Stock Futures : Performance Statistics For June 2010

In the month of June 2010, six trades of Stock Futures were executed as per recommendations given by me at http://www.stockezy.com/ All the six trades were 'Buy' ie long trades. Of these six trades, two trades have been rolled over from June series to July series and are still open. These are Aban Offshore and Suzlon Futures. For the rest of the four trades, I am furnishing the details below:-

1. Tata Comm June Futures :
   Bought at 247.5 and covered at 264. Lot size = 525.
   Investment = Rs 26000/-.
   Profit = 16.5x525= Rs 8862/-.
   Return on Investment = 34%
2. HDIL June Futures :
   Bought at 228 and covered at 235.5. Lot size = 774.
   Investment = Rs 36000/-.
   Profit = 7.5x774= Rs 5805/-.
   Return on Investment = 16.1%
3. Punj Lloyd June Futures :
   Bought at 118.4 and covered at 121.5. Lot size = 1500.
   Investment = Rs 36000/-.
   Profit = 3.1x1500= Rs 4650/-.
   Return on Investment = 12.9%
4. Bajaj Hind June Futures :
   Bought at 116 and covered at 118. Lot size = 2000.
   Investment = Rs 46000/-.
   Profit = 2x2000= Rs 4000/-.Return on Investment = 8.7%

Thus total profit in June 2010 from trading stock futures = 8862+5805+4650+4000 = Rs 23317/-
against total investment of Rs 1,44,000/-.

Monthly Return on Investment = 16.2%

Power of Stock Futures On Lean Trading Days

5th of July 2010. It was one of the most tiring days in trade. There was hardly any movement in global indices, and Indian markets were no exception. Primary reason for weak trading volumes today was the fact that traders stayed on the sidelines ahead of  US Independence Day holiday. All markets were looking for direction to trade, be it Asian markets or European markets.

As for Indian markets, there was an added baggage of nation-wide Bundh call by opposition parties. With means of transport getting badly effected, there was hardly any trading volume on the bourses as traders stayed away. For the entire day Nifty traded in a super tight range of 27 points with day high of 5253 and low of 5226. For day traders, how much more boring than this can things get?

However if you were trading Stock Futures, even such a boring day can be rewarding. The reason is simple- the power of leverage, as explained in my last post on 04July2010 titled "Power of Trading Stock Futures : Bajaj Hindustan". To clarify the point , allow me to highlight the following trades which I had recommended to members at http://www.stockezy.com/   :-

1. Tech Mahindra July Futures : One lot was bought at 736 on last trading session, ie 02July2010. Today the scrip reached the recommended target of 760, thereby giving profit of Rs 24/- per share. Since the lot size is 250, total profit = 24x250= Rs 6000/- against an investment of Rs 37000/-. Thus return on investment in two trading sessions = 16.2%.
2. Balrampur Chini July Futures: In last trading session, one lot of Balrampur Chini July Futures was also bought at 84.1 with a target of 84.45. Today in first half hour of trading the scrip achieved its target price, thereby giving a profit of Rs 1.35 per share. The lot size being 4000, this position attained total profit = 1.35x4000= Rs 5400/- against an investment of Rs 67000/-. Thus return on investment in two trading sessions = 8%.

Hence from two positions with total investment of  Rs 104000/- (67000+37000), total profit obtained was Rs 11400/-(6000+5400). This translates to a return of 11%  in two trading sessions. Remember today was a lean trading day, but the power of leverage in Stock Futures can make any trading day rewarding.

