STOCK MARKET RULES

Price Doubling Is Easy at Low Prices

Many “boiler room” sales representatives have touted this doubtful idea
more than once. Yes, it can be easy for some low-priced stocks to double
in price. However, it can also be easy for high-priced stocks to double in
price. The point is that price doubling depends on factors other than the
current price level. For example, it depends on changes in efficiency,
restructuring, revenue growth, or earnings growth. The stocks might be
new companies or old companies that have recently had earnings problems,
companies that show signs of a turnaround.
Like Onyx Acceptance Corporation.
Onyx
On January 2, 2003, Onyx traded at $2.73. The stock price more than
doubled by June, and increased by the same amount by July. It finally
topped out at $11.73 by December (Figure 2-1). That kind of growth is
terrific for any priced stock, if it stabilizes and doesn’t drop back to previous
levels.
The big question for the investor is: “Do I get out now or hold on
to the stock?” There is no easy answer. No one wants to sell a stock too
soon and leave money on the table. At the same time, it can be terribly
aggravating to see a stock price double and fall back to previous low
levels. Volatility can be an additional frustration. Onyx has a beta factor
of 1.0, which means that it is about as volatile as the rest of the stock
market.

P-NOTES

P-notes are offshore derivative instruments on Indian stocks sold by big brokerage houses to their foreign clients for a substantially higher fee than what the investors would have paid had they invested directly in the market, that is through the Sebi-registered FII route. However, a large number of foreign investors prefer Pnotes which protect their identity and give them easy entry-exit opportunity. Market veterans warned investors to be careful about such short-term money finding its way into India.

A Securities and Exchange Board of India proposal to tighten the rules for purchase of shares and bonds in Indian companies through the participatory note route took the breath away of the Indian stock market and it suffered its biggest fall in history.
So what are these participatory notes? And why do they have this huge impact on the Indian securities markets?

Participatory Notes -- or P-Notes or PNs -- are instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India.
Financial instruments used by hedge funds that are not registered with Sebi to invest in Indian securities. Indian-based brokerages to buy India-based securities / stocks and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.

Why P-Notes?
Since international access to the Indian capital market is limited to FIIs. The market has found a way to circumvent this by creating the device called participatory notes, which are said to account for half the $80 billion that stands to the credit of FIIs. Investing through P-Notes is very simple and hence very popular.

ETFs compared to mutual funds

Costs
ETFs trade on an exchange. Each transaction is subject to a brokerage commission. Commissions depend on broker, with various "plans" and different conditions, so no simple rule can be given. A "typical" schedule (at least in the United States) is $10 or $20, increasing slowly, or not at all, for larger orders. What is clear, however, due to the quasi-flat charge, amount invested has a great bearing; someone who wishes to invest $100 per month may have 10% of their money vaporized immediately (which is ludicrous), while for someone making a $200K investment, commission may be, essentially, negligible. Generally, mutual funds obtained directly from the fund company itself do not charge a brokerage fee. Where low or no-cost transactions are available, ETFs become very competitive.
Most ETFs have a lower expense ratio than comparable mutual funds. Not only does an ETF have lower shareholder-related expenses but, because it does not have to invest cash contributions or fund cash redemptions, an ETF does not have to maintain a cash reserve for redemptions and saves on brokerage expenses.Mutual funds can charge 1% to 3%, or more; index funds are generally lower, while ETFs are almost always in the 0.1% to 1% range. Over the long term, these cost differences can compound into a noticeable difference.
ETFs are almost always compared to no-load funds, for the simple reason that, compared to loaded funds, there is no comparison. A person investing $100K in a load fund may have $5K disappear immediately, which is much higher than any conceivable brokerage commission.
Mutual funds may also charge for too short a holding period, which is nonexistent with ETFs. In fact, ETFs can be bought and sold in the same day, although it's not obvious that it's a good idea. This has made ETFs subject of some criticism, since low fees may cause investors to trade more quickly. In this view, traditional mutual funds are doing investors a favor by charging fees such as front loads.
Taxation
ETFs are structured for tax efficiency and can be more attractive than mutual funds. In the U.S., whenever a mutual fund realizes a capital gain that is not balanced by a realized loss, the mutual fund must distribute the capital gains to its shareholders. This can happen whenever the mutual fund sells portfolio securities, whether to reallocate its investments or to fund shareholder redemptions. These gains are taxable to all shareholders, even those who reinvest the gains distributions in more shares of the fund. In contrast, ETFs are not redeemed by holders (instead, holders simply sell their ETF shares on the stock market, as they would a stock, or effect a non-taxable redemption of a creation unit for portfolio securities), so that investors generally only realize capital gains when they sell their own shares or when the ETF trades to reflect changes in the underlying index.In most cases, ETFs are more tax-efficient than conventional mutual funds in the same asset classes or categories.In the U.K., ETFs can be shielded from capital gains tax by placing them in an Individual Savings Account or self-invested personal pension, in the same manner as many other shares

