London, Sep 23 (PTI) Bondholders of the beleaguered Lehman Brothers may loose USD 110 billion (about Rs five lakh crore) on account of decline in the asset-value of the fourth-largest investment bank in the US, media reports say. The value of the bonds of Lehman Brothers witnessed a major fall after the investment bank filed for bankruptcy protection, the Financial Times report said adding, "further losses on its derivatives positions, which are still being unwound, could leave even less on the table for bond investors.
" According to the FT report, Loomis Sayles Vice-Chairman Dan Fuss has said, "I don't know how this will play out for bondholders, but I doubt if its going to be good." Loomis Sayles has a small holding in Lehman bonds.
The losses would have a far-reaching effect on ordinary investors, FT said as Lehman bonds were widely held by investors such as pension funds and mutual funds. Meanwhile, those who sold protection against a default or Lehman bankruptcy will possibly recover 18 cents on the dollar when the contracts settle in a complicated auction October 10, the report added.
Before Lehman filed for bankruptcy, its 110 billion- dollar of senior bonds were quoted around 95 cents on the dollar. Bond prices then plunged to 35 cents a week ago.
They are now trading at about 18 cents to the dollar. PTI.
Tuesday, September 23, 2008
Saturday, September 13, 2008
INFOSYS Trends
Most of us hear these words on TV and press:
“Don’t buy now as the price is too high” or “Buy on correction” or “Buy Low and Sell High”.And many times we see a stock “never correcting” and continuing to keep its upward journey.
If you see my posts I advocate “buying high and selling higher” which to many people seems like going against the ‘conventional wisdom”.
To show how this philosophy actually works and how it can help us, I ran one of my trading systems which is a long term trend following system on INFOSYS to explain and understand the results.
Please note that all prices used in the analysis are adjusted for splits and bonuses.
INFOSYS was available in 1995 at a price of Rs. 7.
My algorithmic trading System gave its first BUY in April 1996 at Rs. 8.75 and this was all time high for stock then! The price moved up and then went down giving an exit at around Rs 10 in June 97 after reaching an all time high of 11.25 (Yes,we are not trying to pick the top!). The gain was around 15%.
The stock again moved up again after that to give a BUY ENTRY at 11.30 in Dec 96. This time the trend was stronger and the stock continued up to Rs 50 by Oct 97. The Exit came when stock moved back to around 40-41 levels,giving a gain of almost 300% in 10 months.
The stock again continued its upward journey in March 1998 when it moved up the 50 levels and reached all time high of 51. Again you enter on a stronger trend upward at 51 and try to ride the trend. This time trend is really a big one and the stock continues to move for two years and reaches a high of 1742 in March 2000 (The height of IT boom).
The EXIT comes when the stock starts to move back to 1100 levels (a full 600 points from the top!). Still we made 22 times our money in 2 years!
Now comes the most interesting part. Instead of moving up the stock this time begins to go downhill.From 1700 to 1100 to a low of 265 in Oct 01. Now we were not caught on the wrong foot in this fall as we did not try to “pick the bottom” or “buy low” .
The stock stayed like that till Oct 03 when again a buy signal came after the stock started to move up beyond 600. The entry point was 600 but the trend didn’t develop, so there was an exit at around 590 levels. So there was small loss of around 2%. (Also avoiding the May 04 crash)
Now the Stock again moves up in July 04 giving a BUY entry at around 760 levels and trend continues till Feb 2007 at 2095.The returns was almost 300% in 2.5 years.
The current trend in INFOSYS is downward/sideways.
Now lets summarize how much we made or lost on each trade by “buying high” and “selling higher”.
Trade 1 :15%
Trade 2:+300%
Trade 3:+2100%
Trade 4:-2%
Trade 5: 300%
So whats the moral of the story?
There are couple of observations by following this approach:
a) You are able to pick infosys at Rs 8
b)You are on the “right” side of the market most of the market cycles.
c) You are able to “stay out” of bear markets.
d) Sometimes trends continue for extended periods of time because of fear and greed factor in the markets.
e) One can never tell what is the absolute the “top” and the “bottom”. A “top” is only visible when you look back in time.When the stock made the first top of 11, who could have told you that the stock will be making a top of 2400 ?
Now the bull market in India has been continuing for last 4 years and no one can “predict” how long it might continue-5 years,10 years or 25 years!
So if it continues for another 5 years, you will be riding the “full wave” till the end and get out at the right time with your profits.
You might not believe it but the same system gave an entry in UNITECH at Rs 2.20 and gave an exit at 400. The System is still long something in PRAJ Industries after giving an entry at Rs 10.
If it gets out in 5 days, you will be out with your small losses only so that you can again wait for the right opportunity.
People might have been lucky that INFOSYS came back to 1800 levels in seven years but there were many stocks which never came back!They fell from 2000 to 20 levels and just stayed there.
So just think and when you say I am “buy” and “hold” investor or I am a long term investor.
In next post I will try to discuss how a “fundamental analyst” would have dealt with the INFOSYS stock price. It might give you a different perspective about how we view markets.
We will also try to understand how so called ‘technical analysts’ manage to create so much hoopla around their craft.
“Don’t buy now as the price is too high” or “Buy on correction” or “Buy Low and Sell High”.And many times we see a stock “never correcting” and continuing to keep its upward journey.
If you see my posts I advocate “buying high and selling higher” which to many people seems like going against the ‘conventional wisdom”.
To show how this philosophy actually works and how it can help us, I ran one of my trading systems which is a long term trend following system on INFOSYS to explain and understand the results.
Please note that all prices used in the analysis are adjusted for splits and bonuses.
INFOSYS was available in 1995 at a price of Rs. 7.
My algorithmic trading System gave its first BUY in April 1996 at Rs. 8.75 and this was all time high for stock then! The price moved up and then went down giving an exit at around Rs 10 in June 97 after reaching an all time high of 11.25 (Yes,we are not trying to pick the top!). The gain was around 15%.
The stock again moved up again after that to give a BUY ENTRY at 11.30 in Dec 96. This time the trend was stronger and the stock continued up to Rs 50 by Oct 97. The Exit came when stock moved back to around 40-41 levels,giving a gain of almost 300% in 10 months.
The stock again continued its upward journey in March 1998 when it moved up the 50 levels and reached all time high of 51. Again you enter on a stronger trend upward at 51 and try to ride the trend. This time trend is really a big one and the stock continues to move for two years and reaches a high of 1742 in March 2000 (The height of IT boom).
The EXIT comes when the stock starts to move back to 1100 levels (a full 600 points from the top!). Still we made 22 times our money in 2 years!
Now comes the most interesting part. Instead of moving up the stock this time begins to go downhill.From 1700 to 1100 to a low of 265 in Oct 01. Now we were not caught on the wrong foot in this fall as we did not try to “pick the bottom” or “buy low” .
The stock stayed like that till Oct 03 when again a buy signal came after the stock started to move up beyond 600. The entry point was 600 but the trend didn’t develop, so there was an exit at around 590 levels. So there was small loss of around 2%. (Also avoiding the May 04 crash)
Now the Stock again moves up in July 04 giving a BUY entry at around 760 levels and trend continues till Feb 2007 at 2095.The returns was almost 300% in 2.5 years.
The current trend in INFOSYS is downward/sideways.
Now lets summarize how much we made or lost on each trade by “buying high” and “selling higher”.
Trade 1 :15%
Trade 2:+300%
Trade 3:+2100%
Trade 4:-2%
Trade 5: 300%
So whats the moral of the story?
There are couple of observations by following this approach:
a) You are able to pick infosys at Rs 8
b)You are on the “right” side of the market most of the market cycles.
c) You are able to “stay out” of bear markets.
d) Sometimes trends continue for extended periods of time because of fear and greed factor in the markets.
e) One can never tell what is the absolute the “top” and the “bottom”. A “top” is only visible when you look back in time.When the stock made the first top of 11, who could have told you that the stock will be making a top of 2400 ?
Now the bull market in India has been continuing for last 4 years and no one can “predict” how long it might continue-5 years,10 years or 25 years!
So if it continues for another 5 years, you will be riding the “full wave” till the end and get out at the right time with your profits.
You might not believe it but the same system gave an entry in UNITECH at Rs 2.20 and gave an exit at 400. The System is still long something in PRAJ Industries after giving an entry at Rs 10.
If it gets out in 5 days, you will be out with your small losses only so that you can again wait for the right opportunity.
People might have been lucky that INFOSYS came back to 1800 levels in seven years but there were many stocks which never came back!They fell from 2000 to 20 levels and just stayed there.
So just think and when you say I am “buy” and “hold” investor or I am a long term investor.
In next post I will try to discuss how a “fundamental analyst” would have dealt with the INFOSYS stock price. It might give you a different perspective about how we view markets.
We will also try to understand how so called ‘technical analysts’ manage to create so much hoopla around their craft.
Stock Watch- Glenmark Pharma, Aban Offshore,Rolta
Glenmark pharma remains my favourite pick in the pharma space as it continues to trend up nicely. Watch out for the stock.
Similarly Aban Offshore is one of my favourite stocks in the oil exploration space. We had traded the stock last time from 3000 to 5000 and it seems that the stock is ready to make some explosive moves in the coming times.
In IT ,Rolta looks promising once it crosses 330-340 levels.
Still I would be cautious around 5050 levels. We need a strong momentum on the upside to really take a dash at 5300 levels. One good thing is the abundant “scepticism”,so that might limit the downside.
For aggressive traders,there are many good short term trading opportunities. If you are good in managing your risk, you can make some decent money.
Similarly Aban Offshore is one of my favourite stocks in the oil exploration space. We had traded the stock last time from 3000 to 5000 and it seems that the stock is ready to make some explosive moves in the coming times.
In IT ,Rolta looks promising once it crosses 330-340 levels.
Still I would be cautious around 5050 levels. We need a strong momentum on the upside to really take a dash at 5300 levels. One good thing is the abundant “scepticism”,so that might limit the downside.
For aggressive traders,there are many good short term trading opportunities. If you are good in managing your risk, you can make some decent money.
Friday, September 12, 2008
SUN TV Launches DTH
New Delhi (PTI): South India's leading direct-to-home service provider Sun Direct TV, the JV between the Maran family and Malaysia's Astro Group, on Friday expanded its foothold in the western and the northern markets as part of its pan-India service launch.
With this, the services are set to rollout across the country except for east, the company said in a statement.
The DTH player launched its services in Punjab, Himachal Pradesh, Haryana, Jammu and Kashmir and Gujarat.
"We are all set for a pan-India launch of our services. Going by what we have achieved in the four Southern states we are confident of replicating the same model across other markets and our aim is to quickly ramp up operations to emerge as the second largest DTH player in the country," Sun Direct Chief Operating Officer Tony D'silva said.
The company has also plans to start ventures in unexplored North East, Orissa, Maharashtra and West Bengal and thereafter it will also expand to UP, MP, Bihar, it said. It plans to ramp up its pan India operations within the next 40 days.
Sun Direct, an 80:20 joint venture between the Maran family and the Astro Group, has 1.4 million subscribers across South India, the release said.
As an introductory offer, the company is offering a basic package of over 130-plus channels at a price of Rs 999 for 10 months subscription along with free dish and set top box There is Rs 1000 as installation charges.
With this, the services are set to rollout across the country except for east, the company said in a statement.
The DTH player launched its services in Punjab, Himachal Pradesh, Haryana, Jammu and Kashmir and Gujarat.
"We are all set for a pan-India launch of our services. Going by what we have achieved in the four Southern states we are confident of replicating the same model across other markets and our aim is to quickly ramp up operations to emerge as the second largest DTH player in the country," Sun Direct Chief Operating Officer Tony D'silva said.
The company has also plans to start ventures in unexplored North East, Orissa, Maharashtra and West Bengal and thereafter it will also expand to UP, MP, Bihar, it said. It plans to ramp up its pan India operations within the next 40 days.
Sun Direct, an 80:20 joint venture between the Maran family and the Astro Group, has 1.4 million subscribers across South India, the release said.
As an introductory offer, the company is offering a basic package of over 130-plus channels at a price of Rs 999 for 10 months subscription along with free dish and set top box There is Rs 1000 as installation charges.
Hong Kong stocks soared on
Wednesday, buoyed by property and financial shares, amid a broad
regional rally after a Lehman Brothers (LEH.N: Quote, Profile, Research) share offering
sparked hopes that the worst of the credit crisis may have ended.
