“Hedging” or opening up a “hedge position” is the process of establishing an exposure to a particular risk in order to offset an existing but opposite exposure. The term originates from the game of roulette where the lines between betting squares are called hedges. A bet place on the “hedge” wins if the ball lands on one of the numbers either side of it but the payout is lower than for betting on the number itself. The phrase “hedging you bets” became common parlance in English and over time has become established finance terminology. (more…)
One of the underlying assumptions of technical analysis is that stock and index prices follow trends which are determined by the interplay between numerous forces which affect price. These can be broadly split into four categories; economic, monetary, technical and psychological. Depending on the direction of these forces, traders in a stock fall into one of two groups; bulls plan to buy now sell later and benefit from a price rise; bears plan to sell now buy back later and benefit from a price fall.
During a rising trend bulls dominate the market and during a downward trend the bears dominate. In a reversal period, where the trend is changing from an upward one to a downward one (or vice versa), there is a temporary balance between the two groups. These transitional periods are often characterized by price patterns which can be used to identify when a prevailing trend is reversing.
Efficient-market theory (or Efficient Market Hypothesis EMH) argues that in the long run it is impossible to “beat the market” because the current price of a stock always factors in all available information.
According to the theory, stocks always trade at fair value and it is impossible to buy undervalued stocks or sell stocks for inflated prices. Therefore it is impossible to outperform the market by stock picking or market timing; the only way to earn higher returns is to buy riskier investments.The theory gained prominence in the mid-1960s and in 1970 Eugene Fama refined it into three distinct forms: weak, semi-strong and strong. (more…)
The (MACD) Indicator is a technical analysis method first developed in the 1960s by Gerald Appel, a prominent author in investment and trading strategy. MACD stands for Moving Average Convergence-Divergence and is based on the comparison of fast and slow exponential moving average prices. Proponents of MACD Indicator methodology argue it can be used to identify trend changes in stocks and indices.
As with most sectors, Indian pharmaceutical companies have had a tough year. Rising raw material and energy costs squeezed margins for everyone but this was accentuated in the pharmaceutical sector as China halted production of intermediate drugs in the run up to the Olympics. The depreciation of the Rupee also hit many of the bigger players who booked large mark-to-market losses on FX hedges and saw their interest outgoings on foreign currency loans rocket.
The net outcome of these factors was an aggregate 7% reduction in PBT for domestic pharma companies, despite a respectable 24% increase in top line revenue, resulting unsurprisingly in significant market sell-offs. The BSE Healthcare Index is 29% down over the last 12 months with some of the larger pharma stocks such as Ranbaxy and Dr Reddy’s Laboratories being heavily sold (50% and 35% respective YTD fall in share price). However, despite this backdrop the future outlook gives some cause for optimism.
This pick was posted on: Friday by MoneyVidya.com member ‘Vicky’. The price of the scrip when this was posted was Rs. 44.5 and the latest price is 49.10 - indicating a gain of over 10%. The timeframe of this pick is 2 years. Vicky has indicated a target price of Rs. 80 and a stop loss of Rs. 20.
Analysis (Verbatim):
I think that as terrorism rises, people are going to become more insecure and paranoid. With the most recent (and ongoing) terror attacks in Mumbai - possibly the worst that India has ever seen - and the relatively poor handling of the same by government agencies / national security forces, people are going to increasingly take security and safety into their own hands.
The other thing that is quite different about these attacks is that they have struck the hearts and minds of the more affluent classes of Mumbai and indeed the rest of India. As a result, I think that Zicom’s ability to sell its security systems, not only to Corporate offices (more…)
The crash of the Indian Stock Market since January 2008 has been widely attributed to FIIs pulling their money out to meet liabilities and redemptions. According to this article, however, FIIs have only pulled out $12.7bn and still have another $53.7bn, or almost Rs. 270,000 Cr. left in the market.
A lot of market experts are talking about the market being near the bottom (”Valuations just cannot get any cheaper! The Indian growth story is sound, even at 7%!”) Let’s be clear on this: these falling prices are not about fundamentals - its simply about lack of liquidity. FIIs are not exiting the market because they want to, but because they are being forced to - nobody wants to book such massive losses, and nobody would argue against the fact that as an emerging market India is looking pretty cheap.
