Author: shyam

The Reliance on Correlation

Our previous discussion of correlation in the NSE looked at a years worth of data for the NIFTY 50 components to see how individual stocks correlated with the index. There are three ways to look at correlation:

  1. Highly correlated stocks can be substituted with each other. For example, if the price of stock A is highly correlated with the price of stock B (r approaching 1), then investors should be indifferent between owning A or B.
  2. Correlation can be used to expose relative value. For example, in the above example, if A pays more dividends than B, then owning A is better than owning B.
  3. Correlation as a trading tool. In the above example, say on a particular day A drops (or rises) more than B, then you can put on a trade betting on mean reversion – that ultimately A & B will start behaving similarly.

For example, lets have a look at RELIANCE over the NIFTY 50 index. I created a series of 10-day correlations (r)

For 2006:

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For 2007:

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For 2008:

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For 2009:

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For 2010:

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and lastly for 2011:

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It looks like RELIANCE is usually highly correlated to the NIFTY 50 and the range is somewhere between 0.7 and 1.0. Lets have a look at the histogram to get a better idea:

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You need to ignore the deviations around stock splits and dividend ex-dates (for example, on 26-Nov-2009, RELIANCE issued a 1:1 bonus so the displacement that you see surrounding that date should be ignored) to truly appreciate what’s going here.

The charts show that there are significant number of instances when the correlation breaks down but it always moves back into the range. Looks like betting on convergence seems to be a no-brainer.

Have a trade idea? Let me know!

India proves too hot to handle for Norway’s Telenor

Telenor-pirat

Telenor-pirat (Photo credit: Hanne LK)

This is the story of how Norway’s equivalent of India’s BSNL got involved in a $40bn telecom scam. The Indian Supreme Court cancelled 122 2G licenses given on a no-bid basis in 2007. Yes, we are talking about something that happened 5 years ago for technology that’s 10 years old. But the fascinating part is that the spectrum was first sold to a real estate company called Unitech about for $365.42 million which then turn around and sold a 60% stake in its wireless division to Norway’s Telenor for $1360 million! I’m sure some people were feeling pretty smart about turning in a 270% profit for their “navigating” skills.

The minister, A. Raja, who sold the spectrum is a nobody from South India representing a grand total of one million voters. It must be a pretty fascinating journey for him coming in #2 in Time magazine’s 2011 list of “Top 10 Abuses of Power” list (just behind the Watergate scandal).

The underpriced spectrum giveaway unleashed a price war where SMS and voice tariffs in India were hammered down to the lowest in the world. Telenor had planned to invest about $3 bn in India and is said to be almost 2/3rds there. So that’s $2 bn that just got vaporized. Besides, they had out sourcing agreements with a whole bunch of Indian BPOs. Wipro is said to have $550 million worth of deals.

Its funny how Telenor, one of the top performers on the Dow Jones Sustainability Indexes for the 10th year running, got dipped in Indian curry.

Sources:

Telenor History, Nilgiris Lok Sabha Constituency), A Raja, 2G Spectrum Scam, Uninor, IT BPOs Hit

Wife loves Gold. Mom loves Real Estate. Stocks are for Gamblers.

Risk taking is inherently failure prone. Otherwise, it would be called sure-thing taking. –Jim McMahon (American Football Player)

The most favored assets for the Indian middle class remains gold and real-estate. And this is not a post-global-financial-crisis story, it has remained so since my grandmother’s time. The oft cited reasons are that these are “safe” i.e.: they will not depreciate in value. And evidence over the past 20 years suggests that it has indeed been so. But will it be forever into the future?

So lets see what happened over the last few years:

Devaluation: in 1980 1 USD bought about 8 INR. Now it buys about 50 INR.

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The stock market had its share of controversies, roller-coasters and outright fraud.

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Increasing urbanization post 1990 lead to a real estate boom in the cities.

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And Gold went parabolic.

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So basically, if you ask your mom, wife or uncle, the underlying belief would be that these trends are going to continue forever.

Please allow me to make a counter-point: What is the bid-offer for all these “investments”? For gold ornaments it about 20% (try selling a bunch of old jewelry). For real estate (land) it’s a 3-6 month process and trying to sell a 5 year old residential flat might give you a heart attack.

Stocks and ETFs, on the other hand, are liquid. If you want to buy gold as part of an investment portfolio, buy GOLDBEES or if you want to buy real estate as an investment, buy a basket of RE stocks. I am not advocating an “either/or” scenario. Its just that conventional wisdom has such a strong recency bias that you need to verify why it so by taking a step back every once in a while.

Spotted: Some Golden Crossings!

golden cross • swirl

Image by origamidon via Flickr

The January rally has sprouted some Golden Crosses that investors should take note. A Golden Cross is when the 50-day moving average edges atop its 200-day moving average. It indicates that the intermediate-term uptrend has overtaken the longer-term trend. Here are some stocks that formed the Golden Cross the past month: CAIRN, PIRHEALTH, TATACOMM, WIPRO.

The GC marks the spot when a bounce within a bear market transitions to a bull market. All sustained bull markets, by definition, come with the 50 DMA above the 200 DMA.

It looks like the NIFTY has some ways to go before the cross, so its not time yet to break out the champagne. However, Hang Seng index (tracked by the HNGSNGBEES) seems to have crossed over to the bull camp.

Go Bulls!

Month Ender

What a January! One of the few in recent memory that ended up. NIFTY up a solid 11.2%, the Jr. NIFTY up 17% and Banks outperformed coming in at 25%

Major drivers were Greece, stabilizing inflation and RBI’s CRR cut. RelCap got a boost with Nippon Live pumping in close to Rs. 1,500 crores, SUZLON announced Rs. 2,000 crores in orders and the market seems to have shrugged off India Bulls Real Estate’s Q3 net being down 45%

The biggest winners were:

SYMBOL Change %
IVRCLINFRA 77%
NCC 68%
LITL 58%
RELINFRA 56%
ANANTRAJ 53%
SUZLON 53%
RELCAPITAL 53%
IBREALEST 51%

And the few losers of note were:

SYMBOL Change %
GLAXO -1%
COREEDUTEC -1%
M&M -2%
TCS -2%
HEROMOTOCO -3%
GAIL -3%
BIOCON -4%
DABUR -5%
HINDUNILVR -7%
Good luck for February!