Author: shyam

Sunday Long Reads

How can God be sure that this no Super-God?

There’s a strong instinct to abdicate that responsibility – to look at things like global warming, poverty, environmental destruction, human misery in all its forms and say “God will take care of that.” The truth is, whether you like it or not, it’s all on you. The responsibility for those weaker than yourself is not on God’s or the free market’s or history’s or evolution’s head, it’s on your head.

Noah Smith: God and SuperGod

Privatization of Natural Monopolies

Textbook arguments in favor of privatization: Lower prices. Better service. Greater simplicity. Increased investment in infrastructure. More consumer choice.

Reality: The Average Russian, as opposed to the 135 oligarchs controlling 40% of Russia’s wealth, would have been better off had The Party remained in power.

So, the next time somebody tries to convince you of the benefits of privatizing your natural monopoly, remember that, adapting Frank Zappa’s apt words, there is a big difference between kneeling down before the altar of privatization and bending over.

Freedom To Choose (…to be buggered)

German vs. Swedish approach to prostitution

Germany: enacted a law to remove the stigma from sex work by giving prostitutes full rights to health insurance, pensions and other benefits. Employing sex-workers and providing them with a venue became legal. The idea was that responsible employers running safe and clean brothels would drive pimps out of the market.

Sweden: made it criminal to pay for sex (pimping was already a crime). By stigmatising not the prostitutes but the men who paid them, even putting them in jail, the Swedes hoped to come close to eliminating prostitution.

A giant Teutonic brothel

America: A case of secular stagnation?

During the period 1960-85, when the U.S. economy seemed able to achieve full employment without bubbles, our labor force grew an average 2.1% annually. In part this reflected the maturing of the baby boomers, in part the move of women into the labor force.

Now look forward. The Census projects that the population aged 18 to 64 will grow at an annual rate of only 0.2% between 2015 and 2025. Unless labor force participation not only stops declining but starts rising rapidly again, this means a slower-growth economy, and thanks to the accelerator effect, lower investment demand.

Secular Stagnation, Coalmines, Bubbles, and Larry Summers

The 8 Qualities of Cultured People

What is needed is constant work, day and night, constant reading, study, will… Every hour is precious for it.

Anton Chekhov on the 8 Qualities of Cultured People

Weekly Recap: Tolstoy vs. Chekov

Nifty weekly performance heatmap

Oh what a week! It took Rajan’s encouraging words to salvage what could have been a complete rout. Nifty: -1.38% (-1.90% in USD terms)

Index Performance

index weekly performance

Top Winners and Losers

TATASTEEL +5.51%
DIVISLAB +12.53%
ADANIENT +12.58%
ASHOKLEY -10.91%
TATAGLOBAL -10.09%
RELINFRA -8.49%
Adani Enterprises continued to enthrall… Should call it Adani Entertainment instead.

Etfs

JUNIORBEES +1.11%
GOLDBEES +0.98%
INFRABEES -0.22%
BANKBEES -0.53%
PSUBNKBEES -1.42%
NIFTYBEES -1.49%
Midcaps outperformed Largecaps. Question for PSU banks: how much are you going to dilute existing investors?

Advancers and Decliners

advancers and decliners

Yield Curve

Holiday-shortened four day week. Can’t read much into this…

yield curve

Interbank Rates

mibor intebank lending rates

Sector Performance

weekly sector performance chart

Investment Theme Performance

Value themes beat everything else fair and square…

Thought for the Weekend

Tolstoy was a fox whose work was somewhat compromised, especially later in his life, by his belief that one ought to be a hedgehog. To choose Tolstoy is to accept that Pahom ought to have limited his ambitions and chosen to act dead rather than die trying to own the world.

 

Chekov is pure fox. He offers many conflicting, ambiguous and impressionistic takes on the human condition. But on one point he is unambiguous: in the acting dead/choosing life decision, Chekov is unwavering in his assertion that choosing life is the right thing to do, whatever that choice might entail.

 

Russia chose wrong, and ended up with the Soviet Union.

Source: The Gooseberry Fallacy

Will the real arbitrageur please stand up?

The first sign of active HFT involvement is that most of the low-hanging fruit would have been plucked. i.e., text-book arbitrage opportunities would not exist. In the futures market, the low-hanging fruit is the cash-futures basis. Equity futures have a ‘fair-value’:

Futures Price = Cash Price [1+r (x/360)] – Dividends; where x = days to expiration of the futures contract

So whenever the basis goes out of hand, its possible to pocket some risk-free profit.

  1. if Futures << Cash, go long futures, short cash. Or,
  2. if Futures >> Cash, go short futures, long cash.

Given the absurdity involved in shorting stocks, option 1) is not feasible for individual investors. But if HFT arbitrageurs are efficient, then scenario 2) should not exist. So I pulled up some charts and I have annotated days where HFT machines were probably in sleep mode. The filled candlesticks are the cash and the black boxes are the futures candlesticks. Ideally, the futures black boxes should coincide with the cash candlesticks.

JUBLFOOD futures and cash candlestick chart

IDEA futures and cash candlestick chart

Since August this year, there has been at least 5 instances where a risk-free profit could have been locked in by shorting futures and going long cash – if you had a low-latency trading machine.

I pulled up the charts of some of the other punter counters:

JPASSOCIAT futures and cash candlestick chart

RCOM futures and cash candlestick chart

TATASTEEL futures and cash candlestick chart

ADANIENT futures and cash candlestick chart

So what exactly is going on here? Is the cost of funding so high that the HFT guys let this one slide? Or is the liquidity so bad that this can’t be done in size, and hence not attractive to HFT? Will the real arbitrageur please stand up?

 

Ashwani and Emkay: Doodh ya Paani?

The analysts at Ashwani Gujral have collated list of five stocks which can deliver 10-50% returns in the next one year amid volatility. (ET) And not to be left behind, Emkay came out with a research report that picked 9 stocks for the long haul. (MC)

In our tradition of recording things for posterity, we have create two Themes that will track the performance of these research reports:
Ashwani Gujral’s Top 5 Picks – Nov 2013
Emkay’s Picks Nov-2013

 
You can now follow these themes from right within your portfolio and keep track of how the individual stocks perform.
 

 

USDINR 63.5/65 Bull Spread

We entered a USDINR 63.5/65 Bull Spread today. Basically you buy the ITM call and sell the OTM strike – cheaper than buying a call outright.

The trade has a max payoff of Rs. 955 and costs around Rs. 565 to put on. Here’s how the pay-off looks like:

USDINR bull spread payoff

The break-even is around 64 – basically the Rupee has to trade above that. But since we sold the 65 call, our returns are capped if the Rupee depreciates below 65 anytime soon. Novembers were last trading at 64.02 (+0.34)

USDINR technical chart

We had discussed a USDINR Condor before where we were betting on range-bound behavior… and it didn’t quite end well. Hopefully the setup works better this time… fingers crossed!