Intra-Day Volatility

In the current uncertain times, playing in a volatile market may be the only way investors can extract profits from the stock market. Ashish Agrawal and Amit Jain tell you how to cash in on intra-day volatility

VOLATILITY IS no longer being shunned by retail investors these days. In fact, a new breed of investors has emerged which likes to play with the market and is ready to take risks. This is a far cry from the days when retail investors used to play safe and invest with a long-term horizon.

Further, since these are uncertain times in the stock market, the indices and individual stocks have started dancing in tune to the movements in overseas markets.
Given the turmoil in global markets, it is become increasingly difficult for traders and investors to make profits, since all decisions at the global level affect the domestic market as well. Perhaps the only way that retail investors or traders can extract profits from the stock market is to make the most of the intra-day volatility seen in highly liquid stocks, rather than carrying forward their risks.

To provide a reckoner on volatility for this set of investors, ET Investor’s Guide examines the intra-day volatility of constituents of the Nifty 50 and Nifty Junior stocks for the period January-November ’08. The exercise involves calculating the daily volatility for 221 sessions so far and arriving at the average volatility on the basis of this.

Volatility refers to the variation in the value of the underlying and thus measures its instability. Though volatility is generally perceived to be negative, indicating high risk, it can be turned to an investor’s advantage if s/he buys at the day’s lows and sells at the day’s highs. While there are complicated mathematical ways of calculating volatility, a simple method is by looking at the highest and lowest value of the stock.

For example, if a stock had a price range of Rs 900-1,100 on a day, then its volatility for the day will be 200 divided by 1,000 (the average value), expressed in percentage terms. The volatility in this particular case works out to 20%.

Our analysis shows that Housing Development & Infrastructure (HDIL) has the maximum average volatility during this period at 9.1%, with the highest volatility of 34.9%.

This is followed by Unitech, with average volatility of 8.5% and highest volatility of 75.6%. The top 10 companies have average volatility ranging from 7.6% to 9.1%. This means that if an investor had taken an exposure of Rs 100,000 each in the top 10 stocks at the day’s low and sold at the day’s high, s/he would have made a total gain of Rs 80,187, or 8.02% of the exposure taken, on an average day.

Even if an investor is able to encash 50% of the total gains available through intra-day volatility, s/he would have made a total gain of Rs 88.6 lakh on an exposure of Rs 10 lakh — which is almost nine times the exposure taken over a 10-month period! If you think capturing even 50% value is too much and requires a lot of skill, settle for 10%. Even that will give you about Rs 18 lakh within 10 months!

There is scope for an even higher risk and better returns than what we have mentioned so far. This is possible in case of intra-day players who take positions to exit them on volatility at a suitable time during the same session, in the futures and options segment.

What is even more interesting is that the exercise requires a very small capital base in hand — only to offset the maximum losses that an investor undertakes in case s/he continuously goes wrong for a week or so. However, to be on the safe side, a retail investor can make the most of this intra-day volatility by keeping some strict stoploss options on a daily basis, to ensure that his losses get restricted on days when his calls go wrong.

Our analysis shows that the most volatile stocks are concentrated in the real estate and financial services sectors. Among the top 10 most volatile stocks, three are from the reality sector, while two are from the financial sector.

It may be noted that these sectors displayed maximum volatility during last year’s bull run as well. The list also includes names such as Moser Baer and Suzlon Energy, which have become highly volatile in recent times because of various company-specific factors. While there are no trends in terms of promoter group, there are three companies from the Reliance ADAG group among the top 10 volatile stocks.

On the other hand, as regards intraday traders who like to play safe to ensure that their risks get minimised, our study reveals that even the least volatile stocks among the Nifty 50 and Nifty Junior constituents display average intra-day volatility of 3.9-4.8%.

These stocks mainly belong to the FMCG and pharma sectors. They include companies such as Cipla, Sun Pharmaceutical, Cadila Healthcare, Aventis, Hindustan Unilever, ITC, Asian Paints, Container Corporation and Infosys Technologies.

Even capturing half of that volatility, say 1.75-2% on every trading day, will benefit investors, considering that returns are not available by investing in a falling market.

