Saturday, August 1, 2009

The White Knight

In business, a white knight may be a corporation, a private company, or a person that intends to help another firm.They help the firms who face a potential risk of being taken over.When a hostile bid is made by the acquiring company, the target company looks for another company which is more suitable for it.They negotiatie with this third company for taking it over inorder to escape from being taken over by the bidding company.By doing so, they also enter into a contract of avoiding the lay offs.At the same time, they may give only a part of stake to the white knight retaining the major controlling stake.

There are many types of white knights-unfriendly or friendly. Alternatively, a grey knight is an acquiring company that enters a bid for a hostile takeover in addition to the target firm and first bidder, perceived as more favorable than the black knight (unfriendly bidder), but less favorable than the white knight (friendly bidder).


Thursday, June 18, 2009

Now IRFs in Indian Market

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) jointly agreed on enabling exchange-traded interest rate futures (IRF) this week. Interest rate futures are derivative contracts which have an interest bearing security as the underlying instrument. The introduction of this instrument will help banks, insurance companies, bond houses and provident funds manage risks arising from interest rate fluctuations in their fixed income portfolios. Foreign portfolio investors have been allowed to tradeand banks have been allowed to participate in IRFs, but limits have been put in place to keep their influence under check.

This is the second attempt to introduce IRFs. IRFs were launched over five years ago by the NSE, but did not take off due to deficiencies in product design and banks not being allowed to trade in these products. The new IRFs are based on the yield-to-maturity (YTM) curve, which is used daily by traders for their calculations. To start with, futures contracts will be based on the 10-year government bond, with a semi-annual coupon of 7%. There would be quarterly contracts worth Rs 2 lakh crore per contract. Limits have been placed on gross-open positions of clients across all contracts at 6% of the total open interest or Rs 300 crore, whichever is higher.

Source:ET


Credit Default Swap


Credit Default Swaps (CDS) are fast becoming the dominant vehicle for trading credit risk.Two parties enter into an agreement whereby one party pays the other a fixed periodic coupon for the specified life of the agreement. The other party makes no payments unless a specified credit event occurs. Credit events are typically defined to include a material default, bankruptcy or debt restructuring for a specified reference asset. If such a credit event occurs, the party makes a payment to the first party, and the swap then terminates. The size of the payment is usually linked to the decline in the reference asset's market value following the credit event.

In other words it is a specific kind of counterparty agreement which allows the transfer of third party credit risk from one party to the other. One party in the swap is a lender and faces credit risk from a third party, and the counterparty in the credit default swap agrees to insure this risk in exchange of regular periodic payments.If the third party defaults, the party providing insurance will have to purchase from the insured party the defaulted asset. In turn, the insurer pays the insured the remaining interest on the debt, as well as the principal.


CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money .However, there are a number of differences between CDS and insurance, for example:The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event.In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt.Moreover, unlike insurance, CDS are unregulated

Thursday, June 11, 2009

TRAILING STOP LOSS


A complex stop-loss order in which the stop is set at some fixed percentage below the market price. If the market price rises, the stop loss price rises proportionately, but if the stock price falls, the stop loss price doesn't change.

This technique allows an investor to set a limit on the maximum possible loss without setting a limit on the maximum possible gain. It does this without requiring to pay attention to the investment on an ongoing basis.A trailing stop helps protect profits while providing downside protection.

Mechanism of Trailing loss order:

An investor decides to buy into a bull market with the possibility of losses covered by a stop loss. A prudent investor will exit the market once the perceived price is achieved losing on the chance to make any money out of the gains over and above his target. But the idea of the trailing loss order is to raise the exit barrier in the direction of trade instead of setting an absolute value on the rise. A trader using a trailing stop loss would still be hanging on to trading buy waiting for newer highs to be conquered, while the investor with the target selling would have exit the market rally by then.

When the market rises, the trailing stop loss also rises in proportion with the market, leading to escalated stop loss level. But when the market declines, the trailing stop loss doesn’t decline in line with the market. So the profits are protected under such orders. The losses are limited to the extent of the stop loss value.

Sunday, May 24, 2009

Rakesh Jhunjhunwala on market gains-May'2009

What's a Gold Bug?


