Category: Your Money

IPOs – Are they Worth It?

shyam July 11, 2012April 13, 2014

Warren Buffett had this to say about IPOs: “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer(investors).”

How have Indian IPO investors fared lately? To answer this question, StockViz analyzed over 250 IPOs since 2010 and compared them to returns that an investor would get if he had bought the Nifty [stockquote]NIFTYBEES[/stockquote] or the Junior Nifty [stockquote]JUNIORBEES[/stockquote] ETFs instead. The headline: over 200 trading days, IPOs on an average tanked -20% while the ETFs were -0.1% and -4.5% over the same period. Obviously, performance varies depending on the scrip and IPOs, as a group, tend to exhibit volatile returns (a standard deviation, σ , of 0.66 vs. Nifty’s 0.12 for 200 day returns.) So much for “buy-and-hold.”

How did the “flippers” fare? The 5 and 10-day returns are not that much better either: +0.5% and –1.7% on an average, with the Nifty faring better in both the cases.

So why buy IPOs at all? If you look at the histograms, there are about 20-30 stocks that gave more than 30% returns. For example, Peria Karamalai [stockquote]PERIATEA[/stockquote] 200-day return is at 300%. Anecdotes about “friends-of-friends” making a killing in IPOs is a powerful motivation indeed.

Is there a way to play IPOs while managing downside risks at the same time? Turns out there is. If it’s a dog stock, you’ll know it before 5 days. Stocks that doubled 20-days from the day of listing exhibited an average return of 65% within the first 5 days. Stocks that doubled 50-days from the day of listing exhibited an average return of 50% within the first 5 days. The rule of thumb is: If it doesn’t pop within the first 5 days, chances are that it never will.

Follow the StockViz 5-day rule for IPOs and add that extra juice to your portfolio!

You can follow IPO related news by using your ipo smart tag: http://stockviz.biz/index.php/tag/ipo/
The spreadsheet analysis for this article is available on scribd.

Categories Your Money Tags ipo

Weekly Recap: What Recovery?

shyam July 7, 2012July 7, 2012

The NIFTY ended tepid, moving just -0.01% for the week.
Biggest losers were ASIANPAINT (-4.48%), JINDALSTEL (-3.14%) and HEROMOTOCO (-3.13%). And the biggest winners were DLF (+6.45%), BHARTIARTL (+5.33%) and JPASSOCIAT (+5.17%).
Advancers lead decliners 29 vs 19
Gold: +0.35%, Banks: +3.37%. Infrastructure: +1.05%

Friday saw a big miss in US unemployment numbers. The Dow ended -0.93% to 12777, after being down more than 1.38%. Gold -1.66% to $1582.70, in spite of late-day QE3 chatter. Europe gave up most of its intra-week gains: Stoxx 50 -2.3%, Germany -1.9%, France -1.9%, Italy -2.3%, Spain -3.2%, U.K. -0.5%. The Euro flirted with 2012 lows.

Unless there’s some strong reform measures coming out of the government next week, expect the markets to fade: corporate earnings are likely to be week, any growth in IT earnings are likely to be on account of the week Rupee and domestic growth will continue to be stagflationary.

Should we get ready for a post-capitalistic West?

“The domination of capitalism globally depends today on the existence of a Chinese Communist party that gives de-localised capitalist enterprises cheap labour to lower prices and deprive workers of the rights of self-organisation,” says Jacques Rancière, Professor of Philosophy at the University of Paris VIII.

Daily news summaries are here.

Categories Your Money Tags weekly

The Rise of The Machines

shyam July 4, 2012July 4, 2012

Research by Daniel Kahneman, recipient of the Nobel Prize in Economic Sciences, shows that humans are better at thinking about rational decision making than actually practicing it. Is it any wonder then that securities trading, a field that requires fast, emotionless decisions are now increasingly being handed over to machines?

Institutional investors were the first to embrace algo-trading. It offered them the convenience of entering large orders and leaving the machines to divide these large trades into several smaller trades to manage market impact, and risk. Since then, algo-trading has spread like wild fire to encompass a wide array of trading strategies like statistical arbitrage and trend following. As of 2009, Algo-trading firms account for 73% of all US equity trading volume. And according to recent disclosers from the National Stock Exchange (NSE) roughly 30% of trading in the Indian equity market could be algo-based.

That terminator is out there. It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead.

– Kyle Reese (Terminator 1)

The biggest draws of algo-trading is speed and objectivity. Machines can make calculations faster, and they can also monitor several markets more quickly than a human can for simple market conditions to occur in order to justify taking a position. Machines follow their programming in an objective and repeatable way. They also do not suffer from the emotional and health problems that human traders can have which can affect their objectivity when trading online.

Their biggest draws are also their biggest flaws. Unless proper risk management controls are in place and regular human supervision occurs, an otherwise successful trading algo can quite suddenly rack up a substantial set of losing trades if market conditions become especially unfavorable.

Why must the fate of the world always be in the hands of an idiot?

– Grim (The Grim Adventures of Billy & Mandy)

The bigger problem though is people not understanding how these algorithms work. A majority of domestic stock brokers do not have expertise to re-write their algos and use templates from third party vendors. They do not have expertise to track as to how their algos work. So, when the techniques are closely identical, it causes chaos. It is believed that this is why a buyer was offering higher price for a security than the seller intended to sell and trading was disrupted nearly for an hour on NSE in May.