Trading
Perhaps the most important benefit of an ETF is the stock-like features offered. Since ETFs trade on the market, investors can carry out the same types of trades that they can with a stock. For instance, investors can sell short, use a limit order, use a stop-loss order, buy on margin, and invest as much or as little money as they wish (there is no minimum investment requirement). Also, many ETFs have the capability for options (puts and calls) to be written against them. Mutual funds do not offer those features.
For example, an investor in a mutual fund can only purchase or sell at the end of the day at the mutual fund's closing price. This makes stop-loss orders much less useful for mutual funds, and not all brokers even allow them. An ETF is continually priced throughout the day and therefore is not subject to this disadvantage, allowing the user to react to adverse or beneficial market condition on an intraday basis. This stock-like liquidity allows an investor to trade the ETF for cash throughout regular trading hours, and often after-hours on ECNs. ETF liquidity varies according to trading volume and liquidity of the underlying securities, but very liquid ETFs such as SPDRs can be traded pre-market and after-hours with reasonably tight spreads. These characteristics can be important for investors concerned with liquidity risk.
Another advantage is that ETFs, like closed-end funds, are immune from the market timing problems that have plagued open-end mutual funds. In these timing attacks, investors trade in and out of a mutual fund quickly, exploiting minor variances in price in order to profit at the expense of the long-term shareholders. With an ETF (or closed-end fund) such an operation is not possible—the underlying assets of the fund are not affected by its trading on the market.
Investors can profit from the difference in the share values of the underlying assets of the ETF and the trading price of the ETF's shares. ETF shares will trade at a premium to net asset value when demand is high and at a discount to net asset value when demand is low. In effect, the ETF is providing a system for arbitraging value in the market. As the initial costs are one-off, the ETF vehicle offers some cost advantages over other forms of pooled investment vehicles.
Criticism
John C. Bogle, founder of The Vanguard Group, a leading issuer of index funds (and, since Bogle's retirement, of ETFs), has argued that ETFs represent short-term speculation, that their trading expenses decrease returns to investors, and that most ETFs provide insufficient diversification. He concedes that a broadly diversified ETF that is held over time can be a good investment

ETFs are dependent on the efficacy of the arbitrage mechanism in order for their share price to track net asset value. While the average deviation between the daily closing price and the daily NAV of ETFs that track domestic indexes is generally less than 2%, the deviations may be more significant for ETFs that track certain foreign indexes

ETFs offer little or no advantage over index funds for tax-deferred, long-term, retirement investors, because such investors typically conduct little if any trading and tax issues are of little concern for them

In a survey of investment professionals, the most frequently-cited disadvantage of ETFs was the unknown, untested indexes used by many ETFs, followed by the overwhelming number of choices

Major issuers of ETFs

List of exchange-traded funds
Ameristock issues Ameristock ETFs.
First Trust Advisors issues specialty First Trust ETFs.
Barclays Global Investors issues iShares.
State Street Global Advisors issues streetTRACKS and SPDRs.
Vanguard Group issues Vanguard ETFs, formerly known as VIPERs
Rydex Investments issues Rydex ETFs.
ETF Securities issues ETFs or specialised ETCs
Merrill Lynch issues HOLDRS.
PowerShares issues PowerShares ETFs, as well as BLDRS based on American Depositary Receipts.
Deutsche Bank manages PowerShares DB commodity- and currency-based ETFs.
WisdomTree issues fundamentally weighted WisdomTree ETFs.
Lyxor Asset Management issues Lyxor ETFs.
ETF Capital Management operates a global fund of ETFs.
Claymore Securities issues specialty Claymore ETFs.
ProFunds issues inverse and leveraged ETFs.
Van Eck Global issues Market Vectors ETFs.
AdvisorShares proposes to issue actively managed AdvisorShares ETFs.
RevenueShares issues Revenue-Weighted ETFs
SPA ETFs are fundamentally weighted ETFs.
Jovain Capital has control over BETA-PRO ETFs which are available on the Canadian TSX
FocusShares LLC issues specialty ETFs

TYPES OF EXCHANGE TRADED FUNDS

Most ETFs are index funds that hold securities and attempt to replicate the performance of a stock market index. An index fund seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. Some index ETFs, known as leveraged ETFs or short ETFs, use investments in derivatives to seek a return that corresponds to a multiple of, or the inverse (opposite) of, the daily performance of the index.As of February 2008, index ETFs in the United States included 415 domestic equity ETFs, with assets of $350 billion; 160 global/international equity ETFs, with assets of $169 billion; and 53 bond ETFs, with assets of $40 billion.
Some index ETFs invest 100% of their assets proportionately in the securities underlying an index, a manner of investing called "replication." Other index ETFs use "representative sampling," investing 80% to 95% of their assets in the securities of an underlying index and investing the remaining 5% to 20% of their assets in other holdings, such as futures, option and swap contracts, and securities not in the underlying index, that the fund's adviser believes will help the ETF to achieve its investment objective. For index ETFs that invest in indexes with thousands of underlying securities, some index ETFs employ "aggressive sampling" and invest in only a tiny percentage of the underlying securities

Commodity ETFs
Commodity ETFs invest in commodities, such as precious metals and futures. Among the first commodity ETFs were gold exchange-traded funds, which have been offered in a number of countries. Commodity ETFs generally are index funds, but track non-securities indexes. Because they do not invest in securities, commodity ETFs are not regulated as investment companies under the Investment Company Act of 1940 in the United States, although their public offering is subject to SEC review and they need an SEC no-action letter under the Securities Exchange Act of 1934. They may, however, be subject to regulation by the Commodity Futures Trading Commission

