what does P/E ratio tells us about the stock?
Is it significant enough?
P/E leading ration defines price of a stock with respect to its expected earnings.So high P/E ratio is always a very good indicator for a buy position of the stock.
But signifance level of the P/E ratio can always be doubted but we can always mix number of stratergies to derive at final estimations different from other similar traders ruling this world of trading.Its a theoritical concept whose application can be doubted .
I m just explaining the concepts of some crucial terms that works in financial markets.
THERE IS STRICTLY NO INDICATION TO FOLLOW THESE ACTIVITIES.NO RESPONSIBILITIES AGAINST ANYONE.Everthing is theoritical concepts based on some practical facts in lay man language.
Friday, December 5, 2008
Are options traded inthe market offer as a free lunch to the customers??
Because we dont have to pay for the losses for the stock and if this situation arises we just incurr a loss of our premium, and when we earn capital gains we are eligible for the profits derived fro the deal.
CERTAINLY NOT because call option pricing is based on the volatility ,exercise price,returns on stock ,underlying assets,strike price.So after taking every factor into pricing stock options takes away all the free lunches and even if any arbitrage oppurtunity available those are taken up by the market scavengers(techincal analysts.)
Options can be very useful for hedging one's position unwanted fall in underlying assest prices.
Is there a way to predict exchange market returns in future?(conceptual idea)
Our stocks are always correlated to our main market index .But how much effect of stock market index can be applied to the stocks is the main query.If this information is available then it will be free lunch for everyone living in this world and will never face money crisis because of so many free lunches available in this world.But this is not the case .In a market if everyone knows a particular model then it is useless to work on that model because oppurtunities must already be exhausted and no more money could be earned(rather lost).
So a simple model can explain returns on market index by a stock that is forming relationship btw stock and the index.like if an index move by a 1 unit our stock moves by 0.5 unit.this is the degree of responisiveness of our stock whereas if market goes up our stock goes up as well.
so in turn we formed a relationship which is with the flow of market index and ouur stocks move by 50% in value.(assumption).
Now we know that if stock selling at some particular index then we can make out the price of our stocks.But the main point here is to identify the bullish or bearish state of markets .If we dont know that then its not possible to make profits anyways.
So still our positioned is hedged (safe)only half way . now with the help of some technical analysis explained below we can make out bullish and bearish phase. and hence to some extent our investments are more secured.
There are lots of models for regressing the index variables with stock variables like CAPM,APT,FAMA FRENCH,ETC.
now regressing some part of market returns and calculating the risk assoiated to that factor invstments we can make out some proportions of our future earnings on our investments.
Our stocks are always correlated to our main market index .But how much effect of stock market index can be applied to the stocks is the main query.If this information is available then it will be free lunch for everyone living in this world and will never face money crisis because of so many free lunches available in this world.But this is not the case .In a market if everyone knows a particular model then it is useless to work on that model because oppurtunities must already be exhausted and no more money could be earned(rather lost).
So a simple model can explain returns on market index by a stock that is forming relationship btw stock and the index.like if an index move by a 1 unit our stock moves by 0.5 unit.this is the degree of responisiveness of our stock whereas if market goes up our stock goes up as well.
so in turn we formed a relationship which is with the flow of market index and ouur stocks move by 50% in value.(assumption).
Now we know that if stock selling at some particular index then we can make out the price of our stocks.But the main point here is to identify the bullish or bearish state of markets .If we dont know that then its not possible to make profits anyways.
So still our positioned is hedged (safe)only half way . now with the help of some technical analysis explained below we can make out bullish and bearish phase. and hence to some extent our investments are more secured.
There are lots of models for regressing the index variables with stock variables like CAPM,APT,FAMA FRENCH,ETC.
now regressing some part of market returns and calculating the risk assoiated to that factor invstments we can make out some proportions of our future earnings on our investments.
Sunday, November 23, 2008
how are trading techniques defined in financial markets?
There are two aspects of trading techniques being followed at the financial market index namely technical and fundamental trading.
Technical trading techniques derive profits on the basis of historical data of price movement of stocks and commodities whereas fundamental aspect focuses more on the forecast of the future earning capabilties of the market.
How do technical analyst derive their outcomes?
Technical analyst are sometimes referred to as Chartist because their main function is to look at charts and graphs of the historical trend in price movements and make an inference about the price movements in the future.So on the basis of their analysis they derive on a particular set of outcomes.
Basics of technical trading techniques-:
Their are two key terms used in the technical trading defined as support and resistance.
Normally resistance and support are defined as the price above which price cannot go and below which price cannot fall respecively.These are basically market psychology terms . For example:if we buy a share say at price $100 and and the market falls to price to $95 then basic human stratergy is to pray for the price to come at $100 and get out of this bad deal forever.Similarly this indivual view can be generalized to a group of people trading in the market.So as soon as the price of stock again approaches $100 people start selling in huge amounts and hence price starts falling again and declares a bearish phase of the market.Same can be generalised for the support case where the market declares a bullish phase.So basically on the basis of market psychological factor these support and resistance levels are formed.The graph shown defines the bullish and the bearish stage respectively with time to time changing support and resistance levels.
Monday, October 13, 2008
Science of Financial Markets- Can it explain the current Credit Crisis ?
I am suddenly nostalgic being in Asset Management class at Warwick Business School…I remembered my science classes in school.. In 10th grade we learned about the Big Bang Theory and the concept of black holes, white dwarf, etc.
These concepts I guess I can relate to what is happening now in financial markets. A Big Bang has taken place. And the financial markets are shrinking rapidly and are pulled towards their origin by the strong forces of greed, contamination and deregulation. This will result in creation of black holes. In this black holes, the gravity of these forces will be so strong that not a single ray of light can pass through it. I am not exaggerating the magnitude of financial crisis, I am trying to show its impact. Its more than just a financial crisis.
Probably not many people will believe that few people in the industry had predicted this Sub-Prime crisis as early as 2005-2006. Warren Buffet and other notable experts in the filed have recorded their statements that USD will depreciate in future and is in a long term depreciation trend. To add to this, I had presented a similar report in my college in 2005 on the same issue of Sub Prime crisis and tried to evaluate the housing market in USA and tried to identify the asset bubble in making,. In addition, I extended my framework to include gold as an asset class rather than an commodity and pointed out the possible scenarios where gold would outperform the other asset classes. In my report, I clearly mentioned that the spectacular credit growth which led to inflationary asset prices could not be sustained in future and would lead to creation of circumstances which will lead USA and the world economy into a vicious cycle of recession. It would lead to a combination of depreciating dollar, rising interest rates, high unemployment rates, defaults in housing market. And now, the results are in front of us.
Rationale:-Behind Crisis
The reason is very clear whenever anything rises at alarming levels it has to come down at similar periods. Again, I would like to relate this to Newton ‘s Gravity Theory. Issac Newton discovered the Gravitational Theory and concluded that any thing that goes up has to come down back to earth and the speed at which it comes down is faster than it goes up. So please remember these theories and concepts, it has indirect applications in finance. So if you scored well in science, you would score good in finance. In past four years, stock markets experienced spectacular Bull Run and the equities zoomed as if USA & Russia were releasing rockets from earth. But every bull run teaches its own lesson. In 1990’s after the dot com bubble, people became wary of high P/E multiples as high as 100-400 times which were allocated to dot com companies. In fact, for some time when the returns were generated and people who bought these stocks at 100 P/E ratio were able to see it to another fool for 300 P/E ratio, even investor like Warren Buffet was astonished and made public statement that for the first time his research was wrong and probably market was right in its judgement. Soon after he made his confession, in few months the dot come bubble took place and stocks went crashing. After 2008 crisis, people in future will understand the importance of identifying risk involved in asset, its payoff and associated cash flows.
