, vols aren't picking up. Last time markets were at these levels, vols were at 60s and 70s levels, and this time they are peacefully trading in their 40-50 band. I wont be surprised if we see a down leg in vols towards the 40 support.

Market View: January 22

2009-01-22T07:27:00.000-08:00

Markets have already fallen by more than 5% since monday, and we are now below 2700 levels (on 1M futures). Going ahead, I think 2700 would act as a strong resistance, and we may see expiry around these levels.

Today the market moved sideways for whole of the day, without making any convincing moves in either direction. There was good money to be made trading intra-day gamma at smaller intervals. Interestingly, I think in these markets both short gamma and long gamma positions can end up making money. For a short gamma positions hedged at the end of the day, there aren't too many large 1-day moves to worry about, and for long gamma positions, markets really move up and down a lot (even a slightest news from any corner of the world spook the markets). Will be testing the same for January data after the expiry.

The expiry view still remains the same, in the 2600-2700 range. And on the volatility front, now there is a slightly lesser chance of vol spikes in this month. Quite a few results have already come-in, and going by the trend, there are no major surprises to worry about.

Market View: January 19

2009-01-19T08:08:00.000-08:00

Today was a holiday in US, and hence it was expected to be a dull day. Indian markets opened at almost their previous closing levels, and traded well within throughout the day. Lately, we have been so much used to the volatility that a day where market doesn't move more than a percent point appears too dull.

Markets slowly kept moving up throughout the day, and even as the bad news kept pouring in (RBS announcing a loss of $41B, Spain getting its rating cut from AAA to AA+), markets kept their momentum. It was only during the final 30 mins that market showed slight -ve bias, and started paring some of their earlier gains. Still, on a day to day basis, they closed higher by more than half a percent points at 2850 levels.

Europe which was trading at gains when Asia closed is now trading close to -2.5% down from its previous close. RBS is trading 70% down for the day, and seems like a very bad day ahead tonight for all the markets. Thankfully, US is closed for today, else we could have had another spooky day for Citi and Bank of America.

As I had said earlier, I expect markets to break from these levels (may be triggered by a bad earnings from one of the large caps) in the coming days. January expiry could be at a level close to or below 2700. On the volatility front, I do not expect vols to come below 40 levels anytime soon. Even though the realized vols are currently at a lower level, I think the implieds would continue to trade in a 40+ range for some time.

Market View: January 16

2009-01-16T09:08:00.000-08:00

Indian markets are currently trading on the band of 2700-2900. Today they opened at 2700, and kept moving up for the whole session, and closed at the day's high.

The market were up mostly on expectations of good results as well as more clarity on the situation as Citigroup as well as Bank of America were announcing their results today. Both the stocks had been hammered in the last couple of days by the traders.

I personally have a negative bias on the market, and would be short the market till 2700. I would think that the Jan expiry would be close to 2600-2700 levels.

On the volatility front, I think that the vols would remain high till the general elections in May 09. Currently they are trading in the range 45%-50%, and I think they would continue to trade in the 40%+ range for some time. Going forward, I won't be surprised if there is a spike in vols to the 60% levels also as there are a lot of big names announcing their results soon.

I would be short markets at 2800 levels, and long vols at 45% levels. Lets see how it plays out next week.

Short-selling and Efficient markets

2008-11-02T10:26:00.001-08:00

I have pondered over this question for some time now - 'Does short-selling make a market more efficient?' Or, to put it differently, 'Is short-selling a pre-requisite for efficient markets?' Here are my views on the same.

To answer the above question, we must first define 'market efficiency'. In my opinion, an efficient market is one where price discovery is solely based on the intersection of demand and supply functions. And any new information or event affects either or both of these functions, and hence results in the change in price. But as a whole, price is always arrived at by the demand function of the consumers and the supply function of producers.

In stock markets, the demand and supply functions are slightly complicated. The supply function is simpler to understand. During an IPO, its the standard supply function as in case of a manufacturing firm - higher the price, more the supply. As the valuations become richer, promoters supply more and more shares in the market. And as time passes, in a secondary market, the supply comes from prior period consumers (which were the demand function earlier). However, the supply side is still limited by the total amount of stock outstanding, and hence, has its upper-bound. It can always be estimated as coming from a single large firm with limited production - higher the price offered, more the supply.

Demand function, on the other hand, can come from anyone in the market place, and it has no upper-bound. However, it has a non-zero lower bound. So, there is always a positive demand, as well as a positive supply in a perfectly functioning markets. And it doesn't need 'short-selling' to function efficiently. In the worst scenario, there is no demand for the stocks, and hence, there is no trade in the market.

Now if short-selling is allowed, the supply function becomes as independent as the demand function. Everyone can become a supplier (that is, can sell the stock), and the upper bound on supply function disappears. Or, to look at it differently, now there is a possibility of a negative demand, and hence, must be matched by a positive demand. In falling markets where there is no positive demand, a negative demand if not met, can make a stock price nosedive towards zero. It will keep falling as long as it is matched by some positive demand. Hence, it can lead to quicker falls and higher volatility during the times of uncertainty.