Actively managed ETFs
Actively managed ETFs are quite recent and have been offered only since 25 March 2008 in the United States. The actively managed ETFs approved to date are fully transparent, publishing their current securities portfolios on their web sites daily. However, the SEC has indicated that it is willing to consider allowing actively managed ETFs that are not fully transparent in the futureThe fully transparent nature of existing ETFs means that an actively managed ETF is at risk from arbitrage activities by market participants who might choose to front-run its trades. The initial actively traded equity ETFs have addressed this problem by trading only weekly or monthly. Actively traded debt ETFs, which are less susceptible to front-running, trade their holdings more frequentlyThe initial actively managed ETFs have received a lukewarm response and have been far less successful at gathering assets than were other novel ETFs. Among the reasons suggested for the initial lack of market interest are the steps required to avoid front-running, the time needed to build performance records, and the failure of actively managed ETFs to give investors new ways to make hard-to-place betsExchange-traded grantor trustsAn exchange-traded grantor trust share represents a direct interest in a static basket of stocks selected from a particular industry. The leading example is Holding Company Depositary Receipts, or HOLDRS, a proprietary Merrill Lynch product. HOLDRS are neither index funds nor actively-managed; rather, the investor has a direct interest in specific underlying stocks. While HOLDRS have some qualities in common with ETFs, including low costs, low turnover, and tax efficiency, many observers consider HOLDRS to be a separate product from ETFs.

EXCHANGE TRADED FUNDS

An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the Dow Jones Industrial Average or the S&P 500. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. In a survey of investment professionals conducted in March 2008, 67% called ETFs the most innovative investment vehicle of the last two decades and 60% reported that ETFs have fundamentally changed the way they construct investment portfolios. [1] [2]
An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be purchased or redeemed at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be substantially more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs.[3]
Most investors can buy and sell ETF shares only in market transactions, but institutional investors can redeem large blocks of shares of the ETF (known as "creation units") for a "basket" of the underlying assets or, alternatively, exchange the underlying assets for creation units. This creation and redemption of shares enables institutions to engage in arbitrage that causes the value of the ETF to approximate the net asset value of the underlying assets.

3i, Kotak, NSR eye stake in Balaji

SOURCE: ECONOMIC TIMES
A host of private equity (PE) firms have joined the race to acquire STAR’s stake in Balaji Telefilms. New Silk Route (NSR), 3i and Kotak are learnt to be in talks with the television production house to buy 25.99% stake, originally held by STAR. The promoters will now have to buy back the stake at Rs 190 per share within the stipulated time frame of 240 days. ET on Friday reported that ADAG and Eros International are also in the fray to acquire the STAR stake. A source told ET: “With the current slowdown in export-oriented sectors such as IT and ITeS, PE firms are increasingly looking at expanding their media investment portfolio. Especially with the emergence of addressable distribution system (DTH & CAS), content creation would witness increased PE fund infusion.” The source added that Balaji being a successful television content production house will be an attractive opportunity for PE players. When contacted, Balaji Telefilms CEO R Karthik said: “We are in talks with several players but no final decision has been taken yet. We are not in a position to comment.” All the three PE firms have already made investments in the media and entertainment sector in India. The UK-based PE player 3i has picked up stake in two entertainment companies in India. In 2005, it had picked up 35% stake in Nimbus Communication for an estimated $45 million and in January 2007, it had invested $22 million in digital cinema chain UFO Moviez. Both Kotak and NSR have made investments in Indrani Mukherjee-promoted INX Group. According to an analysis by Yes Bank, in the first half of 2008, there were close to five deals in the Indian M&E Industry amounting to a whopping $186 million. Some of the sizeable deals include ICICI & JP Morgan that picked up 20% stake each in PVR pictures for $30 million and Warburg Pincus 15% stake in Laqshya Media for $64 million, among others. Rupert Murdoch-controlled STAR Group, through Dubai-based affiliate Asian Broadcasting FZ-Llc, bought a 21% stake in Balaji for Rs 123 crore in 2004. This was followed by an open offer, which increased its stake to 25.99%.