The fact that there’s so much FII money still in the market - 80% - is quite scary (more…)
Being that the vast majority of my family and friends happen to be in the diamond/jewelery industry, a newly launched electronic diamond exchange platform certainly caught my eye. Currently, many dealers use Rapaport to price diamonds along with its Rapnet Diamond Trading Network. However, what is different about DODAQ, which calls itself the first online certified diamond exchange, is that it enables professional traders to buy, sell and hold certified polished diamonds like stocks! Furthermore, it offers a two-way auction for traders and facilitates transactions with real-time “spot” pricing.
Right now, there aren’t any fixed prices for polished goods, although Rapaport gives a ballpark number, it can often be far off mark. Generally, it’s used much like the debt market where LIBOR is used as a base and instruments are sold X points plus LIBOR. The lists are weekly thus there is no dynamic transaction data. DODAQ creates a centralized virtual location alongside a physical vault location for secure storage of the graded and guaranteed diamonds with their documentation. Thus DODAQ is basically a custodian for which it charges a commission fee on the transaction. (more…)
One of the most elegant applications of mathematics to finance has been in the field of portfolio theory. Active portfolio management requires investors to not only select risky securities, but also decide the appropriate weightage to ascribe to each security in the portfolio.
Developed by Markowitz and Sharpe in the early 1960’s, modern portfolio theory defines portfolio risk and return in precise terms: portfolio return is the weighted average of the expected return of individual securities while portfolio risk, is the weighted sum of individual asset covariances. This simple insight allows us to determine the condition for the efficient frontier – a set of portfolios that combine various risky assets in proportions that yield maximum return for a given level of risk.
Applying the fundamental intuition behind the Markowitz / Sharpe framework, PortfolioEdge has been built keeping in mind the practical investment behaviour of traders, investors and portfolio managers. It is a rebalancing tool for equity portfolios, but can be used for any risky asset-class, provided that it is possible to specify the returns on an NAV basis. By risky, it is meant that the asset class should have a positive standard deviation and it should thus be possible to estimate a distinct higher and lower value for its Upside potential and Downside risk, respectively.
The PortfolioEdge algorithm uses an innovative methodology to estimate the model weightage of stocks in your portfolio. The fundamental intuition behind the allocation mechanism is the Reward-to-Risk ratio (R2R), which is analogous to the Sharpe Ratio under modern portfolio theory. However, unlike the Sharpe Ratio, the measure of risk is not volatility (standard deviation), but expected capital loss.
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There has been a lot of discussion / panic in the markets with regards to ICICI bank.
Nobody really knows what’s going on, but everybody is worried (see this article, which was a result of the response I got from ICICI bank for this article). What we do know is that there were intial reports in January, and then in March we were told that ICICI bank had declared over $260mn in credit derivative losses, on a total exposure of $2.2bn. In mid September there were rumours floating around about ICICI bank going under. These were put to rest by assurance by Kamath, SEBI and the RBI. Then there were more rumours a couple of days ago, and it almost seemed like there was a bit of a run on the bank, with people in Hyderabad, amongst other places, lining up at ATMs to pull out their cash.
While my view is that there isn’t smoke without a fire, and even Bear Stearns denied initially that there wasn’t anything wrong. While I think that ICICI bank shareholders might see a further deterioration in share price, I don’t think that people holding accounts at the retail bank really have much to worry about.
ICICI bank’s business, like any conglomorate bank, can be broadly categorized into - the wholesale/ investment banking arm, which would bear the exposure to the credit derivative instruments, and the retail banking side, which takes deposits from individuals and small businesses. I couldn’t manage to get a hold of the corporate structure or of ICICI Bank, but these businesses should be structurally separate even if they are owned by the same holding company, ICICI Bank.
If this is the case, it would mean that while the shareholders are exposed to both businesses, the customers of the retail bank are relatively safer from the effects of the losses of the wholesale banking / investment banking arm.
Also, as ICICI sets out above, it is mandatory for all Indian Scheduled Commercial Banks to retain 34% of the deposit base in the form of Government Securities (SLR) and cash with RBI (CRR).
Retail depositors are also protected to a limited extent (Rs. 100,000) by depositor insurance (check an article about depositor insurance here: www.rbi.org.in/Scripts/FAQView.aspx?Id=64).
I also believe that like the Fed could not let AIG, an institution that is far to large and far too embedded in the livelihoods of the American population, fail, similarly, the RBI would never let India’s largest private bank fail.
So if I was an ICICI bank retail depositor. I wouldn’t go running to ATMs to pull my cash out, just yet.
Disclaimer: This blog or any other content on this blog should not be construed as financial or investment advice. All views presented here are solely the opinion of the author’s.
Disclosure: I don’t hold any positions in ICICI Bank.
