Markets 24.04.2014

Indian markets are closed due to elections in Mumbai. Here’s a roundup of world markets and the latest flash PMI numbers.

Your world at 9am

world equity markets 2014-04-24

Equities

Major
DAX(DEU) -0.58%
CAC(FRA) -0.74%
UKX(GBR) -0.11%
NKY(JPN) -0.44%
SPX(USA) -0.22%
MINTs
JCI(IDN) +0.18%
INMEX(MEX) -0.62%
NGSEINDX(NGA) -0.54%
XU030(TUR) -0.51%
BRICS
IBOV(BRA) -0.78%
SHCOMP(CHN) -0.11%
NIFTY(IND) +0.37%
INDEXCF(RUS) -0.49%
TOP40(ZAF) -0.14%

Commodities

Energy
Brent Crude Oil +0.17%
Ethanol +0.00%
Heating Oil +0.09%
Natural Gas +1.01%
RBOB Gasoline +0.16%
WTI Crude Oil +0.23%
Metals
Copper +0.26%
Gold 100oz +0.16%
Palladium -0.03%
Platinum +0.13%
Silver 5000oz +0.00%

Currencies

USDEUR:+0.00% USDJPY:-0.10%

MINTs
USDIDR(IDN) -0.04%
USDMXN(MEX) +0.06%
USDNGN(NGA) +0.24%
USDTRY(TUR) -0.00%
BRICS
USDBRL(BRA) -0.71%
USDCNY(CHN) +0.06%
USDINR(IND) +0.52%
USDRUB(RUS) -0.04%
USDZAR(ZAF) -0.06%
Agricultural
Cattle -0.02%
Cocoa +0.48%
Coffee (Arabica) -0.33%
Coffee (Robusta) +0.37%
Corn -0.30%
Cotton +0.10%
Feeder Cattle +0.10%
Lean Hogs -0.30%
Lumber -0.12%
Orange Juice +0.97%
Soybean Meal +0.08%
Soybeans -0.09%
Sugar #11 +2.06%
Wheat -0.59%
White Sugar +1.44%

PMI Roundup

China

Still below 50, but green shoots.

China PMI April 2014

US

Production rises at fastest pace for over three years.

US PMI April 2014

Eurozone

Business activity expansion nears three-year peak.

Eurozone PMI April 2014

Germany

Flash Germany Composite Output Index at 2 month high.

Germany PMI April 2014

France

Flash France Composite Output Index falls to 2-month low.

France PMI April 2014

Source: Markit

Musings on stock-market forecasts

Traffic jams

Say there’s a traffic jam on a busy road. When new vehicles try to enter the same route, the drivers hear on the radio that there’s a jam ahead and adapt by finding another route. Suppose there is only one alternate route. What happens now? The alternate route forms a second jam!

Later entrants have to choose between the two jams. Predicting the actions of this new group is very hard to do. Maybe the second jam is worse than the first. By the time we hit this third layer of participants, predicting the behavior of the system has become extremely difficult, if not impossible.

Complex vs. Complex Adaptive

Weather is a complex system. However, if, on Thursday, the forecast is for rain on Sunday, is the rain any less likely to occur? No. The act of predicting has not influenced the outcome. Although near-term weather is extremely complex, with many interacting parts leading to higher order outcomes, it does have an element of predictability.

The stock-market is a complex adaptive system. Traders and investors in the market are interacting with one another constantly and adapting their behavior to what they know about others’ behavior. The key element of a complex adaptive system is the social element.

For example, Meredith Whitney predicted the crash of Citibank in late 2007.

citi chart

She went on to setup her own advisory firm, Meredith Whitney Advisory Group, and made a similar call on American municipal bonds in late 2010 on national television. Retail investors sold in panic. But for the the most parts, nothing happened.

MUB chart

Reflexivity

Reflexivity refers to circular relationships between cause and effect. A reflexive relationship is bidirectional with both the cause and the effect affecting one another in a situation that does not render both functions causes and effects. It flies in the face of equilibrium theory, which stipulates that markets move towards equilibrium and that non-equilibrium fluctuations are merely random noise that will soon be corrected.

Reflexivity asserts that prices do in fact influence the fundamentals and that these newly-influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern.

Takeaway

Behavioral dynamics is key to understanding complex adaptive systems. One should have a mental model that incorporates higher-order thinking when it comes to navigating the markets.

The big question is, how different is listening to stock-market predictions from listening to an astrologer, reading horoscopes or believing in vastu?

