Author: shyam

The One Man Insurance Company

I am recently reading a book bombastically titled “The Option Trader’s Hedge Fund” (Amazon). In that the author says that the best way to look at option trading is to think of it as an insurance business. So if you are an options trader, you should think of yourself as The One Man Insurance Company (TOMIC).

TOMIC

It sort of makes sense because what you are doing when you are trading options anyways? You are buying and selling insurance of some kind with different co-pays and terms. If you are hedging your positions then you are “reinsuring”, etc.

The chapter on volatility was insightful. It discusses the impact of ATM options price in the near term, volatility skew, and term structure on implied volatility. Its a useful framework to have.

Overall, its an interesting book that’s worth a read.

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M&M Financial: A floozy or a doozy?

M&M Financial reported its 2013 Q3 results yesterday. As a long-time investor in the stock, it raises a couple of questions.

Is it a floozy?

Did news leak out of the bad numbers ahead of the announcement?

Mahindra Financial Services Limited

The stock was at Rs. 240.00, down -5.57% at the time this post was written.

Is it a doozy?

Net NPA went up to 2.2% compared to 1.6% during the same period last year. Was it a kitchen-sink quarter? Not really, as their presentation shows, NPA has been steadily rising, costs have been rising and return on assets has been coming down, consistently since 2011.

Mahindra Financial results

Right now, M&M Financial is looking like both a floozy and a doozy.

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Disruption in action

Long-term investing requires investors to understand the nature of innovation. No industry is safe from it, incumbents are constantly battling it and new business survival depends on it. The previous post briefly mentioned how Circuit City (filed for bankruptcy in 2009) was disrupted by Best Buy and was disrupted by Amazon. And, as it turns out, Amazon is now faced with similar disruption from Alibaba.

Before we discuss Alibaba, here’s the contrast between Best Buy and Amazon stock prices:

Best Buy Chart

 

Amazon chart

The business models of Amazon and Alibaba are different:

  1. Amazon has low margins (e-commerce), Alibaba has no margins (market-place monetized by ads)
  2. Amazon’s openly searchable and indexed website vs. Alibaba’s walled garden
  3. Amazon needs to make a sale in order to make money, Alibaba only needs visitors to search for something and browse through its pages

But if Alibaba can gain a foothold in the US, then it has to potential to impact Amazon’s economies of scale.

Juan Pablo Vazquez Sampere has this to say on the HBR Blog:

There are two possible ways in which Amazon can fight back:

  1. Amazon doesn’t react to this new challenge and continues focusing on its most profitable customers
  2. Amazon creates an independent business unit using Alibaba’s revenue model

 

Here’s the dilemma faced by investors:

  • e-commerce in the US is still a growth industry
  • e-commerce is still disrupting brick-and-mortar businesses
  • Amazon is still a dominant force in the e-commerce space in the US and is aggressively expanding overseas
  • Amazon is likely to lose money on low-margin businesses if it chooses to defend them against Alibaba, putting further pressure on its bottom-line
  • If Amazon decides to cede low-margin businesses and instead focus on extending the brick-and-mortar disruption that it had created, then it allows Alibaba to get a toe-hold. This is how most disruptive companies got their start
  • Both Jeff Bezos and Jack Ma are extremely competent leaders

 
Should investors hold or fold?
 
 

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Mutual fund positioning: 3-month trend

We are trying to figure out if tracking mutual fund purchase and sell decisions can help us be better investors. What fund managers do, vs. what they say, can provide insights into their decision making process. We took a look at what funds have done over the last 3 months (Oct-2013, Nov-2013, Dec-2013 portfolios) to see how they are positioned going into the year end.

Top 10 hated stocks:

RELIANCE [stockquote]RELIANCE[/stockquote]
TECHM [stockquote]TECHM[/stockquote]
IDEA [stockquote]IDEA[/stockquote]
CAIRN [stockquote]CAIRN[/stockquote]
HEXAWARE [stockquote]HEXAWARE[/stockquote]
CIPLA [stockquote]CIPLA[/stockquote]
NTPC [stockquote]NTPC[/stockquote]
PETRONET [stockquote]PETRONET[/stockquote]
HDFCBANK [stockquote]HDFCBANK[/stockquote]
NMDC [stockquote]NMDC[/stockquote]

Top 10 loved stocks:

POWERGRID [stockquote]POWERGRID[/stockquote]
AXISBANK [stockquote]AXISBANK[/stockquote]
BHARTIARTL [stockquote]BHARTIARTL[/stockquote]
WIPRO [stockquote]WIPRO[/stockquote]
ALSTOMT&D [stockquote]ALSTOMT&D[/stockquote]
ACC [stockquote]ACC[/stockquote]
APOLLOTYRE [stockquote]APOLLOTYRE[/stockquote]
TITAN [stockquote]TITAN[/stockquote]
SHOPERSTOP [stockquote]SHOPERSTOP[/stockquote]
SKFINDIA [stockquote]SKFINDIA[/stockquote]

The biggest additions in December were POWERGRID, COALINDIA and ALSTOMT&D and the biggest exits were INDUSINDBK, RELIANCE and OIL

Can the exit out of Reliance explain why the stock hasn’t shown much of a spark in spite of beating consensus estimates? Are fund managers bullish about power distribution companies now that the debt of state electricity boards have been restructured and they can finally pay the discoms? Interesting moves…

Note:

  1. Only open ended funds that were in the “accumulation” phase were considered
  2. Funds named “growth” and with the “direct” option alone were considered
  3. Market value as-of closing 2014-01-20

 

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Nifty Gap Analysis

What is a Gap?

A gap is a change in price levels between the close and open of two consecutive days. A Full Gap Up occurs when the opening price is greater than yesterday’s high price. And a Full Gap Down occurs when the opening price is less than yesterday’s low.

Four type of Gaps example (Chart pattern)
Four type of Gaps example (Chart pattern) (Photo credit: Wikipedia)

Why should investors care?

Gaps indicate “event sensitivity” of the index. In the normal course of business, as information is absorbed by the market, the price reacts. However, if significant events occur outside of market trading hours, the information gets priced in through “gap” opens. And gaps can be traded.

Gap History

The number of gaps have gone up significantly since 2010. Here’s a chart of the number of full gaps (both up and down):

total full gaps

Zooming in, from 2010 onwards:

total gaps 2010-2013

On an average, down gaps have displayed higher magnitude, compared to up gaps:

avg gaps

Specifically:

gaps 2010-2013

Trading the gap

Not only do opening gaps occur daily and offer significant profit opportunity,but they have an inherent directional bias. The following links take you to some of the most common gap trading strategies:

Gap trading is an opportunity worth exploring.

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