Although I mentioned in my last post that the world was coming to an end, I strongly believe that there is plenty of opportunity in the Indian markets. That being said, the US markets will be and have been a drag for India. However, I don’t believe the effects of the US and UK downturn will be recession inducing. In fact, I think India will actually come out stronger.
Of course, I would still err to the side of caution, especially because the markets have just been acting wild. Thus it makes sense to look at a large, steadily growing, but misvalued company such as Mahanagar Telephone Nigam Limited.
Lets start with the negatives: This is the company that I get my broadband connection from and boy has it made a bad impression on me! The government tie to MTNL certainly does not help its case either. And as you would assume the land-line growth, more than 80% of the business, is decreasing.
On the other hand it has Rs. 53.63 in cash/cash equivalents (incl short term investments) per share, with no long term debt. That is more than half of its current stock price (Rs 83.80) in cash! Backing out the cash makes the PE look amusing! Then taking into account the unprecedented credit crisis, it places MTNL in an powerful position.
Meanwhile on a segment basis, the growth in both the cellular and broadband businesses should partially offset the decline in revenues from fixed-lines. Furthermore, the soon to be launched 3G network should accelerate growth in the cellular business, although margins will decrease with the license fees for the spectrum allocation.
First of all let me clarify that in my opinion, there is *absolutely no chance* that ICICI Bank can collapse. Its too well capitalized, its too big and its too important to the Indian financial system for that to happen.
I posted a small article this morning, which has been getting a lot of pageviews. I never expected, however that I’d get a response from ICICI themselves. This is what they left in the comments section of my post:
September 30, 2008
Dear Sir/ Madam,
We greatly value your relationship with us. In the context of the developments in the international financial markets, we thought it pertinent to bring to you our perspective of the prevailing situation.
We would like to bring to your attention that the Indian banking system is well regulated and significantly insulated from global developments. This is because it is mandatory for all Indian Scheduled Commercial Banks to retain 34% of the deposit base in the form of Government Securities (SLR) and cash with RBI (CRR). Besides, sound policies of RBI have ensured prudent credit practices in the Indian Banking system.
ICICI Bank is already compliant with the BASLE II requirement in respect of risk management practices and capital adequacy. At 13.4%, ICICI Bank has one of the highest capital adequacy ratios in the Indian banking industry. Last year, ICICI Bank raised Rs. 20,000 crores (US $ 5 billion) of equity capital, which almost doubled our equity capital base. We have a net worth of over Rs. 47,000 crores (US$ 10 billion), again one of the highest in the banking industry in India We have consolidated total assets of over Rs. 4,84,000 crores (over US $ 105 billion), which is diversified across a wide range of asset classes across retail, wholesale and rural banking.
ICICI Bank is amongst the most profitable banks in India. In FY 08, ICICI Bank made a profit of Rs. 4,158 crores (US$ 900 million).
ICICI Bank has the highest credit ratings in the Indian financial sector. We have AAA ratings for our instruments, such as senior bonds, subordinated bonds, and deposits. We have the highest foreign currency bond ratings assigned to any Indian bank from Moodys and S&P.
We continue to invest in growth, indicating our confidence in the opportunities in the Indian market. In 07-08, ICICI Bank added 650 new branches, taking the total strength to over 1400 branches.
We thank you for reposing trust in us over the years. We look forward to setting new benchmarks in service levels in India and to create a bank that you will continue to be proud of.
As a testimony to the above, please find below the clarification given by Reserve Bank of India.
Date : 30 Sep 2008
RBI Statement on ICICI Bank’s Financial Position
There are reports in some sections of the media that based on rumours regarding the financial strength of ICICI Bank, depositors are withdrawing cash at its ATMs and branches in some locations.
It is clarified that the ICICI Bank has sufficient liquidity, including in its current account with the Reserve Bank of India, to meet the requirements of its depositors. The Reserve Bank of India is monitoring the developments and has arranged to provide adequate cash to ICICI Bank to meet the demands of its customers at its branches/ ATMs.
The ICICI Bank and its subsidiary banks abroad are well capitalised.
Alpana Killawala
Chief General Manager
Press Release : 2008-2009/412
Sincerely,
Nazia Sayeed
Office of Head Service Quality
ICICI Bank Ltd.
It was nice of the folks at ICICI to respond to my humble blog, albeit with a standardized message. I’d like to clarify that I don’t think that ICICI is going to collapse, but at the same time I do feel that it is relatively more at risk in terms of Subprime exposure than other Indian banks. I certainly do not think that given the level of depostitory requirements that Indian banks must comply with - that there’s any reason reason to start pulling out your money from ATMs. Just as the US government protect retail deposits, so would the Indian government.
