By Ajay Shah, on December 6th, 2010
I saw this interesting article about the mind-share of Nifty as opposed to the BSE Sensex. It is by Samie Modak and Muthukumar K. in
the Financial Express.
The NSE data for June 2010 shows that Nifty futures have peaked at Rs.0.36 trillion of notional turnover in a day (27 Jan 2010) and
Nifty options have peaked at Rs.0.89 trillion of notional turnover in a day (24 June 2010). Nifty has shaped up as one of the big
contracts by world standards. It is interesting to go back and read the original paper. Those were interesting times. Looking back, it
seems obvious that Nifty would dominate the derivatives market, but at the time, the outcome was far from clear.
This made me look at data on risk and reward of the alternative indexes. I start from the first data for Nifty Junior, which takes me back to 21 February 1997, thus giving data for 13.7 years.
|
Mean |
Volatility |
Ratio |
| Nifty |
12.99 |
26.37 |
0.4926 |
| BSE Sensex |
12.68 |
26.92 |
0.4711 |
| Nifty Jr. |
18.16 |
32.38 |
0.5608 |
| CMIE Cospi |
17.40 |
27.23 |
0.6391 |
Nifty and the BSE Sensex are a lot like each other.
The real surprise is Nifty Junior: Merely moving down from rank 1-50 to ranks 51-100 has given an enormous juice in the return and in the reward-to-risk ratio. But the volatility of Nifty Junior is also higher.
The CMIE Cospi index has roughly 2800 stocks today, and represents the broad market. It includes the Nifty Junior stocks and a host of other smaller stocks. But unfortunately, these numbers are not comprabale with the other three in that it includes dividends while the other three do not. With this combination of high diversification (giving a low volatility), small-cap stocks (which helps returns) and inclusion of dividends (which helps returns), it is not surprising that it scores the best reward-to-risk ratio.
In my mind, most of the claims of out-performance by active managers in India are purely about being invested in the non-Nifty
space. Nifty Junior ETFs are easily accessible and I get surprised that more people aren’t putting this into their investment strategy.
By Winton Bates, on December 6th, 2010
Before reading Eric Jones book, ‘Locating the Industrial Revolution’, I had thought that the reasons why the industrial revolution began when and where it did would have a lot to do with relative levels of economic freedom in England in the 18th and 19th centuries. The book seems to me to reinforce that view, even though it does not argue strongly in favour of it. The message I get from the book is that the political forces favouring greater economic freedom prevailed over opposing forces in those areas of economic policy that were most critical to economic growth at that time.
 My prior view that the industrial revolution would have had a lot to do with relative levels of economic freedom was associated to some extent with dissatisfaction with alternative explanations such as that offered by Gregory Clark (discussed here). I admit, however, that my prior views were most strongly influenced by contemporary econometric evidence that greater economic freedom tends to promote higher economic growth. I would not be surprised if Eric Jones considers that such reasoning displays ‘too great a willingness to accept dubious data as proxies for the real thing, and too much of a preference for neat solutions’ (p. 6). He uses those words as a general criticism of economists.
The main question that Jones considers in this book is why the location of manufacturing industry shifted from the south to the north of England prior to the industrial revolution. This is an important question because the clustering of industry in the north provided an economic environment conducive to subsequent innovations, including use of coal-fired steam engines as an energy source.
Jones suggests that the economic history of England does not provide neat solutions to the problem of locating the industrial revolution. He claims:
‘There is no determinate solution to the puzzle of why the industrial revolution took place, and when and where it did so. All that can be achieved is a narrowing of the range of possible mixes’ (p. 245).
Jones sees problems with a simple explanation in terms of levels of economic freedom:
‘Ordinarily we might expect that economic growth would be spurred by market freedoms but there are problems with this line of argument. A number of the outcomes do not seem to have been stable. Free-market preferences within the judicial system were inconsistent, since the judges reverted to precedent when it suited them – not that every law was enforced. Protective duties were raised precisely when “a modest flow of works” was starting to extol the virtues of free trade. Nor was corruption decisively reduced until some way into the 19th century’ (p. 243).
However, similar objections have been raised against attempts to explain China’s economic growth in recent decades as a consequence of market freedoms. A point that is often overlooked is that in considering the potential for economic growth offered in a particular economy by a particular level of economic freedom the most relevant comparison is with levels of economic freedom generally prevailing in other economies with similar income levels. An improvement in economic freedom in a low income country can provide an impetus to more rapid growth even though economic freedom remains heavily restricted.
