Equity Trading at Discount in Future Market

On last Thursday you asked me one good question related to future price. On That day I could not answer  your question properly. 

I realized it on this weekend that probably my ans was not up to the standard, because of my concentration on other work .
 
I have tried to ans your question as below in some logical way. I have taken example of three instruments ( Commodities, Index future and particular stock).
I hope this will be proper ans to your question. Please let me know if I have missed to cover any points. All the below given points are just based on my little knowledge and little experience, Please give your thought if you agree with my view.

Your question was that weather any particular stock is sold out at discount in Future market?

Basic View -- As we know that future is a derivative instrument which derive values from underlying instrument. And it is a mechanism to discover the equilibrium price in the market for the underlying instrument. Trader by investing in the derivative market try to earn super - normal profit. But as economics says that no person will be able to earn super-normal profit all the time if flow of information is very fast ( Theory of Market Efficiency).

that underlying instrument can be any thing ( Stock, Bond, Currency and commodities and now some fine art as well in some market).

Theoretically Future price can be in any direction either it can be traded at more than current market price or less than the current market price.

but again it depends on the certain economic factor as well as some behavioral  sentiment of the investor.

It also varies from one underlying instrument to other underlying instrument of the future trade.

As for example commodity - We normally see future traded at higher than current market price or lower than current market price, because normally trader and investors are able do find out the particular trend in the market by looking at the certain pattern and also they are able to analyze supply and demand in the market for the particular commodity.

For an example - Price of Metal, Gold or Silver (As we all know, that supply of these natural resources are in ltd). Investor or trader try to predict the market by looking at the historical pattern and they try to find out that if it is currently overvalued or undervalued in the short run market. And than they quote the price of the product in the future market ( As we know that economics says that in the long run every thing will come down to its potential value, or its  intrinsic value). It is also assumed that in the long run there will be equilibrium in the market.

For Agriculture product - for agriculture products, it is easy to determine the supply and demand of particular product in particular season ( As Aggregate supply and aggregate Demand of country). In India like country, where most of the agricultural production are based on the natural rains and other natural factors of production, So Investor or traders are able to identify that what will be the price of the product in future and they set price accordingly.

Conclusion - Based on the above explanation of commodity future, we can say that future price of commodity can be in either direction, But as per the human nature people want more and it give more satisfaction to human when they see price rising ( Even if, they make equal or more amount of profit at the time of price falling). So if we analyze the commodity future market we will find that difference between the no of time product is being sold out at premium or at discount will be less in agricultural product.

Index Future - As we know that index is the representation of any group of the underlying stock, and it is the Indication of momentum in all those underlying stocks as a whole ( Depending on the nature of index - Price weighted index, Equal Weighted Index and Market cap Index.)

In India we have market cap index for example, Sensex and Nifty.

As we also know that stock Index is assumed as Barometer of any economy. So that also reflect while pricing the Index in future market. For example, if, traders and investors are able to predict the GDP Growth rate of the National economy and International economy so that reflect in the pricing of Index future, Because it is assumed that both will go in similar direction. 

Also Pricing of Index future depends on the Industrial production in that period and the expenditure pattern in the economy. and of course, saving and investment rate plays a vital role while setting the price. 

Also trader try to find the particular trend in the market and while doing the technical analysis and above fundamental economic price.

So whenever any economic reform is announced by government (Keynesian Thought), in the market we see that future index price is traded at premium, We also see the impact of monetary policy on index future when RBI increases liquidity in market or decreases liquidity leval in economy ( Increase in CRR or decrease in CRR Modern economic thought).

Conclusion - 

Here also we can conclude that theoretically price of the Index future can be in either direction. But most of the market participants wants to earn the super normal profits so they always try to look for the positive sign so we see that most of the time Nifty future traded at premium. But yes there are situation when we see that Index future is traded at discount but % index future trading at discount will be less.


STOCK FUTURE ------- 

As per my understanding pricing of particular stock depends on many fundamental factors such as production leval of company, product life cyle of company, revenue growth rate of the company, ETC,,,,,,,,.

