Archive for March, 2009

SEBI Group Recommendations for Derivatives

8 comments Written on March 23rd, 2009 by
Categories: Futures, Options
A thought provoking set of recommendations for derivatives has been released by a SEBI working group.
  • Mini contracts on equity futures, apart from the Mini Nifty. That happened almost automatically as some stocks fell 90%, but now they may be formalised.
  • LEAPs or long term options on stocks and indices. Currently on Nifty only, the recommendation is to do this for stocks and other indices also.
  • Futures and Options on the VIX. Useful to hedge option contracts.
  • Options on Currency futures. These are unbelievably useful.
  • Bond Indices and related F&O. Oh goodness, finally, one can short bonds too. If this is approved.
  • Futures on other currencies: Yen, Euro, Pound.
  • Strategy based ETFs - like covered calls and puts.
  • Credit derivatives, exchange traded or settled.
The suggestions are good, but they seem to happen every year or so, with not much action to support them. Hopefully, this time will be better.

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Posted in Futures, Options

Consumer Price Inflation (CPI) – A Flawed Index? (For Now)

4 comments Written on March 22nd, 2009 by
Categories: Inflation
Recently I've been hearing a lot about how the Consumer Price Inflation (CPI) is still very high, even though the Wholesale Price Index (WPI) has been falling dramatically. WPI is at 0.44% but the latest (Mar 20) release of January data shows CPI is at 10.4%!

Something is black in the mulligatawny. A little investigation revealed a number of interesting details, most of which indicate that the CPI numbers cannot be trusted.

The Ministry of Statistics and Programme Implementation, or MOSPI, used to collect CPI data. But the National Statistics Commission decided in Feb 2008 that the base year (1984-85) was too far back, and therefore decided to change track and deploy all the field investigators to work towards a new index, called CPI (Urban). But that won't get ready anytime soon.

So in the interim, there is no fresh data collection. How, then, do we get CPI?

There's another agency doing inflation calculations, called the Labour Bureau. They produce CPI figures for Industrial Workers - CPI (IW) - and also other figures for agricultural and rural labourers.

MOSPI, in it's infinite wisdom, decided to use the CPI (IW) to determine the CPI figure until the CPI (Urban) index was up and running.

Since the two indices are based on different concepts, MOSPI decided that
a)The CPI(IW) will be "factored" by a certain multiplier, and thus CPI itself would be calculated.
b) CPI is just a weighted sum of sub-level indices (Food, clothing etc.) so,
c) Each CPI "sub-level" index will now be a factor of the main CPI(IW) index value, and the CPI would be calculated by doing a weighted sum of these sub-level indices.

Inflation sub-levels may be confusing - but here's the story. MOSPI releases index numbers for Food, Fuel, Housing, Clothing and "Miscellaneous" separately, and a General Index based on weighting the above. We look at the general index, called the CPI, and compare it to last year, but each individual sub-level usually tells us where we're going up.

But this no longer applies. Each sub-level will now be derived from the CPI (IW) index value, giving no real meaning to the sub-levels anymore.

Technical note: For the 24 months of Jan 2006 to Dec 2007, the factor between the CPI (IW) and the MOSPI released sub-level numbers have been collated, and an average for each sub-level is taken. This average will be used as a multiplying factor - i.e. the CPI you will see from MOSPI for each sub-level = the factor for that sub-level X CPI(IW) as released.

So for all practical purposes, the CPI sub-level data can be ignored, till the new CPI (Urban) index comes into place.

Now, let's check the usefulness of the CPI(IW) index itself. If you look closely, it is seriously flawed as a general index indicator. It seems to be hugely biased towards food. Most of the items they reveal as part of their "selective" data is food directly - rice, wheat, dals etc. The only "fuel" items there are Kerosene, cooking coke and (hold your breath) firewood! And there's two mentions of non-edible materials - washing and toilet soap.

This results in an index - the CPI (IW) - biased towards food, but the CPI (I mean the real thing) is only supposed to be 47% food. Of the rest (fuels, clothing etc), there is no mention of anything in the CPI(IW). No mention of Petrol, LPG or diesel, which should impact everyone much more. The CPI(IW) thus measured is barely a real indicator of urban inflation - it will flip wildly as harvest seasons vary.