Jones suggests that the main factor responsible for the redistribution of manufacturing activity to northern England was market integration associated with improvements in transportation. The merging of markets led to greater competition and specialization on the basis of comparative advantage – with a greater focus on agriculture in the south and manufacturing in the north. He points out, however, that these improvements in transportation often had to overcome substantial political obstacles from wealthy land-owners, whose concern to protect the social status that land ownership offered (linked to landscapes, recreation and privacy) often outweighed their interest in increasing the rental value of their land. He suggests that privatising of rights of way – described as ‘judicial theft of the subjects rights’ – was an ‘astonishingly common’ adverse effect of the enclosure of the commons (p. 153). The merging of markets was only possible because the judges and parliament together increasingly embraced market ideology and overlooked, rejected or struck down local protectionist measures (p. 185).
It seems to me that Eric Jones has provided strong evidence that the industrial revolution occurred when and where it did because market ideology prevailed sufficiently to enable market integration, specialization on the basis of comparative advantage and the clustering of manufacturing industry. I am conscious, however, that he might suggest that in offering that summary my preference for neat solutions has gotten the better of me.
By Claus Vistesen, on December 3rd, 2010
Question: Which picture and caption best describes the outcome of yesterday’s ECB meeting?
“Read my lips, on n’achetera plus de dette”
“Show me to the trough”
Inquiring minds want to know. As far as I can we got the same basic New Speak as we are used to but on the other hand, as FT Alphaville points out the ECB used the occasion of the meeting to pick up a heavy portion of Irish and Portuguese bonds (since essentially, no one else wants to buy at anything near acceptable yields).
Of course, the above picture may be a bit unfair since Trichet did reiterate the “we are here to help” discourse in the sense that existing measures to provide liquidity will be kept in place. However, the expectation was that a heightened risky environment would also call for additional measures. Concretely, investors have been buzzing around the prospects of the ECB moving closer to the outrigt QE position of the BOE and Fed.
On this, Trichet and his colleagues so far stayed their course as the chairman reiterated that purchases on the Securities Market Program would remain to be fully sterilised. So far so good, but as Matteo Regesta from BNP Paribas SA in London points out (via Bloomberg);
“In the scenario where SMP eventually increases to a meaningful size, weekly full sterilization of the stock will become a non- trivial task. The only way to avoid such a jam is to keep the program at a low scale.”
So, there is an inflection point somewhere it seems and we may soon find out where it is.
By Doug Gentry, on December 3rd, 2010
Each year The Economist magazine publishes one of my favorite economic indicators – the Big Mac Index. This year The Economist said,
Our Big Mac index, based on the theory of purchasing-power parity, in which exchange rates should equalise the price of a basket of goods across countries, suggests that the yuan is 49% below its fair-value benchmark with the dollar.
 Here’s the background. First the theory. In a world of freely floating currency exchange rates, those rates will adjust over time so that a commodity costs the same anywhere in the world. This is called purchasing power parity. An example: Imagine that Brazil finds some way to sell sugar on the global market at a much lower price than everyone else. Right away sugar buyers can buy more sugar with their own currency from Brazil than anywhere else in the world. This will substantially increase Brazil’s exports.
Now, we also know that if a country’s exports increase significantly their currency will increase in value on the international currency market. That is because all these purchases of Brazilian sugar will increase demand for the Brazilian real. As the value of the real rises Brazilian sugar becomes more expensive to foreign buyers – their own, local currency can’t buy as many real as before. At the same time other sugar exporters may see a slight decrease in the value of their currencies, as sugar buyers switch to Brazil. Over time international currency exchange rates will adjust so that a sugar buyer will be able to buy the same amount of sugar anywhere in the world. That’s the theory of purchasing power parity. We know that currency rates don’t float perfectly, and in some cases countries seek to influence the value of their currencies. Enter the Big Mac Index.
A number of years ago staffers from The Economist decided to test purchasing power parity (PPP). Rather than using a boring commodity like sugar, they looked at Big Macs, from McDonalds. Big Macs are as close to a commodity at the definition allows – virtually identical everywhere. They recorded the price of Big Macs in scores of countries, converted those prices to dollars and tested the PPP theory. The results showed a wide range of prices for Big Macs.