Although the sectoral thrust of last year continues, the future may not be a replica of the past. The sectoral focus keeps changing with a varying macroeconomic environment, diverse consumer preferences and government policies. For investors who want to cash in on the intra-day volatility, the real art lies in being aware of the changing market dynamics.

 

(Source- The Economic Times) 

IS ART LOSING ITS SHINE AS A VALUABLE ASSET?

IT IS IRONIC that we stand in front of Norbert Bisky’s canvas ‘Slump’, as Ranjana Steinruecke of Galerie Mirchandani+Steinruecke talks about the effects of a global art slump on the Indian market. Okay, so the artwork speaks more of the deterioration of the human condition, but given that it was painted at a time when banks and stock markets were going into freefall, the parallel is easily drawn. It is equally telling that for the up-and-coming star that Bisky is in Germany, his works — debuting in India at the Mumbai gallery — have found few takers. “Times were tough for art anyway and the recent terror attacks (terrorists struck Mumbai on the day the opening was scheduled) have dealt a double blow,” says Steinruecke (the gallery overlooks the beleaguered Taj Mahal hotel).

For Steinruecke, who prides herself on being a gallerist attempting to cut through the clutter of a crowded primary art market by populating her gallery program with international artists (American sculptor-printmaker Kiki Smith was a recent success) and new wave Indian artists, it couldn’t be a worse time to experiment. “The people who are buying want to hang onto a known name,” she says.

Indeed, as economies collapse and credit markets tighten, the global art market is taking a serious hit. Bellwether art auctions at New York, London and Hong Kong alike are seeing lackluster bidding and are falling short of pre-sales estimates leading to mounting debt for auction houses weighed down by the system of guarantees (some, reportedly, have since stopped offering further guarantees). Sales were down in October at London’s Frieze Art Fair and at the recently concluded Miami Basel where deals were slow to close. “Obviously the scrambling for art is over,” says Amin Jaffer, director of Asian Art at leading auction business Christie’s.

So what of it in India? Are the (S.H.) Razas and (Atul) Dodiyas immune? Certainly, it would be foolhardy to assume the Indian market would be unaffected and even stakeholders, until now loath to use the word ‘slump’, are finally giving up their vehement state of denial. Stories abound of prominent galleries in Mumbai and Delhi flooding clients with images of unsold works, offering generous buyers payment plans and discounts far exceeding the customary 10 per cent. Reena Lath of Calcutta’s Aakar Prakaar gallery says buyers are striking a hard bargain but she’d rather offer the large discounts than give in to sixmonth installments plans. “The buyer could go insolvent by then. I can’t take that chance,” she says with a wry laugh.

This comes after some six years of a bull run, where a similar kind of greed (albeit on a smaller scale) to that which plagued the financial services market drove gallerists, speculators and artists to push prices to dizzying heights. Today, everybody is suggesting that the bubble for contemporary art is about to pop and that artists like Subodh Gupta, christened Delhi’s Damien Hirst for his meteoric rise to millions could be the first to suffer. At the just-concluded Saffron Art Winter 2008 Auction, where more than one-third of the lots went unsold, one of Gupta’s feted works sold just above the lower estimate while the other fell below. As Neville Tuli of Osian’s says, “If you have the ability to enjoy and take advantage of the boom times you must equally accept the downturns”.

Still, it seems that some categories of art may be less elastic than others. At the same auction, modern masters like F.N. Souza, Ram Kumar and M.F. Hussain fared well. “Volatile times such as these actually give renewed credibility to historically significant art as a stable asset,” says Tuli. Jaffer agrees, saying that competition for quality works remains intense.

Non-glam artists who may have been earlier overlooked by the flashier names might also get a chance to be noticed. Lath points to a second coming for Bengal Art. Steinruecke says new-age artists like Abir Karmakar (priced in the Rs 15 lakhs range) still managed to find buyers, both at home, and through representation abroad. “We just have to find fresh avenues to reach out to demand,” says Steinruecke. She is hopeful of doing just that at the ARCO Madrid fair in February where 12 Indian galleries will represent 43 artists, with artist Bose Krishnamachari playing curator.

