Bear No More - It's Time To Get Beta In China

The Chinese stock market has had a volatile year, initially rallying before slumping as concerns about a hard landing culminated in speculation on the end of the Chinese economic growth model. If history shows us anything it's that people will always overreact; on the down side and the upside. But is it an overreaction to still be bearish on China?

In order to answer this question, we need to review a number of key economic and market themes. The bottom line is that there is a compelling outlook, but it's not as simple as it may seem.

Full Story: http://seekingalpha.com/article/1040051-bear-no-more-it-s-time-to-get-beta-in-china 

New Zealand - Safe Haven Or Value Trap?

New Zealand has attracted significant bond flows in recent months as the island nation's status as a safe-haven, or relatively-safe-haven, has been galvanized by Euro worries. But where is New Zealand's economy headed? And does the country deserve this 'relatively-safe-haven' status? And of course, what does this mean for New Zealand's share market - which for most people will be expressed as the ENZL exchange traded fund?

Full Story: http://seekingalpha.com/article/679401-new-zealand-safe-haven-or-value-trap

Top 10 Trading Documentaries

With the popularity and feedback on my previous article on the top 10 financial crisis documentaries, here's my take on the top 10 trading documentaries. In the list that follows, the topics covered range from quantitative trading, getting started as a trader, a day in the life of a famous trader, the demise of trading pits, a look at the global foreign exchange market, and a history of market bubbles. These documentaries are a great source of inspiration as well as learning, and anyone who has traded in the markets knows that inspiration and learning are critical inputs to success.

1. Trader - Paul Tudor Jones
This documentary follows famous hedge fund trader Paul Tudor Jones, giving an insight into how a typical day looks, but also some of the unique personality traits and thoughts the man has. The documentary is somewhat dated, but is long on entertainment and inspiration, but perhaps a little short on education, but definitely worth a watch.

2. Million Dollar Traders
This 3 part reality TV show is an experiment by hedge fund manager, Lex  van Dam, to see whether he can train a handful of ordinary people into becoming successful traders. Basically this is The Apprentice meets financial markets. Perhaps the most interesting learning that this series gives is the psychological aspects of trading, you see some of the traders blowout, some of the get caught like a deer in the headlights, while others keep their cool. This one is long on inspiration, entertainment, and insights.

3. Rookie Trader
This is one for the beginners, it follows a CNN news anchor as he attempts to learn how to trade. He speaks with some trainers, coaches, and experts in trading to learn the basics e.g. market terminology, risk management, psychology, and basic operations. Informative for the beginners, and likely entertaining for the more advanced traders.

4. Billion Dollar Day
Here's another oldie but a goodie, this one follows a day in the life of three foreign exchange traders/dealers in New York, London, and Hong Kong. While the fashion and the technology have certainly moved on, it's still an interesting watch from the perspective of understanding the various players in the forex market, particularly in terms of the commercial banks - who largely rule the market.

5. Quants: The Alchemists of Wall Street
Some traders rely on luck, some on their instincts, some lucky ones use their employer's balance sheet, but another breed of traders takes the psychology and luck aspect out, instead focusing on the more scientific side of making money in the markets. The quants develop sophisticated algorithms and use highly advanced computing and connectivity technology to exploit statistical anomalies and patterns in the market. This documentary provides one of the best insights into this arcane corner of Wall Street.

6. Trillion Dollar Bet
But market scientists are not infallible; this documentary looks at the rise and fall of Long Term Capital Management, a hedge fund founded by PhDs and Nobel prize winners; the big names of financial theory. While their meteoric rise and profitability were astounding, equally astounding was the fundamental flaws in their trading thesis and underlying assumptions that lead to their subsequent demise. A fascinating documentary and a good reminder that so-called 'long-tail' events can have a nasty habit of derailing the best laid plans.

7. Floored
With the rise of technology came the fall of old ways of doing things, Floored is a documentary movie that chronicles the demise of the pit trading, or "open outcry" markets (the old days where markets were not trading engines housed in server farms, but a rowdy crowd of individuals shouting out and hand signalling orders to each other). Very interesting look at how the pits used to work, and an interesting look at how the old traders are adapting (or otherwise) to the new world of technology based markets and trading.

