2012: Enter the Dragon
The S&P 500 index ended 2011 relatively unchanged despite a year of high volatility driven by the European Sovereign Debt Crisis and the pertinent risk of double dip recession. During the year, the markets witnessed the major impacts of the Arab Spring, Japanese earthquake, downgrade of the US credit rating and the risk of a Eurozone country defaulting on its debt obligations – none of which were ‘predicted’ by Wall Street analysts in the beginning of the year.
The future is a lot harder to predict than Wall Street would have us believe in. As Nassim Taleb remarked, “To prophesize, don’t add anything to the future; just figure out and eliminate what will not survive.” This Popperian view that all investment hypotheses are provisionally accepted until proven wrong may not seem comforting to investors. Nonetheless, it has not stopped the influx of money flowing into hedge funds.
Hedge funds on average lost 4.83% in 2011 despite amassing a record $2.04 trillion in total capital under management in the first quarter of 2011. The industry – which caters to wealthy and institutional investors chasing higher returns for bigger fees – appears to be licking its wounds as fund managers finished the year in the red. The hedge fund industry which prides itself on outperforming the market has failed to live up to expectations and delivered one of their worst annual performances last year. As 2012 – the year of the black Dragon according to Chinese Zodiac – rolls on, can the industry reverse its fortunes?
To read my interview with David Rosier CEO and co-founder of Thurleigh Investment Managers click here
Book Review: My Life as a Quant: Reflections on Physics and Finance
Written by Emanuel Derman – physicist and ex-Goldman quant. Combines my love for physics and finance. One of the best books I’ve read in a long time. First half of the book covers his life as a physicist at Columbia, Oxford, and Bell Labs. He talks about various luminaries and Nobel prize winners he worked with or came across during his first reincarnation as a physicist . Excellent for those interested in physics and in search for the ultimate ‘truth’.
Emanuel Derman was head of Quantitative Strategies at Goldman and also spent time at the now infamous Salomon Brothers. He describes his work with Fisher Black (yup, THE Fisher Black of the Black-Scholes model) at Goldman and the famed John Meriwether’s bond arb group at Salomon.
First half of the book is physics heavy whilst the second half focuses on one of the most interesting times in finance where academics emigrated into Wall Street as quants in the 80s. As an arm chair physicist, and currently working in finance, I thoroughly enjoyed this book.
I particularly like the part where he wrote :
“I began to believe it was possible to apply the methods of physics successfully to economics and finance, perhaps even to build a grand unified theory of securities.
After twenty years on Wall Street I’m a disbeliever. The similarity of physics and finance lies more in their syntax than their semantics. In physics you’re playing against God, and He doesn’t change His laws very often. In finance you’re playing against God’s creatures, agents who value assets based on their ephemeral opinions. The truth therefore is that there is no grand unified theory of everything in finance. There are only models of specific things.”
Perhaps he is my role model – Finance is means to an end, not the end.
Derman is currently Professor at Columbia University and Director of its Financial Engineering Program
Zynga IPO to raise $1 billion dollars
Games maker Zynga is hoping to raise $1 billion in tough market conditions with an IPO price of $8.50 – $10 – giving it a valuation of $7 billion. Zynga is offfering 14% of its float or 100 million shares which is higher than most tech companies.
Lead underwriters Morgan Stanley and Goldman Sachs have an additional option to sell 15 million shares. Like Groupon and LNKD, I expect downward pressure on the price when the cost of shorting becomes feasible. If you are one of the lucky fews who got in early through private placement it may be time to cash out!
Worth noting that a fund raising in February this year valued the company at $10 billion.
I cannot for the life of me understand why would any ‘ethical’ investor invest in a company which generates the bulk of its profits from the sale of virtual goods. (We are NOT talking e-commerce here) Does it play a socially benefiting role?? We need more clean teah or bio tech!!! . Game makers like Rockstar which makes the highly successful Grand Theft Auto series actually make money from selling games! Virtual goods is on another level! How productive?
Retail investors should ask themselves: “Can I live in my virtual farm in Farmville when Fannie Mae repossess my home??!?”
