After Ireland and Spain, it might be UK's turn to be downgraded. A lot of speculation has been going on on whether UK would be able to maintain its AAA rating.
The most recent quarterly numbers shook everybody up, and GDP has contracted by 1.5% in a quarter. To get an idea of how bad this number is, none of the G-7 countries have contracted by more than 3% annualized in the last 50 years. In addition, there are talks doing round that GBP as such is an inflated currency, with nothing in real economy to justify its levels. UK as an economy is ruled by a few sectors: Energy, Financials and Tourism. And in the current year, all 3 have been badly affected.
While its much outside my knowledge to comment on whether GBP is inflated or not, I certainly feel that the path going ahead is not very rosy for the country. US is a much better placed than UK to contain its crisis. 2009 might see a massive devaluation of EUR as well as GBP. GBP has already fallen from its >2.0 levels to 1.40 levels, and there are reports doing rounds which predicts a rate of parity pretty soon. Same goes for EUR as well, which after trading above 1.60 earlier last year, is now down below 1.30 levels.
We might end up the year with EUR at 1.0, GBP at 1.20 and Yen close to 100 levels.
Monday, January 26, 2009
Friday, January 23, 2009
Market View: January 23
Markets continued to move down on the back of bad news from all around. Companies around the globe are posting bad results, and latest to join the list are the electronics majors Samsung and Sony. Both of them reported record losses, and further outline the common belief now that the recession has expanded into the main street now.
UK economy offically shrank in the last quarter, and now the world growth targets really look far fetched. GBP has been hammered pretty badly, and currently trades at 1.37 (or 67.70/INR).
Back in India, markets broke their 2700 support levels, and traded below it for most part of the day. However, I have a feeling that we might see a small bounce from these levels in coming days. Not that I have a view that markets are going way up from these levels, but I do not expect too many incremental bad news coming out from India. All the large corporates which have announced their results haven't come out with any 'extraordinary' losses. Results of all the big names like Reliance, Infosys, Bharti, Wipro have been 'not-too-bad'. So, I have a feeling that market may remain range bound at these levels for some time now (in absence of a major worldwide shock).
Strangely, vols aren't picking up. Last time markets were at these levels, vols were at 60s and 70s levels, and this time they are peacefully trading in their 40-50 band. I wont be surprised if we see a down leg in vols towards the 40 support.
UK economy offically shrank in the last quarter, and now the world growth targets really look far fetched. GBP has been hammered pretty badly, and currently trades at 1.37 (or 67.70/INR).
Back in India, markets broke their 2700 support levels, and traded below it for most part of the day. However, I have a feeling that we might see a small bounce from these levels in coming days. Not that I have a view that markets are going way up from these levels, but I do not expect too many incremental bad news coming out from India. All the large corporates which have announced their results haven't come out with any 'extraordinary' losses. Results of all the big names like Reliance, Infosys, Bharti, Wipro have been 'not-too-bad'. So, I have a feeling that market may remain range bound at these levels for some time now (in absence of a major worldwide shock).
Strangely, vols aren't picking up. Last time markets were at these levels, vols were at 60s and 70s levels, and this time they are peacefully trading in their 40-50 band. I wont be surprised if we see a down leg in vols towards the 40 support.
Thursday, January 22, 2009
Market View: January 22
Markets have already fallen by more than 5% since monday, and we are now below 2700 levels (on 1M futures). Going ahead, I think 2700 would act as a strong resistance, and we may see expiry around these levels.
Today the market moved sideways for whole of the day, without making any convincing moves in either direction. There was good money to be made trading intra-day gamma at smaller intervals. Interestingly, I think in these markets both short gamma and long gamma positions can end up making money. For a short gamma positions hedged at the end of the day, there aren't too many large 1-day moves to worry about, and for long gamma positions, markets really move up and down a lot (even a slightest news from any corner of the world spook the markets). Will be testing the same for January data after the expiry.