But question comes why should I invest in particular company stock. - I will invest by expecting good return from that company than its Peer groups. Or I expect that company will be able to generate Alpha for me. Or company has good potential of growth, Or company has good track record. Or many other reason.

Since Insider trading is not allowed, it is very difficult to price stock in the future market. 

As normally we see that company try to release positive news more faster and try to hide the negative news of the company.

Since positive news comes faster so particular companies stock is traded at premium in future market all most 90% of the time, ( By assuming that growth rate of the GDP is constant and industry out put is also constant).

In Intra-day it can be in either direction.

But again it varies from industry to industry  for example if particular company is in FMCG Industry or pharmaceutical industry price of the stock will be almost constant and growth rate of stock will be also constant. So we will never see any FMCG Stock traded at discount in future market.

If stock is of any real state company - it is seen that stock of that company is traded at discount , because it easy to predict the growth of the company.

If stock has more market can in the Index like Reliance industry. In that case future price of the stock will be almost near the future price of that index future.

Normally we see that Reliance and Sensex move in similar direction.

Conclusion - As a conclusion we can say that stock can be traded at discount in future market but chances of trading at discount is very less. Because normally people try to invest in those company where they can out - bit the market, and where they can earn the super - normal profit.

As flow of insider information is not fast so prediction is hard. 

At last I can say that every thing is possible in market, but probability is less of stock being traded at discount in future market.

God made the man, Man Made the Money and Money Made the man Mad.

sagar Jha: Global Economic Trend in 2013......We must have he...

sagar Jha: Global Economic Trend in 2013......We must have he...: Global Economic Trend in 2013...... We must have heard many time as world is flat, and whole world is global village and one country i...

Global Economic Trend in 2013......

We must have heard many time as world is flat, and whole world is global village and one country is connected by other. And even a small change in one economy is going to have effects on whole world.

When recession started in 2008. Most of the economist predicted that it is just going to have effect in short run. Some predicted that this recession is going to have V shape. Means after some time economy is going to bounce back and will return to normal growth.

But some of the pessimist compered this crisis with great recession of 1930. And they predicted that this is going to have W shape. Means after downturn it will grow up for short period and again it will come down and then again it will grow back.

    As per my understanding those who predicted W shape were correct partly because of the crisis in Eurozone and and partly because of slow-down in Emerging Market.

Still recession is not over and it is going to be in next few year at least in 2013 it is not going to change.

to prove my view, I am going to explain condition of world economy in brief.

Starting from Europe. Still there is one trillion question that formation of Eurozone was ban or boon for its member countries and other parts of the world.

In Europe, the tail risk of a eurozone break-up and a loss of market access by Spain and Italy were reduced by last summer's decision by the European Central Bank to backstop sovereign debt. But the monetary union's fundamental problems – low potential growth, ongoing recession, loss of competitiveness, and large stocks of private and public debt – have not been resolved.

Moreover, the grand bargain between the eurozone core and, the ECB,  – painful austerity and reforms in exchange for large-scale financial support – is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands.

Meanwhile, Germany's insistence on imposing losses on bank creditors in Cyprus is the latest symptom of bailout effect in the core. Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor "bail-ins" are the way of the future.

Outside the eurozone, even the United Kingdom is struggling to restore growth, due to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary.

In China, the leadership transition has occurred smoothly. But the country's economic model remains, as former Premier Wen Jiabao famously put it, "unstable, unbalanced, uncoordinated, and unsustainable."

China's problems are many: regional imbalances between its coastal regions and the interior, and between urban and rural areas; too much savings and fixed investment, and too little private consumption; growing income and wealth inequality; and massive environmental degradation, with air, water, and soil pollution public health and food safety. China is no longer haven for manufacturing sector. China is expecting dis investment in manufacturing sector.