8. Tricks With Risk
As anyone who deals with financial markets should know, to make money you have to take on risk. How you manage or package the risk makes a great degree of difference as to how much you will make or lose in various scenarios. Indeed, some say the role of traders is to take on risk from those who do not want to hold the risk themselves; risk is a key stock in trade of a financial market participant. But as this documentary reveals, dealing in risk can get you burnt - and in the worst of times e.g. AIG, mismanaging risk can burn the entire system!

9. Betting on the Market
Anyone who was around during the late 1990's can attest to the euphoria of the massive bull market. Valuations went to extremes, everyone was talking about the new economy, and of course everyone was an expert! There will certainly be another massive bull market at some point, and this euphoria will return, so take a look at this documentary for a glimpse at what will be to come. Brilliant little documentary for stock investors.

10. Tulipmania
Speaking of bubbles, why not look back in time to see one of history's most infamous bubbles, the dutch Tulip bulb trading bubble. Perhaps nothing illustrates best the excesses of crowd psychology than the tulip bubble, so this one makes the list as a reminder that all markets are ultimately driven by the thoughts and emotions of the people that are buying and selling.

Hopefully these documentaries help your trading, or at least entertain you during the holiday period. Please be sure to point out any I might have missed, or that should be in the top 10. Best wishes for 2012, may it be a year of profits and prosperity!

Thanks to www.financedocumentaries.com for finding all these documentaries (and others!)

Top 5 Economics Graphs of the Week - 23 Apr 2011

This week the focus goes to the giants of the emerging markets, the "BRIC" economies (the economic/investment one, not the political club). In this edition we review inflation, GDP, monetary policy and the stock markets of Brazil, Russia, India, and China. Also thrown in is a quick review of the monetary policy decisions over the past week.

1. BRIC Inflation
First up is a look at inflation, the BRIC economies are basically the key representatives of emerging markets. And if there's been one key theme for emerging markets, it's inflation. Inflation has been surging in the emerging market world over the past year, driven by a strong run-up in agricultural commodities, thanks to supply shocks paired with the steady increase in demand due to rising wealth in places like the BRIC economies. As I've noted before, inflation will be the key issue in emerging markets this year - mostly because of the monetary policy response, and the subsequent impact on GDP, and stock market returns. It is likely that we'll start to see a tapering off of inflation through the second half of this year - but if not, then things could get 'interesting'.

2. BRIC GDP
Over to GDP, the BRICs bounced back strongly from the great recession. China took a small hit, but charged back with large scale stimulus. India was more or less unscathed on its growth path. Brazil took a decent hit, but has subsequently returned to pre-crisis growth rates. Meanwhile Russia took a significant hit with the collapse of the commodity bubble and is still struggling to get back to pre-crisis levels as it takes on significant economic challenges. However, while the medium term outlook may be less than certain, the fundamentals still support the long term growth story. Also, while the pattern was similar to that of the developed markets' experience, on a relative basis emerging markets got off lightly.

3. BRIC Stock Indexes
Honing in on the stock markets of the BRIC economies, over the past 2 years Russian stocks have been the key performers (thanks in part to the rebound in commodity prices following the crash), while Indian stocks have been a distant second. Brazilian stocks have fallen slightly short of the S&P 500 and Chinese stocks remain weighed down due in part to the uncertainty around the monetary policy tightening cycle. The reigning intuition had been that since the BRIC economies are going to become the next big thing in terms of economic clout and contributors to global growth, then their stocks will also be the next big thing. But for a variety of reasons this may only be partially true. But interestingly, it also doesn't necessarily mean relative out-performance of US stocks since their are a lot of ADRs and large global companies that will reap rewards of said economic ascension, while benefiting from well developed capital markets and associated regulation and transparency.

4. BRIC Monetary Policy
On monetary policy, this (vis a vis inflation) is one of the key factors in the course of emerging market investments this year. The chart below shows that basically all of the BRIC economies are well into the monetary policy tightening cycle, with Brazil increasing rates again in the past week. Clearly, rising policy rates will have a negative short term impact on stocks since on the valuation front higher interest rates reduce the discounted cash flows due to a higher discount rate, but they also have the impact of slowing economic activity - even stalling it over the medium term. This explains much of the caution that investors have collectively shown in relation to emerging markets in recent times. And this is also why people should be watching developments there closely for signs that the worm may turn.