Gold Bug is an individual who is bullish on gold. Gold bugs believe that gold is still a stable source of wealth like it was during the years of the gold standard international currency system. A gold bug invests in gold for what he or she perceives as financial security in the event of a currency devaluation, and often also believes that the price of gold will continue to rise in the future. The term also refers to analysts who consistently recommend gold buy

Gold bugs view gold as a safe investment that will protect them from currency fluctuations or downturns in the financial markets. The market does continue to view gold as the traditional "safe harbor" during times of economic crisis.

The term was popularized in the 1896 US Presidential Election, when William McKinley supporters took to wearing gold lapel pins, gold neckties, and gold headbands in a demonstration of support for gold against the "silver menace", though the term's original use may have been in Edgar Allan Poe's 1843 story "The Gold-Bug," about a cryptographic treasure map.

How to review MF investments before redeeming the units?

If your mutual fund investment is yielding a lower return than what you anticipated, you may be tempted to redeem your units and invest the money elsewhere. The rate of return of other funds may look enticing, but be careful: there are both pros and cons to the redemption of your MF units. Let's examine the circumstances in which liquidation of your fund units would be most optimal and when it may have negative consequences.

1. Mutual Funds Are Not Stocks

2. When Your Fund Changes

3. Change in Fund Manager

4. Change in Fund Strategy

5. Change in Fund Performance

6. When Your Personal Investment Portfolio Changes

7. The need to rebalance your portfolio

8. Need a tax break

Read here to know in details about the different circumstance..



Friday, May 15, 2009

Value at Risk (VAR or VaR)

Value at Risk  is a widely used measure of the risk of loss on a specific portfolio of financial assets.Value at risk  has been called the "new science of risk management" A technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities.VaR is able to measure risk while it happens and is an important consideration when firms make trading or hedging decision.

e.g. Let 0 be the current time. With value-at-risk, we summarize a portfolio's market risk by reporting some parameter of this distribution. For example, we might report the 90%-quantile of the portfolio's single-period USD loss. This is called one-day 90% USD VaR. If a portfolio has a one-day 90% USD VaR of, say, USD 5MM, it can be expected to lose more than USD 5MM on one trading day out of ten. This is illustrated in Exhibit 1.

Example: One-Day 90% USD VaR
Exhibit 1

VaR has five main uses in financerisk management, risk measurement, financial controlfinancial reporting and computing regulatory capital.A risk manager has two jobs: make people take more risk the 99% of the time it is safe to do so, and survive the other 1% of the time. VaR is the border.Common parameters for VaR are 1% and 5% probabilities and one day and two week horizons, although other combinations are in use.Although it virtually always represents a loss, VaR is conventionally reported as a positive number. A negative VaR would imply the portfolio has a high probability of making a profit, for example a one-day 5% VaR of negative $1 million implies the portfolio has a 95% chance of making $1 million or more over the next day.

To sum up,Value-at-Risk (VaR) measures the worst expected loss under normal market conditions over a specific time interval at a given confidence level.It has 3 main components e.g.

  • What is the most I can - with a 95% or 99% level of confidence -  expect to lose in dollars over the next month?
  • What is the maximum percentage I can - with 95% or 99% confidence - expect to lose over the next year?
"VAR question" has three elements: a relatively high level of confidence (typically either 95% or 99%), a time period (a day, a month or a year) and an estimate of investment loss (expressed either in dollar or percentage terms). 

Thursday, May 14, 2009

Dash to Trash

A term relating to when investors flock to a class of securities or other assets, bidding up prices to beyond what can be justified by valuation or other fundamental measures. While the dash-to-trash effect can occur within any type of security, the phrase is typically used to describe low-quality stocks and high-yield bonds, both of which can be subject to periods of overbuying in the markets. 

As the name graphically implies, investors are buying low-quality assets or assets that do not correctly price in the risks associated with them. The dash to trash often occurs near the end of a prolonged bull market, when investors begin to seek higher returns regardless of the risks involved. The longer it has been since a market downturn, the more likely that large pockets of investors feel bulletproof.

 

Source:Investopedia

 

The only thing premanent is "Change"

Willingness to change is a strength, even if it means plunging part of the company into total confusion for a while.