REVERSE MORTGAGE SCHEME

Old age comes with its own share of problems. As a person grows older, and his regular source of income dries up, his dependency on others can increase significantly. With health care expenses on the rise and little social security, living the golden years respectfully can be quite a challenge for senior citizens. In such a scenario, a regular income stream that can help them meet their financial needs and maintain their current living standards becomes important.
One typical feature with most senior citizens is that their residential property accounts for a significant portion of their total asset pie. And, given its illiquid nature, property fails to aid senior citizens on the liquidity front.
In the Union Budget 2007-08, a proposal to introduce 'Reverse Mortgages' was put forth. To understand the concept of reverse mortgage, first let us understand what a regular mortgage is. In a regular mortgage, a borrower mortgages his new/existing house with the lender in return for the loan amount (which in turn he uses to finance the property); the same is charged at a particular interest rate and runs over a predetermined tenure. The borrower then has to repay the loan amount in the form of EMIs (equated monthly installments), which comprise of both principal and interest amounts. The property is utilised as a security to cover the risk of default on the borrower's part.
In the reverse mortgage, senior citizens (borrowers), who own a house property, but do not have regular income, can mortgage the same with the lender (a scheduled bank or a housing finance company-HFC). In return, the lender makes periodic payment to the borrowers during their lifetime. Inspite of mortgaging the house property, the borrower can continue to stay in it during his entire life span and continue to receive regular flows of income from the lender as well. Also, since the borrower doesn't have to service the loan, he need not bother about repaying the 'borrowed amount' to the lender.
The concept of reverse mortgage, although new in India, is very popular in countries like the United States. Recently, National Housing Bank (NHB), a subsidiary of the Reserve Bank of India (RBI), released draft norms of reverse mortgage (the final guidelines are awaited). Following are some of the key features of the scheme from the draft norms.
1. As per the norms, a house owner who has crossed 60 years of age is eligible to seek a loan of upto 60% of the value of residential property by mortgaging the same (for the maximum period of 15 years) with a bank/HFC, while retaining the right to stay in the property. The borrower i.e. house owner is not required to pay back the loan amount.
2. In terms of receiving the loan amount, the borrower can opt for monthly, quarterly, annual or lump sum payments or payments at any other point in time as per his discretion. Also, a revaluation of the property has to be under taken by the bank/HFC once every 5 years. Consequent to the revaluation, necessary changes will be made to the loan amount. However, the bank/HFC will have the discretion to decide the mode of payment of loan and to determine the tenure of the loan, depending on factors like the state and market value of the property and age of the borrower, among others.
3. The borrower can use the loan amount for various purposes like renovation and extension of the residential property, maintenance/insurance of the residential property and family's medical or emergency expenditure, among others. However, the loan amount cannot be used for any speculative or trading purposes.
4. The interest rate on the reverse mortgage will be determined by the bank/HFC based on the risk perception and loan pricing policy, among others. Fixed and floating rate of interest may be offered, subject to a transparent disclosure of the terms and conditions to the borrower.
5. The lender will recover the loan along with the accumulated interest by selling the house after the death of the borrower or earlier, if the borrower leaves the mortgaged residential property permanently. Any excess amount will be remitted back to the borrower or his heirs. However, before resorting to sale of the house, preference will be given to the owner or his heirs to repay or prepay the loan amount, along with the interest, and to get the mortgaged property released.
6. The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability.
As the cliched saying goes,"there are no free lunches in life". In case of reverse mortgage, there exist a few guidelines, which may not 'appeal' to the house property owner i.e. the borrower.
1. As per the guidelines, the maximum loan tenure can be 15 years. So, if the borrower outlives the loan tenure, he can continue to stay in the house. However he will no longer be eligible for any payments from the bank/HFC.
2. The bank/HFC shall have the option to revise the periodic/lump sum amount at such frequency or intervals based on revaluation of property, or at least once every 5 years. The borrower will be provided the option to accept the revised terms and conditions to continue the loan. However, if he refuses to accept the revised terms and conditions, no further payments shall be made by the bank/HFC. Interest at the rate agreed before the review will continue to accrue on the outstanding loan amount.
3. Since the reverse mortgage can be either at fixed or floating rates, it will be prone to the interest rate movements. Hence, in the scenario when interest rates are moving northwards, a floating rate reverse mortgage would add to the borrower's liability.
4. Under the reverse mortgage, the legal heirs of the owner are not entitled to take control over the mortgaged property upto the extent of the outstanding loan. They are required to first repay the outstanding loan amount along with the interest to stake a claim on the property.
5. The banks/HFCs at their discretion may levy penalty or other charges on the prepayment of loan. So, if the borrower or his heirs wish to prepay the loan amount, they may have to bear an additional cost.
The most important advantage offered by the reverse mortgage scheme is that despite mortgaging the house, the house owner retains its ownership, is entitled to live in the same throughout his lifetime and also has access to a regular income stream, which can help meet his day-to-day needs. From the bank's/HFC's perspective, the mortgage on the property in its favour ensures that there is no scope for default.
Having said that, individuals who wish to opt for the reverse mortgage scheme would do well to acquaint themselves with the nitty-gritties of the guidelines. Also, the final guidelines will aid in providing more clarity to individuals who wish to participate in the reverse mortgage scheme.

Reverse Mortgage: A failure in India?