5. Monetary Policy
On the topic of monetary policy, the theme of global monetary policy tightening continued through the past week. The week saw interest rate increases from Thailand +25bps to 2.75%, Sweden +25bps to 1.75%, and Brazil +25bps to 12.00%. Of course there were also two reserve ratio hikes - showing that the inflation fight is not limited to the usual policy interest rate tools, with China hiking required reserves by 50bps and Turkey by 100bps. What was most interesting was the theme of a more global nature of policy tightening starting to come through. Sweden's move perhaps epitomized this, echoing the ECB's recent 25bp increase. So next week it will be particularly interesting to see what the US federal reserve has to say - indeed also Bernanke, in his post-meeting press conference.

Summary

So looking at the emerging giants that are the BRIC economies a couple of key themes stick out. First of all the long-term growth story remains intact, with no major damage to the fundamentals. However over the short-medium term the outlook is less than certain as the challenge of fighting rising inflation presents a tangible set of risks. The course of inflation, and thus monetary policy will perhaps be the key determinant of medium term investment returns. Interestingly, on the topic of monetary policy, the policy tightening cycle is well and alive, and is increasingly becoming a global theme. But there is some truth in the suggestion that emerging markets are a key driver behind this trend. So the main message - watch closely for a turn in the inflation worm.

Sources:
1. Trading Economics www.tradingeconomics.com
2. OECD Statistics stats.oecd.org
3. Yahoo Finance finance.yahoo.com
4. CentralBankNews.info www.centralbanknews.info
5. CentralBankNews.info www.centralbanknews.info

Article Source: http://www.econgrapher.com/top5graphs23apr11.html

Quants: The Alchemists of Wall Street

I found this interesting video while relaxing at home on a weekend morning, it gives a bit of an insight into the world of "quants" - the PhDs, mathematicians, engineers, and model builders of wall street. It also adds a bit of insight into their role in the financial crisis. I certainly wouldn't say that they caused the crisis, but rather a lack of controls and insights into the assumptions that the models were based on may have contributed (but of course there was all the other things like the government encouraging subprime lending, perverse incentive structures, a lack of risk insights, understanding, and thinking). This is well worth a watch if you're in any way finance/markets inclined:



By the way, I found the clip here, (a site which has quickly become a favourite of mine!) there's a few other interesting videos on there as well - great way to whittle away your weekends and broadband bandwidth!

Here's the description from Top Documentary Films:

Quants are the math wizards and computer programmers in the engine room of our global financial system who designed the financial products that almost crashed Wall st.

The credit crunch has shown how the global financial system has become increasingly dependent on mathematical models trying to quantify human (economic) behavior.

Now the quants are at the heart of yet another technological revolution in finance: trading at the speed of light.

What are the risks of treating the economy and its markets as a complex machine? Will we be able to keep control of this model-based financial system, or have we created a monster?

A story about greed, fear and randomness from the insides of Wall Street.

So enjoy, but also ask yourself what you can learn from it. From my experience, the discipline of being very explicit about financial model inputs and assumptions is absolutely critical to ensuring the integrity of the outputs, and ensuring others understand the outputs and the sensitivities. Happy viewing and happy modeling!

Source: http://www.youtube.com/watch?v=ed2FWNWwE3I

Blog post: http://econgrapher.blogspot.com/2010/11/quants-alchemists-of-wall-street.html

New Zealand Markets - Worth a Look?

Here's an update on the New Zealand markets. First up is a look at the currency, the NZD (also known as the "Kiwi") took a bit of a dive in the past week or so on the back of a few things; first there was the Ireland and wider sovereign worries in the EU, this took some of the risk off - and since the NZD is considered a risk currency i.e. correlated with equities, the NZD has also taken a bit of a fall. Which is unsurprising, as the NZD is more or less at the mercy of what the USD is doing in this pair. The other big thing that happened to knock it down a bit was the Standard and Poor's announcement putting New Zealand's sovereign rating on negative outlook (rated AA).


The question is, will these events be the catalyst that starts the Kiwi into free fall? Make no mistake about it, the NZD is well overpriced against the USD at the moment when you considered the fundamentals. It is well beyond the PPP rate, and is still at the high end of it's historical trading range, and quite a distance from the mean. So it wouldn't be surprising if the NZD did fall further, but of course, the USD could stop that if there were further weakness in the dollar. And of course as one of the carry trade currencies, monetary policy will also play a role.