Analysts said the strong rebound came after sub-prime gloom
and recession fears lifted, and the market bounced back from
first-quarter lows, but profit-taking pressure loomed.
"Once the fears of the sub-prime crisis subsided, investors
moved their funds from commodities back to equities," said Alex
Tang, research director at Core Pacific-Yamaichi International.
"But we are looking at resistence between the 24,000 and
24,500 levels in the local market."
The benchmark Hang Seng Index .HSI had risen 4.4 percent to
24,154.75 points by the midday break, with banks such as HSBC
(0005.HK: Quote, Profile, Research), China Construction Bank (0939.HK: Quote, Profile, Research) and ICBC (1398.HK: Quote, Profile, Research)
leading the gains.
The China Enterprises Index of Hong Kong-listed mainland
companies .HSCE, or H shares, leapt 6 percent to 12,973.09.
Mainboard turnover soared to HK$65.70 billion ($8.44
billion), compared with HK$38.39 billion on Tuesday morning, as
investors crammed into the rally.
Earlier in the week, Hong Kong stocks ended their worst
quarterly performance in six years, sliding 18 percent during the
period.
China's main stock index in Shanghai .SSEC rebounded more
than 3 percent on Wednesday on the back of strength in overseas
markets but analysts said the rise might just be a brief bounce
in a longer-term downtrend.
"We're not out of the woods yet," Tang said.
Heavyweight China Mobile (0941.HK: Quote, Profile, Research) gained nearly 5.2 percent,
lifting the index over 160 points.
Financial plays soared after strong demand for Lehman
Brother's $4 billion share offering raised hopes that the worst
was over for the financial sector.
HSBC climbed 2.25 percent to HK$131.90, ICBC leapt nearly 6.9
percent to HK$5.92, Bank of China (3988.HK: Quote, Profile, Research) jumped 5 percent to
HK$3.57 and Bank of Communications (3328.HK: Quote, Profile, Research) soared 7.9 percent
to HK$9.99.
China's second-largest life insurer, Ping An (2318.HK: Quote, Profile, Research) --
coming off lows after announcing its multibillion-dollar
fundraising plan in January -- jumped 9.35 percent to HK$60.80.
Swiss bank UBS (UBSN.VX: Quote, Profile, Research) rattled investors on Tuesday with
news of $19 billion in fresh writedowns [ID:nL01419180] but
markets took the view that banks are wiping their books clean of
investments tied to the U.S. subprime crisis.
Property stocks continued to rebound as investors looked
for bargains after recent lows.
Hang Lung (0101.HK: Quote, Profile, Research) gained nearly 8.8 percent to HK$30.35.
New World Development (0017.HK: Quote, Profile, Research) climbed 8.5 percent to HK$20.40,
and Sun Hung Kai Properties (0016.HK: Quote, Profile, Research), Asia's top developer by
market value, jumped 4.9 percent to HK$129.90.
Refiners and airlines also leapt as oil prices stayed off
highs. Sinopec Corp (0386.HK: Quote, Profile, Research) (600028.SS: Quote, Profile, Research), Asia's top refiner,
soared 8.5 percent to HK$7.40.
Hong Kong's dominant carrier Cathay Pacific (0293.HK: Quote, Profile, Research) gained
3.6 percent to HK$16.16, Air China (0753.HK: Quote, Profile, Research) climbed 2.8 percent
to HK$7.02 and China Eastern (0670.HK: Quote, Profile, Research) rose 1.3 percent to
HK$3.97.
regional rally after a Lehman Brothers (LEH.N: Quote, Profile, Research) share offering
sparked hopes that the worst of the credit crisis may have ended.
Analysts said the strong rebound came after sub-prime gloom
and recession fears lifted, and the market bounced back from
first-quarter lows, but profit-taking pressure loomed.
"Once the fears of the sub-prime crisis subsided, investors
moved their funds from commodities back to equities," said Alex
Tang, research director at Core Pacific-Yamaichi International.
"But we are looking at resistence between the 24,000 and
24,500 levels in the local market."
The benchmark Hang Seng Index .HSI had risen 4.4 percent to
24,154.75 points by the midday break, with banks such as HSBC
(0005.HK: Quote, Profile, Research), China Construction Bank (0939.HK: Quote, Profile, Research) and ICBC (1398.HK: Quote, Profile, Research)
leading the gains.
The China Enterprises Index of Hong Kong-listed mainland
companies .HSCE, or H shares, leapt 6 percent to 12,973.09.
Mainboard turnover soared to HK$65.70 billion ($8.44
billion), compared with HK$38.39 billion on Tuesday morning, as
investors crammed into the rally.
Earlier in the week, Hong Kong stocks ended their worst
quarterly performance in six years, sliding 18 percent during the
period.
China's main stock index in Shanghai .SSEC rebounded more
than 3 percent on Wednesday on the back of strength in overseas
markets but analysts said the rise might just be a brief bounce
in a longer-term downtrend.
"We're not out of the woods yet," Tang said.
Heavyweight China Mobile (0941.HK: Quote, Profile, Research) gained nearly 5.2 percent,
lifting the index over 160 points.
Financial plays soared after strong demand for Lehman
Brother's $4 billion share offering raised hopes that the worst
was over for the financial sector.
HSBC climbed 2.25 percent to HK$131.90, ICBC leapt nearly 6.9
percent to HK$5.92, Bank of China (3988.HK: Quote, Profile, Research) jumped 5 percent to
HK$3.57 and Bank of Communications (3328.HK: Quote, Profile, Research) soared 7.9 percent
to HK$9.99.
China's second-largest life insurer, Ping An (2318.HK: Quote, Profile, Research) --
coming off lows after announcing its multibillion-dollar
fundraising plan in January -- jumped 9.35 percent to HK$60.80.
Swiss bank UBS (UBSN.VX: Quote, Profile, Research) rattled investors on Tuesday with
news of $19 billion in fresh writedowns [ID:nL01419180] but
markets took the view that banks are wiping their books clean of
investments tied to the U.S. subprime crisis.
Property stocks continued to rebound as investors looked
for bargains after recent lows.
Hang Lung (0101.HK: Quote, Profile, Research) gained nearly 8.8 percent to HK$30.35.
New World Development (0017.HK: Quote, Profile, Research) climbed 8.5 percent to HK$20.40,
and Sun Hung Kai Properties (0016.HK: Quote, Profile, Research), Asia's top developer by
market value, jumped 4.9 percent to HK$129.90.
Refiners and airlines also leapt as oil prices stayed off
highs. Sinopec Corp (0386.HK: Quote, Profile, Research) (600028.SS: Quote, Profile, Research), Asia's top refiner,
soared 8.5 percent to HK$7.40.
Hong Kong's dominant carrier Cathay Pacific (0293.HK: Quote, Profile, Research) gained
3.6 percent to HK$16.16, Air China (0753.HK: Quote, Profile, Research) climbed 2.8 percent
to HK$7.02 and China Eastern (0670.HK: Quote, Profile, Research) rose 1.3 percent to
HK$3.97.
Lehman Share Price
Lehman Brothers looks as though it's going to sell its asset management arm, Neuberger Berman, for a sorely-needed $10 billion or so. That's got to be good news for the stock, right? No: Lehman shares are down more than 10% today, and its credit default swaps have gapped out as well.
There's no doubt that if Lehman shares had risen today, everybody would know why. But the fact that they're down puts financial journalists into a quandary: they have to pretend that there's some reason, and the best they can do is "writedown fears".
That said, DealBook has a good post today on why selling Neuberger might be a bad idea for Lehman: it could harm the bank's credit rating, send its compensation ratios soaring, and make future cashflows almost impossible to predict (and therefore to price). "Selling the unit would be tantamount to selling a ship's anchor in the midst of a storm," says the piece, citing no one in particular.
And the "writedown fears" reason isn't as silly as it looks at first glance: Lehman's drop of $1.66 a share today is smaller than the per-share losses that the likes of Kenneth Worthington are now forecasting in the third quarter.
But my feeling is that there isn't a reason -- certainly not a nice clean easy-to-fit-into-a-headline one -- why Lehman's stock is tanking today. Sometimes stocks move and we know why. More often, stocks move and we don't know why, which doesn't stop journalists from guessing. And sometimes stocks move for no particular reason at all -- especially when they're surrounded by uncertainty, they're highly leveraged, and there's a good chance that the CEO will be out within a month.
There's no doubt that if Lehman shares had risen today, everybody would know why. But the fact that they're down puts financial journalists into a quandary: they have to pretend that there's some reason, and the best they can do is "writedown fears".
That said, DealBook has a good post today on why selling Neuberger might be a bad idea for Lehman: it could harm the bank's credit rating, send its compensation ratios soaring, and make future cashflows almost impossible to predict (and therefore to price). "Selling the unit would be tantamount to selling a ship's anchor in the midst of a storm," says the piece, citing no one in particular.
And the "writedown fears" reason isn't as silly as it looks at first glance: Lehman's drop of $1.66 a share today is smaller than the per-share losses that the likes of Kenneth Worthington are now forecasting in the third quarter.
But my feeling is that there isn't a reason -- certainly not a nice clean easy-to-fit-into-a-headline one -- why Lehman's stock is tanking today. Sometimes stocks move and we know why. More often, stocks move and we don't know why, which doesn't stop journalists from guessing. And sometimes stocks move for no particular reason at all -- especially when they're surrounded by uncertainty, they're highly leveraged, and there's a good chance that the CEO will be out within a month.
Lehman Brothers 11th Annual Retail Conf
Family Dollar Stores Inc announced that the Company will make a presentation to the investment community at the Lehman Brothers Eleventh Annual Retail and Restaurant Conference on April 30, 2008.
A webcast of this presentation can be accessed live at approximately 10:15 a.m. EDT through the Company’s website in the “Investors” section under “Presentations & Webcasts.” A replay of the webcast will be available through May 14, 2008.
Operating small store locations, Family Dollar is one of the fastest growing discount retail chains in the United States.
Family Dollar Stores Inc
A webcast of this presentation can be accessed live at approximately 10:15 a.m. EDT through the Company’s website in the “Investors” section under “Presentations & Webcasts.” A replay of the webcast will be available through May 14, 2008.
Operating small store locations, Family Dollar is one of the fastest growing discount retail chains in the United States.
Family Dollar Stores Inc
Thursday, September 11, 2008
Crude oil today
Crude oil traded near new all-time highs above $124 today after the OPEC cartel insisted the market is well-supplied and being driven by speculators.
New York's main oil futures contract, light sweet crude for June delivery, rose 62 cents to $124.31 a barrel in Asian trade after closing at a record $ 123.69 yesterday at the New York Mercantile Exchange.
In after-hours deals, the New York futures contract soared to an all-time high of $124.57. Brent North Sea crude for June delivery was 78 cents higher at $123.62 a barrel.
In London yesterday the contract crossed $123 for the first time and jumped to a new intraday peak of $123.87 before settling at a record $122.84.
Oil prices have smashed one record after another in recent days. "The oil market is so overwhelmingly bullish at this point... It is looking at the $125 mark as its next target," said Victor Shum, senior principal at Purvin and Gertz energy consultancy in Singapore.
OPEC Secretary General Abdalla Salem El-Badri yesterday said that there was no shortage of crude oil, brushing aside US calls for higher output to dampen runaway prices.
"There is clearly no shortage of oil in the market," he said. David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney, said El-Badri was reiterating OPEC's view and "his words are not a surprise to the market."
New York's main oil futures contract, light sweet crude for June delivery, rose 62 cents to $124.31 a barrel in Asian trade after closing at a record $ 123.69 yesterday at the New York Mercantile Exchange.
In after-hours deals, the New York futures contract soared to an all-time high of $124.57. Brent North Sea crude for June delivery was 78 cents higher at $123.62 a barrel.
In London yesterday the contract crossed $123 for the first time and jumped to a new intraday peak of $123.87 before settling at a record $122.84.
Oil prices have smashed one record after another in recent days. "The oil market is so overwhelmingly bullish at this point... It is looking at the $125 mark as its next target," said Victor Shum, senior principal at Purvin and Gertz energy consultancy in Singapore.
OPEC Secretary General Abdalla Salem El-Badri yesterday said that there was no shortage of crude oil, brushing aside US calls for higher output to dampen runaway prices.
"There is clearly no shortage of oil in the market," he said. David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney, said El-Badri was reiterating OPEC's view and "his words are not a surprise to the market."