The country's new leaders speak earnestly of deepening reforms and rebalancing the economy, but they remain cautious.. Moreover, the power of vested interests that oppose reform – state-owned enterprises, provincial governments, and the military, for example – has yet to be broken. As a result, the reforms needed to rebalance the economy.In 2013 we can see some new policy in china to exhilarate the growth.

But as you now all the policy takes its own time to show the real effect. So next few year china will grow as fast as it used to grow.

Coming to Indian Economy. It is also struggling to  restore growth. Indian economy is lacking bold decision from the government. Current account deficit is still high and it will take at least 2 years to bring down to desired level.

In India will again see dance of democracy in 2014, where we are expecting change in government. And it is irony of fate that in India if government changes, whole reform and policy changes, because of politics.

As per Indian leaders trend, they give less importance to development. Their man focus are to change or amend the policy of previous government to satisfy ego of party. As per the BBC news after so many scam in all most all the sector, FDI flow in Indian Economy is going to be affected. It will take so much time and effort to improve the image and satisfy FDI.

As per the Bloomberg news.

In China – and in Russia (and partly in Brazil and India) – state capitalism has become more entrenched, which does not bode well for growth. Overall, these four countries (the BRICs) have been over-hyped, and other emerging economies may do better in the next decade: Malaysia, the Philippines, and Indonesia in Asia; Chile, Colombia, and Peru in Latin America; and Kazakhstan, Azerbaijan, and Poland in Eastern Europe and Central Asia. 

Now let check health of Japan.

 

Oh my God condition of Japan is also not good. Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence. It has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements – starting with the Trans-Pacific Partnership – to boost trade and productivity.

But the challenges are many. It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable. And we should also not forget, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment for both countries.

Then there is the Middle East, which remains an arc of instability from the Maghreb to Pakistan. Turkey – with a young population, high potential growth, and a dynamic private sector – seeks to become a major regional power. But Turkey faces many challenges of its own. Its bid to join the European Union is currently stalled, while the Eurozone recession dampens its growth. Its current-account deficit remains large, and monetary policy has been confusing, as the objective of boosting competitiveness and growth clashes with the need to control inflation and avoid excessive credit expansion.

Moreover, while rapprochement with Israel has become more likely, Turkey faces severe tensions with Syria and Iran, and its Islamist ruling party must still prove that it can coexist with the country's secular political tradition.

Now coming to the American economy. 

In this current global environment, has America become a ray of hope? The US is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labor costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets. As per the recent data from Bloomberg unemployment rate has been decreasing constantly. And mortgage business has started growing and growth rate in real state and Mortgage business is expected to increase in coming days. 

Investment in Manufacturing sector has increased. And Industrial growth rate is positive in last quarter. American government is expecting more investment in Manufacturing sector.

But risks remains. Unemployment and household debt remain stubbornly high. The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarisation impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth.

In sum, among advanced economies, the US is in the best relative shape, followed by Japan, where policy is boosting confidence. The eurozone and the UK remain in recessions made worse by tight monetary and fiscal policies. Among emerging economies, China could face a hard landing by late 2014 if critical structural reforms are postponed, In India growth rate will depend on will power of current government and next government. and the other BRICs need to turn away from state capitalism. While other emerging markets in Asia and Latin America are showing more growth than the BRICs, but size of other emerging economy is not too big to change the direction of world.

At the end 2013 is going to be similar like 2012 and we should wait and watch situation and economic drama of world. We should play our role in this drama carefully.

Thanks

Playing chess in School - Revolution in Indian education system

    Hello friends I am not talking about any playing school or any chess academy, I am talking about all the primary and secondary schools in Gujarat where Modi Government has implemented playing chess as one of the compulsory subject.

   I cordially welcome decision of Gujarat government, They have tried to change the old traditional Indian education system. Indian primary education system is one of the oldest in the world, In present education system hardly there is any space to enhance thinking power of children. Students are not allowed to think out of the box, teachers are not trained enough to teach in innovative styles.