The expiry view still remains the same, in the 2600-2700 range. And on the volatility front, now there is a slightly lesser chance of vol spikes in this month. Quite a few results have already come-in, and going by the trend, there are no major surprises to worry about.
Today the market moved sideways for whole of the day, without making any convincing moves in either direction. There was good money to be made trading intra-day gamma at smaller intervals. Interestingly, I think in these markets both short gamma and long gamma positions can end up making money. For a short gamma positions hedged at the end of the day, there aren't too many large 1-day moves to worry about, and for long gamma positions, markets really move up and down a lot (even a slightest news from any corner of the world spook the markets). Will be testing the same for January data after the expiry.
The expiry view still remains the same, in the 2600-2700 range. And on the volatility front, now there is a slightly lesser chance of vol spikes in this month. Quite a few results have already come-in, and going by the trend, there are no major surprises to worry about.
Monday, January 19, 2009
Market View: January 19
Today was a holiday in US, and hence it was expected to be a dull day. Indian markets opened at almost their previous closing levels, and traded well within throughout the day. Lately, we have been so much used to the volatility that a day where market doesn't move more than a percent point appears too dull.
Markets slowly kept moving up throughout the day, and even as the bad news kept pouring in (RBS announcing a loss of $41B, Spain getting its rating cut from AAA to AA+), markets kept their momentum. It was only during the final 30 mins that market showed slight -ve bias, and started paring some of their earlier gains. Still, on a day to day basis, they closed higher by more than half a percent points at 2850 levels.
Europe which was trading at gains when Asia closed is now trading close to -2.5% down from its previous close. RBS is trading 70% down for the day, and seems like a very bad day ahead tonight for all the markets. Thankfully, US is closed for today, else we could have had another spooky day for Citi and Bank of America.
As I had said earlier, I expect markets to break from these levels (may be triggered by a bad earnings from one of the large caps) in the coming days. January expiry could be at a level close to or below 2700. On the volatility front, I do not expect vols to come below 40 levels anytime soon. Even though the realized vols are currently at a lower level, I think the implieds would continue to trade in a 40+ range for some time.
Markets slowly kept moving up throughout the day, and even as the bad news kept pouring in (RBS announcing a loss of $41B, Spain getting its rating cut from AAA to AA+), markets kept their momentum. It was only during the final 30 mins that market showed slight -ve bias, and started paring some of their earlier gains. Still, on a day to day basis, they closed higher by more than half a percent points at 2850 levels.
Europe which was trading at gains when Asia closed is now trading close to -2.5% down from its previous close. RBS is trading 70% down for the day, and seems like a very bad day ahead tonight for all the markets. Thankfully, US is closed for today, else we could have had another spooky day for Citi and Bank of America.
As I had said earlier, I expect markets to break from these levels (may be triggered by a bad earnings from one of the large caps) in the coming days. January expiry could be at a level close to or below 2700. On the volatility front, I do not expect vols to come below 40 levels anytime soon. Even though the realized vols are currently at a lower level, I think the implieds would continue to trade in a 40+ range for some time.
Friday, January 16, 2009
Market View: January 16
Indian markets are currently trading on the band of 2700-2900. Today they opened at 2700, and kept moving up for the whole session, and closed at the day's high.
The market were up mostly on expectations of good results as well as more clarity on the situation as Citigroup as well as Bank of America were announcing their results today. Both the stocks had been hammered in the last couple of days by the traders.
I personally have a negative bias on the market, and would be short the market till 2700. I would think that the Jan expiry would be close to 2600-2700 levels.
On the volatility front, I think that the vols would remain high till the general elections in May 09. Currently they are trading in the range 45%-50%, and I think they would continue to trade in the 40%+ range for some time. Going forward, I won't be surprised if there is a spike in vols to the 60% levels also as there are a lot of big names announcing their results soon.
I would be short markets at 2800 levels, and long vols at 45% levels. Lets see how it plays out next week.