60% oil speculations
Perhaps 60% of oil prices today pure speculation
Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.
In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.
That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.
By purchasing large numbers of futures contracts, and thereby pushing up futures
prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.
As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.
Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.
Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”
Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and fund numerous hedge funds as well who speculate.
In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.
That would mean today that at least $50 to $60 or more of today’s $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London it is more likely that as much as 60% of the today oil price is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren’t talking.
By purchasing large numbers of futures contracts, and thereby pushing up futures
prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.
As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.
Compelling evidence also suggests that the oft-cited geopolitical, economic, and natural factors do not explain the recent rise in energy prices can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.
Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”
Inflation stream
Inflation is back on the government agenda with a bang. This is natural. What is unusual is the scale and speed of rise in the inflation numbers. In the course of just five weeks or so, the wholesale price based inflation not only breached the comfort level of the target projected by the RBI, namely, four to five per cent, but surged to threaten the almost eight per cent hurdle. Going by the recent trend between the provisional and final numbers, the margin may be in excess of a half percentage point. In effect then, the wholesale price based inflation is already hovering near eight per cent. This has happened after the mid-nineties. Was it unexpected? In an article (Mainstream, February 17, 2007) I had analysed the surge a year ago and concluded thus: “The current inflation is not going to fade away easily and on its own.”
Why has this conclusion proved realistic? The government has easy justification of “the phenomenon of imported inflation”. That implies two things. Firstly, we were aware of the evolving global scenario and yet missed the opportunities for preventive steps in time. Secondly, we are not shielded from the downside of the external sector-led growth strategy so that we are now being hurt. This hurt is self-inflicted. If this is the case, then there is a grievous policy failure. The government has knowingly ignored the global signals of the gathering storm. The Finance Minister has been repeatedly reminding us that our economic and financial fundamentals were strong and the global financial turmoil and economic imbalances in the commodity markets would not influence our economy much. Even now, there are symptoms of ad hoc actions and not any long-term strategy to deal with the backlash of financial globalisation.
Structural Shift
IN taking the risk of rapid globalisation there was the need for a rapid response to the shifting structural base of globalisation. This is seen, in the first place, in growth at the cost of all other concerns inbuilt in the economy. These relate to growing regional differentiation in contribution to growth, strong linkages between investment and consumption in a fragmentary social milieu and, therefore, concealed sources of price surge as between sectors of the economy. Growth cannot be divorced from the inherited imbalances of the past to which new ones have been added. Divorce between domestic focus on the potentials of the hinterland and immediate returns from disproportionate investment in the advanced coastal States is now more pronounced than ever before. Secondly, the Finance Minister has claimed frequently that high prices are natural when the economy had taken to a high growth trajectory. However, the government seems to have ignored the need to work out a more balanced trade-off between inflation and growth that could have been less painful than the current inflation surge. For almost two years now there was apparently a divided view about what should be done as between the government and the RBI. As a result, the benefits of collaborative scales as between monetary and fiscal steps were missing.
Thirdly, as late as his 2008 Budget speech, the Finance Minister emphasised that the driving forces behind growth are manufacturing and service sectors. I have repeatedly questioned the appreciating fiscal incentives to the service sector ahead of the needed incentives for the primary and secondary productive sectors. The crucial role of the primary sector in providing stability to growth and moderating inflation is now fully exposed. Fourthly, little concern is seen for the social consequences of the budgetary exercise for strengthening dependence on the country’s fragmented market to respond to sensitive economic concerns. The current tussle between government and industry on the pricing of steel and cement or protecting escalating input costs exposes the weakness of the strategy pursued. The public sector functioning only as stepny does not seem to match our needs yet. Finally, the consequences of the creeping change in the structure of the global economy with Asia and the former communist economies denting the preponderance of the old world economy in swinging the trade and business cycle remains to be integrated in the policy direction. Repeated emphasis on prices of commodities going up in the global market ignores to take into account that this is happening from the addition of the food, metal and fossil fuel needs of Asia to the total pool. Protecting prosperity for the minority has its adverse consequences for the rest. This political dimension is what must haunt a democratic government.
Contributors to Price Rise
THE government’s explanation that the present spurt in prices is from primary commodities needs to be taken with a pinch of salt. If that were really so, the country or parts of it should have witnessed scarcity protests and riots. That is not happening. The metro and urban area supply chains are functioning well physically. And if the high prices of the food commodities of daily use are giving farmers better returns, then that is only fair and is to be welcomed. But that is exactly what is not happening. The large retail chains, so assiduously promoted by the government, have not produced the needed moderation in prices. The spurt in prices is, therefore, from rising incomes that we are proud to flaunt. It is from the growing tendency among the small minority of consumers to engage in what the mainstream media joins in “splurging”. It signifies conspicuous consumption straining the supply chain. Did not the Finance Minister, while defending changes in the income tax slabs, state that half the gains should go in spending? Again, despite the monetary tightening by the RBI, growth rates are expected to remain at a respectable level. There is month-to-month fluctuation so far for which reasons have to be gone into closely. One view is that black money is sustaining the high growth rates now! So, inflation has a good companion in black money.
The mainstream media screams that food prices have led to higher rates. Is that for real? Eighteen per cent of the GDP has overshadowed the remaining? A deeper analysis shows that food inflation in India is lower than manufacturing inflation taking a year as reference. In terms of global comparison, food inflation in India is six to seven per cent while it is much higher outside. It is also significant that imports are an insignificant portion of food commodities in the market. On the other hand, manufacturing and some segments of the service industry source raw materials through imports. Obviously, when input costs are advanced for increasing prices this is essentially for sectors that are engaging in imports on public explanation of lower costs. If that is so, why is it manufacturing inflation at all? But factually, going by the need to even import bulk commodities such as coal and the surge to acquire assets abroad corporate profits have to go up. Larger fuel price inflation has been contained only because of government subsidy, largely to protect the industry. Has not the Budget reduced excise duty on some automobiles even while crude prices have surged beyond $ 110? The globalised economy is not necessarily a low cost economy. Let us be clear that economic policy is after the high cost-high spending economy. Managers of the economy should, therefore, defend that policy rather than pass the blame on the primary sector or the farmers. Failure on controlling inflation lies in this success of the neo-liberal economic policy. Growth versus Inflation
IT is owned that high growth puts pressure on prices. High growth and higher profits place pressure on sharing the benefits with manpower. The employment data shows that wages of workers are not adequately adjusted even to the level of real productivity gains. However, managerial remuneration is inflated on the ground of skill shortage. The structure of such employment is changing too. Consultancy is gaining in importance in preference to the core sectors of the economy. The government itself is providing a signal through practices that encourage this trend. Add to this cheap loans for expanding consumption, the push for unplanned urban expansion without it contributing to core urban infrastructure, stress on white goods without adequate and quality supply of electricity despite the new love for private distribution and a plethora of incentives that impact prices in general. Overall, the economy is becoming a high-cost, high-consumption economy that domestic production has not received the incentives to sustain. So, imports surge in both segments, namely, intermediate raw material and finished products. The foremost real contributors to price rise are manufacturing, high-tech services, spending-intensive foreign tourism and travel and the like. The bulk of the population can only watch. And suffer.
Food prices have responded because of critical support required from the manufacturing and service industries. However, we have not yet reigned in the middle man directed marketing chain. The farmer’s share in higher prices is small. Agricultural inputs’ prices have gone up consistently. Fertiliser subsidy is one indication of how both domestic and imported prices produce the impact. The perpetually adverse balance of trade numbers is another indication that foreign trade would be unmanageable without a growing surge of remittances of Indians working abroad and without the surge in FII-trading in stocks. Most trading in stocks and in foreign capital management and trade have a tendency to add to inflation more than food prices. In fact the price data that forms the basis of projecting food price inflation has a very narrow footing. First, the weightage of food is very small; manufacturing is the dominant partner. Secondly, consumer price inflation is still running neck-to-neck with wholesale inflation. Thirdly, the frequency of the wholesale inflation reporting can work with an efficient data monitoring system. That is lacking. The private trade data is suspect too since wholesale prices provide the rationale for low interest loans to manufacturing, export sector and industries located in tax-concession zones. In effect it is not a true indicator of cost and profit. All this adds to the woes of food sector pricing. The management of capital flows and price and the inherent profitability levels of the industrial sectors are larger contributors to inflation.
A broader policy framework to remove distortions in the total production to the marketing chain will impact the current incentive structure in the economy. The inflation priority would involve curtailment of the profit margins in the chain. It will have consequences for stock prices and suppressed asset bubbles. This is a risk for growth that the government puts premium on despite the distribution of growth being socially perverse. A state of confusion serves policy-making best in the circumstances. Whether it is in the long term interest of the economy is a different matter. Failures of Policy?
WHO is to blame for the current bout of inflation? The major blame must lie with policy-making that did not factor in the social consequences of growing differentials between incomes, domestic availability of goods and services and surge of “fashionable consumption”. Population groups that contribute to such consumption are a minority but they have the potential not to be socially responsible. Consumption promotion is at the root of the high growth trajectory and concessions in rates and taxes as also duty for import of fancy products, including dog’s food, are adjusted accordingly. Lately, the talk of investment-led growth justified the surge in consumption too. The high point of policy is aggregate growth rate to the exclusion of commensurate welfare. It is ignored that growth is a poor measure of economic prosperity when the economy remains fragmented, regional disparity is rampant and social contribution rigidly segmented. Finally, much reliance is devoted to putting down lending rates artificially to keep these comfortable for the favoured classes. In sum, then, the current phase is an outcome of political complacency about the “good times” never ending.
The basic food staples price has to be seen in the perspective of the last two-three years. This increase has been in the range of 30 per cent plus. Wages, neither on public works nor in private employment, have seen that level of increase. So inflation affects the level of essential consumption of the poor harshly. They cut their consumption to the utmost level. The bulk of foreign remittances by Indians also goes into meeting the deficits in consumption of this hard-pressed group. So, high prices reflect a structural shift in the share of consumption between social groups. The economist’s thesis that with increasing aggregate per capita income, the population necessarily shifts to high value foods is a myth. Inflation has a social bias in hurting: it hurts the economically weak disproportionately. That is the whole debate about the politics of inflation. That is at the root of linking the debate to the proximity of elections and the fortunes of rulers.
It has been proved that the high prices of essential commodities have led to the loss of elections by ruling parties at the Centre. Its Leftist allies are the principal advocates of improving the public delivery of staples and some other essential commodities of mass consumption. Instead, there has been reduction in the targeted allocations to States in the last two years on the basis of one or the other technical considerations. The refrain in the government is that everything possible is being done. Administrative and fiscal measures taken in a whole year have not delivered. That is a poor perception of how politics works. It is more so in our country since no mechanism for working out a strategy by involving political parties across the board exists. Neither the ruling coalition nor the Opposition is interested in such an exercise. So, politics will play itself out while the common people bear the brunt of rising inflation.
A last word about the actual level of inflation may be in order. The past is under attack by the new liberalisers. But in more than a decade-and-a-half of the so-called economic reforms, it has not been possible to establish a new basis for measuring inflation and its social impact on the common people. As it appears, the inflation might be hovering near eight per cent now at the wholesale level. The consumer inflation might have topped that by now. In this respect, at least, we have caught up well with China. Since we are being fed much about the global food scenario influencing domestic prices even after export ban, import liberalisation and subsidies, it is necessary to look at the food security scenario anew. The controversy about futures in food trade is still raging. The Economist of London dwells on the “tsunami of hunger”. The New Statesman examines how the “rich starved the world”. The Washington Post examines the “politics of hunger”. That needs to be looked at closely in the perspective of our national economic policies.
The author, a distinguished administrator, is a former Chief Secretary of Bihar (now retired).
Why has this conclusion proved realistic? The government has easy justification of “the phenomenon of imported inflation”. That implies two things. Firstly, we were aware of the evolving global scenario and yet missed the opportunities for preventive steps in time. Secondly, we are not shielded from the downside of the external sector-led growth strategy so that we are now being hurt. This hurt is self-inflicted. If this is the case, then there is a grievous policy failure. The government has knowingly ignored the global signals of the gathering storm. The Finance Minister has been repeatedly reminding us that our economic and financial fundamentals were strong and the global financial turmoil and economic imbalances in the commodity markets would not influence our economy much. Even now, there are symptoms of ad hoc actions and not any long-term strategy to deal with the backlash of financial globalisation.