   I do not think our government is concerned to produce thinker, Our economists and governments talks a lot to become the economic super power, but they hardly take any actions to build the base of our future generation. The country which has more innovative citizen, and they have more number of thinkers that country is the real super power. Because thinkers have power to create followers and they can be cynosure of world.

    All the concerned people are responsible for this system, as we all know that we are lacking for good quality teachers. Government has shown interest to create more IIT and IIM, but we have hardly seen any decision to create more B.ED College or those institute where teachers and Academic scientist can be produced.Currently there are so many AICTC and UGC approved colleges and Institute where around 50% faculties do not know how to teach, they just and read the books. I do not know how approval are provided to those colleges.

       Government is just focused to provide reservation, just they have passed reservation bill where reservation will be applicable in promotion also. We are going to stay in the country where there will not be any weight of merit. Even some politician have started talking to provide reservation in private Job. God knows, if reservation is applied in private sector, than what will be the condition of our country. 

   It is irony of fate that our nation used to be called the Guru of world, but now we are followers of world. I think Modi has taken very bold decision to bring revolution in the primary education system. By playing chess students can start thinking out of the box. They will just not only become good thinkers but  also good strategist. Students will start thinking about pros and cons of every thinking. Students will be able to take decision independently, And there will be many more benefit by playing chess regularly.

   But above decision is not enough to bring reform in the system, It is just a first step, I hope all the government will follow Modi and implement it in their state. There is a need to apply more mind game in school to develop the thinking power of child. Let us see what action government is going to take in incoming budget to improve basic education.

Until our base is not strong, even if we become number one economy we are not going to stay number one for long time. We will not have sustainable growth for long time. It will be same like our Indian Cricket team which became no one but could not sustain the position.

 

   

Trust and faith among corporate friends.

    These words sounds good when we listen, but it is very difficult to follow in real life. I wonder if two people from same team can ever be a good friend, I have seen many incidents where friendship even old friendship is broken when they work in same team. but exceptionally two people from same team are real friend. If you watch from outside you will find all are so called friend, but only Managers and Supervisors knows what is the base of their friendship.

   As we know every relation is based on trust, faith and emotional attachment, but in corporate world emotion is found only in those employee who are freshers, who have just started their carrier, As per my personal experience when any person start his carrier they join company with thought that company is also like a family or college life. And new joiners a green horn man start sharing every thing to his co-workers, but co-workers uses those things as a weapon against the new-comers. And it looks that in current scenario all the companies are such a battlefield, where most of the employee west their time and energy to prepare strategy to show- down their co- workers. They do not focus to improve their own weaknesses. They do not want to miss any chance to show their colleague down. They feel as a winner when they see manager scolding his colleague.

   After few years when several times new joiners are emotionally blackmailed, They also become part of the system, They also prepare themselves to be better strategist then others. I think Managers and supervisors ignore such things for their own benefit. After interviewing some of my friends who are supervisors or Mangers, I reached on the conclusion that when any employee talks with their supervisors, almost 60% talks about others, like complaining against other team members and complaining systems, only few people talks about his own, only few ask about their feedback, and only few give feedback. This is because only few people have clear vision and they have hardly set their path. Sometime I think how difficult it would be for Managers to judge who is real and who is flatter because he found all on same page.

     But above mentioned all the good characters are mainly found in our Indian. I have visited Dublin two times and I met around 40 people there, I hardly found these attitude in them, I saw them appreciating each others, I saw them clapping on each others success and that clapping was not just by hands, it was from bottom of their hearts. 

     Many companies expends a lot to come -over these wrong culture, but it remains just only boring lecture,

It is hardly followed. All the workshop becomes failure partly because of Managers attitude to implement the change and partly because of employees faith in system.

    I think all the responsible people of any company must take collective action to implement change. They must take all the possible action to establish healthy work culture, where people will have again faith in their team members and they will start feeling that team is also one family and manager is just head of the family. I wish I can see such things in any of the company I work in future,

                   Rape of Democracy.