To quote German theologian and martyr Dietrich Bonhoeffer:

“…how wrong it is to use God as a stop-gap for the incompleteness of our knowledge. If in fact the frontiers of knowledge are being pushed further and further back (and that is bound to be the case), then God is being pushed back with them, and is therefore continually in retreat. We are to find God in what we know, not in what we don’t know.”
vastu
Sources
Related articles

Opening Bell 23.04.2014

Your world at 9am

world equity markets 2014-04-23

Equities

Major
DAX(DEU) +2.02%
CAC(FRA) +1.18%
UKX(GBR) +0.85%
NKY(JPN) +0.57%
SPX(USA) +0.41%
MINTs
JCI(IDN) -0.06%
INMEX(MEX) -0.64%
NGSEINDX(NGA) +0.21%
XU030(TUR) -0.51%
BRICS
IBOV(BRA) -0.26%
SHCOMP(CHN) -0.45%
NIFTY(IND) -0.03%
INDEXCF(RUS) -0.70%
TOP40(ZAF) +0.61%

Commodities

Energy
Brent Crude Oil +0.00%
Ethanol +0.00%
Heating Oil +0.09%
Natural Gas +0.06%
RBOB Gasoline -0.02%
WTI Crude Oil -0.19%
Metals
Copper +0.00%
Gold 100oz +0.00%
Palladium +0.37%
Platinum +0.36%
Silver 5000oz +0.00%

Currencies

USDEUR:-0.07% USDJPY:-0.08%

MINTs
USDIDR(IDN) +0.99%
USDMXN(MEX) +0.06%
USDNGN(NGA) +0.15%
USDTRY(TUR) +0.00%
BRICS
USDBRL(BRA) +0.04%
USDCNY(CHN) +0.08%
USDINR(IND) +0.29%
USDRUB(RUS) -0.01%
USDZAR(ZAF) -0.01%
Agricultural
Cattle -0.16%
Cocoa -100.00%
Coffee (Arabica) +7.32%
Coffee (Robusta) -100.00%
Corn -0.20%
Cotton +0.04%
Feeder Cattle +0.14%
Lean Hogs -0.43%
Lumber +0.39%
Orange Juice +0.82%
Soybean Meal -0.06%
Soybeans -0.30%
Sugar #11 +0.95%
Wheat -0.30%
White Sugar +1.94%

Must reads

Insider trading in India: In the few cases where SEBI has been able to get enough evidence to prosecute, the court cases have sometimes taken more than a decade to make their way through India’s overburdened court system. And Even if insider traders are caught and found guilty after long trials, the punishments have often been too light to offset the potential profits. (WSJ)

Modi says that willpower, decisive leadership needed for India to grow like Gujarat. (LiveMint). But What can Modi do? And just in case: What if: abki baar NO modi sarkar?

Palcohol, the alcohol that you can snort. Enough said. (Pando)

Markets are closed tomorrow due to elections in Mumbai. Futures and Options expirations have been brought forward today. Good luck!

What if: abki baar NO modi sarkar?

What if Modi fails to become the prime minister of India? Some are expecting the Nifty to crack by 1000 points in such a scenario. Although not a perfect hedge, a bear spread makes sense – think of it as insuring your portfolio against the adverse outcome.

NIFTY May 6600/6750 Long Put Spread

NIFTY May 6600-6750 Long Put Spread

The Nifty will have to expire below 6695.00 for the trade to be profitable. The max profit is Rs. 4750.00 and the cost to enter the trade (and max loss) is Rs. 2750.00.

NIFTY May 6600-6750 Long Put Spread payoff
NIFTY May 6600-6750 Long Put Spread PL

Thought process

This trade can be best described as buying a limited form of insurance. You are assuming that the Nifty will not fall too far below 6600 and losses are not going to be catastrophic. You could go farther down the option chain if you are feeling too nervous, but then your δs will get smaller so you will have to buy more spreads to cover your portfolio.

For example, if you did a NIFTY May 6500/6600 Long Put Spread instead, you will be moving the break-even to 6569.70, pay less (Rs. 1515.00) for a max profit of Rs. 3485.00. But the delta of this spread is -0.08 vs. -0.15 for spread described above.

Exiting the trade

The result of this election is expected to be declared on 16 May (Friday). Exit soon after election results are announced or right before it if the trade is profitable.

Read more about options: Options Trading Guide

Of whatsnexters, horoscopes and personal experiences

Can Stock Market Forecasters Forecast?

It’s time we stopped listening to the “whatsnexters.” These folks are everywhere in the financial media pontificating confidently about what they can’t possibly know — what’s next for the economy or the stock market.

Read: Don’t let market pundits lead you astray

Good to Great

The story of success swarms statistics. And there’s always enough random success to justify almost anything to someone who wants to believe.

Read: Stories triumph Statistics

A case for rules-based investment methodology

Our personal experiences disproportionately impact our investing behavior. By simply repeating investing behaviors that resulted in good outcomes for us in the past, and avoiding those that resulted in poor outcomes, we’re potentially eliminating important information that could help future investment performance.

Read: Bad Investor Behavior: Overemphasizing Experience