Structural Shift
IN taking the risk of rapid globalisation there was the need for a rapid response to the shifting structural base of globalisation. This is seen, in the first place, in growth at the cost of all other concerns inbuilt in the economy. These relate to growing regional differentiation in contribution to growth, strong linkages between investment and consumption in a fragmentary social milieu and, therefore, concealed sources of price surge as between sectors of the economy. Growth cannot be divorced from the inherited imbalances of the past to which new ones have been added. Divorce between domestic focus on the potentials of the hinterland and immediate returns from disproportionate investment in the advanced coastal States is now more pronounced than ever before. Secondly, the Finance Minister has claimed frequently that high prices are natural when the economy had taken to a high growth trajectory. However, the government seems to have ignored the need to work out a more balanced trade-off between inflation and growth that could have been less painful than the current inflation surge. For almost two years now there was apparently a divided view about what should be done as between the government and the RBI. As a result, the benefits of collaborative scales as between monetary and fiscal steps were missing.
Thirdly, as late as his 2008 Budget speech, the Finance Minister emphasised that the driving forces behind growth are manufacturing and service sectors. I have repeatedly questioned the appreciating fiscal incentives to the service sector ahead of the needed incentives for the primary and secondary productive sectors. The crucial role of the primary sector in providing stability to growth and moderating inflation is now fully exposed. Fourthly, little concern is seen for the social consequences of the budgetary exercise for strengthening dependence on the country’s fragmented market to respond to sensitive economic concerns. The current tussle between government and industry on the pricing of steel and cement or protecting escalating input costs exposes the weakness of the strategy pursued. The public sector functioning only as stepny does not seem to match our needs yet. Finally, the consequences of the creeping change in the structure of the global economy with Asia and the former communist economies denting the preponderance of the old world economy in swinging the trade and business cycle remains to be integrated in the policy direction. Repeated emphasis on prices of commodities going up in the global market ignores to take into account that this is happening from the addition of the food, metal and fossil fuel needs of Asia to the total pool. Protecting prosperity for the minority has its adverse consequences for the rest. This political dimension is what must haunt a democratic government.
Contributors to Price Rise
THE government’s explanation that the present spurt in prices is from primary commodities needs to be taken with a pinch of salt. If that were really so, the country or parts of it should have witnessed scarcity protests and riots. That is not happening. The metro and urban area supply chains are functioning well physically. And if the high prices of the food commodities of daily use are giving farmers better returns, then that is only fair and is to be welcomed. But that is exactly what is not happening. The large retail chains, so assiduously promoted by the government, have not produced the needed moderation in prices. The spurt in prices is, therefore, from rising incomes that we are proud to flaunt. It is from the growing tendency among the small minority of consumers to engage in what the mainstream media joins in “splurging”. It signifies conspicuous consumption straining the supply chain. Did not the Finance Minister, while defending changes in the income tax slabs, state that half the gains should go in spending? Again, despite the monetary tightening by the RBI, growth rates are expected to remain at a respectable level. There is month-to-month fluctuation so far for which reasons have to be gone into closely. One view is that black money is sustaining the high growth rates now! So, inflation has a good companion in black money.
The mainstream media screams that food prices have led to higher rates. Is that for real? Eighteen per cent of the GDP has overshadowed the remaining? A deeper analysis shows that food inflation in India is lower than manufacturing inflation taking a year as reference. In terms of global comparison, food inflation in India is six to seven per cent while it is much higher outside. It is also significant that imports are an insignificant portion of food commodities in the market. On the other hand, manufacturing and some segments of the service industry source raw materials through imports. Obviously, when input costs are advanced for increasing prices this is essentially for sectors that are engaging in imports on public explanation of lower costs. If that is so, why is it manufacturing inflation at all? But factually, going by the need to even import bulk commodities such as coal and the surge to acquire assets abroad corporate profits have to go up. Larger fuel price inflation has been contained only because of government subsidy, largely to protect the industry. Has not the Budget reduced excise duty on some automobiles even while crude prices have surged beyond $ 110? The globalised economy is not necessarily a low cost economy. Let us be clear that economic policy is after the high cost-high spending economy. Managers of the economy should, therefore, defend that policy rather than pass the blame on the primary sector or the farmers. Failure on controlling inflation lies in this success of the neo-liberal economic policy. Growth versus Inflation
IT is owned that high growth puts pressure on prices. High growth and higher profits place pressure on sharing the benefits with manpower. The employment data shows that wages of workers are not adequately adjusted even to the level of real productivity gains. However, managerial remuneration is inflated on the ground of skill shortage. The structure of such employment is changing too. Consultancy is gaining in importance in preference to the core sectors of the economy. The government itself is providing a signal through practices that encourage this trend. Add to this cheap loans for expanding consumption, the push for unplanned urban expansion without it contributing to core urban infrastructure, stress on white goods without adequate and quality supply of electricity despite the new love for private distribution and a plethora of incentives that impact prices in general. Overall, the economy is becoming a high-cost, high-consumption economy that domestic production has not received the incentives to sustain. So, imports surge in both segments, namely, intermediate raw material and finished products. The foremost real contributors to price rise are manufacturing, high-tech services, spending-intensive foreign tourism and travel and the like. The bulk of the population can only watch. And suffer.
Food prices have responded because of critical support required from the manufacturing and service industries. However, we have not yet reigned in the middle man directed marketing chain. The farmer’s share in higher prices is small. Agricultural inputs’ prices have gone up consistently. Fertiliser subsidy is one indication of how both domestic and imported prices produce the impact. The perpetually adverse balance of trade numbers is another indication that foreign trade would be unmanageable without a growing surge of remittances of Indians working abroad and without the surge in FII-trading in stocks. Most trading in stocks and in foreign capital management and trade have a tendency to add to inflation more than food prices. In fact the price data that forms the basis of projecting food price inflation has a very narrow footing. First, the weightage of food is very small; manufacturing is the dominant partner. Secondly, consumer price inflation is still running neck-to-neck with wholesale inflation. Thirdly, the frequency of the wholesale inflation reporting can work with an efficient data monitoring system. That is lacking. The private trade data is suspect too since wholesale prices provide the rationale for low interest loans to manufacturing, export sector and industries located in tax-concession zones. In effect it is not a true indicator of cost and profit. All this adds to the woes of food sector pricing. The management of capital flows and price and the inherent profitability levels of the industrial sectors are larger contributors to inflation.
A broader policy framework to remove distortions in the total production to the marketing chain will impact the current incentive structure in the economy. The inflation priority would involve curtailment of the profit margins in the chain. It will have consequences for stock prices and suppressed asset bubbles. This is a risk for growth that the government puts premium on despite the distribution of growth being socially perverse. A state of confusion serves policy-making best in the circumstances. Whether it is in the long term interest of the economy is a different matter. Failures of Policy?
WHO is to blame for the current bout of inflation? The major blame must lie with policy-making that did not factor in the social consequences of growing differentials between incomes, domestic availability of goods and services and surge of “fashionable consumption”. Population groups that contribute to such consumption are a minority but they have the potential not to be socially responsible. Consumption promotion is at the root of the high growth trajectory and concessions in rates and taxes as also duty for import of fancy products, including dog’s food, are adjusted accordingly. Lately, the talk of investment-led growth justified the surge in consumption too. The high point of policy is aggregate growth rate to the exclusion of commensurate welfare. It is ignored that growth is a poor measure of economic prosperity when the economy remains fragmented, regional disparity is rampant and social contribution rigidly segmented. Finally, much reliance is devoted to putting down lending rates artificially to keep these comfortable for the favoured classes. In sum, then, the current phase is an outcome of political complacency about the “good times” never ending.
The basic food staples price has to be seen in the perspective of the last two-three years. This increase has been in the range of 30 per cent plus. Wages, neither on public works nor in private employment, have seen that level of increase. So inflation affects the level of essential consumption of the poor harshly. They cut their consumption to the utmost level. The bulk of foreign remittances by Indians also goes into meeting the deficits in consumption of this hard-pressed group. So, high prices reflect a structural shift in the share of consumption between social groups. The economist’s thesis that with increasing aggregate per capita income, the population necessarily shifts to high value foods is a myth. Inflation has a social bias in hurting: it hurts the economically weak disproportionately. That is the whole debate about the politics of inflation. That is at the root of linking the debate to the proximity of elections and the fortunes of rulers.
It has been proved that the high prices of essential commodities have led to the loss of elections by ruling parties at the Centre. Its Leftist allies are the principal advocates of improving the public delivery of staples and some other essential commodities of mass consumption. Instead, there has been reduction in the targeted allocations to States in the last two years on the basis of one or the other technical considerations. The refrain in the government is that everything possible is being done. Administrative and fiscal measures taken in a whole year have not delivered. That is a poor perception of how politics works. It is more so in our country since no mechanism for working out a strategy by involving political parties across the board exists. Neither the ruling coalition nor the Opposition is interested in such an exercise. So, politics will play itself out while the common people bear the brunt of rising inflation.
A last word about the actual level of inflation may be in order. The past is under attack by the new liberalisers. But in more than a decade-and-a-half of the so-called economic reforms, it has not been possible to establish a new basis for measuring inflation and its social impact on the common people. As it appears, the inflation might be hovering near eight per cent now at the wholesale level. The consumer inflation might have topped that by now. In this respect, at least, we have caught up well with China. Since we are being fed much about the global food scenario influencing domestic prices even after export ban, import liberalisation and subsidies, it is necessary to look at the food security scenario anew. The controversy about futures in food trade is still raging. The Economist of London dwells on the “tsunami of hunger”. The New Statesman examines how the “rich starved the world”. The Washington Post examines the “politics of hunger”. That needs to be looked at closely in the perspective of our national economic policies.
The author, a distinguished administrator, is a former Chief Secretary of Bihar (now retired).
Inflation tackle
Inflation is no stranger to the Indian economy. In fact, till the early nineties Indians were used to double-digit inflation and its attendant consequences. But, since the mid-nineties controlling inflation has become a priority for policy framers.
The natural fallout of this has been that we, as a nation, have become virtually intolerant to inflation. While inflation till the early nineties was primarily caused by domestic factors (supply usually was unable to meet demand, resulting in the classical definition of inflation of too much money chasing too few goods), today the situation has changed significantly.
Inflation today is caused more by global rather than by domestic factors. Naturally, as the Indian economy undergoes structural changes, the causes of domestic inflation too have undergone tectonic changes.
Needless to emphasise, causes of today's inflation are complicated. However, it is indeed intriguing that the policy response even to this day unfortunately has been fixated on the traditional anti-inflation instruments of the pre-liberalisation era.
Global imbalance the cause for global liquidity
To understand the text of the present bout of inflation, let us at the outset understand the context: the functioning of the global economy, which is in a state of extreme imbalance. This is simply because developed western economies, particularly the United States, are consuming on a massive scale leading to gargantuan trade deficits.
Crucially their extreme levels of consumption and imports are matched by the proclivity, nay fetish, of the developing countries in having an export-driven economic model. Thus while a set of developing countries produces, exports and also saves the proceeds by investing their forex reserves back in these countries, developed countries are consuming both the production and investment originating from the developing countries.
In effect, developing countries are building their foreign exchange reserves while the developed countries are accumulating the corresponding debt. After all, it takes two to a tango.
For instance, the US current account deficit is estimated to be 7 per cent of GDP in 2006 and stood at approximately $900 billion. Obviously, the current account deficit of the US becomes the current account surplus of other exporting countries, viz. China, Japan and other oil producing and exporting countries.
The reason for this imbalance in the global economy is the fact that after the Asian currency crisis; many countries found the virtues of a weak currency and engaged in 'competitive devaluation.'
Under this scenario, many countries simply leveraged their weak currency vis-�-vis the US dollar to gain to the global (read US) markets. This mercantilist policy to maintain their competitiveness is achieved when their central banks intervenes in the currency markets leading to accumulation of foreign exchange, notably the US dollar, against their own currency.
Implicitly it means that the developing world is subsidising the rich developed world. Put more bluntly, it would mean that the US has outsourced even defending the dollar to these countries, as a collapse of the US currency would hurt these countries holding more dollars in reserves than perhaps the US itself!
In this connection, commenting on the above phenomenon in the Power and Interest News Report, Jephraim P Gundzik wrote that the world growth "was hardly sufficient to be behind the further rise of commodity prices in the first five months of this year (i.e. in 2006). Rather than demand pushing the value of commodities higher in the past 18 months, it has been the (impending) dollar's devaluation against commodities that has pushed commodity prices to record highs."