Had government exercised effective regulation and control on the financial system and imposed stringent capital adequacy norms, the present situation would not have arose. Hedge Funds in US were completely unregulated and there was no check on their activities such as speculation, high leveraging etc. In fact, hedge funds used to go to havens like Bermuda, Mauritius etc to escape from regulation. In past decade, the financial markets made easy for I-Bankers, Hedge Fund managers to earn quick buck. Most of the analyst were new and just experienced the bull run and had never experienced bear run. Thus any stock selected by them performed well in the bull run because of systematic return ie correlation with the index. So they never actually knew how to pick growth and quality stocks, nor could they read off balance sheet items and secret reserves build by the company. People like Warren Buffet understood financial statements and made money. To add to this, when Warren Buffet was asked what do you think your successor should be good at ? He said that my successor needs to be able to analyze the financial statements and especially the off balance sheet items.
Another reason is the unaccounted investments of Hedge Funds. This are specialized institutions that are willing to take risk and beat the market and generate excess return on investments and are looking to make a quick buck in short time. South East Asian Crisis is an example of how can these short term foreign inflows and outflows can distort the BOP of an economy. These funds invest money in un chartered territories and seek advantage of being first mover. Due to their high bulky investments, they attract market attention to that particular asset class. For instance, since 2005 the money flowed into the Equities, mortgage backed securities and other riskier assets. The result bull run in equities. Retail investors entered at peak and are in losses, while hedge funds exited at profits at peak. Then this money made way into commodities like Crude, Base metals, precious metals, agricultural commodities etc. And suddenly the commodities started experiencing a bull run. Crude rose from $70 per barrel and reached sub $150 levels in a short period of time. There were no fundamental reason that justified the magnitude of rise in such a short period of time. And as expected when on corrections, hedge funds were exiting and booking profits, retail investors entered and booked looses. Now the money has flown out of crude and will look at gold as its safe heaven. Gold., as in investment class will be looked upon by investors in next 2-5 years to beat inflation and for safety of capital. One of the reason for the large size of hedge funds was the sheer number of funds launched in short period of time. In Wall Street, any I-Banker with an Ivy League MBA could launch his hedge fund and within hours he would get several billions to start his fund. This unregulated industry presented data of its best fund to raise capital and the funds which failed were not reported at all and thus returns which were reported were biased and misled investors.
Another important reason for the crisis has been structured derivative products and its complexity. The main aim of the derivatives was to enable asset holder to hedge his risk. But the doctorates in physics, math, statistics and ones from engineering background created complex derivatives products whose pay off were not easily determinable and hence the clients-corporates could never understand the risk associated with the product and its pay off. Thus when markets reversed, as in case of Indian IT industry, on one hand they had windfall gain due to depreciation of ruppe on other hand losses from hedges. These left their balance sheet red. The creators of structured products themselves never understood the product and its implications and hence could not analyze the product because they lack the knowledge of financial concepts etc.
Impact of Credit Crisis
The impact of crisis can be measured from the following facts: Fed Reserve has injected 700 billion USD into the system, BoE has injected more than 400 Billion GBP into the system. Bear Stearns and Lehman Brothers have been bankrupt, AIG suffered huge losses and Fed Reserve had to intervene to protect counterparties which were predominantly pension funds, retirement funds etc. Iceland ‘s banking system has collapsed. Russia is seating on around 250 billion USD and is bailing out Iceland, but guess that wont be enough and Iceland is very angry as none of the Western Counterparts are willing to help. The reason is evident, Fed would handle its own economy or Iceland? ECB has asked its member nations to develop their own plans to bail out their domestic banks and central banks throughout the world have coordinated their monetary policy to ease the tight liquidity position in the money markets. The money markets have literally frozen. With LIBOR rising as high as 5%. Nobody is willing to lend in the money markets and after 2001 for the first time there have been such heavy withdrawals from money markets. The banks are trying to recapitalize themselves and holding every penny of money. This has adversely affected the expansion plans of quality corporates because the debt markets have literally frozen. Banks firstly don’t have enough money to lend and secondly they perceive the credit risk is too high.
Will Bail outs be effective? I doubt
I would like to point out that the bail out plans of Fed Reserve and BoE will not necessarily solve this issue. Market will take its own time to assess risk and adjust accordingly. In many of these financially important centers, the size of the banking system exceeds more than 5 times the size of the economy. Take for instance UK, the size of the banking industry is more than 5 times the size of the GDP. This means recapitalizing banking system by 1% requires 5% of GDP borrowing. Thus even a small 5% recapitalization plans would require more than 25% of GDP borrowing and that would take already high levels of Fiscal deficit to still higher levels leading to higher inflation and higher unemployment rates. So here one can see how much dependable these bail outs are. Moreover, higher levels of fiscal deficits would still requite high levels of taxes, which is not possible because slowing economy would reduce incomes and hence the tax collections. The more interesting part is to see how does government handle the defaults in newly nationalized banks like RBS. Will government exercise its right on the collateral to recover loans and ignore that it is responsible for the plight of its citizens.
The current situation relates to Liquidity trap as described in the Keynesian Economics. Eventually, the rate of interest will fall so low that this will lead to an infinite demand for money. As it has been in Japan, where the real rate of interest has been negative for more than a decade and property prices are at 40% of their peak in 1990’s. Until, the credit markets are not stabilized and the confidence levels are restored in the credit holders I don’t see any ray of light in the black hole. For the first time, have investors learned their lessons by not caring out proper risk identification. In last crash in 1987, only the equity holders lost money but the debt holders didn’t even when the bankruptcy was declared. So these were considered to be safe, for the first time has the write downs have been to such a large extent that they have completely wiped off bank’s balance sheets and curtailed their ability to raise capital. This has lead to default and for the first time will the credit holders will suffer losses on a wide scale. A research has even pointed out that sovereign bonds which are said to be risk free are essentially not risk free and more than 27 sovereign bonds have defaulted. Moreover, these carry interest rate risk, purchasing power risk, exchange rate risk for international investors etc. So essentially the concept of risk free rate does not hold true. And investors need to price in the extra risk premium. This will lead to re allocation of wealth among various asset classes. The rate of return required from a bond as compared to earlier (ceteris paribus) would rise significantly and this would have deep impact on the bottom line of highly leveraged companies and would render most of their projects unprofitable and may even force them to delay projects due to non availability of cheap and required capital. Thus only companies which have adequate capital to fund their expansion plans and have strong operating cash flows would survive. That’s why adage goes’ A money today is better than money tomorrow’ and every business should have enough cash to take advantage of market imperfections and opportunities.
Central Banks are cutting Discount rate steeply because they want to improve the liquidity in the system and ensure that there is enough capital in the system but it fails to realize that this money is just finding its way into the treasuries of banks and in reality wont be made available for lending. In fact, one school of thought believes that the rate interest should rise sufficiently to compensate the investors of credit and interest rate as well as purchasing power risk. Only when the rate rises significantly, will investors opportunity cost of money will rise and they part away with money. The speculative demand for money will reduce and money will be deposited with banks and made available for lending. The reason being that the demand for speculative money reduces as the rate of interest rises.
Paradigm Shift-From deregulation to nationalization
Few months back, inflation and rising crude prices was a big concern and suddenly the focus has shifted to more important events like nationalization of banks in UK, USA etc. See the irony, few months back developed economies like USA, UK, EU were advocating liberalization of financial services industry, free movement of capital, deregulation of financial services industry, denationalization of banks and privatization bla-bla . What has happened now? The same nations are now harping the tune of nationalizing banks and using tax payer’s fund to recapitalize national banks and save their banking system from collapsing. Few months back, London and New York were the teller counters of this world economy and whoever wanted money went to these counters and raised money; whatever may be the need speculative demand or investment or consumption demand.
Emergence of ASIA-Middle East
I think soon the Economic power will shift to Asia (including Japan) and Middle East Region specifically. I would like to be say that in future I see Dubai, Egypt, Hong Kong, Singapore and Mumbai as the upcoming international financial centers. And among these specially Dubai, Singapore and Hong Kong. The cash rich OPEC countries are spending heavily on tourism and infrastructure. UAE has completely transformed itself in last decade, and is making most of its windfall gains from high crude prices. It is targeting itself to be one of the most sought after tourist destinations in the world. Most of the I-Banks and other industries are increasing concentrating on Dubai as its base to cater to the Middle East countries. They are hiring in a big way in Middle East and soon the senior management would handle the company affairs from Middle East base.