At the same time, there is the possibility that ICICI will face larger than expected losses from its exposures. Make no mistake - ICICI has already earmaked $260mn+ (Rs. 1000 Cr.+) for losses due to exposure to Credit Derivatives. This was way back in January, and then was talked about again in March. A *lot* of time has passed since March, and alot of negative developments have also taken place.
My worry is that in light of the recent events (Lehman, HBOS, AIG collapse etc.) that there may be further losses. That’s the scary thing about the Subprime mess. When on entity falls over - other firms it owes fall over. Those other firms also owe somebody, who owe somebody else and so on. Suddenly, before you know it, you thought that a counterparty that was good for its promise to pay you what they owe you, no longer is in a position to do so.
According to this article in the Business Standard, its UK arm has 89% of its non indian investments book - estimated at $3.5bn - has an S&P rating of A- or above. ‘Only’ 18%, or $700mn has exposure to the US. I think that an ‘A-’ isn’t a fabulous rating, mind you. The highest rating given by S&P is AAA, after which we have AA, A, BBB, BB etc. to until D. Note that BB and below is rated as ‘Non investment grade’ or ‘junk’. And remember, these are the same ratings agencies that gave AAA ratings to those Subprime backed assets that are actually at the root of this entire mess.
The article goes on to say that ICICI bank asserts that the UK subsidiary has ‘no exposure’ to US subprime. Surely they do have some exposure, albeit indirectly, otherwise they wouldn’t have had that $264mn mark to market loss in the first place?
In fact, according to this article in the Financial Express, ICICI bank has a total of $2.2bn worth of expsosure to credit derivatives. What the underlying for these credit derivatives are, we don’t know. To an extent that is not even that important. I wonder, has ICICI booked all of those losses? Did it close out those derivative positions? Hopeful they did.
Thus, while a ‘collapse’ of ICICI bank, in my opinion, is highly unlikely, we may learn of larger than expected MTM losses on the back of credit derivatives. If this does happen, while the depositor doesn’t have anything to be worried about, it wouldn’t exactly be good news for the ICICI bank shareholder.
Disclaimer: This is not investment advice nor should be construed as such. Do *not* make any investment decisions based on what you read in this article, or anything else on this blog. All views presented here are solely the opinion of the author’s.
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Even those who were smart enough to recognize that the independent investment bank model was no longer viable thought that Goldman would get acquired.
There were whispers that the ~ GBP 103 Billion HSBC (the only mega cap bank stock to actually give investors a positive return year to date), would be the one to pick up the franchise. I for one, was one of the people who liked this story – it made sense right? There really didn’t seem to be anybody else who had the firepower at least liquidity-wise to pull off that kind of trade.
I was naive. I forgot about Goldman.
Firepower clearly has nothing to do with liquidity. The kind of lobby that Goldman commands is undeniable. How else do you explain the fact that Bear, Merrill, and Lehman were allowed to fail (more…)
Many are loudly criticizing Paulson’s mega bailout fund. $700bn is not a small amount considering the fact that the global GDP as of 2007 is estimated at around $55 trn (1% of global GDP), and the size of the US economy is around $14 trn (therefore around 5% of US GDP).
People are saying that the US taxpayer is getting squeezed from every which angle to make up for the irresponsibility of mega ‘sophisticated’ financial institutions. Not only is he having to deal with a fall in the prices of his real estate assets, costlier credit, job insecurity and business uncertainty, he’s now having to subsidize something that he doesn’t even understand. This is not entirely true however (more…)
If you’ve been watching the market, even if not very closely, you’ll agree with me that it’s been – at the risk of sounding facetious – surreal.
Monday felt like a train wreck – Paulson’s refusal to bailout Lehman over the weekend and its subsequent bankruptcy announcement, and Merrill’s overnight sale to Bank of America (BoA) had my head spinning. If the Monday wasn’t black enough with news of Lehman and Merrill, we quickly learned that AIG was going around with a begging bowl trying to raise capital in the tens of billions to escape bankruptcy. Monday closed with the Dow 500 points down – that’s almost 5% - in contrast to the less that 1% movements that we’re used to seeing for that index.