The finance minister's budget proposals last year included the introduction of the reverse mortgage facility for senior citizens in India. Recent reports seem to indicate that less than 150 people have taken advantage of the facility since its inception, and it is, therefore, likely to be considered a failure. This is unfortunate because the facility simply has not been adequately explained. It was also unattractively packaged.
The reverse mortgage facility allows senior citizens to unlock the value of their most valuable asset, their home, by mortgaging it and enjoying the use of the money in their lifetime while continuing to live in it until their deaths.
It is a well-entrenched idea in many developed countries in the West where its terms are such that only home-owners above a given age (typically 60-65 years) may apply.
The bank makes an evaluation of the current value of the home, decides the likely lifespan of the applicant home-owner (and his/her spouse), and, decides what percentage of the current value they are willing to loan them. The bank also fixes the interest rate it wishes to apply.
Typically, the loan amount seldom is lower than 60-70 per cent of the market value of the property. The applicants have the option of taking the loan principal in a single lump-sum amount or by a fixed monthly amount instead. From time to time, the value of the property is re-visited by both parties. If the valuation has increased, the applicants are given the option of increasing the quantum of the loan, and should they do so, are given the incremental amount in lump-sum. If they have opted for the monthly payment scheme, this amount is appropriately increased. The principal plus interest charges accrue at the bank while the applicants live on in the home for the lengths of their lives - or until they decide to sell the home, whichever comes earlier.
If they choose to sell it, they have to pay the bank all the accrued amounts. On the death of the second of the two spouses, the heirs to the property decide either to redeem the loan and keep the property, or sell the property and take the residual amount that may accrue from the sale after settling with the bank. Should the sale proceeds be lower than the accrued principal plus interest amount, the bank takes the loss. (This could happen if the real estate market has not moved up in the manner the bank had estimated originally. However experience of the past indicates that the banks seldom lose, as they factor this likelihood in setting the percentage of the current value they loan the applicants.)
The Indian banking industry must not complicate the scheme as it has done. The industry's offer caps the available loan amount at Rs 50 lakh, instead of providing for an equitable percentage of the property's value, and limits the loan period to tenure of 15 years.
Which 60-year-old couple would wish to put themselves in a position to have to redeem the principal plus interest amount when they are 75 or more, at which age they are unlikely to have the stamina to sell out and move to a new home, which would inevitably be their only option? Inadequate clarity and inappropriate terms have led the reverse mortgage loan facility in India to have limited takers.
It is possible that most Indians will not sell the family home, and would prefer passing it on to the next generation, even if they have to live in relative penury during their waning years because of the small income. However, many Indian traditions and values have changed in the last 15 years. This is like many other things.
For example, we hated debt and dreaded living on borrowed funds. The Diners Club credit card was introduced in India in the 1960s. It never ever took off. But today's new generation has upturned that.
More credit cards are issued in India per month than in most countries in the world, and cards have changed the way life is lived. The increasing GNP and the surge of the manufacturing and service sectors owe much to the great surge in consumer purchasing, including of expensive aspirational goods and real estate.
The urge for a better life NOW is almost fundamental to the way the younger generation perceives its goals.
Another example has to do with the tradition that parents moved in with one or the other of their children when they grew old. That too is changing.
Work opportunities are moving young people away to new cities, even new countries, where their parents cannot or will not follow them. And even in the same cities, many "modern" parents prefer to live on their own.
Further, in many cases, the children do not want to inherit the parents' home. Should they do so, they sell it anyway because they have moved on to bigger and better things. There are also old folk without children, and old folk out of luck with their children. In both cases, they are short of the cash to even pay essential bills.
So while the reverse mortgage idea may not take off in India as it has in the West, where social and parent-child behaviour usually dictates that the old folk live off their very last penny before they die, there are sufficient demographic and psychographic data to indicate that in India there are takers in the millions who, for one reason or another, are likely candidates for the reverse mortgage idea.In any event, the proposal should be given the opportunity to fail for the right reasons. And that means it should be packaged and marketed in a way that makes sense to the likely customer.

STOCK MARKET RULES

CONTINUED....................
STOCK MOVES: SIDEWAYS
Again, ask questions and search for answers. Why isn’t the stock price
moving? If other similar stocks and the market are doing well, there is a
reason for a lack of movement in a given stock. Has there been bad news
recently that has created a lack of investor interest, or is the stock currently
a gem waiting to be discovered?
Although rare, undiscovered gems can experience dramatic price
surges with even a small amount of publicity. Some investors follow a
strategy of seeking out these gems, but often they end up with well-run
companies that the market doesn’t like. Usually they are basically good
companies with limited growth potential. Major investors search for companies
with virtually unlimited growth potential.
STOCK MOVES: UPWARD
Why a stock price is moving upward is most important to investors who
don’t currently own it but would like to be in on the action. Normally,
when there is a sudden surge in either the stock market or an individual
stock, the news appears quickly to trumpet the event.
WHEN TO BUY
Some believe that any time is a good time to buy stock, because over the
long term, the stock will grow and prosper. Essentially that’s correct,
although there can obviously be better times than others to buy stock.
Usually the best time to buy stock in general is when a downtrend turns
up and solidlAy crosses the trend line. If this is the beginning of a new
uptrend and not just a secondary trend, the timing should be good.
TO BE CONTINUED...................

RELATIONSHIP BETWEEN CRUDE INFLATION AND GOLD

INTERESTING STORY

By DEVENDRA NEVGI ( CEO OF QUANTUM MUTUAL FUND )

would start with an interesting conversation I heard recently. I happened to be at an oil trader’s dealing room. I asked the chief dealer, “What’s happening to oil? It is down 20% from its peak. Will you buy now?” He answered: “Oil’s down due to speculative unwinding of long positions and a growth scare in developed countries, which might result in lower demand for the scarce commodity.”

He then called someone in Iran, a member of OPEC, an association which controls around 40% of the global oil output. I heard him saying, “So the skirmishes between Israel and Iran continue? And the usual problems in Iraq, Nigeria, etc, also continue with supplies remaining vulnerable to serious disruptions. US stockpiles are down, no new oil discoveries.” He hung up the line. I was sure that his next reaction would be to buy more crude oil, since according to him, supply remained vulnerable.

Surprisingly, his next call was to someone in South Africa: “How’s the mining industry doing? Any increase in the output in gold? Will the gold mines continue to face power disruptions from Eskom?” The response from the other side was “no” for the first question and “maybe” for the second one.

He said: “Ok, buy gold worth $5 million.” I was shocked, and was compelled to ask: “Hey, after your last phone call, I was convinced that you would immediately place orders to buy more crude oil. Where does gold come into the picture? He was grinning from ear to ear and proceeded to show me a chart.

He asked me: “What do higher crude oil prices do to the general price levels in the world?” I said: “Of course, higher crude oil prices fuel inflation, since most of the demand for oil is inelastic.” He further probed: “Is gold a kind of proxy currency?” I said: “Yes. In fact, in the 1900s, many countries in the world had gold standards — gold was used as a medium of exchange.”

Let’s presume that gold was the currency now. How much gold would be required to buy a barrel of crude oil? Or how many barrels of crude oil will be required to buy an ounce of gold? The answer is around 7.3 barrels of crude oil would fetch one ounce of gold. This ratio is known as the ‘gold-oil ratio’.