Naturally, as the players fear a fall in the value of the dollar and reach out to various assets and commodities, the prices of these commodities and assets too will rise.
The psychological dimension
But as the imbalance shows no sign of correcting, players seek to shift to commodities and assets across continents to hedge against the impending fall in the US dollar. Thus, it is a fight between central banks and the psychology of market players across continents.
As a corrective measure, economists are coming to the conclusion that most of the currencies across the globe are highly undervalued vis-�-vis the dollar, which, in turn, requires a significant dose of devaluation. For instance, a consensus exists amongst economists and currency traders that the Yen is one of the most highly undervalued currencies (estimated at around 60%) along with the Chinese Yuan (estimated at 50%) followed by other countries in Asia.
This artificial undervaluation of currencies is another fundamental cause for increasing global liquidity.
To get an idea of the enormity of the aggregation of these two factors on the world's supply of dollars, Jephraim P. Gundzik calculates the dollar value of rising prices of just one commodity -- crude oil.
In 2004, global demand for crude oil grew by a mere four per cent. Nevertheless higher oil prices advanced by as much as 34 per cent. Consequently, it is this factor that significantly contributed to increase the world's dollar supply by about $330 billion.
In 2005, international crude oil prices gained another 35 per cent and global demand for oil grew by only 1.6 per cent. Nonetheless, the world's supply of dollars increased by a further $460 billion.
Naturally, with all currencies refusing to be revalued, this leads to increased global liquidity. While one is not sure as to whether the increase in the prices of crude led to the increase of other commodities or vice versa, the fact of the matter is that, in the aggregate, increased liquidity has led to the increase in commodity prices as a whole.
Although some of this increase in the world's supply of dollars has been reabsorbed into US economy by the twin American deficits -- current as well as budgetary -- it is estimated that as much as $600 billion remains outside the US.
What has further compounded the problem is the near-zero interest rate regime in Japan. With almost $905 billion forex reserves, it makes sense to borrow in Japan at such low rates and invest elsewhere for higher returns. Obviously, some of this money -- estimated by experts to be approximately $200 billion -- has undoubtedly found its way into the asset markets of other countries.
Most of it has been parked in alternative investments such as commodities, stocks, real estates and other markets across continents, leveraged many times over. Needless to reiterate, the excessive dollar supply too has fuelled the property and commodity boom across markets and continents.
The twin causes -- excessive liquidity due to undervaluation of various currencies (technical) and fear of the US dollar collapse leading to increased purchase of various commodities to hedge against a fall in US dollar (psychological) -- needs to be tackled upfront if inflation has to be confronted globally.
Higher international farm prices impact Indian farm prices
What actually compounds the problem for India is the fact that lower harvest worldwide, specifically in Australia and Brazil, and the overall strength of demand vis-�-vis supply and low stock positions world over, global wheat prices have continued to rise.
Wheat demand is expected to rise, while world production is expected to decline further in the coming months, as a result of which global stocks, already at historically low levels, may fall further by 20 per cent. These global trends have put upward pressure on domestic prices of wheat and are expected to continue to do so during the course of this year.
No wonder, despite the government lowering the import tariffs on wheat to zero, there has been no significant quantity of wheat imports as the international prices of wheat are higher than the domestic prices.
Growth and forex flows
Another cause for the increase in the prices of these commodities has been due to the fact that both India and China have been recording excellent growth in recent years. It has to be noted that China and India have a combined population of 2.5 billion people.
Given this size of population even a modest $100 increase in the per capita income of these two countries would translate into approximately $250 billion in additional demand for commodities. This has put an extraordinary highly demand on various commodities. Surely growth will come at a cost.
The excessive global liquidity as explained above has facilitated buoyant growth of money and credit in 2005-06 and 2006-07. For instance, the net accretion to the foreign exchange reserves aggregates to in excess of $50 billion (about Rs 225,000 crore) in 2006-07. Crucially, this incremental flow of foreign exchange into the country has resulted in increased credit flow by our banks. Naturally this is another fuel for growth and crucially, inflation.
This Reserve Bank of India's strategy of dealing with excessive liquidity through the Market Stabilization Scheme (MSS) has its own limitations. Similarly, the increase in repo rates (ostensibly to make credit overextension costly) and increase in CRR rates (to restrict excessive money supply) are policy interventions with serious limitations in the Indian context with such huge forex inflows.
How about the revaluation of the Indian Rupee?
To conclude, all these are pointers to a need for a different strategy. The current bout of inflation is caused by a multiplicity of factors, mostly global and is structural. Monetary as well as trade policy responses, as has been attempted till date, would be inadequate to deal with the extant issue effectively.
Crucially, a stock market boom, a real estate boom and a benign inflation in the foodgrains market is an economic impossibility.
It has to be noted that the Indian market is structurally suited for leveraging shortages rather effectively. Added to this is the information asymmetry among various class of consumers as well as between consumers, on the one hand, and producers and consumers, on the other.
Further, the sustained flow of foreign money, thanks to the excessive global liquidity in the world, has fuelled the rise of the stock markets and real estate prices in India to unprecedented levels.
This boom has naturally led to corresponding booms in various related markets as much as the increased credit flow has in a way resulted in overall inflation.
Economic policy rests in the triumvirate of fiscal, monetary and trade policies. Theoretical understanding of economics meant that these policies are interdependent.
Also, one needs to understand that growth naturally comes with its attendant costs and consequences. While these policies are usually intertwined and typically compensatory, one has to understand that the issues with respect to inflation cannot be subjected to conventional wisdom in the era of globalisation.
One policy route yet unexamined in the Indian context by the government is the exchange rate policy, especially revaluation of the Rupee as an instrument to control inflation.
It is time that we think about a revaluation of the Indian Rupee as a policy response to the complex issue of managing inflation, while simultaneously address the constraints on the supply side on food grains through increase in domestic production.
A higher Rupee value vis-�-vis the dollar would mean lower purchase price of commodities in Rupee terms. The Indian economy has undergone significant changes in the past decade and a half. With increased linkages to the global economy, it cannot duck the negatives of globalisation.
The natural fallout of this has been that we, as a nation, have become virtually intolerant to inflation. While inflation till the early nineties was primarily caused by domestic factors (supply usually was unable to meet demand, resulting in the classical definition of inflation of too much money chasing too few goods), today the situation has changed significantly.
Inflation today is caused more by global rather than by domestic factors. Naturally, as the Indian economy undergoes structural changes, the causes of domestic inflation too have undergone tectonic changes.
Needless to emphasise, causes of today's inflation are complicated. However, it is indeed intriguing that the policy response even to this day unfortunately has been fixated on the traditional anti-inflation instruments of the pre-liberalisation era.
Global imbalance the cause for global liquidity
To understand the text of the present bout of inflation, let us at the outset understand the context: the functioning of the global economy, which is in a state of extreme imbalance. This is simply because developed western economies, particularly the United States, are consuming on a massive scale leading to gargantuan trade deficits.
Crucially their extreme levels of consumption and imports are matched by the proclivity, nay fetish, of the developing countries in having an export-driven economic model. Thus while a set of developing countries produces, exports and also saves the proceeds by investing their forex reserves back in these countries, developed countries are consuming both the production and investment originating from the developing countries.
In effect, developing countries are building their foreign exchange reserves while the developed countries are accumulating the corresponding debt. After all, it takes two to a tango.
For instance, the US current account deficit is estimated to be 7 per cent of GDP in 2006 and stood at approximately $900 billion. Obviously, the current account deficit of the US becomes the current account surplus of other exporting countries, viz. China, Japan and other oil producing and exporting countries.
The reason for this imbalance in the global economy is the fact that after the Asian currency crisis; many countries found the virtues of a weak currency and engaged in 'competitive devaluation.'
Under this scenario, many countries simply leveraged their weak currency vis-�-vis the US dollar to gain to the global (read US) markets. This mercantilist policy to maintain their competitiveness is achieved when their central banks intervenes in the currency markets leading to accumulation of foreign exchange, notably the US dollar, against their own currency.
Implicitly it means that the developing world is subsidising the rich developed world. Put more bluntly, it would mean that the US has outsourced even defending the dollar to these countries, as a collapse of the US currency would hurt these countries holding more dollars in reserves than perhaps the US itself!
In this connection, commenting on the above phenomenon in the Power and Interest News Report, Jephraim P Gundzik wrote that the world growth "was hardly sufficient to be behind the further rise of commodity prices in the first five months of this year (i.e. in 2006). Rather than demand pushing the value of commodities higher in the past 18 months, it has been the (impending) dollar's devaluation against commodities that has pushed commodity prices to record highs."
Naturally, as the players fear a fall in the value of the dollar and reach out to various assets and commodities, the prices of these commodities and assets too will rise.
The psychological dimension
But as the imbalance shows no sign of correcting, players seek to shift to commodities and assets across continents to hedge against the impending fall in the US dollar. Thus, it is a fight between central banks and the psychology of market players across continents.
As a corrective measure, economists are coming to the conclusion that most of the currencies across the globe are highly undervalued vis-�-vis the dollar, which, in turn, requires a significant dose of devaluation. For instance, a consensus exists amongst economists and currency traders that the Yen is one of the most highly undervalued currencies (estimated at around 60%) along with the Chinese Yuan (estimated at 50%) followed by other countries in Asia.
This artificial undervaluation of currencies is another fundamental cause for increasing global liquidity.
To get an idea of the enormity of the aggregation of these two factors on the world's supply of dollars, Jephraim P. Gundzik calculates the dollar value of rising prices of just one commodity -- crude oil.
In 2004, global demand for crude oil grew by a mere four per cent. Nevertheless higher oil prices advanced by as much as 34 per cent. Consequently, it is this factor that significantly contributed to increase the world's dollar supply by about $330 billion.
In 2005, international crude oil prices gained another 35 per cent and global demand for oil grew by only 1.6 per cent. Nonetheless, the world's supply of dollars increased by a further $460 billion.
Naturally, with all currencies refusing to be revalued, this leads to increased global liquidity. While one is not sure as to whether the increase in the prices of crude led to the increase of other commodities or vice versa, the fact of the matter is that, in the aggregate, increased liquidity has led to the increase in commodity prices as a whole.
Although some of this increase in the world's supply of dollars has been reabsorbed into US economy by the twin American deficits -- current as well as budgetary -- it is estimated that as much as $600 billion remains outside the US.
What has further compounded the problem is the near-zero interest rate regime in Japan. With almost $905 billion forex reserves, it makes sense to borrow in Japan at such low rates and invest elsewhere for higher returns. Obviously, some of this money -- estimated by experts to be approximately $200 billion -- has undoubtedly found its way into the asset markets of other countries.
Most of it has been parked in alternative investments such as commodities, stocks, real estates and other markets across continents, leveraged many times over. Needless to reiterate, the excessive dollar supply too has fuelled the property and commodity boom across markets and continents.
The twin causes -- excessive liquidity due to undervaluation of various currencies (technical) and fear of the US dollar collapse leading to increased purchase of various commodities to hedge against a fall in US dollar (psychological) -- needs to be tackled upfront if inflation has to be confronted globally.
Higher international farm prices impact Indian farm prices
What actually compounds the problem for India is the fact that lower harvest worldwide, specifically in Australia and Brazil, and the overall strength of demand vis-�-vis supply and low stock positions world over, global wheat prices have continued to rise.
Wheat demand is expected to rise, while world production is expected to decline further in the coming months, as a result of which global stocks, already at historically low levels, may fall further by 20 per cent. These global trends have put upward pressure on domestic prices of wheat and are expected to continue to do so during the course of this year.
No wonder, despite the government lowering the import tariffs on wheat to zero, there has been no significant quantity of wheat imports as the international prices of wheat are higher than the domestic prices.
Growth and forex flows
Another cause for the increase in the prices of these commodities has been due to the fact that both India and China have been recording excellent growth in recent years. It has to be noted that China and India have a combined population of 2.5 billion people.
Given this size of population even a modest $100 increase in the per capita income of these two countries would translate into approximately $250 billion in additional demand for commodities. This has put an extraordinary highly demand on various commodities. Surely growth will come at a cost.
The excessive global liquidity as explained above has facilitated buoyant growth of money and credit in 2005-06 and 2006-07. For instance, the net accretion to the foreign exchange reserves aggregates to in excess of $50 billion (about Rs 225,000 crore) in 2006-07. Crucially, this incremental flow of foreign exchange into the country has resulted in increased credit flow by our banks. Naturally this is another fuel for growth and crucially, inflation.