Now, these results could disprove the PPP theory. Instead, The Economist staffers maintained that PPP was true, and that various countries’ currencies were either over-valued or under-valued. Let’s use China as an example. Earlier this year a Big Mac cost $3.58 in the United States, but only $1.83 in China (after converting yuan to dollars). If PPP is true, then China’s currency is under-valued by almost 50 percent. And, in fact, there is considerable angst in the international community about China’s efforts to artificially lower the value of its own currency in order to protect its huge export market and supporting industries.
Economists love to forecast, and yet have a very mixed record of success with their forecasting. The Big Mac Index can be used as a rough forecasting tool. In the March, 2010 article the Euro was 29% over-valued. Over the last six months the Euro has declined in value against the U.S. – just what the Big Mac Index would predict.
Who says economists don’t have fun?
By Eldon Mast, on December 3rd, 2010
Two new reports on Thursday added additional good news to that already reported Wednesday.
Strong retail sales and a healthy reading on the housing market further boosted investor confidence in a recovery that is finding its footing and starting to fire on many cylinders.
Monthly sales volumes from individual department, chain, discount, and apparel stores are usually reported on the first Thursday of each month. This month, that report registered a surge in retail sales for November. Gains appear across the spectrum of stores: big to small, high-end to low-end, general merchandise to apparel.
Year over year sales gains for these stores have now shifted from the low to mid single digit percentage gain to the mid to high single digit percentage gain. Today’s results combined with yesterday’s strong report for vehicle sales points to a U.S. consumer is solidly participating in the recovery.
And on the housing front, the pending home sales index jumped 10.4 percent in October to indicate gains ahead for existing home sales. The index at 89.3 is up 18 percent from its post-stimulus low in June. Low home prices and low rates appear to be stimulating demand. The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes.
In response to these additional pieces of good news, the Dow Jones industrial average rose 106 points. Combined with the 249-point gain Wednesday, the index has now had its best two-day run since July 7-8.
Where the market will go from here and the stock market trend in 2011, is of course anyone’s guess.
By B.P.T., on December 3rd, 2010
At 8:30 AM EST, the Employment Situation report for November will be announced, and the consensus for non-farm payrolls is an increase of 168,000 jobs compared to a gain of 151,000 in October, the consensus for the unemployment rate is that it will increase to 9.7%, the consensus average hourly earnings rate is expected to increase 0.2%, and the consensus for the average workweek is 34.3 hours.
At 10:00 AM EST, the ISM non-manufacturing index for November will be released. The consensus estimate is that it increased 0.7 points last month to a value of 55.0, and will continue to signal economic growth as it remains above the mid-point of 50.
Also at 10:00 AM EST, the Factory Orders report for October will be released. The consensus is for an decrease of 0.8% in orders.
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By Claus Vistesen, on December 2nd, 2010
There aint nothing as a good short covering/melt-up rally day. The market has been in a flux the past weeks, but yesterday’s move proves, I think, that the upside surprise is much stronger than the downside and that the equity still wants to grind higher unless the world really(!) falls apart. On the flip side we are still some way below earlier highs and in this sense, it is very un-impressive. But the Bernanke put is very strong here. Good economics data at the zero lower bound is consequently completely cleansed of risk that it will lead to higher interest rate expectations since no one believes that Bernanke will raise interest rates anytime soon, nah strike that, ever!!
As FT Alphaville latches on to, the market is now trying to play the same game of chicken with the ECB and this time, the stakes are higher. Basically, you want higher equities we can deliver, but if you disappoint we will huff and puff your pretty little house down and all those small piggies will be left without shelter. So, does the ECB plan to deliver then. Well, it seems to be a good idea to cover any short on that prospect alone but on the other hand, Trichet et al would be prone to sticking it to the market just for the sake of it even if the macro backdrop leaves them with the last policy option available.
So, lads and lasses … make your bets!
By Eldon Mast, on December 2nd, 2010
 Many reports out on Wednesday point to a U.S. recovery that is exhibiting healthy signs on many different fronts.
Motor vehicle sales are now enjoying a strong run. U.S.-made vehicle sales held unchanged in November at a 9.1 million unit annual rate. The results surprised many recovery skeptics who were calling for a fizzle in November. Anecdotal reports on used car sales point to strength as do indications on sales at auto-parts retail chains. Motor vehicle sales make up 18 percent of total retail sales.
