Decoupling Theory Goes to Bin

The Blood bath on the street has rejuvenated the chances of Double dip recessions, the last bloodbath on street was due the failure of the Banking system, this time around we have another reason for the plunge ‘ fear of Sovereign Debt crisis in Eurozone’. 

Now today’s (19’th May 2010) fall was purely due to tinkering with the free markets, history has proved time & again, banning of short selling has never helped in the past (Academic Study), but even regulators as experienced as SEC have failed to understand that short selling is a simple tool to avoid asset bubble formation, still we have politicians with their own whims & fancies & they expect the markets to work according to them. Last week we started on a good note but as expected Germany’s Chancellor’s comments made its ending weak, markets rejoiced on 11’th of May on the news that EU and IMF agreed to act as fairy godmother and pay a $1 trillion emergency-bailout package to stem the sovereign-debt crisis. Sounds good but I have my doubts that we will come out of the tunnel unscratched, & I have my reasons to believe so:-

1)     1)The Bullish pattern in the Fear Index: -   The INDIA VIX index , many call it the fear index is trading well above its 15 day moving average. Thus indicating the fact that volatility is the only reality. CBOE VIX is also trading well above its 200dma & staying there. 

 2)    Yellow metal still shining bright:-

The very fact gold is able to close above $1200per ounce on a consistent basis, indicates the aversion of risk from EM’s, Currency , Crude & Commodities ( Non precious).

3)No takers for Euro :-

The Euro index has seen a freefall & has also breached the lows it had touched after the Lehman Bros. crash. It has breached a strong support of 123-125, still people are feeling the good old dollars are safest currency to stay in.

1)    4)China Commodity Scare:-

I       I am scared of China’s growth & fear that its insatiable thirst for Natural resources  could lead to

  A bubble formation, which if burst’s it could create a catastrophic scenario.

  So if Money is not parked in EM’s, Commodities, Eurozone, Equities in developed markets, then Gold seem to be    the most likely option. So its safe to assume that 2007 high’s of 21K on sensex is still a distant dream, but a  possibility if we see the so called as ‘ Decoupling Theory ‘  coming true due to good monsoons, but I personally expect Nifty to first go to 4600 levels & then 6200.   

PS:-  Many facts & figures are taken from Mr. Deepak Singh’s Blog. ‘ State of the Market’,  Deepak is a vetran technical analyst, and my role model.

Sebi extends Insider Trading to Outsiders

Sebi twigs insider trading norms and almost makes them outsider trading norms…
Securities & Exchange Board of India (Sebi) recently amended the Insider trading regulations.
Amendment No 1: It amended the definition of insider trading almost to an extent where it can be termed as Outsider trading.
Amendment No 2: The second one creates a bar for insiders from trading in their companies for six months after execution of 1’st leg of trade. (After either buying or selling the insider can’t exit or enter the stock of his company in the next six months)
These both are extreme measures, nearly unrivalled in their scope anywhere in the world by any regulator. Especially the first one.
Insider trading as per the law existed last month penalized the misuse of non-public price-sensitive information by parties of interest in the company ( employees, promoters or directors) of the company, who have access to such information, and, in breach of their trust owed to the company, use it for private gain at the cost of other shareholders.
Economists call this simple thing as ‘exploitation of information asymmetry’. In simple trading language ‘Tippee giving a Tip’. Whatever be the name the recent Sebi’s amendment makes anyone liable who has received or has had access to such unpublished price-sensitive information even without having any connection with company. (Even the Thrash cleaner who might not even be on pay-role of the company) Previously, this class of persons was only limited to those connected with the company.
So, now anyone who chances across price-sensitive information can be liable for insider trading. Thus a person who recycles paper from the trash of a listed company, or a journalist who actively attempts to uncover fraud, also becomes an insider as opposed to only officer/directors/fiduciaries and their tippees as previously existed.
US. Dirks, an analyst and an (temporary) investigative journalist who actively uncovered a massive fraud in a company and communicated this fact to his clients, was alleged by the SEC for insider trading. The US Supreme Court had to finally rescue Dirks in a landmark case of Dirks vs SEC.

PS: This Blog is takes References From an Article published in ET by Prof Sandeep Parekh (IIM-A, Visiting faculty)

Will BSE as an Exchange Die?

