StockViz – Page 215 – Invest Without Emotions

Watch what they do, not what they say

shyam April 29, 2013

Whenever there is a new piece of technology, finance figures out a way to butcher it. Using social media for sentiment analysis is a great tool for manufacturers who don’t sell directly to the consumer to get advance warnings of shifting tastes or possible product recalls. If you look at the lead times between when the product is boxed and shipped to the retailer and when sales turnover numbers make their way back to the manufacturer, twitter is a god send of an early warning system. For example, it makes sense for a company like P&G to invest in social media monitoring tools to make sure that a new fragrance they released into the market is not met with backlash that spirals out of control.

However, I have seen a significant uptick in data vendors pushing social media sentiment analysis tools onto traders. Now traders can react to twitter sentiment in real time. Does it really make sense or did we just find a new way to lose money?

First, do investors really know how to gauge the impact of bad publicity on the stock price? For example, if P&G released a purfume that people on twitter hated, should investors really care and by how much?

Second, the stock markets are reflexive. Investors will say a lot of nice things about a company whose stock is going up and will start finding faults with it when it starts going down. You don’t need twitter to tell you that.

Third, does it really matter what they say? For a day-trader, the order-book summarizes how others are voting, in real-time, with their own money, on where the stock should trade. For investors, daily or weekly charts neatly summarize the sentiment of people willing to bet their capital, i.e., people who put their money where their mouths are.

Fourth, it only makes sense if you get this news ahead of everyone else who is going to react the same say as you did. For example, Reuters releases the University of Michigan Surveys of Consumers to “ultra low-latency” subscribers 2 seconds before it is made widely available. Since you might expect all investors watching this news to react the same way, those 2 extra seconds allow you the front-run the “muppets”, so to speak. But if only you have the news, and nobody else cares about it or have differing opinions on how it is going to impact the stock, then it makes no sense for you to have it.

And lastly, remember this: the market is the news.

Categories Your Money

What is Investment Banking?

Deepti Rao April 27, 2013April 27, 2013

Investment banking covers a wide spectrum of activities, basically most banking activities other than accepting commercial deposits from customers would come under the purview of investment banking.

Bonds and Equity Issues

Issues involve both new issues and rights issues. New issues are first time issues of bonds or equity. Investment banking activities for new issues include pricing the securities, selling them to investors, underwriting and general advice to the parties involved. Underwriting is the practice of the investment banks buying the securities if they cannot be sold to any investors. Of course, substantial fees will be charged for all these activities! Often, several banks perform the underwriting jointly in order to spread the risk – the consortium of banks is called a syndicate. In the case of equities, the underwriters purchase the unsold shares only after it is evident that any investors are not taking it up. On the other hand, in the case of many bond markets, the underwriters buy the issue first and then attempt to sell them to investors.

Rights issues are similar to new issues – the key difference being that in the case of rights issues, there are already shares of the company in the market i.e. there are existing investors, and the company wants to issue more of the same. In this case, there are laws and regulations in place to ensure that the existing shareholders get the first rights to purchase the new issue often at a discount. The investment banking activities associated with a rights issue is similar to a new issue.

Mergers and Acquisitions

Mergers and Acquisitions are the mainstay of investment banking. Mergers, as the name suggests are the coming together of two or more companies and acquisition is the taking over of one company by another. In both these activities, the advisory role of investment banks is paramount and there are hefty fees involved. Due to the often acrimonious nature of these activities an interesting set of phrases has come to be associated with them.

If a takeover is looming, the target may try to find a rival bidder who is preferable to the original predator. This more acceptable candidate is called the ‘White Knight’. Sometimes a few people can be found who will take a small stake in the company and block the takeover – these are the ‘White Squires’. Sometimes, the ‘White Squire’ may become a ‘Trojan Horse’ meaning he tries to take over the company himself! If you remember the old computer came, you may be interested to hear about the ‘Pac-man defense’ where the company being taken over turns around and gobbles up the monster trying to take it over! Sometimes, the bidder may be forced to withdraw by the target who buys back the price at a higher price. This is called ‘greenmail’ as opposed to blackmail. In the US, a legal provision provides for a popular defense against hostile takeover bids. Called the ‘poison pill’, it allows the target company to give all existing shareholders the right to buy new shares are a large discount, thus diluting the stake of the bidder considerably.