In a discussion with a friend we realised that two global and highly esteemed (although Lehman had a more patchy 160 year history than Merrill Lynch) had within days just *poof!* ceased to exist. While BoA will probably retain the Merrill brand, its unlikely that my kids will ever hear the word ‘Lehman’. Indeed Lehman Brothers will probably be relegated to a notch in Barclay’s timeline on their website’s ‘About Us’ page.
The fact is that I was terrified of even stepping out from the aircraft. I had been warned by virtually everyone who had traveled to South Africa, “dude, be careful”. One person even went to the extent of suggesting that I carry along a gun (seriously!).
However, now that I have spent a few weeks here, I feel that the dangers of visiting this rather beautiful country have been grossly exaggerated. Sure, there is crime! But people here are so neurotically pre-occupied with the subject that our poor ol’ bandit hardly stands a chance: electric fences, motion activated alarm systems, laser security, steel barges and if that isn’t enough, there is a good chance that the “victim” will own a personal weapon.
Leaving aside the local “culture” however, I find South Africa to be a rather attractive investment destination (more…)
Analysts blame the high interest rate environment on the poor results. Some 70% of car sales are financed, and high interest rates make it more expensive to take out loans to pay for their car purchases. The small car segment is thought to be more sensitive to interest rate fluctuations, as the middle class families that buy from this segment cannot afford to make outright purchases.
I largely agree with the rationale presented above. However, the high interest rate environment should have had an equally damaging effect on Hyundai’s sales as well. Even if you take into account that Hyundai’s August 2007 base of 16,000 cars was lower than Maruti’s base of 60,000 cars – you cannot explain away such a dramatic a dramatic difference in results.
The reason for Maruti’s poor performance goes beyond the interest rate environment. Since the Swift Maruti hasn’t had any new launches of note. Moreover, its marketing has been limited and unfocussed. Its strategy of driving sales through schemes in the rural and semi-urban segment – although intuitively appealing (tap into less served segments) – failed to provide results. The likely reason is that households in these regions, who have fewer financing options, are even more interest rate (more…)
Periods of high inflation often provide a much more difficult investment environment than periods of low inflation. Investors may therefore need to adopt a more active investment style if they are to maximise returns.
When inflation is high, as it is now, there are two basic principles which should be followed. Firstly, buy companies whose earnings growth will be able offset the inflationary effects on P/E ratios. Secondly, be prepared to rebalance your portfolio between inflationary and deflationary strategies, in response to changes in the economic environment.
The inflationary effect on P/E ratios is that they are generally downgraded in times of high inflation. As inflation rises, the inflationary component of earnings growth becomes a more significant proportion of the total. As the price of both inputs and sales increases, profits generally rise in nominal value without any improvement in productivity. So over time earnings growth, which is a key factor in determining stock price, becomes more and more a product of inflation rather than anything else.
Now you might think that all earnings growth would be a good thing. However, investors typically place less value on increased earnings (more…)
There has been a lot of chatter in the market about FIIs staying away from the Indian markets because they feel that the valuations in India are still relatively quite expensive. Index PE ratios, when looked at in comparison to historical levels are a good way to determine how cheaply/fairly/expensively the companies that make up the index are relative to their historical levels.
But first, an explanation of how an ‘Index’ is calculated: There several ways to create an ‘index’ but the method commonly used is the ‘free float market capitalisation methodology’ where very crudely Indices are calculated adding together the market capitalisation of each of the companies chosen for that index based on some sort of criteria, dividing that figure by the sum of the market capitalisation of those companies that met the same criteria in a base year and then (more…)
After the January 21 crash, I was pretty sure that the investor participation in both cash and derivatives had suffered, but when I had look at the NSE turnover figures, I was pleasantly surprised. For the first four months of the fiscal, turnover in the cash segment has averaged at around 13,200 Cr., only 7% from the previous fiscal. Admittedly, the numbers for Feb and March must have pulled down the 2008 average - the average daily cash segment turnover for October 2007 peaked at almost 21,000 Cr. for the NSE. In January, the figure was (more…)
Manmohan Singh prepared a Working Paper for the International Monetary Fund in December 2007, in light of the curbs imposed by the Securities and Exchanges Board of India (SEBI). It clearly explains the history and origins of P-notes and suggested at the time what the impact of the curb may be.
Some history:
Since 1992, when FIIs were allowed to invest in Indian equity markets after the balance of payments crisis, an offshore market for PNs developed as a primary conduit for foreign investors to invest in India.