The new system of cross margining between the cash and the F&O (derivatives) segments that Sebi is putting in place *would impart all important liquidity for liquidity thirsty markets, and they are thirsty alright the combined daily trading volumes on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have dropped at least 56% since the beginning of this year, this is a welcomed move as margin’s required for trading are calculated depending on volatility of an index and VIX, the Volatility Index has been very high, for instance earlier this year the margin requirement for trading in Nifty futures was 10-15% now it has gone up to 25%.
While this move of allowing cross margining** between the cash and the derivatives segments i.e. treating the risk margining on a basket basis rather than on a individual basis makes business and economic sense as its great news for brokers and traders, in terms of boosting the volumes. Some experts say the oldest bourse in Asia might be on verge of extinction. As the derivative segment of BSE is not as developed as NSE, and it’s clear NSE is the main beneficiary out of the two.
But BSE are prisoners of their own device, and the situation they are in place right now is due to their own lethargic (for lack of a better word) actions. For instance in 2007-08 the value of share delivered in BSE in cash segment was 476,196 Cr, and that on NSE was almost twice 970,618 Cr .Many examples can be cited where BSE never capitalized and seized the moment. The biggest issue which BSE faces is, lack of proper and deep derivatives market, as a result they not only loose revenues by not having strong F&O market, but also lose the arbitrageurs who bring in the volumes. The Oldest Asian bourse wanted to introduce currency derivatives, but got delayed, and NSE was first to jump on the button. The BSE has come out from the regime in which few brokers on Dalal Street controlled majority stake in the exchange, and were more keen on milking the fat cow for making their own cheese to taste sweet, but still can we say that Is BSE completely demutualized in true sense of the word. BSE has to dig deep within and get some answers and do it fast before it’s too late.


Information in detail :
*Previously it was allowed for Institutional Investors, now as on 2’nd Dec 2008 this facility is for all sets of Investors.
**Margin is the collateral a trader or an investor has to keep with the exchange while trading. At any point of time, the amount of margin depends on the trading value as well as several other factors associated with overall market risks. Margins could be kept in the form of cash, fixed deposits, bank guarantees, shares and other forms of assets as specified by the existing rules. Cross-margining, which is also known as “spread margin”, allows market participants to reduce the total margin payment required, if they are taking two mutually offsetting positions. This enables market participants to transfer excess margin from one account to another account.
Currently, the margin risk in the derivatives segment is calculated using the standardized portfolio analysis of risk software, developed by the Chicago Mercantile Exchange. The software uses a set of algorithms that helps assess one-day risk for a trader

Innovation Liberates

Fiction liberates and Reality educates, and if we don't learn we don't evolve.. Innovation and adaptation and most importantly acceptance are the key to chest of Doom, in which we find ourselves locked. Jobs being slashed right , left and center uncertainty and hope lingering heavily in the Air, what should we do....Or What can we do...Are we responsible for Sins of few aspirational (for lack of a sophisticated word)Investment bankers...We ask ourselves why should we suffer?
But if we check the History one fact is accentuated... the entire community pays for actions of one Aspirational (Greedy/Maniac)Leader. We can cite millions of examples from Jangeis Khan to Adolf Hitler, to Osama- Bin laden and few bankers.I believe herd mentality to earn profits of few basis points and follow the leader spelt the dooms day.
Yes you may argue i don follow the herd.. i am different..I think differently.. But there lies the catch we as a human race are excellent thinkers and less of doers.. as it takes courage to swim against the tide.
But History has been testimonial to the fact that great leaders and Change agents who have the tenacity to seize the moment emerge as strong leaders.
And in the Indian context i appreciate the proactive measures taken by Dr Subarao to tackle the situation,some thing that was never done and was never thought of, reminded me of situation when Manmohan Singh was the Finance Minister, and when he took decision to pledge Gold Reserves and Open the Economy. True these decisions are not taken by a single man, but men having vision can influence Bold decisions. Yes Call Money Rates were as high as 20%.. but taking action in all three fronts was a bold and appreciated move. Hard decisions seldom don't come with a pinch of a salt...
But these decision are key ingredients to as i said seizing the moment.
If India is able to weather his storm ( and this Sub-prime Crisis is one Perfect Storm seen once in Century)it is poised for emerging as a strong leader.