Warren Buffet-at a glance

Warren Buffett, a billionaire investor is the world's second-richest person, and perhaps America's most-revered capitalist. Buffett, 78, bought Berkshire, a struggling textile mill, in 1965,whose market value is approx $145 billion at present. Berkshire owns close to 80 companies. According to Berkshire's latest proxy filing, as of February 28, Buffett owned 26.9 per cent of Berkshire in aggregate and controlled 31.8 per cent of the company's voting power. Berkshire's stock price is high, trading in the last year for high five-figure and low six-figure amounts for a Class "A" share, because there are few shares outstanding. Buffett does not believe in stock splits and encourages long-term investing.

Buffett has nearly all his net worth, estimated in March at $40 billion by Forbes magazine, invested in Berkshire. He has said every Berkshire share he has will go to philanthropies after his death. In June 2006, he pledged 85 percent of his net worth to the Bill & Melinda Gates Foundation and four family charities. He supports several charities and nonprofit offering programs for the poor, hungry and homeless.Buffett tells his shareholders that he thinks of them as "owner-partners" who will retain their part-ownership in Berkshire indefinitely.

Buffett draws a $100,000 annual salary to run Berkshire. He drinks five cans of Cherry Coke a day. Buffett has lived in the same house for a half-century, a 10-room, five-bedroom home on less than three-quarters of an acre in Omaha, near his office. The home was assessed at $727,600 last year. Buffett plays ukulele and is a bridge partner of Bill Gates, the Microsoft Corp chairman and Berkshire director.

Thursday, May 7, 2009

Obamanomics

Barack Obama has declared his position on many political issues through his public comments and legislative record. If leadership is defined as recognizing a crisis, addressing its challenges, and setting new directions while remaining true to one's values, then Barack Obama is already demonstrating his strengths as a leader. He has inherited an economic crisis worse than any the nation has experienced since the Great Depression.

Obamanomics is  the economic philosophy of 2008 democratic presidential candidate Barack Obama. Obamanomics calls for lower tax rates for companies that meet certain criteria, such as providing decent healthcare and maintaining a U.S. workforce and headquarters. Obama's economic platform also calls for higher taxes for high-income families and investment in education, healthcare and the sciences.

 Obamanomics generally stands in opposition to supply-side, or "trickle-down", economics, which holds that people  should keep more of what they earn because they will spend that money, promoting economic growth. It believes that the  active government intervention and monetary policy can smooth out bumps in economic cycles and promote stability.President Bush's tax cuts are scheduled to expire at the end of 2010. At that time, assuming the economy has entered a recovery, President Obama's budget will restore the top two marginal income tax rates to their 1990s levels of 36% and 39.6% for individuals earning more than $200,000 and couples earning more than $250,000. These changes will affect only the top 3% of taxpayers, the group that has enjoyed the largest gains in income and wealth over the last decade.

The real risk lies in the possibility that the economy's recovery starts later and is much weaker than the economic assumptions in the budget. In this case, President Obama will have to adjust his plans while remaining true to his values. In a very few days, he has already demonstrated that he has the leadership skills to rise to the challenge.

Art of Short selling


Short selling or "shorting" is the practice of selling a financial instrument that the seller does not own at the time of the sale. If you sell a stock you don't own, you are selling short.Short selling is done with the intent of later purchasing the financial instrument at a lower price. Short-sellers attempt to profit from an expected decline in the price of a financial instrument.

Short selling allows investors to profit from falling stock prices. "Buy low, sell high" is the goal . A short sale reverses the order of a typical stock purchase: the stock is sold first and bought later.

Short selling is a marginable transaction. One needs to open a margin account to sell short. This is the same account you would use if you want to use your stocks as collateral margin to trade in the markets.When you open a margin account, you must sign an agreement with your broker. This agreement says you will maintain a cash margin or pledge your stocks as margin.

