Category: Your Money

The trouble with Quants

During the week of August 6, 2007, many large and previously successful hedge funds were forced to de-lever their portfolios and liquidate commonly held securities, resulting in simultaneous drawdowns of 30%, 50%, or worse.

After all, the quant funds of 2007 shared the same structural flaws as the highly engineered financial trading strategies that caused the stock market crash in 1987 and the implosion of Long-Term Capital Management in 1998.

At first, the identified predictability in security price movements is reinforced as funds using the quant model, along with similar funds using similar models, begin buying and selling the same securities.

To facilitate the use of leverage, risk models were used to minimize country, sector, and other common factor risks.

Read more here: http://researchaffiliates.com/ideas/pdf/fundamentals/Fundamentals_Aug_2011_The_Trouble_With_Quants.pdf

 

 

Debt relief replaced with recession fear

In a matter of days, investor relief that the United States avoided default has been replaced by fears Europe’s debt crisis is deepening and the world’s biggest economy may be slipping back into recession.

“The odds of the economy going back into recession are at least one in three if nothing new is done to raise demand and spur growth,” Summers said of the United States in his column.

The bellwether S&P 500 index dropped more than 2.5% on Tuesday to wipe out 2011 gains after data showed U.S. consumer spending fell in June for the first time in nearly two years.

Insight: Debt relief replaced with recession fear | Reuters.

India’s Software Companies Need a New Model

Over the last few years, software as a service has disrupted the traditional enterprise software industry for most business applications, including accounting, collaboration, customer relationship management, enterprise resource planning, invoicing, human resource management, content management and service desk management. For those who are unfamiliar with the term, software as a service is a delivery model in which software is provided as a service to users without requiring them to install or maintain it.

According to a Gartner Group estimate, global sales in 2010 reached $9 Billion (up 15.7% from 2009), and are projected to increase to $10.7 billion in 2011.

Gartner also estimates that these software applications, which accounted for a little more than 10% of the total enterprise software market last year, will represent at least 16% of worldwide software sales by 2014.

Zoho is a great example of a software as a service company that was bootstrapped in India and now competes in a global market with corporations like Google and Microsoft.

That said, there are some key challenges that these providers face: Ubiquitous broadband connectivity is still a long way away in India.

In a global context, there are some additional hurdles for an Indian company to compete globally, and Zoho’s success may prove to be an exception, rather than the rule.

U.S. companies already use Indian outsourcing companies to build their product and most of the small- to mid-sized software service providers turn to online marketing for customer acquisition, which means the cost remains the same whether the company is based in India or the U.S.

Read more here: Expert Insight: India’s Software Companies Need a New Model – WSJ.com.

Morgan Stanley: India – Heading for the Worst Growth Since the Credit Crisis

Following the credit crisis, India, like many other developed and emerging economies, resorted to fiscal and monetary stimulus to push growth back to its pre-crisis trend immediately.

This easy approach of loose fiscal and monetary policy did boost growth strongly – but the low productivity dynamic accompanying it meant that the country faced challenges of inflation, the current account deficit and tight inter-bank liquidity.

Investment spending: We do not have good real-time indicators for investment trends, but it appears that investment spending is also beginning to slow, based on the quarterly results of a select few engineering and construction companies for the quarter ending June 2011, and the steel production trend.

Government spending: While state government spending data are not available, the monthly central government spending data indicate that government spending has declined on a year-on-year basis in May and June 2011.

Auctioning of coal blocks: The government has been working on an amendment to the Mines and Minerals (Development and Regulation) Act to allow allocation of coal mining rights on a competitive-bidding basis.

Land acquisition bill: Land acquisition has emerged as a prominent political issue, with farmers complaining about poor compensation and the loss of livelihood subsequent to the land acquisition.

We expect the sum of food, fertilizer and fuel subsidies to be 2.1% of GDP in F2012, up from 1.8% in F2008 (including off-budget expenditure).

Morgan Stanley – Global Economic Forum.

Asia stocks slide as economy fears rattle markets

Completion of a last-gasp deal to avoid a U.S. default failed to bring any relief, as investors focused instead on how tighter fiscal policy could constrict U.S. growth and Europe’s debt crisis was still worsening.

U.S. consumer spending fell in June for the first time in nearly two years and incomes barely rose, signs that the economy lacked momentum as the second quarter drew to a close, data on Tuesday showed.

Taiwan, where about half of the equity market cap is in the technology sector, has been the biggest target of downward EPS revisions in Asia Pacific, according to Thomson Reuters StarMine SmartEstimates, which gives a greater weighting to the more accurate forecasters.

Asia stocks slide as economy fears rattle markets | Reuters.