He continued his questions: “Paper currencies like US dollar tend to lose their purchasing power over the years, why?” I replied: “Simple — due to inflation.” As time passes, paper currencies can’t buy the same amount of oil which you could have bought years ago. And the final words of wisdom came from him: “But gold is different.

It preserves value — better known as a store of value — and that’s the reason why gold is used to hedge inflation.”
He said: “Look at the very long term chart, the average number of barrels required to buy one ounce of gold is around 14.5, which is now at 7.3.”

I nodded in affirmation and said: “That’s because crude oil has moved up sharply from $38 in 1980s to $123 (high of $144), whereas gold has not moved in tandem. It is still trading near $910 per ounce, a little more than the 1980s high of $850 per ounce.” He jumped up and said: “Bingo, now for the gold-oil ratio to reach its long-term average of 14.50, at current prices, either the crude oil price has to move down to $63 or the gold price has to move up to $1,700.”

As I was leaving his office enlightened, I thought with the current uncertain geo-political situation in oil-rich countries such as Iran, Iraq and Nigeria, and with no new discoveries, crude oil seems unlikely to move down to say $63 levels for the gold-oil ratio to reach its long-term average of 14.50. In that case where would gold go?

With the US on the brink of a recession, financial crisis still not over, inflation not abating on higher food and commodity prices and the US dollar depreciating, all the positive factors for a gold price rise are in place.

And by sheer coincidence, I got a call from my stock broker, lamenting the fact that the equity markets were heading south and trading volumes had crashed. He was keen that I buy stocks. I told him: “Sorry, I am now only keen on buying gold.” He was happy.

“I can help you in buying gold at attractive prices,” he said and then explained: “The most appropriate way to buy gold is to buy a gold exchange traded fund (ETF) on the NSE. It is as easy as buying any other stock. The units are held in demat form in your account, thus eliminating the need to hold gold in the physical form.”

Acquiring gold via ETFs ensures no hassles of storage, security, quality, insurance, transportation, making charges and others. The fund house stores all the gold backing — each unit in secured vaults — and also has it completely insured. The price of gold ETFs reflect the domestic gold prices, less expenses. There is also a Gold Exchange Traded Fund which charges very low expenses. Moreover, easy liquidity and price transparency is ensured as they are listed on the NSE.

Later in the evening, I reflected on how much the relationship between crude, inflation and gold is important for investment decisions. And, how easy and convenient it is to buy gold and hold it without any worries — especially in times like these, with high crude oil prices, high inflation and falling equity markets.

by: CA RAGHAV SHARDA

COMPANIES LIKELY TO BE BENEFITTED FROM NUCLEAR DEAL

CONTINUED....................

ABB

ABB makes components for power projects. Its parent company's exposure includes new

nuclear power plants, systems and components. The parent company's exposure includes fuel services, waste management and decommissioning.

Crompton Greaves

Crompton Greaves works with Nuclear Power Corporation of India. It has completed a switchyard for nuclear project.

Walchandnagar Industries makes critical equipment for India's nuclear power facilities.

Siemens has a marginal exposure through its parent company.

Reliance Energy plans to invest additional Rs 12,000 crore in nuclear power capacity. It plans to install 2000 MW of nuclear power capacity.

Tata Power has tied up with some major nuclear equipment suppliers like Areva. It already has a relationship with Toshiba; it will leverage on it.

BY: CA RAGHAV SHARDA

COMPANIES LIKELY TO BE BENEFITTED FROM NUCLEAR DEAL

CONTINUED...................................

L&T

L&T has done engineering, procurement and construction projects for nuke power plants. It is currently working on the 2,000 MW Kudankulam nuclear project. The company will get into mainstream nuclear projects if the deal goes through. L&T's talks with Toshibha failed. It entered into a recent tie-up with Mitsubishi for super critical boilers. The Mitsubishi technology would be used for Nuclear Power Corp. L&T may leverage its relationship with Mitsubishi for its other nuclear business.

BHEL

BHEL supplies up to 500 MW of equipment to Nuclear Power Corp. It is looking for a tie up manufacturing equipment of up to 700 MW & 1500 MW. The company has been in talks with Alstom, GE Energy, Russia's LMZ and Siemens. It has an existing tie-up with Siemens for nuclear technology.

NTPC

The company is in talks with Nuclear Power Corporation of India. It is looking at setting up 2000 MW nuclear plant. He is In talks with GE Energy for technology and fuel. NTPC is looking at the project to be operational by 2012-2013.

Areva T&D

Areva T&D is looking at a plant for uranium mining and recycling. The plant would be set up after nod from Nuclear Power Corp.

Alstom Projects

The company already makes nuclear reactors and rotors. Its parent company is a world leader in conventional nuclear projects. It makes turbines for nuclear power stations. It supplies steam turbines to over 30% of nuke power stations globally.

Rolta

The Rolta-Stone and Webster joint venture competent provides reactor-building technology. It will leverage on its partner's core competency. Stone & Webster's parent has 20% in Westinghouse Electric, a nuclear reactor maker.

Gammon has undertaken turnkey construction for nuclear projects.

HCC

HCC has constructed four of seven nuclear power projects in India. It is an EPC contractor for nuclear projects.

BY:RAGHAV SHARDA

TO BE CONTINUED.....................................

Power stocks unlikely to benefit from N-deal

From the stock market perspective, listed power companies are less likely to benefit from it. Said Dipen Shah, vice president-PCG Research at Kotak Securities: “no major impact is seen on shares of power companies, in the immediate term. Right now nuclear power contributes less than 10 per cent of total power produced. It will take a few years for nuclear power companies to come up with additional facilities.”