Power of Trading Stock Futures : Bajaj Hindustan

While trading Stock Futures, one has to constantly keep in mind the power it generates in terms of leverage. Its return on investment is five times that of trading in cash segment. And with this power you can rotate your money faster for further leveraging effect. When the markets are moving sideways trading in stock futures can be very rewarding. Case in point is that of Bajaj Hindustan. The recommendation to buy Bajaj Hindustan Futures was posted by me at http://www.stockezy.com/

Bajaj Hindustan June Futures was bought on 16 June 2010 at 116 for a target of 121, as per my recommendation posted. The scrip was chosen for Futures trade because all Technical parameters were giving strong buy signal. However Fundamental reasons for entering into sugar sector in general and Bajaj  Hindustan in particular were as follows:-

1.  On 14 June 2010 Indian Government had approved rise in levy sugar prices paid to mills by Rs 4/-. This would help market sentiments to improve as it signals that the prices could be higher than what they were.
2. Global sugar prices were rising.
3. Bajaj Hindustan was to merge it subsidiary - Bajaj Hindustan Sugar. This move would strengthen Bajaj Hindustan's position in Indian Sugar Sector through rationalization of operations, resulting in enhanced production, better profitability and stronger competitive edge.

The position was rolled over to July series as the target was not met. On the first day of July series Bajaj Hindustan surged past 121. I had then recommended to hold the stock for enhanced target of  127 which was later revised to 130. In this position I had recommended a trailing stop loss of 118. However the stock reached a high of 121.7 but met with trailing stop loss of 118 on 29June 2010. In this manner we could protect our profit in a very volatile market. Profit made was Rs2/- per share and since the lot size is 2000, the total profit was Rs 4000/- against an investment of Rs 46000/-.

Again on 30June2010, one lot of Bajaj Hindustan July Futures was bought at 116.75. Next day this position was squared off at 119. This provided a profit of Rs 2.75/- per share  and total profit from one lot of 2000 shares worked out to be Rs 5500/-.

Further on 01 July2010 one lot of Bajaj Hindustan was again bought at 116.8 and covered on 02July2010 at 118.5. This gave a profit of Rs 1.7/- per share and total profit of Rs 3400/- from one lot.

Thus by rotating our capital we could make a total profit of Rs 4000+5500+3400 = Rs 12900/- against capital investment of Rs 46000/-. That is equivalent to a return of 28% in two weeks.

Comparison With Cash Segment
Now for some comparison of Futures trading with Cash market trading. If we had bought Bajaj Hindustan in cash segment with capital investment of Rs 46000/- and at buy price of 116, we would have bought 396 shares. With a profit of Rs 2/- per share we would have made a profit of Rs 2x396= Rs 792/-. Instead ,by trading in Futures, we made a profit of Rs 4000/- with the same capital and at same buy and sell prices. This is the power of leverage acting on Futures trading which gave us a profit multiplication of five times over cash trading.

Now if you make a profit of Rs 792/- in delivery based trading , you will not like to exit your position because most of this profit will evaporate in giving brokerage. But with brokerage being one tenth in Futures trading in comparison to cash trading, you will not mind exiting your position with a profit of Rs 4000/-. And that is why we could rotate our capital of Rs 46000/- to make a total profit of Rs 12900/- with a return of  28% in two weeks. This quick money rotation would not have been possible in cash segment trading.

Thus we have seen the power of Futures trading in terms of leverage and capital rotation.

Sovereign Debt Default : Price To Pay For Sub Prime Crisis

Sub Prime crisis seems to be a thing of the past. People are now grappling with Sovereign Debt Default crisis in Europe. Investors are accusing European countries for bringing about gloom and doom in the financial world. But what has caused such deplorable financial condition of European nations, a sphere where everything was hunky dory just a couple of years back? As was the general perception then, conditions in European Union was one of growth and prosperity. As per IMF estimates of 2008 GDP and purchasing power parity among various currencies, the Eurozone was the second largest economy of the world. It was a place which was touted to be making a bipolar world with aspirations of giving a countervailing effect to the financial clout of USA. In fact the Euro was deemed to be the next dollar in the coming years, slowly and steadily replacing the dollar in international trade. Central Banks of many countries were increasing their exposure to Euro as their reserve currency. So much so that in 2007 former US Federal Reserve Chairman Alan Greenspan opined  " it is absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency". Strong opinion that! But then what happened suddenly within a span of two years that Euro has lost all its sheen? Today Eurozone bonds are hurtling towards acquiring junk bond ratings as many European nations are staring at the spectre of being declared insolvent.