Krishnamachari is just back from London where Indian Highway — a travelling group exhibition of Indian artists across a range of media — opened at the Serpentine Gallery. “Indian art is still getting a lot of attention from gallerists and curators abroad,” he says, adding though that talk everywhere is gloomy. “Everyone’s talking about recession,” he says.

That kind of psychological meltdown can’t be good for Tuli who started the Osian’s Art Investment Fund two years ago when the surge in art investment was at its peak, and investors were assured an annual return of about 35 percent. He maintains that they started selling many months ago and are still outperforming other assets. “That is not to say we are not affected… for every one great painting that holds its value, 1000 will lose its value,” he concedes.

Some like Gaurav Assomull have used this time to spot a lacuna in the supply market. He’s just opened Marigold Fine Arts gallery in Delhi that sells only European art. The opening two weeks ago —that featured 30 works including Salvador Dali sculptures, Pablo Picasso lithographs, and works by David Kracov all priced between Rs 2-30 lakhs — was a sell-out in two hours. The 23-year old believes he’s onto a good thing. “Buyers today believe they have overpaid for Indian art. We are offering something affordable that will appreciate at a steady 6-8%,” he says. Still, he agrees the timing could be better and has decided not to invest in original Matisses or Miros that formed part of his plan. “But we can source these originals on commission,” he says.

That might have to wait. Indeed it isn’t supply that’s a constraint; at least in India, distressed sales might be a driving force. “People have been asking me to source old masters like Ganesh Haloi, Hussain and J Swaminathan — they were out of reach in the last five years but today collectors are offloading their assets and are ready to swallow cheaper prices,” says Lath, who just sourced a work, on commission, by Shyamal Dutta Ray that would’ve fetched Rs 18 lakhs last year, for 11 lakhs. “This is actually a great time for true collectors to take advantage of favourable pricing,” says Jaffer referring to the last few years when collectors were outdone by the cold hard cash of speculators.

All or none of these rules could apply in a market that has been gripped by what Tuli calls a “knee jerk paralysis”. Christie’s India representative Ganieve Grewal is still hopeful — “There have always been highs and lows in art — the stock market crash of 87, the Asian crisis of 97, the art market crisis of 2000. But while art may slow down, it always manages to avert a crash.” She denies rumours that Christies might have to resort to lay-offs (Competitor Sotheby’s
has announced workforce reduction) or shut down international operations. Jaffer says that Asia remains a bright spot for Christie’s. “No one knows how long this will last but we would be short-sighted to exit India or Asia,” he says.
Could there be good news in any of this? For one, say all, years of indiscriminate buying of mediocre work has stopped. “Buyers have started becoming selective about the quality of works; this is a sign of a maturing market,” says Grewal.

Krishnamachari suggests this is the perfect time for an overhaul of the system. He hasn’t produced much saleable work in the last two-and-a-half years but says some of his contemporaries will definitely take a hit. “Everybody, even the artists, could benefit from introspection,” he says.

 

 (Source: The Economic Times) 

Real Estate Sector

 

Run A Realty Check

 

The real estate sector has been struggling since the past six months. But the govt’s stimulus package and RBI’s move allowing banks to provide special treatment to realty cos may provide a breather to the sector. Supriya Verma Mishra explores

 

“I would give a thousand furlongs of sea for an acre of barren ground.”    

SO SAID Shakespeare, the great playwright, and that’s the attraction the real estate sector has for investors. Yet, things are not too rosy for this muchcoveted asset class. The real estate scenario has changed completely since the beginning of ’08. Investor sentiment has turned negative and even genuine buyers are holding on to their purchases. This is an offshoot of declining affordability levels. High home loan interest rates, coupled with reducing loan to value (LTV) ratio, have adversely impacted end users’ ability to fund their purchases. However, all’s not over yet for this sector.

INDUSTRY SCENARIO:

The government could not ignore the fact that the real estate sector is the second-largest employer in the country. As a result, the Union government’s recently announced stimulus package, coupled with Reserve Bank of India’s (RBI) efforts, are expected to change the fortunes of the domestic real estate sector, which has been struggling to survive for the past six months. 