Its a choice between a dry market with no trading (zero demand) or a highly volatile market with falling prices (negative unmet demand). And am not sure why the latter is better than the former.

Financial Crisis

2008-11-02T09:48:00.001-08:00

The ongoing financial crisis is getting worse with each passing day. No one seems to have any clue as to when things would start improving. It has put some doubts over everyone's immediate future as well with their companies. Already, a couple of my friends have received the pink-slips, and I fear there is worse to come.

Just hoping that time would pass, and things would be normal again. These days, there is gloom all around. A lot of dreams, unfounded or grounded, have burst in recent times. And we are now in the process of realizing that Rome wasn't built in a day. Growth and development are slow process, and they happen over time. None of the economies move as fast as the stock or currency markets, and hence, there are crashes everywhere. Last few years were really a mad period in the world economic history where central banks around the world eased monetary policies, and credit was very easily available. Everything was made to appear rosy, and risk had disappeared from the world. The process of securitization had distributed to risk to everyone, and hence the crisis we find ourselves in has taken everything with itself.

There would be massive de-leveraging all around the world, and we can expect further crashes in almost all the asset classes. The emerging markets would be the worst affected, and there is a slight chance that it may pre-maturely end a lot of 'growth stories'.

Market Efficiency and Speculation

2008-10-12T10:03:00.001-07:00

Much of the debate in recent few days has been about the massive amount of speculative positions in the stocks and other securities. People are blaming the short selling speculators for the demise of firms like Lehman Brothers, AIG, Bear Sterns, and many more. The argument is, even though the positions of these companies is sound in the long term, short sellers are putting undue pressure on the firms, and has resulted in forced liquidation.

I personally would think of these arguments as lame excuses. While not myself a supporter of naked short-selling to start with, I nonetheless believe that most of the firms which have fallen have fallen for the right reasons. If short-selling was to be blamed, and their balance sheet were sound, why would the senior debt holders in Lehman get only 8-9 cents per dollar as recovery? They ought to be making a lot more than this.

Short-selling didn't (or rather couldn't) have changed anything. At the low valuations at which Lehman Brothers or Bear Sterns was finally sold, the Management could easily have bought the firm with the personal pay-cheques. The fact that they themselves didn't do the same make the whole speculation argument seem hollow.

End of Road for US?

2008-09-12T21:18:00.001-07:00

This would be the year of contrasts. The two biggest events of the year symbolize the same thing - US power may be waning, and something must be done very soon to save it.

Lets start with the first event - the great credit crisis. As has been said earlier, it was a game of musical chair being played by the banks, and thankfully, they always seemed to have a seat when the music suddenly stopped. Many corporations as well as a few banks have gone bankrupt in the last 2 decades, but the big ones got bigger. They became too big to fail. But in a complete turn-around, banks now find themselves caught in their own game. All are left with huge amount of sub-standard assets on their balance sheets, and with continuous fall in their market values, its a south journey for most of them this year. Bear Sterns has already been sold-off at throw-away prices, and Lehman Brothers may no longer exist after a couple of days. Nobody wants to make a guess on who would be next, but everybody in almost convinced that this is not the end of pain.

All the great institutions of US are performing badly. The big three of the automobile would may be struggling, and may meet the same fate as their banking counter-parts. The US is losing its hold over all the manufacturing sectors, and now with financial services, this may be the beginning of the service sectors as well. Already a large chunk of the these companies is being owned by Asian funds.

A marked phenomenon has been the interference by the US government and treasury in dealing with this crisis. The treasury tried its might to lend support to the sector, and extended a number of facilities earlier undreamt of. It was a great irony that the greatest proponent of Capitalism and free-market needed government intervention at the time when Socialist countries are turning towards Capitalism.

The second event that would define the year would certainly be the Beijing Olympics. From being described in superlatives all over the world, it was undoubtedly, the best ever sports event hosted on such a large scale. China showed its might to the world, and in the year where US and Europe are struggling with their economies and budget deficits, China spent more than USD 70 billion in preparation of the games. The move has paid-off handsomely, at least in an absolute sense. The world which was already witnessing an ailing giant saw a rising star as well in the same year. China brought an end to the US domination of the games, and in its typical manner. There was no star like Michael Phelps, or Usain Bolt. It was an effort by little known athletes, who together brought a giant to its knees. It was just another example of how socialism conquered the year.

What are the implications of these events for the future? They clearly shows us the divergence between the two big powers today. Whereas much of the money and energy in US has gone into preserving its institutions and survival, China has grown by leaps and bounds. For all the talks about recession and its severity, a country which spends all its year in fighting for survival and arranging bail-outs must surely be in a deep recession.