NTPC, having an installed capacity of over 20,000 MW, plans to start with 2000 MW nuclear plant once it gets the go-ahead from the government. Others private players like Tata Power and Reliance Power have shown interest in engaging in nuclear power plants once they get necessary approval from the government.

India has a total installed power generation capacity of 1,44,564.97 MW. Out of this, 64.6 per cent capacity is achieved by thermal fuel (coal, gas and oil), hydro contributes 10.5 per cent while nuclear energy generates 2.9 per cent. (Source: Ministry of Power)

The government has recommended a roadmap for meeting the energy requirement for the next 25 years. It has approved four sites of 700 MWe pressurised heavy water reactor and four Light Water Reactor of 1000 MWe. From a capacity of 3,900 MWe in March 2006, the government has set an ambitious goal of 20,000 MWe for the year 2020. (Source: Nuclear Power Corporation of India)

Construction and power equipment companies who may get contracts for construction of nuclear plants are likely to see major rise in their order book. However, rising interest costs and economic slowdown will be a hurdle these companies will have to face.

“Power equipment companies like L&T and Areva and some construction companies which have prior experience in building parts of nuclear power plants will be impacted beneficially,” Shah added.

He added that the power generated from nuclear plants will not outstrip demand. Hence, it will not impact earnings of non-nuclear fuel companies.

“We could not identify clean beneficiary of the 123 Agreement--owing to meaningless contribution and insignificant exposure of listed companies to nuclear energy. However, we view that few companies like Areva T&D, Alstom Projects, Rolta India, KSB Pumps, HCC, Simplex Infrastructure, McNally Bharat, etc have products in the nuclear energy segment but cannot ascertain the benefit derived from the same,” says Emkay Global Financial Services.

BY CA RAGHAV SHARDA

STOCK MARKET RULES

CONTINUED....................................
STOCK MOVES: DOWN
Buying a car, a computer, or a new television, only to see it on sale the following
week, can be a big source of irritation. Of course, the same holds
true for stocks. To pay $52 a share one day, then to hear some negative
news and see a price of $42 the next week, is not a pleasant experience. If
the investor’s research and selection are valid, the price will probably
recover and move to new highs. But the price damage on the way down
can be difficult to endure. An interesting phenomenon can occur with a
stock price that appears to keep on dropping.
As the price declines, investors will appear to buy up shares at perceived
bargain prices. If enough of these bargain hunters appear, they can
stop the price drop, but sellers might overpower them. Bottom is where the
price stops declining and goes flat or begins to retrace its upward trend.

On Sale, Limited Time Only
Many investors consider a market “dip,” “pullback,” “correction,” or “bear
market” a buying opportunity. The price is lower, the stock’s on sale. The
Nasdaq Composite Index and S&P 500 Index, 1999-2003
reasons for a price decline can be serious; lower earnings or estimates are
predicted, credit ratings are lowered, or a possible lawsuit or tax problem
has developed. The reason for a price decline might not be so serious:
market correction, profit taking, employee stock distribution, or no newsrelated
reason at all. Whatever the reason for a stock price move, it can be
worthwhile to find out why it is moving before investing.
Information about a stock in question can be obtained from the news
media, the Internet, or by calling the company directly. Calling the company
might be difficult if hundreds of other investors are trying to do the
same thing. Often calling the stockbroker or checking a news service on a
computer will provide the answer. Learning why a stock is declining in
price can enable the investor to form a strategy of buy, hold, or sell.

STOCK MARKET RULES

CONTINUED..........................

Get Information Before You Invest, Not After

Most of the complicated aspects of our lives could be improved by gathering
information before taking action. Asking why and digging deeper
for information is an inconvenience because it calls for analysis, thought,
and the formation of a conclusion. These activities take time and energy,
and they can often lead to confusion and frustration. To avoid these problems,
we mainly depend on the wisdom of others or adopt a shoot-fromthe-
hip approach to investing.
Depending entirely on the wisdom of others or shooting from the hip
can lead to many misunderstandings. Misunderstandings cause bad timing
and poor strategies. Investment advice can be helpful, but it can be even
more useful as a point of reference, a second opinion, rather than being
accepted as the only approach.
In the stock market, the odds of doing well are improved for the
investor who becomes familiar with the current action of the market and
the particular stock of interest. Becoming familiar with the action can be
accomplished by asking why: Why is the market making this move? Why
is the stock an attractive purchase now?