With the new "factored-sub-level" formula, the results are unreliable as well. The March 20 release of CPI showed Fuel inflation at 8% compared to last year. Since last Jan we have had small fuel price hikes but much bigger drops - retails prices are at 2006 levels. Fuel inflation should therefore be negative - yet, the CPI shows 8% up, which is dramatically flawed.

Similar arguments apply for the clothing, housing and Miscellaneous subitems. As I've mentioned the sub-level data is unreliable. These items, added up, make up for 53% of the CPI!

Finally, the data is off by a large date as well. CPI (IW) is released on the last date of the month - for Feb, it will be released on March 30. After that, there is another 20 day gap after which CPI is reported. Which makes no sense because if it is based on a direct factor multiple of the CPI(IW), we needn't wait! That is only a minor issue.

Overall, I think the WPI is a better indicator of inflation; at least I can see sub-item pricing and I know relevant data is being collected everytime. Plus, the WPI is more "urban" - meaning, food is a smaller constituent. CPI, for all the above reasons, and until the new index is released, is worthless. I would take any political assumption of higher prices based on the CPI with a pinch of salt.

Posted in Inflation

Twittering Up There

No Comments » Written on March 20th, 2009 by
Categories: Uncategorized
I've found that I've been spending an inordinate amount of time on Twitter recently, and to be honest, I'm finding that better to write small tidbits or post individual links, than to write full and complete blogs.

So I've placed my twitter updates - the top five at least - on the home page of the blog. For the rest, click @deepakshenoy.

Must check new twitter tools. Comments, suggestions are all appreciated!

Posted in Uncategorized

Akruti: The Mega Short Squeeze

No Comments » Written on March 20th, 2009 by
Categories: Akruti
Akruti has been removed from the NSE F&O segment, and has been placed in the trade-for-trade segment.
Limited Members are requested to note that the said security shall consequently not be available in rolling segment (series: EQ). In view of the same, the above mentioned security will be available in the trade for trade segment from March 27, 2009 (Friday) at a price band of 5%.

Further, the scrip will be excluded from equity derivatives segment. Thus, fresh month contracts will not be introduced for the expiry month June 2009 on the expiration of March 2009 contracts. All existing contracts i.e. contracts with expiry dates April 30, 2009 and May 28, 2009 will expire on March 26, 2009. Accordingly, no futures and options contracts will be available in the underlying AKRUTI for trading from March 27, 2009 onwards. The methodology for position adjustments shall be separately intimated by NSCCL.

This is amazing. Yesterday, the Akruti April contract traded at 1823, a substantial discount to the March contract which was at 2215.

And of course, the price has been going up, in dramatic fashion, over the last fortnight, scaling from 900 in the first week of March to over 2200 yesterday.

This seems to be a short squeeze of epic proportions. Akruti has a small free float and the market wide limit for F&O is only 13 lakh shares. When 95% of that limit was breached, no fresh F&O contracts could be created - meaning, no fresh shorts. Long operators could then easily push up the price of the stock - given the small free float - and that would increase the price of the future; that would push the losses on the short positions MTM, and force them to buy back, at any price.

India's Volkswagen of sorts. Also check out how this is happening; Timamo has a very interesting post on delivery volume drops, from over 50% down to 10% or less. Meaning, not much in terms of positional trading, and therefore, likely to be driven by operators.

Given this drama will continue till Thursday, what happens? SEBI will probably ban someone for two months or some stupid period like that. Those people will take a nice holiday and come back. The shorts will be dead, and rightfully so; a squeeze is normal market behaviour, because it's not price manipulation, people just aren't selling enough. More on this later.

Posted in Akruti

Photos of the Recession

No Comments » Written on March 19th, 2009 by
Categories: Recession
A fantastic photo set of the recession, worldwide. A photo of Kiev, Ukraine struck me:

Minus the snow, this could be Gurgaon or Navi Mumbai. The recession is here, just the photos aren't there. Yet.