Securities Trading

Investment banks usually have a separate trading wing in which they invest in securities by trading. Trading may be on behalf of their clients or for the firm itself – called ‘Proprietary Trading’. Usually, there are different departments dealing with different types of securities like bonds, equity, derivative products, commodities etc.

Investment Management

Lastly, investment banks often manage clients’ money on their behalf. The reason some clients opt to let investment banks manage their money is that the banks are likely to get higher returns on investment than the average investor. These clients may be private individuals, in which case banks usually stipulate that they’re net worth must be above a certain value (high net-worth individuals) or corporate institutions.

Some banks have both an investment banking side as well as commercial banking interests. In this case, it’s important that the interests of clients of the bank are put ahead of the profit making strategies of the bank. All countries have regulations in place to separate the commercial and investment banking activities to ensure this.

[stockquote]SHALPAINTS[/stockquote]

Categories Your Money Tags introduction

Gold: Why?!

shyam April 25, 2013

“I don’t gamble. I only invest in gold.”

When I was growing up, nobody had heard of “Akshaya Tritiya.” And then, perhaps borrowing a page from how Hallmark created Valentine’s Day, jewelers have turned it into the most auspicious day to buy gold. Have people actually stepped back and asked themselves why they are partaking in this madness?

Is Gold money? No.

Try paying for your morning coffee with bullion and be prepare to be astounded at the discount you are offered on your gold. Not only is gold not money in a disaster scenario – it is not even wealth! People will hunger for food, water, and fuel – not gold.

Is Gold a good disaster trade? Only if disaster hits you and spares everybody else. From Dubai’s blow-up to the Grexit that wasn’t to the almost-collapse of the Euro Zone to the Arab Spring to the death of Andy Rooney, gold was the first thing to fall as investors rushed to sell whatever they could.

Back in 2010, The Economist had warned: the traditional markets for gold cannot be expected to pick up the slack if rich-world investors’ appetite should pall. And this is exactly what Indian investors need to keep in mind when they use anecdotal evidence to gloss over the fact that at the end of the day, gold is just like any other commodity. And it maybe the ultimate Greater Fool trade.

Categories Your Money

Real Estate Bill: Buyer Nirvana?

Monica Samuel April 24, 2013

The Real Estate Bill 2011 is the strongest attempt so far to regulate the massive real estate market. Since there seems to be rare consensus between political parties on the issue, there’s a good chance the Bill will be passed in Parliament. The Real Estate Bill will not only protect buyers from the unethical practices of unruly builders and developers but also promote transparency and accountability in the real estate sector.

It is often the case that developers do not divulge the nature of a housing project, size and cost accurately. Agreements between buyer and developer typically favor the builder, giving him tremendous leeway to change terms without any compensation to the consumer. Take the case of Springfield Apartments in Bangalore where seven wings were constructed illegally and sold by the builder without the necessary approvals. Almost 1,300 residents faced eviction when the fact came to light.

Housing projects also get delayed or cancelled if builders launch projects without acquiring necessary sanctions. The Real Estate Bill aims to right this skewed balance of power and restore confidence of buyers in the real estate sector.