The market were up mostly on expectations of good results as well as more clarity on the situation as Citigroup as well as Bank of America were announcing their results today. Both the stocks had been hammered in the last couple of days by the traders.
I personally have a negative bias on the market, and would be short the market till 2700. I would think that the Jan expiry would be close to 2600-2700 levels.
On the volatility front, I think that the vols would remain high till the general elections in May 09. Currently they are trading in the range 45%-50%, and I think they would continue to trade in the 40%+ range for some time. Going forward, I won't be surprised if there is a spike in vols to the 60% levels also as there are a lot of big names announcing their results soon.
I would be short markets at 2800 levels, and long vols at 45% levels. Lets see how it plays out next week.
Sunday, November 2, 2008
Short-selling and Efficient markets
I have pondered over this question for some time now - 'Does short-selling make a market more efficient?' Or, to put it differently, 'Is short-selling a pre-requisite for efficient markets?' Here are my views on the same.
To answer the above question, we must first define 'market efficiency'. In my opinion, an efficient market is one where price discovery is solely based on the intersection of demand and supply functions. And any new information or event affects either or both of these functions, and hence results in the change in price. But as a whole, price is always arrived at by the demand function of the consumers and the supply function of producers.
In stock markets, the demand and supply functions are slightly complicated. The supply function is simpler to understand. During an IPO, its the standard supply function as in case of a manufacturing firm - higher the price, more the supply. As the valuations become richer, promoters supply more and more shares in the market. And as time passes, in a secondary market, the supply comes from prior period consumers (which were the demand function earlier). However, the supply side is still limited by the total amount of stock outstanding, and hence, has its upper-bound. It can always be estimated as coming from a single large firm with limited production - higher the price offered, more the supply.
Demand function, on the other hand, can come from anyone in the market place, and it has no upper-bound. However, it has a non-zero lower bound. So, there is always a positive demand, as well as a positive supply in a perfectly functioning markets. And it doesn't need 'short-selling' to function efficiently. In the worst scenario, there is no demand for the stocks, and hence, there is no trade in the market.
Now if short-selling is allowed, the supply function becomes as independent as the demand function. Everyone can become a supplier (that is, can sell the stock), and the upper bound on supply function disappears. Or, to look at it differently, now there is a possibility of a negative demand, and hence, must be matched by a positive demand. In falling markets where there is no positive demand, a negative demand if not met, can make a stock price nosedive towards zero. It will keep falling as long as it is matched by some positive demand. Hence, it can lead to quicker falls and higher volatility during the times of uncertainty.
Its a choice between a dry market with no trading (zero demand) or a highly volatile market with falling prices (negative unmet demand). And am not sure why the latter is better than the former.
To answer the above question, we must first define 'market efficiency'. In my opinion, an efficient market is one where price discovery is solely based on the intersection of demand and supply functions. And any new information or event affects either or both of these functions, and hence results in the change in price. But as a whole, price is always arrived at by the demand function of the consumers and the supply function of producers.
In stock markets, the demand and supply functions are slightly complicated. The supply function is simpler to understand. During an IPO, its the standard supply function as in case of a manufacturing firm - higher the price, more the supply. As the valuations become richer, promoters supply more and more shares in the market. And as time passes, in a secondary market, the supply comes from prior period consumers (which were the demand function earlier). However, the supply side is still limited by the total amount of stock outstanding, and hence, has its upper-bound. It can always be estimated as coming from a single large firm with limited production - higher the price offered, more the supply.
Demand function, on the other hand, can come from anyone in the market place, and it has no upper-bound. However, it has a non-zero lower bound. So, there is always a positive demand, as well as a positive supply in a perfectly functioning markets. And it doesn't need 'short-selling' to function efficiently. In the worst scenario, there is no demand for the stocks, and hence, there is no trade in the market.