This Reserve Bank of India's strategy of dealing with excessive liquidity through the Market Stabilization Scheme (MSS) has its own limitations. Similarly, the increase in repo rates (ostensibly to make credit overextension costly) and increase in CRR rates (to restrict excessive money supply) are policy interventions with serious limitations in the Indian context with such huge forex inflows.
How about the revaluation of the Indian Rupee?
To conclude, all these are pointers to a need for a different strategy. The current bout of inflation is caused by a multiplicity of factors, mostly global and is structural. Monetary as well as trade policy responses, as has been attempted till date, would be inadequate to deal with the extant issue effectively.
Crucially, a stock market boom, a real estate boom and a benign inflation in the foodgrains market is an economic impossibility.
It has to be noted that the Indian market is structurally suited for leveraging shortages rather effectively. Added to this is the information asymmetry among various class of consumers as well as between consumers, on the one hand, and producers and consumers, on the other.
Further, the sustained flow of foreign money, thanks to the excessive global liquidity in the world, has fuelled the rise of the stock markets and real estate prices in India to unprecedented levels.
This boom has naturally led to corresponding booms in various related markets as much as the increased credit flow has in a way resulted in overall inflation.
Economic policy rests in the triumvirate of fiscal, monetary and trade policies. Theoretical understanding of economics meant that these policies are interdependent.
Also, one needs to understand that growth naturally comes with its attendant costs and consequences. While these policies are usually intertwined and typically compensatory, one has to understand that the issues with respect to inflation cannot be subjected to conventional wisdom in the era of globalisation.
One policy route yet unexamined in the Indian context by the government is the exchange rate policy, especially revaluation of the Rupee as an instrument to control inflation.
It is time that we think about a revaluation of the Indian Rupee as a policy response to the complex issue of managing inflation, while simultaneously address the constraints on the supply side on food grains through increase in domestic production.
A higher Rupee value vis-�-vis the dollar would mean lower purchase price of commodities in Rupee terms. The Indian economy has undergone significant changes in the past decade and a half. With increased linkages to the global economy, it cannot duck the negatives of globalisation.
Sensex ends at low
The Sensex opened with a negative gap of over 100 points at 14,557, which also turned out to be the high for the day. Sustained selling in heavyweights like Reliance saw the index drop to a low of 14,265 - an intra-day swing of over 290 points. The Sensex finally closed with a loss of 338 points (2.31%) at 14,324.
All the sectoral indices closed in the red. The BSE Oil & Gas and Power indices declined 3%. Market breadth was extremely bearish - out of over 2,710 scrips traded, over 1,785 declined.
Reliance declined over 4% to Rs 1,998. Bharti and Reliance Infra also dropped over 4% each to Rs 776 and Rs 992, respectively.
ONGC slipped nearly 4% to Rs 1,035. Tata Power and DLF were also down over 3% each at Rs 1,012 and Rs 485, respectively.
M&M, BHEL, NTPC, Maruti, HDFC, ICICI Bank, L&T and SBI also declined.
Tata Motors gained over 1% at Rs 424. Ranbaxy was up marginally at Rs 459 crore.
Total market turnover (BSE+NSE) was Rs 65,923 crore. Reliance was the most active counter on the BSE with a turnover of Rs 479 crore followed by Reliance Capital (Rs 241 crore) and ICICI Bank (Rs 166 crore).
All the sectoral indices closed in the red. The BSE Oil & Gas and Power indices declined 3%. Market breadth was extremely bearish - out of over 2,710 scrips traded, over 1,785 declined.
Reliance declined over 4% to Rs 1,998. Bharti and Reliance Infra also dropped over 4% each to Rs 776 and Rs 992, respectively.
ONGC slipped nearly 4% to Rs 1,035. Tata Power and DLF were also down over 3% each at Rs 1,012 and Rs 485, respectively.
M&M, BHEL, NTPC, Maruti, HDFC, ICICI Bank, L&T and SBI also declined.
Tata Motors gained over 1% at Rs 424. Ranbaxy was up marginally at Rs 459 crore.
Total market turnover (BSE+NSE) was Rs 65,923 crore. Reliance was the most active counter on the BSE with a turnover of Rs 479 crore followed by Reliance Capital (Rs 241 crore) and ICICI Bank (Rs 166 crore).
Sensex @ 10K
Patrick Shum, chief strategist, Karl Thomson Securities, said the Sensex may drop to 10,000 by the end of the year.
At what levels, in terms of price correction, does India become good on a valuation basis to look at?
Shum: I guess at the end of this year, the Sensex may drop to 10,000 points. I think at that level, it is a good time for buying. Before that, I suggest investors should be more patient and wait for the correction.
What is your worst-case scenario for inflation and interest rates now?
Shum: Inflation is over 12% - so it is higher than the economic growth, and we can see in India that the economy is under stagflation. The central bank will have less flexibility to implement their policys... so uncertainty will affect investment sentiment.
What is the flow of money from the FII side into Asia? Are they looking at equities in emerging markets?
Shum: Most of the equity markets is still facing pressure because a strong US dollar means money is returning to the US. So, in the near term or the rest of this year, money flow to Asian markets will be low, and the equities markets will face certain pressure.
You said India is probably heading towards stagflation? Is that correct?
Shum: I think investors, for the rest of this year, should hold more cash and increase their cash holding... I can see more downside in the coming months.
From an economic stand point, I didn't catch the word stagflation. What is that?
Shum: In economic terms, you can see the sub-prime crisis in the US, and in the European market, we can see negative GDP growth. So, in economic terms, I think the global economy will slow down.. so it's not a good time for investments.
What accounts for the rally that we saw in Indian equities all through July? We were one of the outperformers ...
Shum: I think in the near-term, the Indian market will underperform but in the long- term, let's say 1-2 years, I think India will outperform because the fundamentals are still good... in the near-term, strong inflation will erode consumers' purchasing power. I think the valuation of the Indian market is relatively higher than other markets...
I think the market will become weaker because inflation is still there, and I think because of strong oil prices and food prices, inflation pressure will increase and the central bank may raise interest rates again.
At what levels, in terms of price correction, does India become good on a valuation basis to look at?
Shum: I guess at the end of this year, the Sensex may drop to 10,000 points. I think at that level, it is a good time for buying. Before that, I suggest investors should be more patient and wait for the correction.
What is your worst-case scenario for inflation and interest rates now?
Shum: Inflation is over 12% - so it is higher than the economic growth, and we can see in India that the economy is under stagflation. The central bank will have less flexibility to implement their policys... so uncertainty will affect investment sentiment.
What is the flow of money from the FII side into Asia? Are they looking at equities in emerging markets?
Shum: Most of the equity markets is still facing pressure because a strong US dollar means money is returning to the US. So, in the near term or the rest of this year, money flow to Asian markets will be low, and the equities markets will face certain pressure.
You said India is probably heading towards stagflation? Is that correct?
Shum: I think investors, for the rest of this year, should hold more cash and increase their cash holding... I can see more downside in the coming months.
From an economic stand point, I didn't catch the word stagflation. What is that?
Shum: In economic terms, you can see the sub-prime crisis in the US, and in the European market, we can see negative GDP growth. So, in economic terms, I think the global economy will slow down.. so it's not a good time for investments.
What accounts for the rally that we saw in Indian equities all through July? We were one of the outperformers ...
Shum: I think in the near-term, the Indian market will underperform but in the long- term, let's say 1-2 years, I think India will outperform because the fundamentals are still good... in the near-term, strong inflation will erode consumers' purchasing power. I think the valuation of the Indian market is relatively higher than other markets...
I think the market will become weaker because inflation is still there, and I think because of strong oil prices and food prices, inflation pressure will increase and the central bank may raise interest rates again.
Monday, September 8, 2008
Long Term Investment Strategies:
The markets are now having higher intermediate bottoms but lower intermediate tops. Long term perspective will be good if the markets closes above its last intermediate top of around 15,580 levels. We can see a good come back rally after that. Do remember to book profits at higher levels. The equivalent levels in nifty would be 4,650. Indian markets were able to sustain good levels in the last 2-3 months as against the global peers. It sustained the last intermediate lows of 12,514 levels. So thats a pretty good sign for long term investors.
Some concerns would be as always the inflation figures, crude oil prices and certain developments at the center. The Singur issue is almost solved with some announcement expected very soon on that matter. Now as said watch out for levels like 11,200 in Dow and Hang Seng should also make a comeback as it has touched yearly lows now. Another space to watch for would be the IT stocks as the dollar has touched 44.60 levels already against Indian currency. The IT stocks could be a safe bet for coming days along with other exporters.
Some concerns would be as always the inflation figures, crude oil prices and certain developments at the center. The Singur issue is almost solved with some announcement expected very soon on that matter. Now as said watch out for levels like 11,200 in Dow and Hang Seng should also make a comeback as it has touched yearly lows now. Another space to watch for would be the IT stocks as the dollar has touched 44.60 levels already against Indian currency. The IT stocks could be a safe bet for coming days along with other exporters.
RIL among world's 100 most respected cos
Billionaire Mukesh Ambani-led Reliance Industries [Get Quote] has made it to the annual list of the world's 100 most respected companies compiled by the Wall Street Journal, topped by US-based healthcare products major Johnson & Johnson.
Ranked 83rd, RIL is the only Indian company on the list, although there are three more companies led by persons of Indian origin -- PepsiCo, ArcelorMittal and Citigroup.
J&J is followed by FMCG giant Procter & Gamble, Japanese auto maker Toyota Motor, legendary investor Warren Buffett-led Berkshire Hathaway and technology giant Apple in the top five positions.
While Berkshire has slipped from its first position last year, J&J has moved up from its second place in 2007 list. Toyota has retained its third place, while Apple and P&G have improved on their previous year rankings.
Besides, Google (6th), Wal-Mart (7th), Coca-Cola (8th), PepsiCo (9th) and Nestle [Get Quote] (10th) also figure among the top-ranked companies.
As part of the fourth annual survey, Wall Street Journal asked money managers to indicate the degree to which they respect or don't the 100 largest publicly traded companies, as measured by total market value.
According to the survey, 74 per cent respondents said they 'highly respect' J&J, 23 per cent said they 'respect', 3 per cent said 'respect somewhat' but none said they 'don't respect' the company making it the top-ranked company.
About RIL, 4 per cent considered the company as highly respected, 17 per cent said they 'respect' it, 46 per cent responded saying they 'respect somewhat', while 11 per cent said they 'don't respect' the firm.
The publication said it assigned a point each to the four categories highly respect, respect, respect somewhat and don't respect to determine mean scores, using the percentage of highly respect to break ties.
Telecom giant Vodafone Group (UK) has been ranked at the 66th spot.
Beverages major Pepsico headed by India-origin Indra Nooyi has gone up three places to the ninth position from the previous year's ranking.
However, arch rival Coca-Cola is one place ahead of PepsiCo at the eighth spot.
Indian billionaire Lakshmi Mittal-led ArcelorMittal (France) has moved up 33 spots to corner the 60th rank. In last year's ranking, the company was placed at the 93rd position.
Further, banking behemoth Citigroup has dropped in its ranking to the 99th spot from the previous year's 53rd place.
Ranked 83rd, RIL is the only Indian company on the list, although there are three more companies led by persons of Indian origin -- PepsiCo, ArcelorMittal and Citigroup.
J&J is followed by FMCG giant Procter & Gamble, Japanese auto maker Toyota Motor, legendary investor Warren Buffett-led Berkshire Hathaway and technology giant Apple in the top five positions.
While Berkshire has slipped from its first position last year, J&J has moved up from its second place in 2007 list. Toyota has retained its third place, while Apple and P&G have improved on their previous year rankings.
Besides, Google (6th), Wal-Mart (7th), Coca-Cola (8th), PepsiCo (9th) and Nestle [Get Quote] (10th) also figure among the top-ranked companies.
As part of the fourth annual survey, Wall Street Journal asked money managers to indicate the degree to which they respect or don't the 100 largest publicly traded companies, as measured by total market value.
According to the survey, 74 per cent respondents said they 'highly respect' J&J, 23 per cent said they 'respect', 3 per cent said 'respect somewhat' but none said they 'don't respect' the company making it the top-ranked company.
About RIL, 4 per cent considered the company as highly respected, 17 per cent said they 'respect' it, 46 per cent responded saying they 'respect somewhat', while 11 per cent said they 'don't respect' the firm.