And what of New Zealand equities? The valuations are still relatively attractive, and it's a good market to generate dividend income, with many high yielders on the NZX. On NZ equities, if you can't gain access to the New Zealand stock market directly there is the recently launched ETF; ENZL which so far is up about 10% since inception, and has clocked up about $55 in net assets. But one of the biggest attractions about the New Zealand market is its low rate of broker research coverage. This means the benefits to be garnered from doing additional research are much higher than e.g. the US, which means opportunities for relatively easy alpha capture. But on the economic outlook front, the prospects are probably similar to the US; the recovery is underway, but growth will almost certainly be sub-trend for a period. Macro aside, it's worth a look.

Sources
Econ Grapher Analytics www.econgrapher.com
Yahoo Finance finance.yahoo.com
Global View Forex www.global-view.com

Article Source: http://www.econgrapher.com/27nov-nzmarkets.html

3 Tiered Economic Recovery: a Stock Index Survey

Is there a 3 tiered global economic recovery under way? And how might stock market performance look?

The other day I noted in a comment on seeking alpha (an extension of ideas in the latest top 5 graphs article) the possibility for the existence of a 3-tiered global economic recovery. The basic idea is that there are 3 tiers in this recovery, with emerging markets leading (and developing economies following):

1. Emerging Markets
2. Lucky Developed Economies
3. Unlucky Developed Economies

Basically this is simplifying the notion of an uneven recovery down to 3 categories (also could be called fast, medium, and slow). The lucky/unlucky comment is a bit facetious, but it refers to the divergence in prospects between developed economies such as Australia, South Korea, Poland, Canada, and New Zealand; and the older developed economies such as most of Europe, the UK, US, and Japan. While the first tier contains most emerging markets.

This divergence is driven by a number of factors such as existing and new vulnerabilities created by fiscal positions and government borrowing. But it also refers to factors (the lucky part) such as a fundamentally strong economy, and benefit from recovering commodity prices, and to a lesser extent global trade volumes.

Of course there are risks to all 3 tiers, and you only need to look at 2008 to see how correlated things can get, but I reckon the 3 tiers accurately captures the way the recovery will unfold for the various economies: fast growth, average growth, and low growth (or stagnation).

Stock Market Returns
So enough hypothesizing and proselytizing, let's do as the article title suggested; survey the stock market returns of the supposed 3-tiers. First up is Tier 1 - Emerging Markets; the category which is mostly to see the highest growth rate... The Chart below shows (with ETFs used as proxies where I couldn't find index data) tier 1 has been clocking up some pretty high annual returns (chart shows year on year % change on a weekly basis). But of course it's matched with higher volatility. Note the correlations in the past 2 years.


Next up is tier 2. The first thing to note is that returns are generally lower over the past 5 years than tier 1, another notable point is the higher correlation across the period vs tier 1. The generally lower returns relative to tier 1 will in part reflect the dichotomy of growth prospects (or potential growth rate).


Last but not least is the tier 3 economies, the unlucky ones. The bounce back has been and gone by a quick glimpse at the chart below, and the fundamentals tend to support that notion. Within this group there are those such as Japan and the EU, who may be more vulnerable with greater structural issues to deal with; especially in terms of fiscal positions. Also note that returns are generally lower than both tier 1 and 2; reflecting lower yet potential growth rates.


So what? So we can make a few generalizations like tier 1 generally had higher returns and higher volatility, and generally lower correlations prior to the crisis. But once the crisis hit all markets started behaving pretty similarly (to state the obvious). But there are some clues emerging e.g. looking at the tier 1 and 2 charts you can see the beginnings of a decline in correlations, with each market starting to move slightly different to the rest (in contrast to tier3).

So if I were to pick where things might go, I'd say tier 3 markets will generally show low performance in line with low growth prospects, and possibly lower correlations. Tier 1 will likely show the highest returns, but retain its characteristic volatility; and the past will probably look somewhat like the future in that respect. Tier 2, though, may present a more balanced mix of volatility and returns, tier 2 has reasonable growth prospects, and most tier 2 markets possess the desirable traits of developed economies i.e. good legal system, rule of law, democracy, stability, investor protections, etc. In any event this supposed 3-tier recovery concept will be an interesting one to think about as the fragile, gradual, and uneven global recovery unfolds...

Sources
Econ Grapher Analytics www.econgrapher.com
Yahoo Finance (Historical Index Levels) finance.yahoo.com

Article Source: http://www.econgrapher.com/7june-3tieredrecovery.html