After algo trading was considered the key catalyst for some of the recent instances of market crash, including a sharp fall in Infosys shares, the NSE and the BSE have imposed separate charges on the use of algos to curb excessive speculation, misuse of the technology and also keep a check on the pace of rise in algo volumes. The exchanges have now imposed a fee of one to five paise per algo order or modification of the trade. At least 50% of algo trading is expected to be affected by this fee.

Be that as it may, algorithmic trading is here to stay. The steady march of technology and cloud computing will ensure that machine trading will become more affordable and percolate down from institutional investors to individual traders and investors.

Categories Your Money Tags HFT

Weekly Recap: Like a Rocket

shyam June 30, 2012June 30, 2012

The NIFTY ended on a bullish note, shooting up +3.11% for the week. Biggest losers were CAIRN (-5.69%), BPCL (-2.52%) and TATAMOTORS (-1.88%). And the biggest winners were TATAPOWER (+10.79%), JINDALSTEL (+8.39%) and MARUTI (+6.14%).
Advancers lead decliners 42 vs 7
Gold: -1.64%, Banks: +2.95%. Infrastructure: +6.51%,

Europe soared on Friday following the summit agreement overnight. Stoxx 50 +4.9%, Germany +4.3%, France +4.7%, Italy +7% , Spain +5.8%, U.K. +1.4%.Dow +2.37% to 12901. S&P +2.7%. Nifty +2.52% to 5279

Some perspective from Floyd Norris: There has been 18 European summit meetings since the beginning of 2010, before this one; decisions seeming to indicate action were announced after 10. Over those 10 two-day stretches The MSCI European stock index was up 9.6%. But over the entire two-and-a-half-year period, the European stock index is down 17%. The pattern has been that relief because disaster was averted is followed by disappointment and eventually by a new crisis. Europe has found ways to fund whichever country (or banks) was in trouble, but has not found ways to enable those countries to become economically competitive while remaining in the euro zone. Read the while thing in NY Times.

“People need to stop spending money they don’t have. The solution to too much debt is not more debt. All this little agreement does is give them (banks) a chance to have even more debt for a while longer” – Jim Rogers

Also, FT collected all the EU-skepticism in one place.

Have a nice weekend!

Daily news summaries are here.

Categories Your Money Tags weekly

State power utilities must go bold or get whacked

Thyagarajan June 27, 2012June 27, 2012

It’s do or die situation for the country’s precariously placed companies in the power sector, especially distribution companies (discoms) or state electricity boards (SEBs).

The Shunglu panel, set up by the Planning Commission, last year pegged accumulated losses of discoms at Rs 82,000 crore from 2006-10. The committee was set up to look into the financial health of discoms. The losses of SEBs indirectly impact the power producers since SEBs are the largest buyers of power in the country.

According to a report released by the 13th Finance Commission, these financial losses may increase to Rs. 116,089 crore by FY 2016-17, much higher than Rs 63,500 crore seen in FY 2010. Non-revision of tariffs and non-realisation of subsidies has severely plagued these entities.

With debts at unmanageable levels and losses mounting, reports have hinted at a bailout for these distribution utilities that are tethering on the brink of bankruptcy. Is it a case of throwing good money after bad or will these companies get rid of their complacency and deliver hard-hitting reforms like raising power tariffs, eliminating theft and corruption through efficient delivery mechanisms?

Deteriorating financial position has handicapped SEBs ability to service debt. This has prompted banks to turn cautious in extending loans to the power sector as a whole. Nearly 70% of the SEB losses are financed by public sector banks. Some lenders have started insisting on riders like automatic pass-through of fuel costs and filing tariff petitions every year in their loan agreements with SEBs.

While a bailout is needed to avert a total blackout in the power sector, it must be backed by structural reforms like strict reduction in transmission and distribution losses and frequent revisions in tariffs to ease liquidity constraints faced by discoms.

Currently, regulatory framework for distribution utilities is marred due to political interference in tariff fixation.

The Shunglu panel has called for independence of the regulator, creation of a special purpose vehicle by the RBI to purchase the liabilities of distribution companies, non-creation of regulatory asset in the books of discoms, etc among other measures to prop up their finances.

Several states have seen the writing on the wall. All the top 10 loss making states have revised tariffs in the past 18 months.

Delhi raised tariffs by 24% this week, the fourth such hike in the last 10 months, after distribution companies complained of severe financial strain due to the rising power purchase cost. Tamil Nadu proposed a tariff hike of 38% while Rajasthan raised rates by 24% in September 2011. The hikes will give some room for state distribution companies to repair their balance sheets.

While the recent tariff hikes have held out hope of a turnaround, SEBs must resort to sustainable measures like annual tariff petition filing, timely revision of tariff, increasing private participation in the distribution business, computerisation of accounts, better monitoring of funds, etc. The Shunglu committee has also called for stern action against state regulators if adequate tariff revisions are not undertaken and penal action against utilities for not filing annual accounts.

The financial health of distribution utilities is critical for the success of the power sector that will see a capacity addition of 85,000 mw during the 12^th five-year plan.

Categories Your Money Tags economy, reading