Private-sector employment increased by +93,000 from October to November on a seasonally adjusted basis, according to the latest ADP National Employment Report released today. The best news in the report shows that small businesses (the heart of job producers) actually accounted for more than half of the net additions. (+54,000) The report bodes well for the government’s report released later this week which will also include government job additions. Some analysts now believe net additions in November may have reached close to +200,000 jobs for the month.
Manufacturing continues to grow at a healthy pace, according to the ISM report for November. The growth has now been persistent for 16 straight months with the sector now adding jobs for 12 straight months.
Construction spending surprisingly jumped in October, rising 0.7 percent, following a 0.7 percent rebound the month before. The market expectation was for a 0.4 percent decrease. Strength was in multifamily housing. (Also a surprise to many)
The Beige Book prepared for the December 14 Fed meeting gave the economy a modest upgrade.
Quotes included:
- Manufacturing activity continued to expand in almost all Districts, with relatively strong growth seen in metal fabrication and the automotive industries. Reports also showed steady to increasing activity for professional and nonfinancial services.
- Retail spending showed improvement across most Districts.
- Lending activity is picking up somewhat for businesses in most Districts.
- Hiring activity showed some improvement across most Districts.
- Inflation remains subdued.
The Economic Cycle Research Institute, ECRI, a New York-based independent forecasting group, upgraded their projection for future economic growth. Earlier in the week, ECRI’s managing director and cofounder, Lakshman Achuthan, was on CNBC Monday to discuss the enhancement of their Oct 28, 2010 prediction. Last month the Institute declared that “The much-feared double-dip recession is not going to happen”. This month they go several steps further to say:
- There will be a revival of US Economic growth in the near future.
- When you are at this stage of the [recovery] cycle, a shock won’t derail us and put us into a new recession.
- In October they said “no second recession.” Now they are saying economic growth is likely to accelerate to a 3-4% annualized rate.
Achuthan went on to indicate that although we are a long way off from recovering the 8.5M jobs lost in the recession, the economy has now added back 1M and we are on track for to begin to see significant job gains again.
By B.P.T., on December 2nd, 2010
The monthly Chain Store Sales report will be released today. This report on sales in chain stores gives a look at the health of stores that make up about 10% of all retail sales.
The Monster Employment Index for November was released today, and the index moved down 2 points to a value of 134, but is 13% higher than last November’s value.
At 8:30 AM EST, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 423,000 new jobless claims last week, which would would be 16,000 more than the number released last week, which was unexpectedly low.
At 10:00 AM EST,the value of the pending home sales index for October will be announced.
At 10:30 AM EST, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 4:30 PM EST, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EST, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
By Trace Mayer, on December 1st, 2010
In this exclusive interview with David Morgan topics discussed include the silver manipulation, concentration of derivatives, differences between paper silver products and what thankfulness. A few of the articles referenced are high frequency fake trading, Reg Howe’s discussion of gold derivatives contracting and concentrating, the GLD and SLV ETFs, Ted Butler and GATA.
Please keep in mind that as the 200 day moving average shows on the price chart that silver is currently very expensive and it appears that silver and gold are consolidating for the next upleg in the new year. However, silver is the restless metal and about 90% of its price movement happens in 10% of the time. Consequently, it can make a particularly exciting speculation at the present moment.
But keep in mind that you are playing against some of the largest money in the world who have, it appears, the regulators and court system on their payroll. The safest way to play is to buy silver and take physical possession. Then you can remain solvent longer than the market can remain irrational. If you apply leverage in any way then you can either be forced out of your position or the exchanges or regulators can simply change the rules without notice like they recently did with margin requirement increases or to the Hunt’s.
NEW BOOK FOR SALE
For those who have not heard a new book went on sale last week called How To Vanish. This is co-authored by Trace Mayer and Bill Rounds. It is an extremely helpful tool for protecting your personal and financial privacy. You may want to check it out. Please stay safe during this holiday season and enjoy your family and friends!
EXCLUSIVE INTERVIEW WITH DAVID MORGAN (14:46)
As mentioned in the interview, the GVZ has declined precipitously in after hours trading on 26 November 2010 despite the massive volume of about $272M of gold for February 2011 delivery.
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