Short selling is not complex, but it's a concept that many investors have trouble understanding. But Shorting is very, very risky. The mechanics behind a short sale result in some unique risks.
  1. Short selling is a gamble
  2. Losses can be infinite
  3. Shorting stocks involves using borrowed money(Margin Trading)
  4. Short squeezes can wring the profit out of your investment
  5. Even if you're right, it could be at the wrong time.
The two primary reasons for selling short are opportunism and portfolio protection. A short sale provides the opportunity to profit from the overpriced stock. Short sales are also used to protect an investor's portfolio against a market downturn. It protects portfolios against erosion due to a broad market decline. Short selling is essential for proper functioning of the stock market as it provides essential liquidity which in turn leads to proper price discovey.

Tuesday, May 5, 2009

Back to 12k




The buzz was back on Dalal Street as FIIs pumped in Rs 1,417 crore to help Sensex notch its biggest single-day gain in seven months. The 30-share BSE Sensex rose 6.4%, or 731.5 points, to close at 12,134.75, with FIIs largely responsible for the spectacular surge in stock prices. Shares from the metal, banking and IT sectors were the best performers. The coincidence of a host of factors sent the domestic indices skyrocketing.Economic parameters would increasingly get better hereon.

A positive government view on P-notes in a state affidavit to the Supreme Court and strong FII inflow; optimistic manufacturing data from China, and the taking of fresh positions on the first day after F&O expiry, all this after a four-day closure of the market — served to push stocks up.

From October 2008 when the Sensex was last seen at 12k to now, only 18 of the 30 Sensex stocks have ended with gains, while the rest have declined. But what’s interesting is that this time around the rally appeared to be fairly sector-agnostic and stock-specific.

In terms of contribution to the index in its 12k-to-12k sojourn, Reliance Industries (plus 295 points) and Infosys Technologies (plus 211 points) chipped in the most, while poor performance by the beleaguered IT major Satyam Computers (minus 244 points) and L&T (minus 100 points) restrained the index.

So,BSE's benchmark Sensex finally managed to breach 12,000 mark but will it able to maintain the psychological level. Many economists and market analysts have warned that the surge in stock prices globally and in India could be a short-lived reaction to the fiscal packages announced by governments.

Saturday, May 2, 2009

Investing in liquid funds


A good avenue to invest for a short term and earn reasonable returns is a liquid fund. Liquid funds are ultra short-term debt funds.They invest in money market instruments such as certificate of deposits, commercial paper and treasury bills, either on an overnight basis, for 10 days or a month. Liquid funds have no entry and exit loads in most cases. These funds can be used to park cash for a short term. These funds are used to earn a definite amount in less than a year.

The income or bond funds have much longer tenures than liquid funds, and therefore have potentially more downsides as also higher returns. They are suitable for medium to long term horizons . Income funds primarily invest in different, longer tenured instruments like corporate bonds and government securities.

Compared to savings accounts, where the returns are as low as four per cent per annum, the historical returns on liquid funds have been as high as eight per cent per annum. Liquidation is easy. Investors can liquidate at a NAV (net asset value) which they consider to be lucrative, as against a normal mutual fund where the NAV just has a notional value. These funds require a minimum investment of Rs 1,000. However, some funds have a minimum investment requirement of Rs 5,000 too.

There are two kinds of liquid funds. One is a pure liquid fund and the other is liquid plus. The main difference between pure liquid and liquid plus funds is the tenure of the securities held. The instruments held by liquid plus funds have a longer tenure than those held by liquid funds. In terms of tax implications, there is a dividend distribution tax of 28.33 per cent on liquid funds, whereas 14.16 per cent is levied on liquid plus funds (in case of individual investors).

FDI can boost Retail sector

Foreign direct investment in organised retail, if allowed, can bring in a flurry of economic activity to India by global players, an expert with a US-based think-tank said .

"FDI (in organised retail) is allowed in most of the countries in the world ... why not here. If the government opens it to FDI, there will be a flurry of (activity) by foreign players who will not only bring in investible funds but also global expertise and knowledge, much needed to develop this growing sector," the International Food Policy Research Institute Director (Asia) Ashok Gulati said.

FDI in multi-brand retail is not allowed in India and it is permissible only for the wholesale cash and carry firms and in the single brand retail. The organised retail is growing annually by over 70 per cent since 2002. However, since the multi-brand domestic retail sector is in the infancy stage, it has shown significant expansion on a low base.

