I remember the days when recruitments happened in our B-School ... India was a good place to go to ... not surprisingly Indian companies did offer similar packages to what some of foreign companies did... yes the Sensex was at 16000 and on its way up! when it touched 21! I started to wonder if I had missed the boat....In the hidsight though whatever happened; happened for good...
This morning when i checked all NAV's for the MF's I am invested, I happened to have lost a significant chunk of money ... however, investing in funds was any day a better idea than investing in stocks... nopes ... this is not a crib blog ....
It is amazing about how dramatically things can change; you lose 30% of the market cap in 5 months ... what changed is the bigger question. Specifically in case of India things dont look brighter any more ... you have a soaring inflation; an unstable government; a haphazard monetary policy (let alone the fiscal policy) and a frightened 'white' ghost. The never ending capital flow into the indian market has suddenly figured out a new tourist destination or rather is just sitting at home trying to save itself from depreciation. A large current account deficit which eventually results into a weaking currency is adding salt to the injury at the central bank in India. 11% inflation (reported) is a huge number and today we saw one more CRR hike to take out the liquidity from the market.
The India central bank (RBI) has not been premptive in chasing down the inflation and one cant blame them because growth was the only objective till last year. Also, I must say that the policy makers have got it spot on in terms of the foreign currency reserves. I remember my argument with my economics professor in B-school over spending FC reserves for long term infrastructure projects in India. Now when you have dollar leaving the country, the central bank is able to restore some semblance in the currency market by selling these reserves .. if not; the INR must have been down to 45 atleast adding to the existing inflation woes.
So what does all this translate into ... the market is down 30% YTD and is there more pain left? .. I think yes.. India was an overbought story ... the stock market was a crazy place ... analyst's had ego's as big as an elephant's shit ... Being into hedge funds; i have learnt that the first golden rule of shorting any equity is when the management of that company doesnt wanna own that stock at the prevailing price ... and again the first golden rule of buying an equity is when a marginal buyer see's a huge value left in it... I think India is caught somewhere in between ... Even though stocks have corrected as much as 50%, we see no corporate intending a buy-back (may be one argument is that debt trades at high yields at the moment) ... second reason is that there has to be an earnings revision and this can only be on the downside at the moment and third and the most importantly you find cheaper markets than India with ample liquidity coming either from agricultural or energy commodities.
Having said what I have, I believe we may be approaching the golden rule for buying equities, how far is it depends upon each specific stock. If you believe that India can grow at 6% p.a the indian GDP doubles in 9 years and taking into account the target inflation rate of 5.5%, your money invested in stocks can double in 6 years. Hey thats not a bad deal at all; however for now I wake up in the morning and ask myself .. 'hey what happened here'...
Tuesday, June 24, 2008
Saturday, June 7, 2008
Perception rules!
"Fact of the market is the Perception of its participants"! there is no better time to explain this statement; now that panic has set in and the market just cant figure out a bottom, least to say a direction in which it should go....
Perception cant be defined in a scientific terminology; its like air ... everybody knows its there however no one can touch or smell it ... no one know where does it come from or where it goes. Recent financials crisis has been no different than a perceptional paradox. Investors are caught in two minds as to what they can do to save their capital. Every one believes there is more weakness in Banks; and therefore everyone shorts them; its like herd's ... contrarians would be punished ... a few people who did well in the last year would be able to drive the sentiment in favour of their positions. No one believes central banks today ... you see wild swings in the currency markets ... suddenly a 0.5% move in EUR for e.g. which was considered to huge about 1.5 years ago seems to be the norm nowadays .. suddenly every asset class is volatile which kind of shows perceptional paradox going around in the markets these days.
At this point in time people who are on the short side are doing marginally better than their counterparts partly because the long guy has no money left to buy new instruments and partly because the perception really is that one can find companies which may go from 100 to 40 in a days time! (I saw the move on Man financials yesterday and coudnt believe my eyes)..
Its a market where every1 has forgotten the fundamentals ... equity analyst are losing their jobs ... portfolio managers now decide to have a long holiday ... CEO's are been thrown out ...best of all Lehman wants to sell itself .. pbbttt.... are we in a shit or are we?! ...
This is sentiment at its best! ....
What results in a change of perceptions; I dont know .. lesson learnt is perception governs all !
Perception cant be defined in a scientific terminology; its like air ... everybody knows its there however no one can touch or smell it ... no one know where does it come from or where it goes. Recent financials crisis has been no different than a perceptional paradox. Investors are caught in two minds as to what they can do to save their capital. Every one believes there is more weakness in Banks; and therefore everyone shorts them; its like herd's ... contrarians would be punished ... a few people who did well in the last year would be able to drive the sentiment in favour of their positions. No one believes central banks today ... you see wild swings in the currency markets ... suddenly a 0.5% move in EUR for e.g. which was considered to huge about 1.5 years ago seems to be the norm nowadays .. suddenly every asset class is volatile which kind of shows perceptional paradox going around in the markets these days.
At this point in time people who are on the short side are doing marginally better than their counterparts partly because the long guy has no money left to buy new instruments and partly because the perception really is that one can find companies which may go from 100 to 40 in a days time! (I saw the move on Man financials yesterday and coudnt believe my eyes)..
Its a market where every1 has forgotten the fundamentals ... equity analyst are losing their jobs ... portfolio managers now decide to have a long holiday ... CEO's are been thrown out ...best of all Lehman wants to sell itself .. pbbttt.... are we in a shit or are we?! ...