The origins of such flows stems from the bilateral tax treaty that India has had with Mauritius. The main provision of the 1983 treaty was that no resident of Mauritius would be taxed in India on capital gains arising from the sale of securities in India. The treaty therefore gave capital gains exemption for investments routed via Mauritius. Despite the uniform reduction in capital gains tax arbitrage that existed from the early 1990s through July 2004, it is interesting to note that there has been a rapid growth in the market for PNs in the last three to four years.
In the decade, short term capital gains have been as high as 40% and long term capital gains as high as 20%. However, since July 2004, the tax treatment on short term (security held for less than 1 year) capital gainshave been reduced to 10%, and there are no taxes (more…)
We haven’t heard much (except Bhave telling some investors that SEBI may allow it, read BS article here) about Real Estate Investment Trusts (REITs) since SEBI released the draft guidelines in December last year - but I think that its a very interesting concept and worth a revisit.
Real estate in India has experienced exceptional growth since 2004-05, with some cities even experiencing a more than 50% price rise on a compounded annual basis. While pundits and the common man alike are slightly nervous owing to double digit inflation, rising crude prices, and a stumbling equity market - leading to a cooling of real estate prices in tier 1 cities, residential and commercial real projects in tier 2 and tier 3 cities are holding firm. 8 months have already passed since the equity market crash of January this year, and while many are forecasting a further drop in the markets, others are talking more optimistically about us already having bottomed out, and the interest rate cycle having peaked. This bodes well for the real estate market, and as inflation and interest rates start coming off over the next 6 months (we hope) - this will lead to a resumption of the real estate bull run.
With this backdrop, Indian investors are slated to have access to real estate investment trusts (REITS) as the country is poised to embrace deregulation and further formalization of its booming real estate market.
The move is driven in part by the demand fuelled by domestic players looking to implement ambitious expansion plans. Reits have been introduced in most of Asia’s leading markets (Singapore, HK and Japan) in the last seven years and the introduction of Indian Reits will prevent the profitable Reit business going overseas. Moreover, as property prices in the the US and elsewhere crumble in light of the subprime mess, foreign investors seeking to allocate their capital to real estate will seek to put their funds elsewhere - e.g. developing economies such as India, where although there has been recent turmoil, fundamentals are strong, and this may be a good opportunity to get in at a bargain. Reits would certainly be a mechanism that simplifies investment (more…)
If you’re lucky enough to be a high net worth individual, you’re probably going to have dozens of personal financial advisors running circles around you, showering you with advice on how to invest your money. The richer you are, the more complex the financial instruments your personal financial advisor will suggest you invest in, and the bigger the words they’ll use to describe the simplest of things: and this will make you feel good. “This attractive woman is actually quite intelligent”, you’ll say to yourself.
I’m a young professional, and I cannot afford a personal financial advisor. To be honest, I’m also a little bit more comfortable managing my own money - it forces me to know what’s going on, and forces me to understand what I’m getting into. It makes me feel like I’m more in control of my finances. Having worked in Financial Services, I’m a little luckier though - I’m slightly more used to all the jargon. But what about those retail investors that haven’t worked in financial services - and don’t have advisors from large banks with European sounding names?
For the west, there are resources such as Investopedia.com and Fool.com that seek to demystify investing. They’re simple, straightforward and down to earth in the way that they explain (more…)
Until a few weeks ago a target price of $100 for crude would have been laughable. The market seemed sure prices would steadily climb towards $200.
So what has happened since then, other than the 25% fall in price?
For a start, many people now predict a fall in global demand, as economies adjust consumption in light of growth forecasts and the high price. This reduction in planned consumption has released the pressure which kept oil at $140 per barrel.
However, it was well known several months ago that further rises in the price of oil would damage the economy; in other words that $200 was not sustainable.
Why then were we so happy to believe prices would continue to rise, and why are we not now revising growth forecasts back up, in light of the recent fall in oil price?
That growth forecasts are not being seriously revised is due to tight global credit markets and perceived instability in the financial system restricting investment, while commodity price inflation is still hurting consumers’ real spending power.
The question of why we were willing to believe oil would continue to rise is more challenging: I believe the markets underestimated the speed with which the US credit problems would spread to the real economy outside the US. This led to an early reduction (more…)
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“Hedging” or opening up a “hedge position” is the process of establishing an exposure to a particular risk in order to offset an existing but opposite exposure. The term originates from the game of roulette where the lines between betting squares are called hedges. A bet place on the “hedge” wins if the ball lands on one of the numbers either side of it but the payout is lower than for betting on the number itself. The phrase “hedging you bets” became common parlance in English and over time has become established finance terminology. (more…)