Key provisions of the Real Estate Bill 2011

The Real Estate (Regulation & Development) Bill 2011 supports regulated and planned real estate development via standardized practices and efficient systems for the sale of immovable properties. Key provisions of the draft Bill include:

Establishment of Real Estate Regulatory Authority (RERA) in each state to assure planned and orderly growth.
Mandatory registration of developers and builders for accreditation.
Mandatory public disclosure norms (allowed only after all approvals are in place) that include developer details, project, land status, statutory approvals, and contractual obligations.
Promoters’ obligation to adhere to approved plans and project specifications, with clause to refund buyer satisfactorily in case of default.
Allottee’s (Buyer) obligation to furnish payments at agreed interest rate without delay.
Directive for developers to allocate 70% of funds collected to that project to avoid misappropriation of consumer’s money and delays.
Establishment of Authority (one chairperson and at least two members with experience and knowledge of real estate) to advise government in planning and dispute resolution.
Establishment of a Real Estate Appellate Tribunal (REAT) by Central Government for quick resolution of disputes submitted by Authority.
Establishment of a Central Advisory Council to counsel government and make recommendations to protect consumers and foster growth of real estate sector.
Penal provisions to ensure compliance.
Jurisdiction of Civil Courts barred on matters before Authority or REAT.

What’s in it for buyers?

The Real Estate Bill will help to contain the circulation of black money that is rampant in the real estate sector. Public disclosure norms and registration of developers will reduce fraud and possession delays as developers will have to complete all approval processes before launching a project or advertising it.

Developers’ unfair practice of reducing common areas, making arbitrary changes, selling off cordoned open spaces, and modifying terms would be restrained as these actions will be penalized. Fair agreement terms will also help buyers.

What’s in it for developers and promoters?

The Real Estate Bill will create an opportunity for honest developers to differentiate their projects and services from the masses. Since state authorities will be given 30 days to reject or accept an application along with necessary paper work, development of projects will not be delayed over administrative red tape. As allottees are also legally accountable under the Bill, developers will be protected from defaulting buyers and bankruptcy.

If the Real Estate Bill is passed in Parliament, buyers will be the happiest lot. Too many unscrupulous builders have come up, looting people as well as the environment with corruptly gotten sanctions, false promises and unplanned development. However, a Bill is as effective as its implementation. Will the Real Estate Bill lead to the maturation of a quality real estate industry in India? I sure hope so.

Categories Your Money Tags real estate

Bye Bye Austerity?

shyam April 23, 2013April 23, 2013

In 2010, a pair of Harvard economists published a paper, “Growth in a Time of Debt” that concluded that countries with a debt exceeding 90% of their annual GDP experienced slower growth than their thriftier peers. It was a statistic to which pro-austerity policymakers could cling and Germany, with a “never again” attitude towards Weimar Republic era hyperinflation, got much of Europe to sign-off on austerity to obtain bail-out funds.

However, biggest problem with austerity is that it can potentially kick-off a deflationary spiral that might actually increase indebtedness. And the latest euro-zone stat is proof of that: In the euro area the government debt to GDP ratio increased from 87.3% at the end of 2011 to 90.6% at the end of 2012. Besides, how is growth going to come about if both the public and private sectors contract at the same time?

The latest manufacturing PMI numbers are showing that the slow-down has now spread to the “core” Euro-zone economies. “The renewed decline in Germany will also raise fears that the region’s largest growth engine has moved into reverse, thereby acting as a drag on the region at the same time as particularly steep downturns persist in France, Italy and Spain.”

Bill Gross, of PIMCO fame, who had once warned that UK debt levels were too high, leaving gilts “resting on a bed of nitroglycerine” has recently changed his tune: “The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not. You’ve got to spend money.”

And last week, Reinhart and Rogoff’s most famous finding has been debunked by a 28-year-old student. Earlier this month, Thomas Herndon, a graduate in the economics department at Amherst College in Massachusetts, found that they had made fundamental mathematical errors in the study – and all because of a flubbed Excel spreadsheet.

Will Europe’s policy makers change their stance and resort to a looser monetary policy and ease up on the austerity principle? Markets in europe (London +1.88%, Germany +2.23%, France +3.14%) started rallying as soon as the dismal PMI numbers came in – at least they seem to believe that the liquidity spigot is soon going to be let loose.