The publication said it assigned a point each to the four categories highly respect, respect, respect somewhat and don't respect to determine mean scores, using the percentage of highly respect to break ties.
Telecom giant Vodafone Group (UK) has been ranked at the 66th spot.
Beverages major Pepsico headed by India-origin Indra Nooyi has gone up three places to the ninth position from the previous year's ranking.
However, arch rival Coca-Cola is one place ahead of PepsiCo at the eighth spot.
Indian billionaire Lakshmi Mittal-led ArcelorMittal (France) has moved up 33 spots to corner the 60th rank. In last year's ranking, the company was placed at the 93rd position.
Further, banking behemoth Citigroup has dropped in its ranking to the 99th spot from the previous year's 53rd place.
Saturday, September 6, 2008
Nifty resistance at 5625
Nifty has made a great comeback,as predicted in this blog, if someone visits this blog regularly, he/she will be benefitted greatly as with my knowledge of charts i can give good turning points in advance and on that basis once time his/her buy/sell strategy on stocks/futures.
Currently it looks like Nifty is heading towards 5625 which is again a strong resistance, if not crossed with volumes then consider a small mid-term correction which can happen this week on any day or in intraday, watchout for this level in Nifty spot and at the same time watch Nifty futures, as Futures move according to the underlying security, as this is the principle in Derivatives. If you dont know this, then you are a newbie and even after good experience you dont know this, then you should think of doing something else apart from stock trading.
Currently it looks like Nifty is heading towards 5625 which is again a strong resistance, if not crossed with volumes then consider a small mid-term correction which can happen this week on any day or in intraday, watchout for this level in Nifty spot and at the same time watch Nifty futures, as Futures move according to the underlying security, as this is the principle in Derivatives. If you dont know this, then you are a newbie and even after good experience you dont know this, then you should think of doing something else apart from stock trading.
Monday, September 1, 2008
Indian Share Falls 0.5 pct
MUMBAI, June 27 (Reuters) - Indian shares fell 0.48 percent
to their lowest close in a week on Wednesday, with banking
stocks weakened by a low rollover rate of expiring futures
contracts and telecom shares giving up some of their recent
gains.
The benchmark 30-issue BSE index ended 70.02
points lower at 14,431.06, with 20 components losing ground, to
be 2 percent below its record high of 14,723.88 hit in
February.
"We are approaching the futures and options clearing tomorrow
and that is why the market is having such jitters," said
Gajendra Nagpal, CEO at New Delhi-based Unicorn Financial
Intermediaries.
"There is no immediate trigger in the market and we have to
wait for next month's corporate earnings for some action."
Indian futures contracts expire on the last Thursday of
every month. Traders said banking stocks were sold because
holders were slow to roll over postions in their futures
contracts compared to those of the broader market.
Top private lender ICICI Bank Ltd. (ICBK.BO: Quote, Profile, Research) fell 0.8
percent to 938.35 rupees, its lowest close in three weeks,
while State Bank of India (SBI.BO: Quote, Profile, Research) eased 0.7 percent to
1,447.20 rupees. The 50-issue NSE index fell 0.51
percent to 4,266.95, and analysts said short positions had
built in the July futures contract NIFc2 as investors worried
over weak global cues.
Second-ranked mobile provider Reliance Communications Ltd.
(RLCM.BO: Quote, Profile, Research) fell 2.05 percent to 514.95 rupees, largely on profit
taking after it posted a record close on Tuesday, traders said.
Top mobile firm Bharti Airtel Ltd. (BRTI.BO: Quote, Profile, Research) slipped 1.3
percent to 839 rupees. The stock had risen 2 percent on Tuesday
to its highest close in more than a month.
Software service exporters, which have been under pressure
from the gains in the rupee this year, rose as the rupee
eased to around 41 per dollar on Wednesday, the lower
end of its rough range since hitting a nine-year high of 40.28
in late May.
Top software services firm Tata Consultancy Services Ltd.
(TCS.BO: Quote, Profile, Research) rose 0.9 percent to 1,133 rupees, after it had closed
at its lowest in more than six months on Tuesday, and
second-ranked Infosys Technologies Ltd. (INFY.BO: Quote, Profile, Research) gained 0.7
percent.
In the broader market, 1,348 losers beat 1,255 gainers on
volume of more than 236 million shares.
For technical analysis by Reuters, please double-click on
www.reutersindia.com.
A Reuters poll of 14 brokerages showed the BSE index may
rise to a median of 15,520 points by end-2007 and to 16,000
points by middle of 2008. For details, please double-click
EQUITYPOLL23.
Elsewhere, Karachi's 100-share index ended at record close
of 13,669.03 points, after hitting a life high of 13,682.78
during trade. Colombo's All-Share index .CSE fell 0.07
percent to 2,570.47.
STOCKS THAT MOVED
* Debutant Nelcast Ltd. (NLCA.BO: Quote, Profile, Research) closed at 206.25 rupees,
lower than its issue price of 219 rupees a share.
* Motor Industries Co. Ltd. MICO.BO fell 4.3 percent to
4,485.65 rupees after its parent, Robert Bosch GmBH [ROBG.UL],
raised its open offer price for an additional 20 percent stake
in the company by 15 percent to 4,600 rupees a share.
[nBOM214778].
* Drug maker FDC Ltd. (FDC.BO: Quote, Profile, Research) lost 4.8 percent to 32.70
rupees after it said January-March net profit fell 43 percent
from a year earlier to 43.2 million rupees.
MAIN TOP 3 BY VOLUME
* IFCI Ltd. (IFCI.BO: Quote, Profile, Research) on 18.1 million shares.
* Reliance Petroleum Ltd. (RPET.BO: Quote, Profile, Research) on 7.9 million shares.
* Nelcast on 6.1 million shares.
FACTORS TO WATCH
* Indian rupee eases on risk aversion, oil demand
[INR/]
* Indian bond yields rise as cash seen tighter
[IN/]
* FOREX-Risk wary investors buy yen, sell high-yeilders
[FRX/]
* Oil slides below $70 ahead of U.S. fuel data
[O/R]
* GLOBAL MARKETS-Asia stocks fall on US economy fears,yen
rises [MARKETS/AS]
* US stocks set for mixed start, mortgages in focus
[.N]
* ADR Report- ADRs up on ABN AMRO, pharmaceutical gains
[ADR/]
to their lowest close in a week on Wednesday, with banking
stocks weakened by a low rollover rate of expiring futures
contracts and telecom shares giving up some of their recent
gains.
The benchmark 30-issue BSE index ended 70.02
points lower at 14,431.06, with 20 components losing ground, to
be 2 percent below its record high of 14,723.88 hit in
February.
"We are approaching the futures and options clearing tomorrow
and that is why the market is having such jitters," said
Gajendra Nagpal, CEO at New Delhi-based Unicorn Financial
Intermediaries.
"There is no immediate trigger in the market and we have to
wait for next month's corporate earnings for some action."
Indian futures contracts expire on the last Thursday of
every month. Traders said banking stocks were sold because
holders were slow to roll over postions in their futures
contracts compared to those of the broader market.
Top private lender ICICI Bank Ltd. (ICBK.BO: Quote, Profile, Research) fell 0.8
percent to 938.35 rupees, its lowest close in three weeks,
while State Bank of India (SBI.BO: Quote, Profile, Research) eased 0.7 percent to
1,447.20 rupees. The 50-issue NSE index fell 0.51
percent to 4,266.95, and analysts said short positions had
built in the July futures contract NIFc2 as investors worried
over weak global cues.
Second-ranked mobile provider Reliance Communications Ltd.
(RLCM.BO: Quote, Profile, Research) fell 2.05 percent to 514.95 rupees, largely on profit
taking after it posted a record close on Tuesday, traders said.
Top mobile firm Bharti Airtel Ltd. (BRTI.BO: Quote, Profile, Research) slipped 1.3
percent to 839 rupees. The stock had risen 2 percent on Tuesday
to its highest close in more than a month.
Software service exporters, which have been under pressure
from the gains in the rupee this year, rose as the rupee
end of its rough range since hitting a nine-year high of 40.28
in late May.
Top software services firm Tata Consultancy Services Ltd.
(TCS.BO: Quote, Profile, Research) rose 0.9 percent to 1,133 rupees, after it had closed
at its lowest in more than six months on Tuesday, and
second-ranked Infosys Technologies Ltd. (INFY.BO: Quote, Profile, Research) gained 0.7
percent.
In the broader market, 1,348 losers beat 1,255 gainers on
volume of more than 236 million shares.
For technical analysis by Reuters, please double-click on
www.reutersindia.com.
A Reuters poll of 14 brokerages showed the BSE index may
rise to a median of 15,520 points by end-2007 and to 16,000
points by middle of 2008. For details, please double-click
EQUITYPOLL23.
Elsewhere, Karachi's 100-share index ended at record close
of 13,669.03 points, after hitting a life high of 13,682.78
during trade. Colombo's All-Share index .CSE fell 0.07
percent to 2,570.47.
STOCKS THAT MOVED
* Debutant Nelcast Ltd. (NLCA.BO: Quote, Profile, Research) closed at 206.25 rupees,
lower than its issue price of 219 rupees a share.
* Motor Industries Co. Ltd. MICO.BO fell 4.3 percent to
4,485.65 rupees after its parent, Robert Bosch GmBH [ROBG.UL],
raised its open offer price for an additional 20 percent stake
in the company by 15 percent to 4,600 rupees a share.
[nBOM214778].
* Drug maker FDC Ltd. (FDC.BO: Quote, Profile, Research) lost 4.8 percent to 32.70
rupees after it said January-March net profit fell 43 percent
from a year earlier to 43.2 million rupees.
MAIN TOP 3 BY VOLUME
* IFCI Ltd. (IFCI.BO: Quote, Profile, Research) on 18.1 million shares.
* Reliance Petroleum Ltd. (RPET.BO: Quote, Profile, Research) on 7.9 million shares.
* Nelcast on 6.1 million shares.
FACTORS TO WATCH
* Indian rupee eases on risk aversion, oil demand
[INR/]
* Indian bond yields rise as cash seen tighter
[IN/]
* FOREX-Risk wary investors buy yen, sell high-yeilders
[FRX/]
* Oil slides below $70 ahead of U.S. fuel data
[O/R]
* GLOBAL MARKETS-Asia stocks fall on US economy fears,yen
rises [MARKETS/AS]
* US stocks set for mixed start, mortgages in focus
[.N]
* ADR Report- ADRs up on ABN AMRO, pharmaceutical gains
[ADR/]
Share Names
Share Name Symbol
Associated Cement Co. Ltd Acc
Bharat Petroleum Corporation Ltd Bpcl
Canara Bank Can Bank
Cipla Ltd Cipla
Grasim Industries Ltd. Grasim
Hindustan Petroleum Corporation Ltd. Hpcl
Infosys Technologies Ltd. Infosys
ITC Ltd. ITC
Mahindra & Mahindra Ltd. M&M
Maruti Udyog Ltd. Maruti
Oil & Natural Gas Corp. Ltd. Ongc
Oriental Bank of Commerce Orientbank
Polaris Software Lab Ltd. Polaris
Ranbaxy Laboratories Ltd. Ranbaxy
Reliance Industries Ltd. Reliance
Satyam Computer Services Ltd Satyamcomp
State Bank of India Sbin
Tata Motors Ltd. Tata Motors
Tata Iron and Steel Co. Ltd. Tisco
Wipro Ltd. Wipro
Associated Cement Co. Ltd Acc
Bharat Petroleum Corporation Ltd Bpcl
Canara Bank Can Bank
Cipla Ltd Cipla
Grasim Industries Ltd. Grasim
Hindustan Petroleum Corporation Ltd. Hpcl
Infosys Technologies Ltd. Infosys
ITC Ltd. ITC
Mahindra & Mahindra Ltd. M&M
Maruti Udyog Ltd. Maruti
Oil & Natural Gas Corp. Ltd. Ongc
Oriental Bank of Commerce Orientbank
Polaris Software Lab Ltd. Polaris
Ranbaxy Laboratories Ltd. Ranbaxy
Reliance Industries Ltd. Reliance
Satyam Computer Services Ltd Satyamcomp
State Bank of India Sbin
Tata Motors Ltd. Tata Motors
Tata Iron and Steel Co. Ltd. Tisco
Wipro Ltd. Wipro
Golden Rules - Long Term
The Five Golden Rules
1. Invest in the direction of the Trend!
The fastest and most risk free way to make money in the markets is to identify a change of trend in the market as early as possible, take your position, ride the trend and close your position shortly after the trend reverses.