I think investing in Indian Stock markets are better than its Asian peers. I know, many of you may say I am wrong and China is the place. Please bear and give me a chance to justify my answer. China like other Asian economies viz Singapore, Malaysia etc is export oriented economy. India on other hand is a domestic consumption driven economy. It still has high Balance of Payments deficit, reason it imports crude in high volumes. And in addition, its exports don’t match its imports. Off late, the deficit in current account has been matched with surplus in the capital account, thanks to the FII and booming stock markets. But again, with FII withdrawing money, rupee has depreciated vis-à-vis dollar and foreign kitty has been reduced. But still, I feel rupee is in a long term appreciation trend and once the unwinding in the credit markets is done with, dollar will depreciate further. What makes India an attractive destination to me is its young population. It has a high proportion of its population who are in their middle ages and are spending high proportion of their income on luxuries and other consumer durables, making India less affected by slowing demand from export markets. The other thing, which has recently turned into India’s favour is 123 agreement. Since long, the shortage of energy has withheld the development of rural areas and there are power cuts in many parts of India and many areas have no access to electricity. Nuclear energy is a clean and green energy and will reduce India’s dependence on crude to some extent and make the demand for crude from inelastic to elastic in long run. Though the advantages of this deal will take 3-4 years to start accruing but it’s a positive step and this is Manmohan Singh’s greatest achievement I guess. He took a tough decision and even risked his Chair. He will be remembered as a man who single handedly turned Indian Economy, which was in a terrible state in 1991 to India which is looked upon by world as the fuel for the growth of world economy. Economics always says that the impact of policy decisions will accrue in the long run. His financial sector reforms in 1991 set the stage for growth in 2000’s and now 123 agreement will provide new impetus to growth in India.
Sir. Warren Buffet & Mr.Rakesh Jhunjhunwalaji- Stock Market Barrons
Billionaires like Warren Buffet and Mr.Rakesh Jhunjhunwalaji can easily read singals of market and can withstand the turmoil in the markets and probably that is the reason they have been able to earn massive wealth from stock markets. There is a common principle these investors follow: When markets rise, we should see and when markets are selling we should buy. These investors buy at troughs or just before recovery starts and sell when the markets are at peak and the valuations are expensive and defy fundamentals. One more common principle they employ is : due diligence of the target company. One of the reasons why the crisis took place was that, bankers were busy minting money for themselves. They were ambitious and wanted to meet their targets and were happy with their fat salary and bonus cheques. I-Banks have virtually vanished and are aliens and perhaps future generations wont even know that in past there were financial organizations such as I-Banks. In greed of money, the young analyst compromised with the due diligence process, they did not study the target company product, management quality, competitive position, economy’s trend, production process etc in detail. Crunching numbers, does not mean you have made a good investment. What differentiates Sir. Warren Buffet and Rakesh Sir is their ability to perform a top-down analysis of the target company and integrating it in a broader landscape with the domestic and global economy. They choose companies which are close to natural monopoly and this gives these companies pricing power, certainty in cash flows, uninterrupted demand etc. Readers don’t even think for a moment, that there are no monopolies and they are not investing in current periods and are just reaping from past investments. Sir Warren invested in a transportation company which had 80% -90% on its route in USA, he invested in a candies and chocolate manufacturing company. Sir Rakesh invested in Crisil, which had a near monopoly in India when he invested and negotiated with S&P when it bought Crisil. They invest in companies which they believe have long term fundamentals and not on basis of short term price targets, M&A, etc. They buy stake in companies in which they think even if they have to buy 100% equity of that company from market, they wont be in loss because they are sure that the company would earn enough profits to make their investment profitable. Another factor which distinguishes them from other is their size of investment, which gives them the negotiation power. Rakesh Sir negotiated in a big way when they sold Crisil’s stake to S&P and helped other share holders in realizing fair return on their investments. The reason why companies like Goldman Sachs, S&P agree to their terms is because the kind of experience and value they add to the company. They can turnaround a company in short period of time and work closely with the management to improve the growth of the firm.
And if u trust my instinct and as far as I know them, both of these genius are on a shopping spree now. They were seating on huge cash balances waiting for right time to deploy funds and will now start bottom fishing in few months. Who knows, they might already have begun talks with managements as well. And Sir Warren has already bought stake in the Wall Street’s sought after firm Goldman Sachs. Infact, I would recommend investors with long term horizon to hold on cash and start deploying funds in fundamentally sound companies with good track record of management, earnings visibility, strong cash flows, low leverage, adequate capital to meet capex requirements for next 2-3 years. Wont advise any particular sector but few companies which meet above said criteria.
From
Pratik Tibrewala
Msc Finance WBS
I am suddenly nostalgic being in Asset Management class at Warwick Business School…I remembered my science classes in school.. In 10th grade we learned about the Big Bang Theory and the concept of black holes, white dwarf, etc.
These concepts I guess I can relate to what is happening now in financial markets. A Big Bang has taken place. And the financial markets are shrinking rapidly and are pulled towards their origin by the strong forces of greed, contamination and deregulation. This will result in creation of black holes. In this black holes, the gravity of these forces will be so strong that not a single ray of light can pass through it. I am not exaggerating the magnitude of financial crisis, I am trying to show its impact. Its more than just a financial crisis.
Probably not many people will believe that few people in the industry had predicted this Sub-Prime crisis as early as 2005-2006. Warren Buffet and other notable experts in the filed have recorded their statements that USD will depreciate in future and is in a long term depreciation trend. To add to this, I had presented a similar report in my college in 2005 on the same issue of Sub Prime crisis and tried to evaluate the housing market in USA and tried to identify the asset bubble in making,. In addition, I extended my framework to include gold as an asset class rather than an commodity and pointed out the possible scenarios where gold would outperform the other asset classes. In my report, I clearly mentioned that the spectacular credit growth which led to inflationary asset prices could not be sustained in future and would lead to creation of circumstances which will lead USA and the world economy into a vicious cycle of recession. It would lead to a combination of depreciating dollar, rising interest rates, high unemployment rates, defaults in housing market. And now, the results are in front of us.
Rationale:-Behind Crisis
The reason is very clear whenever anything rises at alarming levels it has to come down at similar periods. Again, I would like to relate this to Newton ‘s Gravity Theory. Issac Newton discovered the Gravitational Theory and concluded that any thing that goes up has to come down back to earth and the speed at which it comes down is faster than it goes up. So please remember these theories and concepts, it has indirect applications in finance. So if you scored well in science, you would score good in finance. In past four years, stock markets experienced spectacular Bull Run and the equities zoomed as if USA & Russia were releasing rockets from earth. But every bull run teaches its own lesson. In 1990’s after the dot com bubble, people became wary of high P/E multiples as high as 100-400 times which were allocated to dot com companies. In fact, for some time when the returns were generated and people who bought these stocks at 100 P/E ratio were able to see it to another fool for 300 P/E ratio, even investor like Warren Buffet was astonished and made public statement that for the first time his research was wrong and probably market was right in its judgement. Soon after he made his confession, in few months the dot come bubble took place and stocks went crashing. After 2008 crisis, people in future will understand the importance of identifying risk involved in asset, its payoff and associated cash flows.
Had government exercised effective regulation and control on the financial system and imposed stringent capital adequacy norms, the present situation would not have arose. Hedge Funds in US were completely unregulated and there was no check on their activities such as speculation, high leveraging etc. In fact, hedge funds used to go to havens like Bermuda, Mauritius etc to escape from regulation. In past decade, the financial markets made easy for I-Bankers, Hedge Fund managers to earn quick buck. Most of the analyst were new and just experienced the bull run and had never experienced bear run. Thus any stock selected by them performed well in the bull run because of systematic return ie correlation with the index. So they never actually knew how to pick growth and quality stocks, nor could they read off balance sheet items and secret reserves build by the company. People like Warren Buffet understood financial statements and made money. To add to this, when Warren Buffet was asked what do you think your successor should be good at ? He said that my successor needs to be able to analyze the financial statements and especially the off balance sheet items.