This is sentiment at its best! ....
What results in a change of perceptions; I dont know .. lesson learnt is perception governs all !
150! be next...
If you are related to the field of finance in any small way .. u cant ignore but discuss about one instrument which could have made a jackpot for you this year. No prizes for guessing that this instrument is 'Oil'. Yesterday (friday - june 6th) saw highest intraday move for oil .. the price was $138.54 up 8.41% to a life high!
Now the question is who would buy oil at $138.54 a barrel? and most important who brought it upto $138.54 a dollars? .. answer to both these questions is not only difficult but devious. Here is just a possibility of reasons which have led to oil price explosion.
If you recollect; just recently Calpers had decided to increase its global allocation to commodities and so did other pension funds and endowments. An increase in unemployement rate; decelarating US economy and global infaltion fears have prompted these pension / endowment funds to re-think their asset liability mismatch. To the extent now that US interest rates trade at a negative real yield and fear of losing substantial capital through inflationary pressure has spurred a huge investment demand for oil. As we all know that only commodities serve as an anti-inflationary hedge; investment demand for Oil, gold and other soft commodities will continue to rise. Fact of the matter is oil is not a replacable input into industrial production; and a stable production demand coupled with this investment demand is spuriing up oil prices. Even if the global growth rate was to go down 2% this year and assuming 50% industrialization of growth; the demand for oil would be down just 4% ( 2%/50%); however, the investment demand has already covered up this difference. This is now becoming a problem for economies with current account deficits; as widening deficits are leading to currency devaluation which turns into a higher cost of input and further an inflation which is impossible to contain. And the mother of all problems is that no one can dare raise interest rates now to contain inflation as the financial market is already in midst of an impending credit distress. Any weak data now is an impetus for commodities like oil and there is no reason why Oil can't reach $150 in a months time.
Second reason for this spree in oil price is less of an issue but still a cause!... Being into the structured products world; i remember that during jan/feb/march many of the investment banks were engaged in selling Structures on oil which profitted from a fall in oil price. Infact one of the ideas we sold to our client was shorting Oil at $117 when the spot was $90; I am glad we didn't sell this one to our client. Such structures were caught by the investment demand mentioned earlier and resulted in a Bear trap. When these structures were squared off eventually it resulted in a price push to an already inflated price.
On the supply side nothing much has changed and to be honest nothing much has changed in terms of the real demand for Oil. However, we have just added two more dimensions to the demand-supply balance; Capital Protection (investment demand) and Leveraged trading (structured products) and unfortunately both of these are on the demand side of things.
There is reason to believe that this price of oil has no fundamental justification .. however I cant be sure to short Oil till the I know some god father has raised interest rates; killed inflation (or alteast put it to bed); our investment banking friends have sqaured their structures and most importantly there is investable real yield avaliable for pension funds in the markets.
Stay Delta nuetral! (Long Straddle)
Now the question is who would buy oil at $138.54 a barrel? and most important who brought it upto $138.54 a dollars? .. answer to both these questions is not only difficult but devious. Here is just a possibility of reasons which have led to oil price explosion.
If you recollect; just recently Calpers had decided to increase its global allocation to commodities and so did other pension funds and endowments. An increase in unemployement rate; decelarating US economy and global infaltion fears have prompted these pension / endowment funds to re-think their asset liability mismatch. To the extent now that US interest rates trade at a negative real yield and fear of losing substantial capital through inflationary pressure has spurred a huge investment demand for oil. As we all know that only commodities serve as an anti-inflationary hedge; investment demand for Oil, gold and other soft commodities will continue to rise. Fact of the matter is oil is not a replacable input into industrial production; and a stable production demand coupled with this investment demand is spuriing up oil prices. Even if the global growth rate was to go down 2% this year and assuming 50% industrialization of growth; the demand for oil would be down just 4% ( 2%/50%); however, the investment demand has already covered up this difference. This is now becoming a problem for economies with current account deficits; as widening deficits are leading to currency devaluation which turns into a higher cost of input and further an inflation which is impossible to contain. And the mother of all problems is that no one can dare raise interest rates now to contain inflation as the financial market is already in midst of an impending credit distress. Any weak data now is an impetus for commodities like oil and there is no reason why Oil can't reach $150 in a months time.
Second reason for this spree in oil price is less of an issue but still a cause!... Being into the structured products world; i remember that during jan/feb/march many of the investment banks were engaged in selling Structures on oil which profitted from a fall in oil price. Infact one of the ideas we sold to our client was shorting Oil at $117 when the spot was $90; I am glad we didn't sell this one to our client. Such structures were caught by the investment demand mentioned earlier and resulted in a Bear trap. When these structures were squared off eventually it resulted in a price push to an already inflated price.
On the supply side nothing much has changed and to be honest nothing much has changed in terms of the real demand for Oil. However, we have just added two more dimensions to the demand-supply balance; Capital Protection (investment demand) and Leveraged trading (structured products) and unfortunately both of these are on the demand side of things.
There is reason to believe that this price of oil has no fundamental justification .. however I cant be sure to short Oil till the I know some god father has raised interest rates; killed inflation (or alteast put it to bed); our investment banking friends have sqaured their structures and most importantly there is investable real yield avaliable for pension funds in the markets.
Stay Delta nuetral! (Long Straddle)
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