MARKET MOVES

The stock market is a continuous auction, with the same product being
bought and sold every business day. If there are more buyers than sellers,
the market and prices of individual stocks rise. If there are more sellers
than buyers, prices fall. It’s that simple.
But if it’s so simple, then why does it seem so complicated? Why are
all these investors buying and selling stock? If they’re investors, shouldn’t
they all be buying and holding stock for its investment value? Why are
people surprised when the stock market drops a few hundred points? Does
a severe market correction mean the economy will take a nosedive? The
newscasters always say the stock market forecasts the economic situation
six months to a year away. So what gives?
Anticipation
The most important fact to remember is that the stock market always
trades in anticipation of future events. Often, investors are looking ahead
six to 12 months, but (and here’s the kicker) not always. If the Dow
Industrial Average is down 50 points or more, the major, professional
investors couldn’t care less about what might happen in six to 12 months.
They are concerned only with what might happen in the more immediate
future, that being the next 10 minutes. The faster the market drops, the
shorter their focus becomes. The believers of doom and gloom busily pat
themselves on the back for being correct, and those who know better take
a more moderate stance. Thankfully, it usually takes more than an overcorrection
in the market to cause an economic recession.
Real, Imagined, and Fabricated Factors
A real factor motivating stock market buyers or sellers is money—specifically,
the availability of money. Money availability, as it changes with a
movement of the interest rates or the earnings of corporations.
An imagined factor can be the respected opinion of an economist or
market analyst as to the current strength or weakness of the stock market.
A fabricated factor is the merciless hammering of computerized sell
programs. The sells are often implemented with the intent of testing market
strength by pushing the market down as far as possible. “As far as possible”
is a point that is reached when buyers enter the scene and stop the decline;
that point is called support.
On June 2, 2001, these factors came into play and made a turn in the
Primary Trend of the Dow Industrial Average and other major indexes.
The Dow dropped 3,101 points before reaching support and starting the
recovery. It did a retracement to the 10,635 level, turned and started down
again, this time dropping to the 7,423 point level

TO BE CONTINUED.............................

STOCK MARKET RULES

Research

To say that research is important to investing is like saying air is important
to breathing. The strange thing is that research is often overlooked by
the amateur and the professional alike. Instead they look for today’s
action. What’s moving? Where’s it going?
Ideally, the investor knows ahead of time what’s likely to be moving,
where’s it going, and why. To have a relatively small group of stocks that
one follows well is both wise and often fruitful. If following the group is
not fruitful, change the makeup. Find different stocks to follow.
Getting the basic information before the investment is made can do
absolute wonders for saving the investor money. A sudden price increase
should never be the only reason to buy a stock. An increase in either price
or volume might call your attention to a particular company, but also get
the background on what’s happening.
In recent times one only need look at the fortunes of WorldCom or
Enron to see the disaster that can befall an investor who has little or no
understanding of a company. There are still people who got burned on
both of these stocks who have very little knowledge of what the companies
did and what happened to them.
Do the research before you invest, not after.

Sebi cuts rights issue time, mum on P-notes

There was a lot of hype around Wednesday's board meeting of the Securities and Exchange Board of India (Sebi). There was expectation that the market regulator would take a hard look at foreign funds' dealings in participatory notes (P-Notes), especially relating to shortselling backed by borrowed stocks. But except reducing the time period for rights issue, Sebi did not take any other major decision in the board meeting.
Regulator boss C B Bhave said the board discussed some issues relating to PNotes, but didn't take any decision on the same. Sebi was expected to extend its 18month deadline for unwinding of P-notes on derivatives which were banned last October. Sebi didn't announce any decision on this front too.
Sebi said the time taken to complete a rights issue would be reduced drastically to 43 days from 109 days now. ‘‘The reduction in the time period would reduce the market risk faced by investors and issuers and would ensure faster turnaround of money for investors,'' Bhave told reporters.

NSE adds 39 scrips for F&O trading

ECONOMIC TIMES

The inclusion of 39 scrips for trade in the futures and options by the National Stock Exchange with effect from August 21 sparked a sharp rally in their share prices Wednesday even as the rest of the market remained subdued tracking weak global cues. The likes of ABG Shipyard (10.62%), GTL Infrastructure (6.66%), SREI Infrastructure Finance (7.17%), GVK Power and Infrastructure (7.22%), UCO Bank (7.69%) and Akruti City (6%) notched up significant gains. Indiabulls Real Estate (3.6%), PTC India (4.97%), Sintex Industries (3.96%), Asian Paints (2.72%), TV18 India (1.32%) and Thermax (1.53%) are also part of the list. These scrips, being components of the second rung universe, sent the BSE Midcap and Smallcap indices up 0.97 per cent and 0.49 per cent higher. On the other hand, the Bombay Stock Exchange's Sensex was down 0.15 per cent at 15,189.96 and National Stock Exchange's Nifty shed 0.34 per cent to 4536.90.

SEBI okays NSE's plan for currency trading

India's first exchange for trading in foreign currency derivatives is likely to go live on the NSE's platform. NSE, the country’s largest stock exchange by volumes, on Tuesday got an in-principle approval from the Securities and Exchange Board of India (SEBI) to start an exchange to trade foreign currency derivatives, sources said. According to plans, NSE will have a separate segment on its existing stock and derivatives bourse to trade in forex derivatives. It would also use its clearing corporation to settle the trades on the new segment. “It’s not only the NSE brokers, most of the large and medium sized banks have been very supportive in NSE’s endeavour to start a currency exchange,’’ a source said. “They will get another asset class to invest in,’’ the source added.
Last week RBI, the banking regulator, along with stock market regulator SEBI, had made public the rules that would govern currency derivatives exchanges in the country. Soon after three bourses-NSE, Multi Commodities Exchange (MCX), the largest commodities trading bourse in the country, and Bombay Stock Exchange (BSE), the oldest stock exchange in Asia-had jumped into the fray to start forex exchanges. Over the last few weeks, both NSE and MCX, had been conducting awareness programmes among probable market participants for a currency trading platform. When a forex derivatives trading platform goes live, Indian investors would also get newer forex trading and hedging products, industry players said. At present, in the forex trading space, market participants have the option of either trading in spot or the forward contracts. To start with, RBI-Sebi combine has allowed futures contracts in rupee-dollar contracts. The roadmap is to launch contracts on other currencies post the initial trading phase.

Courtesy: Times of India