Another reason is the unaccounted investments of Hedge Funds. This are specialized institutions that are willing to take risk and beat the market and generate excess return on investments and are looking to make a quick buck in short time. South East Asian Crisis is an example of how can these short term foreign inflows and outflows can distort the BOP of an economy. These funds invest money in un chartered territories and seek advantage of being first mover. Due to their high bulky investments, they attract market attention to that particular asset class. For instance, since 2005 the money flowed into the Equities, mortgage backed securities and other riskier assets. The result bull run in equities. Retail investors entered at peak and are in losses, while hedge funds exited at profits at peak. Then this money made way into commodities like Crude, Base metals, precious metals, agricultural commodities etc. And suddenly the commodities started experiencing a bull run. Crude rose from $70 per barrel and reached sub $150 levels in a short period of time. There were no fundamental reason that justified the magnitude of rise in such a short period of time. And as expected when on corrections, hedge funds were exiting and booking profits, retail investors entered and booked looses. Now the money has flown out of crude and will look at gold as its safe heaven. Gold., as in investment class will be looked upon by investors in next 2-5 years to beat inflation and for safety of capital. One of the reason for the large size of hedge funds was the sheer number of funds launched in short period of time. In Wall Street, any I-Banker with an Ivy League MBA could launch his hedge fund and within hours he would get several billions to start his fund. This unregulated industry presented data of its best fund to raise capital and the funds which failed were not reported at all and thus returns which were reported were biased and misled investors.
Another important reason for the crisis has been structured derivative products and its complexity. The main aim of the derivatives was to enable asset holder to hedge his risk. But the doctorates in physics, math, statistics and ones from engineering background created complex derivatives products whose pay off were not easily determinable and hence the clients-corporates could never understand the risk associated with the product and its pay off. Thus when markets reversed, as in case of Indian IT industry, on one hand they had windfall gain due to depreciation of ruppe on other hand losses from hedges. These left their balance sheet red. The creators of structured products themselves never understood the product and its implications and hence could not analyze the product because they lack the knowledge of financial concepts etc.
Impact of Credit Crisis
The impact of crisis can be measured from the following facts: Fed Reserve has injected 700 billion USD into the system, BoE has injected more than 400 Billion GBP into the system. Bear Stearns and Lehman Brothers have been bankrupt, AIG suffered huge losses and Fed Reserve had to intervene to protect counterparties which were predominantly pension funds, retirement funds etc. Iceland ‘s banking system has collapsed. Russia is seating on around 250 billion USD and is bailing out Iceland, but guess that wont be enough and Iceland is very angry as none of the Western Counterparts are willing to help. The reason is evident, Fed would handle its own economy or Iceland? ECB has asked its member nations to develop their own plans to bail out their domestic banks and central banks throughout the world have coordinated their monetary policy to ease the tight liquidity position in the money markets. The money markets have literally frozen. With LIBOR rising as high as 5%. Nobody is willing to lend in the money markets and after 2001 for the first time there have been such heavy withdrawals from money markets. The banks are trying to recapitalize themselves and holding every penny of money. This has adversely affected the expansion plans of quality corporates because the debt markets have literally frozen. Banks firstly don’t have enough money to lend and secondly they perceive the credit risk is too high.
Will Bail outs be effective? I doubt
I would like to point out that the bail out plans of Fed Reserve and BoE will not necessarily solve this issue. Market will take its own time to assess risk and adjust accordingly. In many of these financially important centers, the size of the banking system exceeds more than 5 times the size of the economy. Take for instance UK, the size of the banking industry is more than 5 times the size of the GDP. This means recapitalizing banking system by 1% requires 5% of GDP borrowing. Thus even a small 5% recapitalization plans would require more than 25% of GDP borrowing and that would take already high levels of Fiscal deficit to still higher levels leading to higher inflation and higher unemployment rates. So here one can see how much dependable these bail outs are. Moreover, higher levels of fiscal deficits would still requite high levels of taxes, which is not possible because slowing economy would reduce incomes and hence the tax collections. The more interesting part is to see how does government handle the defaults in newly nationalized banks like RBS. Will government exercise its right on the collateral to recover loans and ignore that it is responsible for the plight of its citizens.
The current situation relates to Liquidity trap as described in the Keynesian Economics. Eventually, the rate of interest will fall so low that this will lead to an infinite demand for money. As it has been in Japan, where the real rate of interest has been negative for more than a decade and property prices are at 40% of their peak in 1990’s. Until, the credit markets are not stabilized and the confidence levels are restored in the credit holders I don’t see any ray of light in the black hole. For the first time, have investors learned their lessons by not caring out proper risk identification. In last crash in 1987, only the equity holders lost money but the debt holders didn’t even when the bankruptcy was declared. So these were considered to be safe, for the first time has the write downs have been to such a large extent that they have completely wiped off bank’s balance sheets and curtailed their ability to raise capital. This has lead to default and for the first time will the credit holders will suffer losses on a wide scale. A research has even pointed out that sovereign bonds which are said to be risk free are essentially not risk free and more than 27 sovereign bonds have defaulted. Moreover, these carry interest rate risk, purchasing power risk, exchange rate risk for international investors etc. So essentially the concept of risk free rate does not hold true. And investors need to price in the extra risk premium. This will lead to re allocation of wealth among various asset classes. The rate of return required from a bond as compared to earlier (ceteris paribus) would rise significantly and this would have deep impact on the bottom line of highly leveraged companies and would render most of their projects unprofitable and may even force them to delay projects due to non availability of cheap and required capital. Thus only companies which have adequate capital to fund their expansion plans and have strong operating cash flows would survive. That’s why adage goes’ A money today is better than money tomorrow’ and every business should have enough cash to take advantage of market imperfections and opportunities.
Central Banks are cutting Discount rate steeply because they want to improve the liquidity in the system and ensure that there is enough capital in the system but it fails to realize that this money is just finding its way into the treasuries of banks and in reality wont be made available for lending. In fact, one school of thought believes that the rate interest should rise sufficiently to compensate the investors of credit and interest rate as well as purchasing power risk. Only when the rate rises significantly, will investors opportunity cost of money will rise and they part away with money. The speculative demand for money will reduce and money will be deposited with banks and made available for lending. The reason being that the demand for speculative money reduces as the rate of interest rises.
Paradigm Shift-From deregulation to nationalization
Few months back, inflation and rising crude prices was a big concern and suddenly the focus has shifted to more important events like nationalization of banks in UK, USA etc. See the irony, few months back developed economies like USA, UK, EU were advocating liberalization of financial services industry, free movement of capital, deregulation of financial services industry, denationalization of banks and privatization bla-bla . What has happened now? The same nations are now harping the tune of nationalizing banks and using tax payer’s fund to recapitalize national banks and save their banking system from collapsing. Few months back, London and New York were the teller counters of this world economy and whoever wanted money went to these counters and raised money; whatever may be the need speculative demand or investment or consumption demand.
Emergence of ASIA-Middle East
I think soon the Economic power will shift to Asia (including Japan) and Middle East Region specifically. I would like to be say that in future I see Dubai, Egypt, Hong Kong, Singapore and Mumbai as the upcoming international financial centers. And among these specially Dubai, Singapore and Hong Kong. The cash rich OPEC countries are spending heavily on tourism and infrastructure. UAE has completely transformed itself in last decade, and is making most of its windfall gains from high crude prices. It is targeting itself to be one of the most sought after tourist destinations in the world. Most of the I-Banks and other industries are increasing concentrating on Dubai as its base to cater to the Middle East countries. They are hiring in a big way in Middle East and soon the senior management would handle the company affairs from Middle East base.