How has this sudden capitulation taken place in such strong and vibrant economies? Why Europe, even US is reeling under the pressure of mounting debt. On 30 June 2010, the Congressional Budget Office(CBO) in US predicted that US debt will reach 62% of GDP by year end, which happens to be the highest percentage since just after World War II. Further, China happens to be the biggest creditor to US and also has huge exposure to Euro in its reserve. So you see, with every crisis of US and Europe in terms of debt servicing, China will be wincing in pain. Many South Asian economies will do the same since their economies in turn are China-centric. In other words Asia will be in pain whenever Europe and US feel the heat of sovereign debt default. As for African nations, most of them are already so badly managed economies that they figure in the Forbes list of top ten worst economies of the world. Since they depend on US and its financial organizations giving aid in some form or the other, Africa also will be under the weather with US economy in spot. That leaves us with South American nations. Well most of those economies are fully dependent on trade with US and hence will be effected too, if US is forced to go through austerity drive to curtail its fiscal challenge. In short, the entire world is under threat of an impending economic crisis.

But our central question still remains unanswered. How has this catastrophic situation come about? What has triggered this avalanche of economic woes upon affluent nations? In quest of an answer let us proceed step by step in the following direction :-

• The US sub prime crisis had morphed into global credit crisis of epic proportions. As we had seen in my last post on 12th June 2010 titled "Wall Street Shenanigans - Is Iconic Brand US Under Threat?", billions of dollars had been lost by global financial institutions in the wake of sub prime crisis. Every financial institution worth its name was on the verge of being bankrupt.
• These financial institutions were the backbone of every nation and this backbone was under threat of being broken. That is when Governments had to step in to save these financial institutions. It was a rare display of synchronized actions taken by all nations as they pumped in billions of dollars to save their terminally ill financial institutions. Such heavy injection of steroids(bailout money) is being popularly referred to as "Stimulus Package".
• This unified stand taken by all nations speak of the severity of  threat of annihilation, since politics of nations has never before allowed the world to be united on any single issue. But this time was an exception, a time to unite for survival. On 28Mar2009 in a post titled " Aftermath of Global Slowdown"   I had emphasized that for the leaders of G20 nations, meeting on 02Apr2009, it was their last chance to steer the world away from global catastrophe. And this time leaders of 20 most powerful nations united to deliver what is now popularly known as "Stimulus Package".
• Apart from many actions which increased liquidity, Governments across the globe injected money to bail out their financial institutions who had lost billions to the machinations of Wall Street investment banks.
• This bailout money eroded the coffers of nations making them credit unworthy. Injection of bailout money to save financial institutions at that point was unavoidable, but then measures should have been taken to ensure that this money was used for activities that kickstart economic revival. Instead billions of dollars again ended up in the kitty of people who planned and executed sub prime crisis in the first place. Take the example of AIG taking US tax payers' money as bailout to the tune of $182 billion and immediately paying off counterparties like Goldman Sachs and other Wall Street banks at 100% on the dollar. No negotiations?? Joseph Cassano, former head of AIG's derivatives unit, appearing before Financial Crisis Inquiry Commission, said he could have saved tax payers billions of dollars by negotiating harder with banks. Are the American tax payers paying attention?
• So instead of reviving the economy with activities which create jobs, these billions of dollars of stimulus money were siphoned off  to people who have again used it for more speculative purposes like dollar carry trade. To read more on dollar carry trade do look up my post on 27Nov2009 titled "Dollar Carry Trade - Easy Money in Difficult Times".
• With no revenue generation activities and empty coffers of nations, time had to come when debt servicing and debt repayment by nations was to become difficult. And that time has now come upon the world in the form of impending Sovereign Debt Default. To get a grasp on the implications of Sovereign debt default it is recommended that you visit my post of 18Dec2009 titled "Sovereign Debt Default Scare - Is Dubai Too Big To Fail?".