Now if short-selling is allowed, the supply function becomes as independent as the demand function. Everyone can become a supplier (that is, can sell the stock), and the upper bound on supply function disappears. Or, to look at it differently, now there is a possibility of a negative demand, and hence, must be matched by a positive demand. In falling markets where there is no positive demand, a negative demand if not met, can make a stock price nosedive towards zero. It will keep falling as long as it is matched by some positive demand. Hence, it can lead to quicker falls and higher volatility during the times of uncertainty.
Its a choice between a dry market with no trading (zero demand) or a highly volatile market with falling prices (negative unmet demand). And am not sure why the latter is better than the former.
Financial Crisis
The ongoing financial crisis is getting worse with each passing day. No one seems to have any clue as to when things would start improving. It has put some doubts over everyone's immediate future as well with their companies. Already, a couple of my friends have received the pink-slips, and I fear there is worse to come.
Just hoping that time would pass, and things would be normal again. These days, there is gloom all around. A lot of dreams, unfounded or grounded, have burst in recent times. And we are now in the process of realizing that Rome wasn't built in a day. Growth and development are slow process, and they happen over time. None of the economies move as fast as the stock or currency markets, and hence, there are crashes everywhere. Last few years were really a mad period in the world economic history where central banks around the world eased monetary policies, and credit was very easily available. Everything was made to appear rosy, and risk had disappeared from the world. The process of securitization had distributed to risk to everyone, and hence the crisis we find ourselves in has taken everything with itself.
There would be massive de-leveraging all around the world, and we can expect further crashes in almost all the asset classes. The emerging markets would be the worst affected, and there is a slight chance that it may pre-maturely end a lot of 'growth stories'.
Just hoping that time would pass, and things would be normal again. These days, there is gloom all around. A lot of dreams, unfounded or grounded, have burst in recent times. And we are now in the process of realizing that Rome wasn't built in a day. Growth and development are slow process, and they happen over time. None of the economies move as fast as the stock or currency markets, and hence, there are crashes everywhere. Last few years were really a mad period in the world economic history where central banks around the world eased monetary policies, and credit was very easily available. Everything was made to appear rosy, and risk had disappeared from the world. The process of securitization had distributed to risk to everyone, and hence the crisis we find ourselves in has taken everything with itself.
There would be massive de-leveraging all around the world, and we can expect further crashes in almost all the asset classes. The emerging markets would be the worst affected, and there is a slight chance that it may pre-maturely end a lot of 'growth stories'.
Sunday, October 12, 2008
Market Efficiency and Speculation
Much of the debate in recent few days has been about the massive amount of speculative positions in the stocks and other securities. People are blaming the short selling speculators for the demise of firms like Lehman Brothers, AIG, Bear Sterns, and many more. The argument is, even though the positions of these companies is sound in the long term, short sellers are putting undue pressure on the firms, and has resulted in forced liquidation.
I personally would think of these arguments as lame excuses. While not myself a supporter of naked short-selling to start with, I nonetheless believe that most of the firms which have fallen have fallen for the right reasons. If short-selling was to be blamed, and their balance sheet were sound, why would the senior debt holders in Lehman get only 8-9 cents per dollar as recovery? They ought to be making a lot more than this.
Short-selling didn't (or rather couldn't) have changed anything. At the low valuations at which Lehman Brothers or Bear Sterns was finally sold, the Management could easily have bought the firm with the personal pay-cheques. The fact that they themselves didn't do the same make the whole speculation argument seem hollow.
I personally would think of these arguments as lame excuses. While not myself a supporter of naked short-selling to start with, I nonetheless believe that most of the firms which have fallen have fallen for the right reasons. If short-selling was to be blamed, and their balance sheet were sound, why would the senior debt holders in Lehman get only 8-9 cents per dollar as recovery? They ought to be making a lot more than this.
Short-selling didn't (or rather couldn't) have changed anything. At the low valuations at which Lehman Brothers or Bear Sterns was finally sold, the Management could easily have bought the firm with the personal pay-cheques. The fact that they themselves didn't do the same make the whole speculation argument seem hollow.
Friday, September 12, 2008
End of Road for US?