I think investing in Indian Stock markets are better than its Asian peers. I know, many of you may say I am wrong and China is the place. Please bear and give me a chance to justify my answer. China like other Asian economies viz Singapore, Malaysia etc is export oriented economy. India on other hand is a domestic consumption driven economy. It still has high Balance of Payments deficit, reason it imports crude in high volumes. And in addition, its exports don’t match its imports. Off late, the deficit in current account has been matched with surplus in the capital account, thanks to the FII and booming stock markets. But again, with FII withdrawing money, rupee has depreciated vis-à-vis dollar and foreign kitty has been reduced. But still, I feel rupee is in a long term appreciation trend and once the unwinding in the credit markets is done with, dollar will depreciate further. What makes India an attractive destination to me is its young population. It has a high proportion of its population who are in their middle ages and are spending high proportion of their income on luxuries and other consumer durables, making India less affected by slowing demand from export markets. The other thing, which has recently turned into India’s favour is 123 agreement. Since long, the shortage of energy has withheld the development of rural areas and there are power cuts in many parts of India and many areas have no access to electricity. Nuclear energy is a clean and green energy and will reduce India’s dependence on crude to some extent and make the demand for crude from inelastic to elastic in long run. Though the advantages of this deal will take 3-4 years to start accruing but it’s a positive step and this is Manmohan Singh’s greatest achievement I guess. He took a tough decision and even risked his Chair. He will be remembered as a man who single handedly turned Indian Economy, which was in a terrible state in 1991 to India which is looked upon by world as the fuel for the growth of world economy. Economics always says that the impact of policy decisions will accrue in the long run. His financial sector reforms in 1991 set the stage for growth in 2000’s and now 123 agreement will provide new impetus to growth in India.
Sir. Warren Buffet & Mr.Rakesh Jhunjhunwalaji- Stock Market Barrons
Billionaires like Warren Buffet and Mr.Rakesh Jhunjhunwalaji can easily read singals of market and can withstand the turmoil in the markets and probably that is the reason they have been able to earn massive wealth from stock markets. There is a common principle these investors follow: When markets rise, we should see and when markets are selling we should buy. These investors buy at troughs or just before recovery starts and sell when the markets are at peak and the valuations are expensive and defy fundamentals. One more common principle they employ is : due diligence of the target company. One of the reasons why the crisis took place was that, bankers were busy minting money for themselves. They were ambitious and wanted to meet their targets and were happy with their fat salary and bonus cheques. I-Banks have virtually vanished and are aliens and perhaps future generations wont even know that in past there were financial organizations such as I-Banks. In greed of money, the young analyst compromised with the due diligence process, they did not study the target company product, management quality, competitive position, economy’s trend, production process etc in detail. Crunching numbers, does not mean you have made a good investment. What differentiates Sir. Warren Buffet and Rakesh Sir is their ability to perform a top-down analysis of the target company and integrating it in a broader landscape with the domestic and global economy. They choose companies which are close to natural monopoly and this gives these companies pricing power, certainty in cash flows, uninterrupted demand etc. Readers don’t even think for a moment, that there are no monopolies and they are not investing in current periods and are just reaping from past investments. Sir Warren invested in a transportation company which had 80% -90% on its route in USA, he invested in a candies and chocolate manufacturing company. Sir Rakesh invested in Crisil, which had a near monopoly in India when he invested and negotiated with S&P when it bought Crisil. They invest in companies which they believe have long term fundamentals and not on basis of short term price targets, M&A, etc. They buy stake in companies in which they think even if they have to buy 100% equity of that company from market, they wont be in loss because they are sure that the company would earn enough profits to make their investment profitable. Another factor which distinguishes them from other is their size of investment, which gives them the negotiation power. Rakesh Sir negotiated in a big way when they sold Crisil’s stake to S&P and helped other share holders in realizing fair return on their investments. The reason why companies like Goldman Sachs, S&P agree to their terms is because the kind of experience and value they add to the company. They can turnaround a company in short period of time and work closely with the management to improve the growth of the firm.
And if u trust my instinct and as far as I know them, both of these genius are on a shopping spree now. They were seating on huge cash balances waiting for right time to deploy funds and will now start bottom fishing in few months. Who knows, they might already have begun talks with managements as well. And Sir Warren has already bought stake in the Wall Street’s sought after firm Goldman Sachs. Infact, I would recommend investors with long term horizon to hold on cash and start deploying funds in fundamentally sound companies with good track record of management, earnings visibility, strong cash flows, low leverage, adequate capital to meet capex requirements for next 2-3 years. Wont advise any particular sector but few companies which meet above said criteria.
From
Pratik Tibrewala
Msc Finance WBS
Tuesday, September 30, 2008
Subprime Crisis
How has subprime crises in USA erupted a volcano in remaining world?
Basically subprime crises act as a chain reaction resulting in a bigger blast every time its effect is felt on the member of the chain. So as the loans were defaulted in the US by the firms and households, this chain of continuous defaults resulted in increasing number of properties in the hands of banks and as these were handed more and more to these banks the value depreciated in huge values as compared to previously stated values when the private players were banking upon their huge earnings to cash these properties. So continuous withholdings of these assets from households/firms to banks sparked an unwanted downfall in the liquidity in the current state of the market. By liquidity, i mean the cash flows reduced as the mortgaging by the banks increased to innumerable numbers causing a huge fall in the liquid form f money that is cash or bank deposits fell causing a tremendous amount of effect in the current picture of the market situation. Such setbacks acted as a fuel to fire in the whole world economy as major banks set up in USA failed with subprime crises. With many local banks and financial institution banking upon these banks failed and hence resulted in a big phase of recession. This worse phase of recession is felt throughout the whole economy in every single country and the situation can’t be taken under control till the time government interferes with the matter on hand.
Now this government interference can be taken as a phase of development transition of capitalism into socialism phase .Socialism is the ultimate phase of Development .This is mainly because of the fact as world globalises the only force in hand is government interference whenever the world economy suffers from crises . And hence socialism.
So this subprime crisis can mark a possible transition of development phase from Capitalism to Socialism.
Basically subprime crises act as a chain reaction resulting in a bigger blast every time its effect is felt on the member of the chain. So as the loans were defaulted in the US by the firms and households, this chain of continuous defaults resulted in increasing number of properties in the hands of banks and as these were handed more and more to these banks the value depreciated in huge values as compared to previously stated values when the private players were banking upon their huge earnings to cash these properties. So continuous withholdings of these assets from households/firms to banks sparked an unwanted downfall in the liquidity in the current state of the market. By liquidity, i mean the cash flows reduced as the mortgaging by the banks increased to innumerable numbers causing a huge fall in the liquid form f money that is cash or bank deposits fell causing a tremendous amount of effect in the current picture of the market situation. Such setbacks acted as a fuel to fire in the whole world economy as major banks set up in USA failed with subprime crises. With many local banks and financial institution banking upon these banks failed and hence resulted in a big phase of recession. This worse phase of recession is felt throughout the whole economy in every single country and the situation can’t be taken under control till the time government interferes with the matter on hand.
Now this government interference can be taken as a phase of development transition of capitalism into socialism phase .Socialism is the ultimate phase of Development .This is mainly because of the fact as world globalises the only force in hand is government interference whenever the world economy suffers from crises . And hence socialism.
So this subprime crisis can mark a possible transition of development phase from Capitalism to Socialism.
Monday, September 8, 2008
Commodities Continue Their Late Summer Swoon
Commodities Continue Their Late Summer Swoon
In my last column, I mentioned that most of the commodity sectors have seen selling over the past few weeks, with many falling from multi-year, or all-time highs. And it looks as though that selloff still remains in force for now until something causes it to turn around.
We’ll start with the crude oil first…
Oil Slides Below 200-Day Moving Average… More Downside To Come?
Crude oil futures were trading in the vicinity of $115 a barrel (the October futures contract). Since then, the price has continued to move to the downside and currently sits around $106.50 a barrel. That’s $42 lower than its high, set on July 11. That equates to a dollar value change of $42,000 move on one futures contract.