    We used to be proud to leave in civilized and cultured society.  India used to be called the symbol of democracy, In every election we used to see so many foreigners coming to our country to see the how citizen of India are using their democratic right peacefully.

   But I can see that in recent past Indian Politician have raped our democratic right, they have spoiled the culture and they have looted the nation in all possible ways. Delhi which is the capital of one of the biggest democratic country is also capital of Rape and all the heinous crimes. 

   Last Sunday what ever happened it was not first incident in Delhi. We Indian are habitual of such incidents. Every morning when we open Newspaper we see at least 3 or 4 reports regarding rape and other brutal incidents across the nation, on all the news channels we see such crimes are shown on daily basis. People had started thinking that India is not going to change we have to leave in only this situation. We hardly see any politician talking regarding reforms to provide better security and protect the people.

     In every fiscal budget we see major focus is given on defense budget, to protect people from other nation.We hardly see any focus is given on the internal security like police reforms and other reforms to provide security. We do not see any action by the Judiciary to bring fear in people to commit the crime.

   Per my understanding it is most important to bring fear, and it will only happen when Police, Judiciary and Government will show some quick action, and tough action. 

    Last year we saw protest taking place in many democratic countries across the world, and we also saw peaceful protest by our own Anna, Ramdev and Kejriwal, This gave confidence in people that, we can bring reform in our society and we can force govt to bring changes.

  From last 1 week whatever is happening, it is going to change the society and all the Politician will have to do a lot to win the confidence of people. On India gate all the youth can be seen showing their support for that medical girl who is fighting for her life in hospital. But protester are just not showing their support but they want change and they do not want any more woman becoming victim. They want to raise their voice in all possible ways to get assurance and surety of judgement.

    Since the incident, We have hardly seen any business personality speaking against the crime. We have hardly seen any Actors and Actress participating in Protest because they think they are safe so why should they worry about the common man.

In last two days whatever has happened at India gate it would have been easily avoided. But Government took it in casual way that it is winter so people will not stay here for long time. But government should remember that when people are in groups and they are for some reason they do not care about the rains, cold and even snow. All the big leaders should have came from all the parties  to meat the protester and requested them to return home, they should have assured in one voice that they are going to change the law, Administrator should have assured people to provide better securities to them.

    I hope government have learned lesson now, and they are not going to take any such action which will have more reaction. The girl who is fighting in hospital she is just not only girl, She is Indian Democracy which has been raped and democracy is now looking for freedom and right.

Modi and his Style.

        God has created every person with different talent and different skills.  All the person on the earth are having some unique talent. Some people are able to display that unique talent, and get the advantage of that uniqueness. Many people in the world are not able to show their special talent throughout their life.

There are many reason behind that, like some are not having self confidence and others are having confidence but they are not able to use at the appropriate time and at right place.

    One of the best example with unique talent is Narender Modi. He is the person of his own style. He has confidence in himself, He nurture his own talent rather than others. As a result Mr. Modi is winer in his all field of his work. He has proved again and again, if you believe in yourself, no one is going to stop you from achieving success. In one of his interview he has told that I do not care about the others comment, I do not have enough time to waste my time, I remember one song of Hindi movie (Kuch to log kehenge logon ka kaam hai kahena). 

              There are so many lessons to learn from Modi style of working. And I that style is followed there will not be any hindrance in your path. 

1. Believe in yourself.

2. Do not care about others comment because their motive is to deviate you.

3. Continuous improvment.

4. Reply people with your work rather by your word. When your word is supported by your work your opponent will be defeated.

5. Be humble - After wining the election he went to meat Keshu Bhai Patel who fought against him. It shows his humbleness.

6. Try to say no - Many people hesitate to say no for any thing, they are habitual of saying yes. But Modi do not hesitate to say no, if he believe it will not work

   

       Per my understanding above pointed 5 characteristic are applicable in all sphere of life. Weather we are in business, Politics, in Corporate, and in any field. I would definitely like to apply all these things in my own life and will advise all my friends also to do so.