But how soon the sector can be thrown open to the foreign players depends on "political wisdom".

Source:Economictimes

Thursday, April 30, 2009

Qualified Institutional Placement


Qualified institutional placement (QIP) is simply the means whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a Qualified Institutional Buyer (QIB).

Apart from preferential allotment, this is the only other method of private placement. However, it scores over other methods, as it does not involve many of the common procedural requirements such as the submission of pre-issue filings to the market regulator. 

Why was it introduced? 

The Securities and Exchange Board of India (Sebi) introduced the QIP process in 2006, to prevent listed companies in India from developing an excessive dependence on foreign capital. 

The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets via Foreign Currency Convertible Bonds (FCCB) and Global Depository Receipts (GDR) to fulfil their needs. To keep a check on this process and to give a push to the domestic markets, QIPs were launched. 

QIP in the news lately 

The latest company which adopted the QIP route to raising capital is the cash-strapped real estate major Unitech. While Unitech has managed to garner Rs 1620 crore through QIP, the promoter holding has now come down to 51%.

There are also reports that LIC Housing Finance is mulling over a QIP where it is expected to issue shares of the value of up to 10% of its total paid up capital.

 

 

Brain Drain




A slang term for a significant emigration of educated or talented individuals.It is also referred as human capital flight

This cause countries to lose valuable professionals i.e. departure of doctors, scientists, engineers or financial professionals who seek a better standard of living or who gets a better professioal opportunity outside their home country. When the intellect capital leaves, the home country is harmed in two ways. 

  • First, expertise is lost with each emigrant, diminishing the supply of that profession. 
  • Second, the  economy is effected as each  professional represents surplus spending units.

 As they earn large salaries, so their departure results in  significant decline in consumer spending in the nation.Counteracting the emigration of highly skilled personnel remains a key pursuit. But while some countries suffer the consequences of the so-called "brain drain", others are beginning to reap its potential benefits

An opposite situation, in which many trained and talented individuals seek entrance into a country, is called a brain gain; this may create a brain drain in the nations that the individuals are leaving.This is sometimes referred to as a 'brain transplant'.It  occurs when there is a large-scale immigration of technically qualified persons.





Wednesday, April 29, 2009

Swine flu and sectors to get HIT or LIFT


There’s a lot of uncertainty around the swine flu situation.Again, these are just some of the possible short-term effects we could see resulting from the swine flu epidemic news. Further, it’s worth remembering that at this point, even the authorities have limited information on and predictive power over the swine flu situation. Lets see the sectors which will be effected by the spread of swine flu.(Source:etfdb.com)

Sectors That Could Be Hit Hard

Transportation sector: Travel advisories and recommendations to stay home won’t help transportation stocks.
Energy: Fewer people flying and traveling in general could cause weaker overall demand for energy and crude oil funds.
Equities in general: As we’ve seen in the past six months, a little bit of uncertainty can go a long way towards causing equities to tank.

Sectors That Could Get a Lift

Pharma and Healthcare sectors: In anticipation of demand for vaccines and health services, shares of pharmaceutical and healthcare companies could appreciate.
Gold and Commodities: In the last year precious metal ETFs have been popular buys on days when panic seemed to set in.
Treasuries: Similarly, a flight to safety away from equities could make for inflows in bond funds thought to be very secure.

Swine Flu depresses the market


The stock market had to absorb a number of unsettling headlines on financial and economic matters over the past several months. But it was news of an event outside the realm of finance—an outbreak of swine flu in Mexico and other countries—that rattled the market on Apr. 27.The outbreak of swine flu in Mexico and its spread to other countries has inevitably raised questions about the broader economic and market implications.The worst-case scenario is the sort of global flu pandemic that the World Bank estimated last year might eventually cost up to 4.8% of world gross domestic product (more than $3 trillion).

The positive sentiment in the market has been badly hit by this flu scare. Mexico is the epicentre of the crisis and the Mexican Peso has fallen in thin Asian trading, with the threat of bigger falls ahead.While the White House down plays swine flu as to not disrupt the financial system which has been seen as stabilizing over the last month it could back fire with dramatic consequences. A weak banking system who just underwent a stress test never anticipated an epidemic much less a pandemic.  A sheer drop off in spending by consumers might spell doom for retailers that have struggled to survive until now.