A few weeks ago, we’d pegged the 200-day moving average area of about $110 a barrel on the daily charts as a level of potential support. But that has now been breached, we could see more downside to come. One thing is sure: You never want to write off this market, as many of the events that had propped it up in the first place are still lurking in the background.
Gas Gets Pounded
The energy sector’s other major player - natural gas - has suffered a relentless downside slump recently. It’s been mashed so much that it’s given up all the gains it made for 2008.
So what next? We may be nearing a final support area, as the charts have become very oversold and the hurricanes rumbling through the Gulf of Mexico are keeping many of the short sellers at bay for now.
The October futures contract has currently lost about 500 points since our last update - with an even lower level seen just a few days before that. That 500-point move equates to a dollar value of $5,000 on one futures contract - and an unbelievable $63,000 move from its high price on July 2.
Whether the hurricanes cause any real damage and disrupt supplies is yet to be seen, but it looks like we could finally be getting to a stable support area for natural gas.
Lastly, let’s take a look at the metals market…
These Metals Have Lost Their Shine
For the most part, silver and gold are still taking their cues from the oil and dollar markets. These physical commodities follow the oil market directionally, but move to the inverse of the dollar.
Right now, silver is by far the weaker of the two metals, as it just can’t seem to muster up a sustained rally for some reason. It continues to trade at the low end of its recent range.
The December futures contract currently trades around $12.10 an ounce, which is well off its last high of $19.70 an ounce on July 15. This equates to a dollar change of $7.60 an ounce, or $38,000 with the silver point multiplier. That’s a big chunk of change in that short period of time.
From a technical perspective, silver is still oversold, but it’s hard to pick a bottom from here. What we can say is that if the dollar starts to sell off and the oil market starts to move back up, we could see a nice rebound for silver.
Gold has also continued to move in a similar pattern to silver: Lower. However, not to the same extent. December gold futures are currently near the $807 an ounce level and holding above its lows of $778 an ounce from a few weeks ago.
Since both metals move in tandem, when one goes down, so does the other. Gold topped out right near $1,000 an ounce back on July 15 and has given up roughly $200 an ounce since then - a $20,000 move in equity.
As with the other commodities, that’s a big swing. And just like silver, gold is oversold and could see just as impressive a bounce if people start to pile in.
Commodities Continue Their Late Summer Swoon
In my last column, I mentioned that most of the commodity sectors have seen selling over the past few weeks, with many falling from multi-year, or all-time highs. And it looks as though that selloff still remains in force for now until something causes it to turn around.
We’ll start with the crude oil first…
Oil Slides Below 200-Day Moving Average… More Downside To Come?
Crude oil futures were trading in the vicinity of $115 a barrel (the October futures contract). Since then, the price has continued to move to the downside and currently sits around $106.50 a barrel. That’s $42 lower than its high, set on July 11. That equates to a dollar value change of $42,000 move on one futures contract.
A few weeks ago, we’d pegged the 200-day moving average area of about $110 a barrel on the daily charts as a level of potential support. But that has now been breached, we could see more downside to come. One thing is sure: You never want to write off this market, as many of the events that had propped it up in the first place are still lurking in the background.
Gas Gets Pounded
The energy sector’s other major player - natural gas - has suffered a relentless downside slump recently. It’s been mashed so much that it’s given up all the gains it made for 2008.
So what next? We may be nearing a final support area, as the charts have become very oversold and the hurricanes rumbling through the Gulf of Mexico are keeping many of the short sellers at bay for now.
The October futures contract has currently lost about 500 points since our last update - with an even lower level seen just a few days before that. That 500-point move equates to a dollar value of $5,000 on one futures contract - and an unbelievable $63,000 move from its high price on July 2.
Whether the hurricanes cause any real damage and disrupt supplies is yet to be seen, but it looks like we could finally be getting to a stable support area for natural gas.
Lastly, let’s take a look at the metals market…
These Metals Have Lost Their Shine
For the most part, silver and gold are still taking their cues from the oil and dollar markets. These physical commodities follow the oil market directionally, but move to the inverse of the dollar.
Right now, silver is by far the weaker of the two metals, as it just can’t seem to muster up a sustained rally for some reason. It continues to trade at the low end of its recent range.
The December futures contract currently trades around $12.10 an ounce, which is well off its last high of $19.70 an ounce on July 15. This equates to a dollar change of $7.60 an ounce, or $38,000 with the silver point multiplier. That’s a big chunk of change in that short period of time.
From a technical perspective, silver is still oversold, but it’s hard to pick a bottom from here. What we can say is that if the dollar starts to sell off and the oil market starts to move back up, we could see a nice rebound for silver.
Gold has also continued to move in a similar pattern to silver: Lower. However, not to the same extent. December gold futures are currently near the $807 an ounce level and holding above its lows of $778 an ounce from a few weeks ago.
Since both metals move in tandem, when one goes down, so does the other. Gold topped out right near $1,000 an ounce back on July 15 and has given up roughly $200 an ounce since then - a $20,000 move in equity.
As with the other commodities, that’s a big swing. And just like silver, gold is oversold and could see just as impressive a bounce if people start to pile in.
Wednesday, August 13, 2008
speculation vs. analysis
Can games in casino be won?
Casino is a game of expectation. With proper expected values and sufficient funds any casino game can be won with lowest probability of losing the game.
According to me, the catch of winning casino games lie in controlling the main emotions that rule the market indexes which are greed and fear. Being greedy and fearless, anyone can win any amount of money desired from casino.
Casinos run only on a margin of 3% above their capital which is a very low amount. And to believe that casinos are the only winner is a wrong perception and with proper expected values game can always be won.
For example- in an one on one flash with casino , everytime the player is having half a probability of winning the game .So with half a probability and a specific sum of money we are always at profit.
Lets be numeric on this .
If player gets colour amount of money with the player gets 5 times
If player gets sequence amount of money with the player gets 6 times
If player gets coloured sequence amount of money with the player gets 10 times
If player gets triplet amount of money with the player gets 11 times
If player gets double amount of money with the player gets 3 times
If playeronly wins amount of money with the player gets 2 times.
Let the specific sum of money played with be Rs.1000 on every game with total amount of Rs.10,000 to play the game with. Let suppose we don’t have emotions(greed and fear)
With expected valueshalf times we will win and half times we ‘ll loose so so 5 times we loose that is we loose Rs.5000 and we win 5 times that is 5000 x 2=10,000 which is our initial amount.So we should play the same amount again and againuntil we get colour,sequence,coloured sequence,triplets or doubles.
Hence we are always in win win situation.But my assumption of keeping two emotions silent is very strong.These two emotions of common people makes 3%profitmargin for the casino.
Casino is a game of expectation. With proper expected values and sufficient funds any casino game can be won with lowest probability of losing the game.
According to me, the catch of winning casino games lie in controlling the main emotions that rule the market indexes which are greed and fear. Being greedy and fearless, anyone can win any amount of money desired from casino.
Casinos run only on a margin of 3% above their capital which is a very low amount. And to believe that casinos are the only winner is a wrong perception and with proper expected values game can always be won.
For example- in an one on one flash with casino , everytime the player is having half a probability of winning the game .So with half a probability and a specific sum of money we are always at profit.
Lets be numeric on this .
If player gets colour amount of money with the player gets 5 times
If player gets sequence amount of money with the player gets 6 times
If player gets coloured sequence amount of money with the player gets 10 times
If player gets triplet amount of money with the player gets 11 times
If player gets double amount of money with the player gets 3 times
If playeronly wins amount of money with the player gets 2 times.
Let the specific sum of money played with be Rs.1000 on every game with total amount of Rs.10,000 to play the game with. Let suppose we don’t have emotions(greed and fear)
With expected valueshalf times we will win and half times we ‘ll loose so so 5 times we loose that is we loose Rs.5000 and we win 5 times that is 5000 x 2=10,000 which is our initial amount.So we should play the same amount again and againuntil we get colour,sequence,coloured sequence,triplets or doubles.