From April 2009 till date we have witnessed stimulus induced growth in all markets across the globe. That is artificial recovery and has no fundamental moorings. Nothing has changed on ground as far as growth parameters of nations are concerned. Take the latest US Jobs Report for instance. Last Friday the US unemployment data showed that the nonfarm payrolls fell by 125000 in June 2010. Economic activity is just not picking up in US and hence new jobs are not being created. If new jobs are not created then consumption will fall. Consumption falls then inventories increase and so production activities have to be curtailed. Decreased production requires even less jobs and inspires further fall in consumption. Hence we go into a vicious cycle in which you can imagine what happens to the economy.

Stimulus Induced Growth that we have seen for the last one and half year is at its end. Having taken not enough measures to induce structural economic growth, US is on the path of double dip recession. And history tells us that the Great Depression of 1929 got prolonged for similar reasons. You can get more details on stimulus packages in my post of 17Jan2010 titled "Stimulus Induced Growth - Is It Global Recovery On Steroids". At this stage it is judicious to remember that earlier World Wars were basically fought not for ideological or emotional reasons but for economic reasons, sparked by trade wars. I hope the world leaders are listening.

Wall Street Shenanigans - Is Iconic Brand USA Under Threat?

Breach of trust. Isn't that a culpable crime in financial world? How will you feel when your most trusted financial advisor, the one you even played golf with, was to commit breach of trust in order to swindle billions of dollars from you? Further, how would you feel if you happen to be the conscientious fund manager of a large Pension Fund on whom rests the onerous responsibility of ensuring that thousands of Pensioners have a respectable old age through timely pension? For a minute jump into the shoes of such a Pension Fund Manager and then tell me if  breach of trust is not a crime.

That is exactly what happened in the making of Sub Prime Crisis. Investment   bankers of Wall Street inflicted total breach of trust upon unsuspecting Institutional Investors and High Net worth Individuals(HNIs). This is becoming evident from the slew of court cases popping up against Goldman Sachs, the most venerable Investment Bank of Wall Street operating for the last 140 years. In global investment circles, Goldman Sachs' word in the final word on financial investment. And why shouldn't it be? Former employees of Goldman Sachs have headed World Bank, US Treasury Department, New York Stock Exchange, White House Staff, and financial giants like Citigroup and Merrill Lynch. Some such luminaries in recent times are Robert Rubin and Henry Paulson, who were United States Secretary of the Treasury under Bill Clinton and George W Bush respectively.

Here we realize that we are talking of an all powerful global Investment Bank with some very influential links. It is so powerful that in 1995 Robert Rubin, as US Treasury Secretary, could enforce bailout of Mexican Bonds with US taxpayers'  money worth $20 billion. Reason : Goldman Sachs had huge exposure to bonds issued by Mexican Government and Mexico was in economic crisis which threatened to wipe out the value of these bonds. And also remember that Robert Rubin was a former employee of Goldman Sachs, managing  its Mexican investments. So the point is, when Goldman Sachs gives financial investment advice institutional investors around the world take action in accordance. It was this very faith which was smothered by Goldman Sachs, thereby morphing the sub prime crisis into a credit crisis of  magnitude unparalleled since the Great Depression of 1929.