This would be the year of contrasts. The two biggest events of the year symbolize the same thing - US power may be waning, and something must be done very soon to save it.
Lets start with the first event - the great credit crisis. As has been said earlier, it was a game of musical chair being played by the banks, and thankfully, they always seemed to have a seat when the music suddenly stopped. Many corporations as well as a few banks have gone bankrupt in the last 2 decades, but the big ones got bigger. They became too big to fail. But in a complete turn-around, banks now find themselves caught in their own game. All are left with huge amount of sub-standard assets on their balance sheets, and with continuous fall in their market values, its a south journey for most of them this year. Bear Sterns has already been sold-off at throw-away prices, and Lehman Brothers may no longer exist after a couple of days. Nobody wants to make a guess on who would be next, but everybody in almost convinced that this is not the end of pain.
All the great institutions of US are performing badly. The big three of the automobile would may be struggling, and may meet the same fate as their banking counter-parts. The US is losing its hold over all the manufacturing sectors, and now with financial services, this may be the beginning of the service sectors as well. Already a large chunk of the these companies is being owned by Asian funds.
A marked phenomenon has been the interference by the US government and treasury in dealing with this crisis. The treasury tried its might to lend support to the sector, and extended a number of facilities earlier undreamt of. It was a great irony that the greatest proponent of Capitalism and free-market needed government intervention at the time when Socialist countries are turning towards Capitalism.
The second event that would define the year would certainly be the Beijing Olympics. From being described in superlatives all over the world, it was undoubtedly, the best ever sports event hosted on such a large scale. China showed its might to the world, and in the year where US and Europe are struggling with their economies and budget deficits, China spent more than USD 70 billion in preparation of the games. The move has paid-off handsomely, at least in an absolute sense. The world which was already witnessing an ailing giant saw a rising star as well in the same year. China brought an end to the US domination of the games, and in its typical manner. There was no star like Michael Phelps, or Usain Bolt. It was an effort by little known athletes, who together brought a giant to its knees. It was just another example of how socialism conquered the year.
What are the implications of these events for the future? They clearly shows us the divergence between the two big powers today. Whereas much of the money and energy in US has gone into preserving its institutions and survival, China has grown by leaps and bounds. For all the talks about recession and its severity, a country which spends all its year in fighting for survival and arranging bail-outs must surely be in a deep recession.
Lets start with the first event - the great credit crisis. As has been said earlier, it was a game of musical chair being played by the banks, and thankfully, they always seemed to have a seat when the music suddenly stopped. Many corporations as well as a few banks have gone bankrupt in the last 2 decades, but the big ones got bigger. They became too big to fail. But in a complete turn-around, banks now find themselves caught in their own game. All are left with huge amount of sub-standard assets on their balance sheets, and with continuous fall in their market values, its a south journey for most of them this year. Bear Sterns has already been sold-off at throw-away prices, and Lehman Brothers may no longer exist after a couple of days. Nobody wants to make a guess on who would be next, but everybody in almost convinced that this is not the end of pain.
All the great institutions of US are performing badly. The big three of the automobile would may be struggling, and may meet the same fate as their banking counter-parts. The US is losing its hold over all the manufacturing sectors, and now with financial services, this may be the beginning of the service sectors as well. Already a large chunk of the these companies is being owned by Asian funds.
A marked phenomenon has been the interference by the US government and treasury in dealing with this crisis. The treasury tried its might to lend support to the sector, and extended a number of facilities earlier undreamt of. It was a great irony that the greatest proponent of Capitalism and free-market needed government intervention at the time when Socialist countries are turning towards Capitalism.
The second event that would define the year would certainly be the Beijing Olympics. From being described in superlatives all over the world, it was undoubtedly, the best ever sports event hosted on such a large scale. China showed its might to the world, and in the year where US and Europe are struggling with their economies and budget deficits, China spent more than USD 70 billion in preparation of the games. The move has paid-off handsomely, at least in an absolute sense. The world which was already witnessing an ailing giant saw a rising star as well in the same year. China brought an end to the US domination of the games, and in its typical manner. There was no star like Michael Phelps, or Usain Bolt. It was an effort by little known athletes, who together brought a giant to its knees. It was just another example of how socialism conquered the year.