Any market professional will tell you that it is impossible to buy at the lows and sell at the highs (or sell at the highs and buy at the lows) consistently, but with the Trend Trading Picks Weekly Newsletter, it is very possible to catch 60 to 80% of many intermediate term and long term market movements.
2. Cut Losses Quickly
In order to keep investing, you must preserve your capital. It is therefore important to keep the individual losses small in relation to the overall size of your investment.
The Trend Trading Picks Weekly Newsletter incorporates Money Management Principle and Stoploss Levels will ensure that you will never loose more than 1.0% of your investing capital in any single trade. This means that even if you make five incorrect investment decisions, you will still have 95% of your capital to continue investing.
Alternatively the Trend Trading Picks Weekly Newsletter trailing stop loss mechanism helps you to capture 70% to 90% of most trends. Our "Trailing Stop Loss" tracks the trend direction, liquidity, volatility and momentum and automagically adjusts itself to stay with profitable trends as long as possible to make your profits even larger.
3. Let Profits Run
Only the Trend Trading Picks Weekly Newsletter stays with profitable trends as long as possible because the trend is likely to continue and make your profits even larger.
The Trend Trading Picks Weekly Newsletter lets profits run while still guarding against the possibility that prices will turn around and take away much of your accumulated profits before the trend actually reverses.
The Trend Trading Picks Weekly Newsletter includes what is called a trailing stop. This is a method of moving an exit point along some distance behind your trade.
The "Stop Loss" mentioned in "Trend Trading Picks Weekly Newsletter" will let profits run while still guarding against the possibility that prices will turn around and take away much of your accumulated profits before the trend actually reverses. It is called a "trailing stop loss". This "Stop Loss" level is always some distance behind your trade. As long as the trend keeps moving in your favour, you stay in the trade. If the market reverses direction by the amount of the "Stop Loss', you exit the trade at that point.
Thus the "Trend Trading Picks" "Stop Loss" will always protect your profits by insuring that you keep 80% to 90% of the accumulated profit.
4. Diversify
The Trend Trading Picks Weekly Newsletter includes diversification for spreading risk and or increasing the odds of good fortune.
The Trend Trading Picks Weekly Newsletter insists that one diversify their portfolio over 10 different securities across different industry sectors having a low correlation with one another.
Spreading your risk between 10 different securities across different sectors reduces your odds of losing your entire capital on a single stock or industry sector.
Diversifying across different sectors is important because when the economy is digging itself out of recession, certain sectors whose profits are particularly enhanced by falling interest rates put in their best price performance. Then as the economy moves into the terminal recovery phase, the outperforming issues start to decline, but the market averages are buoyed by previous underperforming issues, which thrive in this kind of environment.
5. Manage Risk
The Trend Trading Picks Weekly Newsletter Risk Management Strategy covers the most important element of managing risk by keeping your losses as small 1% of your trading capital.
Our Risk management Strategy ensures that you as a investor can continue to invest in the markets even after a couple of incorrect decisions. In fact if you follow our "risk management strategy" along with the Trend Trading Picks Weekly Newsletter you can continue investing in the markets for as long as you live. You will never ever have to worry about losing your entire trading capital.
Check out the performance of the Trend Trading Picks Weekly Newsletter and see how you too can multiply your trading capital by investing in the long term trends of multi bagger stocks.
1. Invest in the direction of the Trend!
The fastest and most risk free way to make money in the markets is to identify a change of trend in the market as early as possible, take your position, ride the trend and close your position shortly after the trend reverses.
Any market professional will tell you that it is impossible to buy at the lows and sell at the highs (or sell at the highs and buy at the lows) consistently, but with the Trend Trading Picks Weekly Newsletter, it is very possible to catch 60 to 80% of many intermediate term and long term market movements.
2. Cut Losses Quickly
In order to keep investing, you must preserve your capital. It is therefore important to keep the individual losses small in relation to the overall size of your investment.
The Trend Trading Picks Weekly Newsletter incorporates Money Management Principle and Stoploss Levels will ensure that you will never loose more than 1.0% of your investing capital in any single trade. This means that even if you make five incorrect investment decisions, you will still have 95% of your capital to continue investing.
Alternatively the Trend Trading Picks Weekly Newsletter trailing stop loss mechanism helps you to capture 70% to 90% of most trends. Our "Trailing Stop Loss" tracks the trend direction, liquidity, volatility and momentum and automagically adjusts itself to stay with profitable trends as long as possible to make your profits even larger.
3. Let Profits Run
Only the Trend Trading Picks Weekly Newsletter stays with profitable trends as long as possible because the trend is likely to continue and make your profits even larger.
The Trend Trading Picks Weekly Newsletter lets profits run while still guarding against the possibility that prices will turn around and take away much of your accumulated profits before the trend actually reverses.
The Trend Trading Picks Weekly Newsletter includes what is called a trailing stop. This is a method of moving an exit point along some distance behind your trade.
The "Stop Loss" mentioned in "Trend Trading Picks Weekly Newsletter" will let profits run while still guarding against the possibility that prices will turn around and take away much of your accumulated profits before the trend actually reverses. It is called a "trailing stop loss". This "Stop Loss" level is always some distance behind your trade. As long as the trend keeps moving in your favour, you stay in the trade. If the market reverses direction by the amount of the "Stop Loss', you exit the trade at that point.
Thus the "Trend Trading Picks" "Stop Loss" will always protect your profits by insuring that you keep 80% to 90% of the accumulated profit.
4. Diversify
The Trend Trading Picks Weekly Newsletter includes diversification for spreading risk and or increasing the odds of good fortune.
The Trend Trading Picks Weekly Newsletter insists that one diversify their portfolio over 10 different securities across different industry sectors having a low correlation with one another.
Spreading your risk between 10 different securities across different sectors reduces your odds of losing your entire capital on a single stock or industry sector.
Diversifying across different sectors is important because when the economy is digging itself out of recession, certain sectors whose profits are particularly enhanced by falling interest rates put in their best price performance. Then as the economy moves into the terminal recovery phase, the outperforming issues start to decline, but the market averages are buoyed by previous underperforming issues, which thrive in this kind of environment.
5. Manage Risk
The Trend Trading Picks Weekly Newsletter Risk Management Strategy covers the most important element of managing risk by keeping your losses as small 1% of your trading capital.
Our Risk management Strategy ensures that you as a investor can continue to invest in the markets even after a couple of incorrect decisions. In fact if you follow our "risk management strategy" along with the Trend Trading Picks Weekly Newsletter you can continue investing in the markets for as long as you live. You will never ever have to worry about losing your entire trading capital.
Check out the performance of the Trend Trading Picks Weekly Newsletter and see how you too can multiply your trading capital by investing in the long term trends of multi bagger stocks.
Futures
What are Derivatives?
A derivative is a financial instrument whose value depends on the values of other underlying variables. As the name suggests it derives its value from an underlying asset. For Ex-a derivative, may be created for a share, or any material object. The most common underlying assets include stocks, bonds, commodities etc.
Let us try and understand a Derivatives contract with an example:
Anil buys a futures contract in the scrip "Satyam Computers". He will make a profit of Rs.500 if the price of Satyam Computers rises by Rs 500. If the price remains unchanged Anil will receive nothing. If the stock price of Satyam Computers falls by Rs 800 he will lose Rs 800.
As we can see, the above contract depends upon the price of the Satyam Computers scrip, which is the underlying security. Similarly, futures trading can be done on the indices also. Nifty futures is a very commonly traded derivatives contract in the stock markets. The underlying security in the case of a Nifty Futures contract would be the Index-Nifty.
What are the different types of Derivatives?
Derivatives are basically classified into the following:
Futures /Forwards
Options
Swaps
What are Futures?
A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price.
The example stated below will simplify the concept:
Case1:
Ravi wants to buy a Laptop, which costs Rs 50,000 but owing to cash shortage at the moment, he decides to buy it at a later period say 2 months from today.However,he feels that after 2 months the prices of Lap tops may increase due to increase in input/Manufacturing costs .To be on the safer side, Ravi enters into a contract with the Laptop Manufacturer stating that 2 months from now he will buy the Laptop for Rs 50,000. In other words he is being cautious and agrees to buy the Laptop at today's price 2 months from now.The forward contract thus entered into will be settled at maturity. The manufacturer will deliver the asset to Ravi at the end of two months and Ravi in turn will pay cash delivery.
Thus a forward contract is the simplest mode of a derivative transaction. It is an agreement to buy or sell a specific quantity of an asset at a certain future time for a specified price. No cash is exchanged when the contract is entered into.
What are Index Futures?
As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.
What is meant by Lot size?
Lot size refers to the quantity in which an investor in the markets can trade in a derivative of a particular scrip.For Ex-Nifty Futures have a lot size of 100 or multiples of 100.Hence if a person were to buy 1 lot of Nifty Futures , the value would be 100*Nifty Index Value at that point of time.
Similarly lots of other scrips such as Infosys, reliance etc can be bought and each may have a different lot size. NSE has fixed the minimum value as two lakhs for an Futures and Options contract. Lot sizes are fixed accordingly which will be the minimum shares on which a trader can hold positions.
What is meant by expiry period in Futures?
Each contract entered into has an expiry period. This refers to the period within which the futures contract must be fulfilled. Futures contracts may have durations of 1 month,2 months or at the most 3 months. Each contract expires on the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expiry of a contract.
What are the uses of Derivatives? What are the various derivative strategies that I can use?
Derivatives have a multitude of uses namely:
a) Hedging
b) Speculation &
c) Arbitrage
A derivative is a financial instrument whose value depends on the values of other underlying variables. As the name suggests it derives its value from an underlying asset. For Ex-a derivative, may be created for a share, or any material object. The most common underlying assets include stocks, bonds, commodities etc.
Let us try and understand a Derivatives contract with an example:
Anil buys a futures contract in the scrip "Satyam Computers". He will make a profit of Rs.500 if the price of Satyam Computers rises by Rs 500. If the price remains unchanged Anil will receive nothing. If the stock price of Satyam Computers falls by Rs 800 he will lose Rs 800.
As we can see, the above contract depends upon the price of the Satyam Computers scrip, which is the underlying security. Similarly, futures trading can be done on the indices also. Nifty futures is a very commonly traded derivatives contract in the stock markets. The underlying security in the case of a Nifty Futures contract would be the Index-Nifty.
What are the different types of Derivatives?
Derivatives are basically classified into the following:
Futures /Forwards
Options
Swaps
What are Futures?
A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price.
The example stated below will simplify the concept:
Case1:
Ravi wants to buy a Laptop, which costs Rs 50,000 but owing to cash shortage at the moment, he decides to buy it at a later period say 2 months from today.However,he feels that after 2 months the prices of Lap tops may increase due to increase in input/Manufacturing costs .To be on the safer side, Ravi enters into a contract with the Laptop Manufacturer stating that 2 months from now he will buy the Laptop for Rs 50,000. In other words he is being cautious and agrees to buy the Laptop at today's price 2 months from now.The forward contract thus entered into will be settled at maturity. The manufacturer will deliver the asset to Ravi at the end of two months and Ravi in turn will pay cash delivery.
Thus a forward contract is the simplest mode of a derivative transaction. It is an agreement to buy or sell a specific quantity of an asset at a certain future time for a specified price. No cash is exchanged when the contract is entered into.
What are Index Futures?
As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.
What is meant by Lot size?
Lot size refers to the quantity in which an investor in the markets can trade in a derivative of a particular scrip.For Ex-Nifty Futures have a lot size of 100 or multiples of 100.Hence if a person were to buy 1 lot of Nifty Futures , the value would be 100*Nifty Index Value at that point of time.
Similarly lots of other scrips such as Infosys, reliance etc can be bought and each may have a different lot size. NSE has fixed the minimum value as two lakhs for an Futures and Options contract. Lot sizes are fixed accordingly which will be the minimum shares on which a trader can hold positions.
What is meant by expiry period in Futures?
Each contract entered into has an expiry period. This refers to the period within which the futures contract must be fulfilled. Futures contracts may have durations of 1 month,2 months or at the most 3 months. Each contract expires on the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expiry of a contract.
What are the uses of Derivatives? What are the various derivative strategies that I can use?
Derivatives have a multitude of uses namely:
a) Hedging
b) Speculation &
c) Arbitrage
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