Hence we are always in win win situation.But my assumption of keeping two emotions silent is very strong.These two emotions of common people makes 3%profitmargin for the casino.
Monday, August 11, 2008
WHERE WILL CRUDE PRICES GO?
Being a leader in the commodity market right now.What will be the future of Crude as well as other commodities?
Crude prices burn heating oil bottom lines
By Maria Panaritis
Inquirer Staff Writer
It has been an unforgiving six months for the heating-oil industry. Rather than coasting into summer with the crush of winter behind them, companies are grappling with the wreckage that $130-a-barrel crude continues to heap onto their balance sheets.
Companies across the region say they have been saddled with so many unpaid customer bills that they are taking out bigger loans from already credit-shy banks to cover the unpaid debt while crossing their fingers that customers will pay.
The situation is all the more urgent, they say, given that crude prices this month hit the $130-a-barrel mark - higher than anyone was predicting even six months ago.
That means that dealers are getting hit a couple of ways. Not only are they financing their customers' unpaid bills, they are paying more than ever to fill their tanks at the refinery and store the oil until customers need it.
As a result, the region's heating-oil companies are scavenging to avoid being blown out of business.
"We're really financing [customers'] heat - not selling oil anymore," said Dan Hanly, vice president of Dave Hanly Oil in Collingdale. "I've had to take out a line of credit to pay my suppliers and be able to carry my customers."
With retail prices well above $4 a gallon, customers are hard-pressed to pay for what they buy.
"I used to discount my oil for a payment of five days," Hanly said. "Now I find I'm carrying these people for 60, 90 days - some maybe into next season before they can pay me off for what they're using this year."
Dealers across the region face the same storm of troubles: Customers are breathing down their necks about sticker shock; international commodities traders continue to force the price of crude to unprecedented levels; and bank loan terms are tougher than ever thanks to the credit crisis.
An oil supplier has it tough. "He's working with his bank as well as he can. He's trying to collect from the consumer early where possible. But usually that's not possible. He's struggling," said Roy Patterson, executive vice president of the Delaware Valley Fuel Dealers Association, a nonprofit trade group that represents 30 full-service heating-oil dealers in Philadelphia, Delaware, Montgomery and Bucks Counties.
Kurt Haab, president of F.C. Haab Co., of Philadelphia, described the current state as "very stressful" and blamed much of today's problems on commodities traders investing furiously in oil futures as the value of the dollar has made investments elsewhere less attractive.
"I think the health of anybody in the retail heating-oil business is at stake," he said. "There's a lot more companies going out of business, putting themselves up for sale, because they can't afford to stay in business."
"Just look at the phone book," said Haab, whose grandfather Fred Haab founded the company in 1945. "It's gone from four pages of heating-oil businesses to two."
Haab said his company was seeing larger unpaid customer balances.
The average wholesale price per gallon of heating oil at the Port of Philadelphia was $3.97 on Tuesday - 73 percent higher than it was Oct. 1, when a gallon cost $2.29, according to The Energy Cooperative, based in Philadelphia.
Hanly said his company was carrying over $100,000 more in unpaid balances than usual this spring.
It has gotten to the point where Hanly waits to hear from refineries what their prices will be the next day before sending any of his trucks for a fill-up.
"If the price is going up at midnight, I'll load my trucks up this afternoon," he said. "If the price is going down, I'll hold off until tomorrow.
A nickel up or down is worth the effort. On a 3,000-gallon truck it adds up to $150 savings.
Consumers buy heating oil one of three ways: spot priced (they pay what it costs that day on the spot market); price protected (they negotiate a locked-in per-gallon rate with a company that can last for a year); capped (they pay a premium to adjust their rate if crude prices drop).
Patterson said many dealers had stopped offering locked-in contracts. He said the market was simply too volatile for anyone to come out feeling happy with their bet.
"Most of the ones . . . that had offered it in previous years have it available," Patterson said, "but they're not promoting it. Because nobody wants to be the one who locks in at $4 and the price drops down to $2.50."
Crude prices burn heating oil bottom lines
By Maria Panaritis
Inquirer Staff Writer
It has been an unforgiving six months for the heating-oil industry. Rather than coasting into summer with the crush of winter behind them, companies are grappling with the wreckage that $130-a-barrel crude continues to heap onto their balance sheets.
Companies across the region say they have been saddled with so many unpaid customer bills that they are taking out bigger loans from already credit-shy banks to cover the unpaid debt while crossing their fingers that customers will pay.
The situation is all the more urgent, they say, given that crude prices this month hit the $130-a-barrel mark - higher than anyone was predicting even six months ago.
That means that dealers are getting hit a couple of ways. Not only are they financing their customers' unpaid bills, they are paying more than ever to fill their tanks at the refinery and store the oil until customers need it.
As a result, the region's heating-oil companies are scavenging to avoid being blown out of business.
"We're really financing [customers'] heat - not selling oil anymore," said Dan Hanly, vice president of Dave Hanly Oil in Collingdale. "I've had to take out a line of credit to pay my suppliers and be able to carry my customers."
With retail prices well above $4 a gallon, customers are hard-pressed to pay for what they buy.
"I used to discount my oil for a payment of five days," Hanly said. "Now I find I'm carrying these people for 60, 90 days - some maybe into next season before they can pay me off for what they're using this year."
Dealers across the region face the same storm of troubles: Customers are breathing down their necks about sticker shock; international commodities traders continue to force the price of crude to unprecedented levels; and bank loan terms are tougher than ever thanks to the credit crisis.
An oil supplier has it tough. "He's working with his bank as well as he can. He's trying to collect from the consumer early where possible. But usually that's not possible. He's struggling," said Roy Patterson, executive vice president of the Delaware Valley Fuel Dealers Association, a nonprofit trade group that represents 30 full-service heating-oil dealers in Philadelphia, Delaware, Montgomery and Bucks Counties.
Kurt Haab, president of F.C. Haab Co., of Philadelphia, described the current state as "very stressful" and blamed much of today's problems on commodities traders investing furiously in oil futures as the value of the dollar has made investments elsewhere less attractive.
"I think the health of anybody in the retail heating-oil business is at stake," he said. "There's a lot more companies going out of business, putting themselves up for sale, because they can't afford to stay in business."
"Just look at the phone book," said Haab, whose grandfather Fred Haab founded the company in 1945. "It's gone from four pages of heating-oil businesses to two."
Haab said his company was seeing larger unpaid customer balances.
The average wholesale price per gallon of heating oil at the Port of Philadelphia was $3.97 on Tuesday - 73 percent higher than it was Oct. 1, when a gallon cost $2.29, according to The Energy Cooperative, based in Philadelphia.
Hanly said his company was carrying over $100,000 more in unpaid balances than usual this spring.
It has gotten to the point where Hanly waits to hear from refineries what their prices will be the next day before sending any of his trucks for a fill-up.
"If the price is going up at midnight, I'll load my trucks up this afternoon," he said. "If the price is going down, I'll hold off until tomorrow.
A nickel up or down is worth the effort. On a 3,000-gallon truck it adds up to $150 savings.
Consumers buy heating oil one of three ways: spot priced (they pay what it costs that day on the spot market); price protected (they negotiate a locked-in per-gallon rate with a company that can last for a year); capped (they pay a premium to adjust their rate if crude prices drop).
Patterson said many dealers had stopped offering locked-in contracts. He said the market was simply too volatile for anyone to come out feeling happy with their bet.
"Most of the ones . . . that had offered it in previous years have it available," Patterson said, "but they're not promoting it. Because nobody wants to be the one who locks in at $4 and the price drops down to $2.50."
Monday, July 28, 2008
FLOOR MARKET TRADING
Different investors who are interested in investing at the offered price of the companies go forward to purchase their shares and become part of the company. Stock exchange serves as a platform for companies to disclose the prices of their stock. The market for trading securities is known as the stock exchange. This is the main channel for investors to trade in stock and for the companies to list their prices.