What are the implications of these events for the future? They clearly shows us the divergence between the two big powers today. Whereas much of the money and energy in US has gone into preserving its institutions and survival, China has grown by leaps and bounds. For all the talks about recession and its severity, a country which spends all its year in fighting for survival and arranging bail-outs must surely be in a deep recession.
Saturday, September 6, 2008
Trading is an Art?
I have often heard people saying that trading is an art, and not a pure science. Well, based on my little experiences, I can certainly say for sure its not an art. Whether its a science or not, I would take another year or so to make a view on.
When I say Art here, I mean a field where individual choices are different, and there is no way to judge two different entities. Two paintings or two works of music can both be good, and they might be incomparable to each other. Similarly, one can argue that even in trading there are different techniques used by different traders, and no one of them can be said to be superior to the other. Agreed to this, however, isn't it always about the output more than about the process?
Whatever be the technique employed by different traders, over a sufficiently long period of time, its a common measure that is used to judge who was better amongst them. Again, this measure can be flawed over the short term where luck and chance play a big role, and that is the reason why I have said over a sufficiently long time - around 10-12 years.
In my humble views, trading is much closer to science. All the successful traders have always been hardworking people, who keep a closer look at anything and everything happening in the world. I have seen/heard good traders working on the weekends to catch-up on the events of the past week, and get up to date with the world. They must study not just their own asset classes, but also what is happening in the other asset classes. At the minimum, one's view on interest rates and foreign exchange is a must, irrespective of the assets one trade. In the recent times, Commodities have acquired much more significance than in the past, and may truly end up becoming another big asset class. Its more a result of unrelenting efforts by the investment banks and hedge funds to bring it to prominence, and this is the first time we have had an oil shock after the derivatives got popular. It may have far reaching results a to how traders keep track of the world.
I'm yet to develop my own methods of trading, and that has more to do with the fact that I have not been able to zero down on the final asset class/securities that I would be trading. I have to make a choice between Equities and FX at the broader level, and between delta trading and volatility trading at the securities level. At the moment, I'm more inclined towards FX and Delta trading, and will be able to make a final decision by first half of 2009.
When I say Art here, I mean a field where individual choices are different, and there is no way to judge two different entities. Two paintings or two works of music can both be good, and they might be incomparable to each other. Similarly, one can argue that even in trading there are different techniques used by different traders, and no one of them can be said to be superior to the other. Agreed to this, however, isn't it always about the output more than about the process?
Whatever be the technique employed by different traders, over a sufficiently long period of time, its a common measure that is used to judge who was better amongst them. Again, this measure can be flawed over the short term where luck and chance play a big role, and that is the reason why I have said over a sufficiently long time - around 10-12 years.
In my humble views, trading is much closer to science. All the successful traders have always been hardworking people, who keep a closer look at anything and everything happening in the world. I have seen/heard good traders working on the weekends to catch-up on the events of the past week, and get up to date with the world. They must study not just their own asset classes, but also what is happening in the other asset classes. At the minimum, one's view on interest rates and foreign exchange is a must, irrespective of the assets one trade. In the recent times, Commodities have acquired much more significance than in the past, and may truly end up becoming another big asset class. Its more a result of unrelenting efforts by the investment banks and hedge funds to bring it to prominence, and this is the first time we have had an oil shock after the derivatives got popular. It may have far reaching results a to how traders keep track of the world.
I'm yet to develop my own methods of trading, and that has more to do with the fact that I have not been able to zero down on the final asset class/securities that I would be trading. I have to make a choice between Equities and FX at the broader level, and between delta trading and volatility trading at the securities level. At the moment, I'm more inclined towards FX and Delta trading, and will be able to make a final decision by first half of 2009.
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