As the plot unravels, deals of Goldman Sachs are continuously tumbling out of cupboard like the proverbial skeletons. From 2004 to 2008 Goldman sold 25 toxic mortgage based Collateralized Debt Obligations(CDO) products labelled Abacus. They even pressured Moody's to rate these products higher. These deals were worth billions and Tetsuya Ishikawa was one of the Goldman investment bankers who was involved in these deals. He later published a book titled " How I Caused the Credit Crunch". However Securities and Exchange Commission (SEC), the regulatory body of markets in US, later sued Goldman Sachs and one of its employees Fabrice Tourre in April 2010. SEC alleged that Goldman sold Abacus 2007-AC 1(a synthetic CDO product of Abacus series) by misrepresenting facts to its investors. It allowed a hedge fund, named Paulson & Co., to select underlying mortgages, which Paulson was shorting, into this synthetic CDO. In this manner Paulson made $ 1 billion in profit from shorting and investors in this Abacus deal lost the same amount. On 30 April 2010 a criminal probe has been launched into Goldman Sachs by Manhattan office of US Attorney General.

SEC is now probing a second Goldman CDO called Hudson Mezannine 2006-1. It underwrote this CDO and itself was the only short investor on all the assets worth $ 2 billion tied to the CDO. Honesty is such a orphaned word!! Last week Basis Capital, an Australian Hedge Fund, sued Goldman Sachs for $1 billion alleging that it fraudulently sold bits of toxic assets in the form of CDO called Timberwolfe-1, while itself shorting the market. When the CDO eventually collapsed with the US housing market, Basis Capital had to shut shop.

Goldman is also in the eye of the storm regarding controversial American International Group(AIG) bailout with $182 billion of taxpayers' money by US Federal Reserves in September 2008. AIG is a massive insurance corporation with almost all global banks having insurance exposure to it. It is alleged that Goldman Sachs engineered the bailout with its lobbying muscles and links inside the Federal Reserves. It is reported that AIG bailout money has finally gone into Wall Street investment banks like Goldman Sachs with overpayment. New York State Attorney General announced on March 2009 that he was investigating whether AIG counterparties improperly received Government money.

Then there is this skeleton of Goldman Sachs having created the recent European Sovereign Debt Default crisis. It is reported that from 1998 to 2009 Goldman has been systematically helping the Greek Government to help mask facts about its true national debt. Then in September 2009 it created a special Credit Default Swap(CDS) index for cover of high risk national debt of Greece. The Greek national bond prices fell drastically, making it difficult for Greece to raise further funds thereby leading the economy to near bankruptcy.

Let us not get carried away by the wrong notion that only Goldman Sachs is to be blamed. What Goldman Sachs did, other Investment Banks on Wall Street also did the same. Take the court cases piling up against Merrill Lynch  where the stories sound exactly similar to those of Goldman Sachs' cases, albeit with different name. One case filed by Rabobank against Merrill Lynch is so similar to Goldman's Abacus case that it is quite unnerving. It is because the entire Investment Bank community on Wall Street was practising what by then had become glorified business of daylight robbery in the garb of global investment opportunities in housing market of Brand USA. Imagine devastating plots being hatched by coterie of investment bankers in smoke-filled-cellars of Wall Street, plots which crippled the financial world and is now ready to take down nations with debt burden.

What is most disturbing in all this is that breach of trust is not being given due importance. No one has been found guilty so far in any meaningful way and hence no one has been sufficiently punished. As I mentioned in my last post of 6th June 2010 titled " Isn't It Anymore Immoral to Loot!- Oh Wall Street Ethics", derivatives is a zero sum game. If trillion dollars have been lost collectively in sub prime crisis by vast majority of global investors, then there will be a handful  who would have gained trillion dollars. Track down these few heroes and investigate their dealings and links with  Wall Street Investment Banks and you will get your answer. Although some investigations are directed towards that but they are yet to bear any fruit. A global crisis which could propel a German billionaire to commit suicide is no mean crisis. What US has build painstakingly as  iconic Brand America over decades is at a risk of being diluted, if not lost, just because Wall Street honchos cannot control their excessive greed. Breach of Trust can have a telling effect on pecking order of financial world , so what if it gets unnoticed in courtroom battles.

In the next post we shall scrutinize the role of nations in pumping steroids into  their respective economies hit by the tsunami of credit crisis. Commonly known as stimulus packages, we will dwell on the fallout of such steroids.