For a copy of their IPO prospectus click on the link below:
Commodities Investing: Demand, Supply and Speculation
First published on BBeyond Magazine blog – an ultra niche publisher that caters exclusively for the global UNHW market and community: http://bbpublications.org/BBblogs/commodities-investing-demand-supply-and-speculation/
An unsophisticated forecaster uses statistics as a drunken man uses lamp-posts -
for support rather than for illumination.
– Andrew Lang
The price of a commodity is determined by demand and supply. At least that is what most of us are taught in ‘Economics 101’. The relationship between supply and demand forms the cornerstone of economic models. The most fundamental concept in economics – price – is therefore, a reflection of supply and demand. Or is it? Ask anyone who has traded Brent Crude or Light Sweet Crude (WTI) oil contracts and they will tell you the oil market is driven as much by speculation and momentum, as it is by demand and supply. To put it in perspective, the CFTC (Commodity Futures Trading Commission) recently revealed that almost 95% of US crude oil futures volume is generated by day trading and OPEC president Mohammad Aliabadi noted futures contract trade an astonishing 18 times higher than the volume of daily traded physical crude.
The world’s population currently stands at 6.93 billion (and counting). It is expected to surpass 9 billion by 2050. As such, there has been a lot of brouhaha about our capacity to accommodate the rising demand. The rise of emerging economies like BRIC (Brazil, Russia, India, China) has pushed the prices of commodities the new highs. In the post 2007 credit crunch economic climate, despite the possibility of prolonged spells of slow growth in the developed world, demand is expected to be robust. Chinese GDP per capita alone more than doubled from $3600 in 2001 to $7600 in 2011 and is forecast to surpass $12,000 by 2016. This is a large demand explosion and the question is: How quickly can supply response to that? The prices of commodities will thus be determined using supply-side fundamentals.
In India, 60% of farmers’ produce spoils before it reaches the market. The problem therefore is not supply per se, but infrastructure (which constricts the supply chain). New technologies can lower production costs while increasing the supply of the commodity. A technology is classified as ‘disruptive’ when it significantly lowers the supply-demand equilibrium price while it simultaneously causes a surge in production capacity. For example, the natural gas market was hit by a disruptive technology in the form of horizontal drilling. Each horizontal rig can surge production by 5-10x the previous capability of vertically drilled wells. In the past, natural gas needed to trade near $6 – $7 per mmbtu (million British thermal unit) to encourage new production. Now natural gas in expected to remain under $5.50 per mmbtu for the foreseeable future. The key to successful commodities investing is to spot these disruptive technologies in the wings.
The ideas in this blog post stem from a panel discussion on Commodities Investing the author recently attended at JP Morgan, London. The event was sponsored by the Chartered Alternative Investment Analyst Association.
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What’s happening in my world
- Kenny Urges Ireland to Back EU Treaty May 27, 2012Ireland's Prime Minister Enda Kenny used a nationally televised speech Sunday to urge voters to endorse the European Union's fiscal treaty.
- Greek Conservatives Take Poll Lead May 28, 2012Greece's conservatives are in first place ahead of next month's election, according to four separate polls, with the gap over the radical leftist Syriza party ranging from 1.3% to 5.7%.
- Spain Bails Out Its Third-Largest Bank May 27, 2012Spain will pump $24 billion into troubled lender Bankia, effectively nationalizing the country's third-largest bank in a dramatic effort to assuage concerns about the stability of its financial sector.
- Swiss Look at Capital Controls May 27, 2012Switzerland may introduce capital controls to fight a sharp rise in the Swiss franc in the event of a euro-zone collapse.
- Brewers Quench Thirst for Steady Returns May 28, 2012Market Focus: Global beer companies, with their diversified portfolios of branded drinks across both developed and emerging economies, are well-placed to weather regional economic downturns.
- Dollar's Path to Be Guided by Jobs Report, Greece May 27, 2012Two issues will likely dictate the direction of the U.S. dollar this week: the continuing euro-zone crisis, including rumbles about a Greek exit, and Friday's U.S. employment report.