The RBI’s move of allowing banks to provide special treatment to real estate companies is likely to result in long-term benefits. The proposed cut in interest rate on housing loans to 7% from 8% can trigger a strong uptrend in sales in the residential market, particularly in the mid-income housing segment. Measures such as according priority sector lending status to low-value loans, restructuring of loans taken for commercial property, and reduction in excise duty on input materials like steel and cement are all welcome steps. These come at a time when the industry is faced with a major liquidity crunch. They will certainly prove to be advantageous for companies facing working capital shortage.

THE STORY SO FAR:

In the race to amass huge land reserves, companies were outdoing each other by bidding for the costliest land parcels. Financing was done through internal accruals, private equity funding and large-scale borrowings — through banks, as well as against promoter shares. Hence, property prices started touching new highs virtually everyday. With interest rates hovering around 12-13%, home loan offtake was the first to bear the brunt of the stock market crash. Absence of demand led to a severe cash crunch. As a result, property prices took a sudden U-turn and started plunging.

The situation became unmanageable. Completion of under-construction projects became the first priority and since then, new launches have taken a backseat. This led companies to retrench their staff from projects whose launches were delayed. Financial services and IT — the biggest patrons of the real estate industry — are under immense pressure, though some companies have resorted to the softer option of cutting salaries by 20-25%. However, given the possibility of a moratorium, developers can now focus on finishing projects, rather than worrying about debt repayment. Moreover, demand in the affordable housing segment will also get a boost.

FUTURE PATH:

The future of the real estate sector lies in providing affordable housing. The focus has shifted from luxury or premium category apartments to smaller, no-frills affordable houses. Around 70% of the Indian population comes under this category of housing. Companies like Omaxe and Puravankara Projects formed subsidiaries to focus on this part of the business. An upsurge in demand is the only saving grace for these builders. This is what prompted the RBI to declare low-cost loans as priority lending. Developers with projects in Tier-II and Tier-III cities are expected to benefit from this move.

SCENARIO IN NORTH INDIA:

Companies like Ansal Properties & Infrastructure, DLF, Unitech, Parsvnath Developers and Omaxe have realised the growth potential in the mid-income housing segment — which ranges between Rs 10 lakh and Rs 50 lakh depending on location — and have forayed into affordable housing. Sonepat, Ghaziabad, Faridabad, some parts of Chandigarh, Agra, Lucknow and many more cities are driven by industrial demand. Hence, there is immense potential to be tapped in these regions. This can further help in creating central business districts within these regions, ultimately boosting the demand for low-cost housing.

SCENARIO IN WEST & SOUTH INDIA:

Mumbai’s real estate market is a different ball game compared to the rest of India. Premium housing and slum rehabilitation are the two main categories where the majority of developers such as Orbit, HDIL and Akruti City operate. As of now, affordable housing is missing from the Mumbai market, since land prices in this region are among the highest in the country. Thus, it is difficult for this stimulus package to impact end customers in Mumbai. In other cities like Pune, Ahmedabad, Nasik and Surat, developers who have launched projects within Rs 15-25 lakh will benefit from the government’s package. Down South, property prices had started correcting earlier than in Mumbai. Developers were facing a major headwind in sales. However, some sanity prevailed and with reduced profit margins, property is now being sold at affordable levels. This shows that the scenario can improve significantly for developers like Puravankara Projects, as well as Sobha Developers, Brigade Enterprises and IVR Prime, to some extent.

FINANCIALS:

The overall demand in the real estate industry has come to a standstill. There was a time when newly launched projects were sold within a few days of being launched, but now, hardly one or two units are sold in a span of 7-8 months. There has been a 360-degree shift in the sector outlook. After witnessing an average 214% year-on-year growth in sales, the real estate sector posted a 4.7% decline in topline in the September ’08 quarter. Profitability has also taken a big hit. Companies which have more number of residential projects have fared better, as cash is received upfront for such projects, while in the case of commercial property, the rentals accrue every month. Within the residential segment too, companies like DLF, which have tweaked their projects from high-end to mid-income, have managed to perform better.
   However, this does not mean that any company is insulated from this mayhem. Large-scale borrowings have landed companies in a soup. Stagnant sales forced developers to borrow at high costs to fund their working capital requirements. Interest costs — which accounted for 3% of the total sales of listed companies in the March ’06 quarter — rose to 15% of the topline in the September ’08 quarter.
   Unitech and Sobha Developers have the highest debt-to-equity ratio ranging between 1.8 and 2.4. This raises a question regarding the companies’ potential to survive the current market conditions. Other companies like DLF, Puravankara Projects, HDIL and Orbit are also facing increasing debtors and inventory build-up, while salary and material costs have further dented their margins.

TO SUM UP:

There is still some time before we see a major shift in investor sentiment and actual buying takes places in the market. In fact, some developers feel that the real estate sector requires much more than what this stimulus package provides. It is the end consumers who are now leading the demand in the sector. Though it may still be too early to gauge the actual impact of the stimulus package on real estate companies, it will definitely provide a breather to the sector.

 

(Source: The Economic Times) 

The Great Madoff scandal

It all happened at 17th floor of Lipstick Building, an oval red-granite 34-floor building at Third Avenue in Midtown Manhattan. Bernard L Madoff, the 70-year old founder of Bernard L. Madoff Investment Securities operated from there.
Madoff, ex-chairman of Nasdaq, was well respected in the investment community, made a name for himself in wealthy circles.
Was arrested on December 11, 2008, for an alleged fraud of around $50 billion. If convicted, Madoff faces 20 years in prison and a maximum fine of $5 million. At present, he is free on a $10 million bond but can’t travel far outside New York.

In one of the largest frauds in Wall Street history, prosecutors said, Madoff maintained a separate and secretive investment advising business that served between 11 and 25 clients and had about $17.1 billion in assets under management. The assets of Madoff’s investment company were frozen on December 12, 2008 and now US authorities want to sell it out

What is a Ponzi scheme?

A pyramid scheme, which uses cash from new customers or investors to pay returns to existing investors. It does little legitimate business, but just recycles money. The scheme depends on a constant stream of new investors to fund the payouts.

How did Madoff’s alleged fraud work?

Madoff was running a huge investment business for wealthy clients and investors, along with his stockbroking firm. It was on a separate floor from the stockbroking business. He was offering attractive returns to new investors. He made it look as if he was investing in blue-chip stocks and options, but there was very little capital at the heart of the operation.

How did he attract new investors?

He was paying clients a 10% to 12% annual return. He managed to offer consistent returns over 10-year period, which is extremely unusual for the fund management business. His broking, hedge funds and fund management businesses all recorded the same “success”.

How did it go wrong?

New clients began to dry up during US credit crunch. As stock markets crashed, many investors who lost money elsewhere, sought to withdraw money from Investments with Madoff

Why did regulators miss it?

US SEC argues that Madoff kept few records and was clever at hiding the alleged fraud. While he was a pioneer of electronic trading and rose to become chairman of the Nasdaq technology exchange, he refused to provide his clients online access to their accounts. According to the Washington Post, he sent out accounting statements by post, whereas most hedge funds e-mailed statements and allowed them to be downloaded via computer for easier analysis by investors.

Who was Ponzi?

Charles Ponzi gave his name to pyramid selling in US after he carried out America’s biggest fraud of the early 20th century. An Italian immigrant Ponzi bought postal coupons that were depressed in value in Europe and sold them at a 400% mark-up in US. There was only a limited supply, but that didn’t stop Ponzi advertising the scheme to thousands of clients, whose funds financed payouts to existing investors. He became a multi-millionaire. An investigation by the New York Post uncovered the fraud and he was sent to jail. He ended life in poverty.

BIGGEST LOSERS (according to reports)

British, Japanese, S Korean, French and Spanish banks have massive exposure: RBS | $600 million Nomura | $303 million HSBC | $1.5 billion S Korean FIs | $95.1 million Satander | Above $3 billion Man Group | $360 million Natixis | 450 million euro Swiss private banks |     £2.5 billion
   Many charitable trusts also fear losing money

 

(Source: The Times of India)