Posted in Recession

Why not rescue only the counterparties?

1 Comment » Written on March 19th, 2009 by
Categories: MoralHazard
Charlie Rose interviews the big few on the AIG bailout. What's very interesting is this question by Gretchen Morgenson:
..the question, which is if in fact [AIG going bust] was systemic risk, if in fact Goldman Sachs was going to, you know, fail or somebody else was going to fail because of this, let’s take a look at this list of counterparties and decide who, in fact, does need to be bailed out because of systemic risk, and who does not and who could take a haircut and who could say, OK, I will pay, you know, the government could negotiate tough across the table and say, you are not in any risk of failure, you are going to take -- you are going to pay 75 -- I am going to pay you 75 cents on the dollar, instead of 100 cents on the dollar.

There did not appear to be any thought to how to make this the best possible deal for the taxpayer. It was all just hurry up, we have got to do this, it’s a problem, it’s a problem, and now we are paying the consequences.

We've all been told that AIG going down is a big risk. Very big risk. The mother kahoona of all risks. The risk that will destroy the very fabric of civilization as we know it, worse than 3,000 nuclear bombs, or 600 meteors hitting Manhattan at the same time, and definitely worse than global warming.

But how f-ing bad, darn it?

I want to call this bluff. They tell us, look, see what happened after Lehman. What happened, really? Some stocks went down. Some banks went and got capital. AIG should have gone bust, but they weren't allowed to. Citi had other problems. Goldman Sachs neatly swiped off $12 billion of the AIG bailout, as did Deutsche Bank and Merrill/BoA.

In general, everyone survived. Maybe if we let AIG go down, they will survive - and if they can't, the US government can figure out if saving anyone is of any real use (not to save THEIR counterparties, but to see if putting capital will provide any return to the taxpayer) and then consider putting capital in. Surely, people like Buffett will identify the best survivors and put capital there; and the rest may not even need to be saved.

I know this is way early; and also way too easy for me to say, sitting where I am. But this is my rant for the day, and I need to figure out how "systemic" this "risk" really "is". I'm already scared of words in quotes.

Posted in MoralHazard

Tata Capital Bonds Start Trading

6 comments Written on March 17th, 2009 by
Categories: TataCapital
Tata Capital's Non-Convertible Debentures listed today at the NSE:

Bond PriceVolume (Lakhs)
100K Bond Monthly Dividend 100,502.00 18.33
1K Bond Quarterly Dividend 1,032.44 8.14
1K Bond Annual Dividend 1,037.45 261.44
1K Bond Cumulative Dividend 1,020.68 453.95

Yields, where I can calculate them, are 10.3% to 10.5%.

Liquidity is an issue at the lower end, but the Annual and Cumulative options seem to have reasonable trading going on. This is one of those must-keep-watching bits, especially if yields go above 12% (i.e. prices fall below the 1000 face value).

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Posted in TataCapital

Retaliation: Mexico Imposes Trade Restrictions on American Goods

No Comments » Written on March 17th, 2009 by
Categories: Protectionism
BBC: US law sparks Mexican trade row
Mexico will impose higher tariffs on a range of US goods in retaliation for a "protectionist" law passed in the US, Mexico's economy secretary has said.

Last week the US government stopped a pilot scheme which had allowed Mexican lorries to use roads in the US.

And the UK has a "migrant fee":
Foreign students and workers from outside the European Union will be required to pay a “migrant” fee of £50 each before they are allowed into Britain under new rules to be introduced next month as part of a phased shake-up of the immigration system.
Australia doesn't want migrants to compete with local jobs:
Australia has said it will cut the number of skilled foreign workers it accepts by 14% to safeguard local jobs.

Immigration Minister Chris Evans announced the cut, the first by the country in 10 years.

Mr Evans said the government did not want to admit people who would compete with Australians for limited jobs amid the global financial crisis.

The scene is like this:
1) Developed countries attempt to protect their jobs
2) Developing countries will tax imports to retaliate.

This is bad for economies in general; the alternative will be to set up free trade only between developing nations. The developed world is f***ed anyhow.

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Posted in Protectionism

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