In a reprise of what happened with the SARS panic, airline and tourism stocks are under pressure in early European trading on fears that the swine flu pandemic will curtail travel.

This will deepen the global recession and will probably have a contagion effect on export-led economies in Asia such as South Korea, Thailand, Indonesia, Malaysia, China. All of them depend on the U.S. economy to recover. The stock market will suffer, but the bond market will not be affected that much.The swine flu is undermining confidence and contributing to risk aversion in an array of assets,This is going to hurt at a time when we've had a pickup in stock markets. On the other hand, it could just be an excuse for people to take money off the table.Hence,the market rises or falls according to its own cycle of fear and greed, not the history books.

Tuesday, April 28, 2009

Aspirin Count Theory


This is one of the interesting thoeries which I came across.I found it fascinating as it directly relates to human behaviour. It is a market theory that states stock prices and aspirin production are inversely related. The term arises from the belief that as stock prices fall people are more likely to consume medication such as Aspirin. Investopedia explains Aspirin Count Theory :As stock prices fall, more and more people need pain relievers to get through the day.

For example the Aspirin count theory would predict that as aspirin sales increase, the stock market's value decreases and vice versa. The Aspirin count theory is a lagging indicator and actually hasn't been formally tested, so it is more a humorous hypothesis than a theory.

Recession :Impact on unemployment


As we know,the economic downturn has brought to the fore some stark realities, at least on the jobs front. 'Cost cutting' and 'downsizing' have become the new buzzwords.The eruption of the crisis has caused companies to compel underperformers to either pull up their socks or leave.
A recession is defined as a period of general economic decline; specifically, a decline in the country's GDP for two or more consecutive quarters.During a recession the company would either:
1. reduce unnecessary expenditure (cost optimization) and/or
2. reduce unnecessary work force (resource optimization).
Both the situations would ultimately result in unemployment. Similarly, the company would not be in a position to expand its operations. Hence the number of fresh employment positions that would be created by the company would also take a hit. This would also cause unemployment.

Recessions are often associated with downturns in the gross domestic product (GDP) of countries. The current recession, which affects most of the world, was sparked by events in Asia, but has since included many other nations in its effects. Many companies are finding that they are caught between the benefits of the recession (lower prices for components) and the problems associated with the recession (lower prices for competing products).Certainly, a sufficient proportion of the world's economies are current in recession to warrant an assessment of the potential of this situation to affect future employment levels.

Just as there are different types of employment - with their various impacts on the economy - so, too, does unemployment vary. So, do the economic theories differ in their interpretations of the character of unemployment and, more importantly, in their responses to unemployment.
There are three basic forms of unemployment:
  • Frictional unemployment arises from the "normal" process of turnover in the labor market: as new workers enter the market , and as existing workers quit the jobs.
  • Cyclical unemployment is that which varies with business conditions; for example, workers are laid off when business is bad - then rehired when conditions improve.
  • Structural unemployment caused by imperfect labor-market adjustment, i.e. workers and resources do not move freely to places where they are needed.

A recession in 2008 would raise the national unemployment rate by between 2.1 and 3.8 percentage points. According to Cepr, the unemployment rate and the number of unemployed - based on the historical pattern - would continue to increase through 2010 (to 6.7 percent in the case of a mild-to-moderate recession) or 2011 (to 8.4 percent in the case of a more severe economic downturn).

The last few weeks have seen a remarkable degree of consensus across most of the economics profession around the need for a sharp short-term stimulus to the economy. The goal is to avoid a recession or, in the likely event that that isn’t possible, to make the recession shorter and more shallow. By one rule of thumb, the unemployment rate has now risen enough to send a reliable signal of recession.

The nations are held at the binary decision of are we or aren’t we in recession which is a meaningless exercise, as they are not in a position to realise the fact that the unemployment rate has risen meaningfully and is apt to continue going up which implies that the economic environment is weak.All the industries irrespective of its quarter performance have rung the bells for the unemployment rate to increase significantly and the same would continue to rise in the coming 2 years ahead.