On the floor the buyers and the sellers come in contact and agree on a particular price of the stock. Here trading is carried in a traditional method of auction. Traders announce their bidding price and the investors interested to buy the security at the offered price signal the trader by raising their arms. These match their bids and ask prices. This enables trade between the trader and the investor. Anybody can be a part of the floor, whether a small investor or huge companies, banks etc. Stock market trading helps the investors to invest their capital in the business which can fetch them a large profit.
New York Stock Exchange was brought up in 1792. It is the largest and most popular stock exchange. All the companies aim in listing their stocks in the New York Stock Exchange. Many requirements have to be fulfilled. An annual fee is charged for the companies to enter in this exchange. New York Stock Exchange provides data of different securities from various companies. Information of the changes in the price is displayed on the board. The stock brokers gather on the floor for conducting transactions. Investors all around look from the balcony, the floor, high above the floor etc. The podium is filled with people. People surround the scroll boards, phones and computers. Zooming of the prices is done
American Stock Exchange also carries trading on the floor. This stock exchange is situated in Manhattan. It is famous for trading in both stocks and options. This exchange is operated under National Association of Security Dealers. NASDAQ offers listing the quotes of all companies in the industry but it is popular for listing technology related companies. Launching of this exchange was done in 1971. For buying the stock it is very important to be ware of different markets. Also different markets specialize in certain type of stocks ; hence investors need to be informed for easy buying. Without stock markets it would be very difficult for the investors to find the right stock they wish to invest in. At the same time the traders would face the difficulty to approach the investors and offer their price.
On the floor the buyers and the sellers come in contact and agree on a particular price of the stock. Here trading is carried in a traditional method of auction. Traders announce their bidding price and the investors interested to buy the security at the offered price signal the trader by raising their arms. These match their bids and ask prices. This enables trade between the trader and the investor. Anybody can be a part of the floor, whether a small investor or huge companies, banks etc. Stock market trading helps the investors to invest their capital in the business which can fetch them a large profit.
New York Stock Exchange was brought up in 1792. It is the largest and most popular stock exchange. All the companies aim in listing their stocks in the New York Stock Exchange. Many requirements have to be fulfilled. An annual fee is charged for the companies to enter in this exchange. New York Stock Exchange provides data of different securities from various companies. Information of the changes in the price is displayed on the board. The stock brokers gather on the floor for conducting transactions. Investors all around look from the balcony, the floor, high above the floor etc. The podium is filled with people. People surround the scroll boards, phones and computers. Zooming of the prices is done
American Stock Exchange also carries trading on the floor. This stock exchange is situated in Manhattan. It is famous for trading in both stocks and options. This exchange is operated under National Association of Security Dealers. NASDAQ offers listing the quotes of all companies in the industry but it is popular for listing technology related companies. Launching of this exchange was done in 1971. For buying the stock it is very important to be ware of different markets. Also different markets specialize in certain type of stocks ; hence investors need to be informed for easy buying. Without stock markets it would be very difficult for the investors to find the right stock they wish to invest in. At the same time the traders would face the difficulty to approach the investors and offer their price.
Thursday, July 24, 2008
Market Stratergy
Why is there a need for averaging in market? This is most unwantedstratergy followed by people all over the word. According to me ,averaging fails in the market in the long run ,keeping someprobability for the unpredictable nature of the Marketindexes . Ifcertain share or commodities fall to a great extent then there is noreason to buy that at a lower price as I have already pointed out flowwith market otherwise market will punish for going against the trend.
Monday, July 21, 2008
market emotions
Can the success ratio be 100% in predicting the formation of a trend in a market ? According to the professional traders , the success ratio can be increased maximum 80% but trading companies cannot be 100% sure of their success . so what is the ultimate reason for their huge profits ? The only reason behind their win win situation are their average profits always greater than their average lossess. If they get stuck up in some deal they'll admit their mistake quickly and book the loss and on the order hand a retail investor always wait for some miracle to happen which drains away all the profits earn in the previous deals. So the ultimatum is markets are never wrong and it,ll punish the investor until he admits his mistake. The two emotional factors that rules the person in a market are greed and fear . If a person is able to form a stratergy in a market in which both these emotions are hidden factors then success ratio always increases .
Thursday, July 17, 2008
Why is it not possible to track market trend whether its up or down?
The main reason for inability to judge the trend is the nonlinear
trend followed by market, that is, the upward trend can be formed by
the market by registering higher bottom and higher lower compared to
previous low and previous high respectively . This indecisive
formation is what makes this attractive .
The main reason for inability to judge the trend is the nonlinear
trend followed by market, that is, the upward trend can be formed by
the market by registering higher bottom and higher lower compared to
previous low and previous high respectively . This indecisive
formation is what makes this attractive .
Wednesday, July 16, 2008
. Is there any lower bound to the market index ? There's a common
perception among the people that buying the stocks when the market
falls will yield them huge profits but unfortunately that doesn't
happen and eventually they are forced to book huge losses.this is
basically because of the fact that people don't follow the trend the
market follows. In nutshell , flowing with the market yields profits
going against it will yield only disappointments
perception among the people that buying the stocks when the market
falls will yield them huge profits but unfortunately that doesn't
happen and eventually they are forced to book huge losses.this is
basically because of the fact that people don't follow the trend the
market follows. In nutshell , flowing with the market yields profits
going against it will yield only disappointments
Tuesday, July 15, 2008
MARKET INDEXES
The three top most traded markets in the world according to the trade volumes are -:Currency trading
Commodities trading
Stock market trading.
Since only commodities and stock market are open to common traders in India,currency trading is of less importance in our analysis.
How is stock market realated to commodities market?
Since nearly every commodity is open to trade on the index.The spot price is decided on the basis of the trade taking place in the index.(spot price is the actual price we pay in order to get the physical delivery of the commodity).As evident from every day news on channels commodity market is on a life time high at the moment .this is resulting in high inflation in the society.(Inflaion is the acual increase in the price value of different commodities).With hike in inflation the commodities basic as well as luxurious are getting expensive and in turn people are left with lesss money to be invested in stocks.So in turn the stock market index fall on a global perspective.
Q.Is the sudden upward trend detrimental to our country's growth?
commodity exchange is basically for hedging purpose(Hedging means protecting onself from the unexpected changes in prices in future).Since the exchange can help against the unexpected changes in prices , the exchange serves a good purpose for the traders of the commodity but since exchange is open for all including speculators and professional traders,the prices acn always pose a wrong picture of the spot price in market.The sudden bubble formation in the prices of certain commodities resulting from speculations can always pose a great problem to the actual bearer of the situation.For example -:The gold traders (jewellers)e facing a huge problem arising out of a sudden hike in gold prices.As they are not equiped with knowledge of exchange trading they are ignorant of the ways of hedging against the sudden fallouts in gold prices.
Since commodity market is not being properly worked on by the actual traders in the market ,the futures market for commdity is not able to serve the purpose it is required.
Rather then simply opening up the markets for futures trading,Government should workout different policies of how to get the purpose of futures commodity market to the actual traders in our country.For example :In United states , every farmer hedges his position for his commodity in the commodity index in order to hedge himself againt the sudden changes in the prices of his commodity.This is reason why the American farmers own private airplanes and our Indian farmers are deprived of food.
Q.Is it possible to make money out of stock and commodity market for the investor ?
As i m a trader in commodity market ,it is not possible to make money out of stocks and commidity index on the basis of speculation.There are two types of trading techniques which are :
technical analysis trading and
fundamental analysis trading.
professional traders use tecnical analysis techniques with modern graphs ,different series ,stop loss techinues,etc.If a person follows these tools then it is possible to make money out of index but if these tools are not available then money will flow from speculator to profeesional in the long run.The speculator will always be empty handed.
But the story is still not complete .If the investor invests on the basis of strong fundamental analysis,then the position can turn in his favour in the long run but not in the short run.(fundamental analysis is done on the basis of which sector the company's in?what are the projects undertaken on past few years?,etc)
Subscribe to:
Posts (Atom)
