The Subprime Crisis: a graphical glance

Here's a very comprehensive illustration of the subprime crisis and its related terms. I'm sure we would all get the "picture" now.


Source: Wikipedia (IMF Diagram of CDO and RMBS)

It's time I do it!

More than 2 years since my last post, it's time I fill in the lost times.

An extract from 'The Big Short', an ideology followed by Michael Burry - a student of neurology, a surgeon and founder of the hedge fund Scion Capital LLC, a financial expert by inclination.

"Time is a variable continuum. An afternoon can fly by or it can take 5 hours. Like you probably do, I productively fill the gaps that most people leave as dead time ... ... ... Before I went to college the military had this "we do more things before 9 am than most people do all day" and I used to think and I do more than the military."

My mother's words those, exactly! Well, in my case, my afternoon just flies by and I've hardly seen the 9 o'clock sun. But times do change. And time is ticking on my side now. May be not the military, but I do aspire to become a financial expert one day! So here I declare, hereon I shall do more things better and better things more!!

Understanding Sensex and Nifty Calculations

Sensex Calculations - (Source: http://www.bseindia.com/)

Sensex is calculated using the 'Free-float Market Capitalization' methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.

The base period of Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79 = 100. The calculation of Sensex involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scripts etc.

Understanding Free-float Methodology:
Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market.

It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.

In India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and Bankex in June 2003. While BSE TECk Index is a TMT benchmark, Bankex is positioned as a benchmark for the banking sector stocks. Sensex becomes the third index in India to be based on the globally accepted Free-float Methodology.

Example:
Suppose the Index consists of only 2 stocks: Stock A and Stock B. Suppose company A has 4,000 shares in total, of which 2,000 are held by promoters, so that the remaining 2,000 shares are 'free-floating'. Similarly, company B has 5,000 shares in total, of which 2,000 are held by the promoters and the rest 3,000 are free-floating.

Now suppose the current market price of stock A is Rs.200. Thus, the 'total' market capitalization of company A is Rs.8,00,000 (4,000 x 200), but its free-float market capitalization is Rs.4,00,000 (2,000 x 200).

Similarly, suppose the current market price of stock B is Rs 500. The total market capitalization of company B will thus be Rs 25,00,000 (5,000 x 500), but its free-float market cap is only Rs 15,00,000 (3,000 x 500).

So as of today the market capitalization of the index (i.e. stocks A and B) is Rs.33,00,000 (Rs.8,00,000 + Rs.25,00,000); while the free-float market capitalization of the index is Rs.19,00,000 (Rs.4,00,000 + Rs.15,00,000).

The year 1978-79 is considered the base year of Sensex with a value set to 100. That is, suppose, at that time, the m-cap of the stocks that comprised the index was 50,000; then we assume that an index m-cap of 50,000 is equal to an index-value of 100. This m-cap value (50,000) can be obtained from the Exchange. Also note: At that time, there may have been some other stocks in the index, not A and B. But that does not matter.

Thus, the value of the index today is = 19,00,000 x 100/50,000 = 3800.
This is how the Sensex is calculated. The factor 100/50,000 is called index divisor.

For further info, you may view: http://www.bseindia.com/about/abindices/bse30.asp

Nifty Calculations

The NSE S&P CNX Nifty is a 50-stock index accounting for 24 sectors of the economy. Nifty essentially comprises the top-50 most liquid stocks that are traded on the NSE. This involves a thorough economic research.

Each scrip has its own beta (volatility) value. Beta indicates how each scrip is correlated with the index movements. Positive correlation implies that the scrip movement is in line with the index movements (ie. when beta is more than 0). Negative correlation implies that the scrip moves in a direction opposite to the index movement (ie. beta value less than 0). Beta = 0 signifies no correlation between the scrip and index movements ie. independent movements. Beta = 1 implies perfect correlation between the two.

Nifty is also calculated as per the 'Free-float Market Capitalisation' methodology. This methodology also takes into consideration corporate actions such as rights issues, stock-splits, etc. affecting the index value.

For Nifty, the base year is 1995 and the base value 1000. The base period considers the closing prices as on November 3, 1995, which marks the completion of one year of operations of NSE’s Capital Market Segment. The base value of the index has been set at 1,000 and the base capital is Rs. 2.06 trillion.

The Sensex and Nifty are calculated every 15 seconds and is disseminated in real time.

The NSE Derivative trading commenced in June 2000. To know more about Bank Nifty F&O Index calculations, the following link may help you:
http://www.thehindubusinessline.com/2005/06/11/stories/2005061102131300.htm

Filmi Chakkar

(duly edited making way for some more ideas)

‘Kitne Ajeeb Rishtey Hain Yahaan Pe’
Heard of this track?
Enjoy it now….

Seen Amitabh Bachchan play 'Eklavya' a couple of years back…
Now Abhishek Bachchan plays 'Dhrona' …
Did we hear, The Child is the father (teacher) of the Man? Filmdom goes to prove it… :)

Shah Rukh Khan enjoyed Pardes a few years ago,
next he was seen in Swades...
Guess, he was still confused where his big bucks lay…
So he took the third way out… how about a ‘Prades’ (Paschim Bangal???)
And bingo!!! He earns the maximum out of his Knight Riders!!!

Salman Khan’s movie ‘Dus’ never got completed…
So, he settles for the small screen…
The same-name ‘game’, you see…

Aamir (the great!) Khan would involve himself in no Filmi Chakkars,
... only Takkars.

Ram Gopal Verma forgot about the “Raj” element in his movie Sarkar…
Politics mein “Raj” kaun banega...oops... karega???
So a sequel by the name of Sarkar Raj…(naam mein wajan hai)
Politics ke saath panga nahi leneka, right RGV?

Will keep adding more... :)
You guys can add on... Think of any...?

Random thoughts peeping into the streets of Mumbai…

It was barely a couple of years ago. Newspapers and news channels flashed news about a Readers’ Digest survey which proclaimed Mumbai to be the rudest city in the world (ranked 36th). And then, of course followed the opposing versions and refutes by the Mumbaikars. Honestly, at that time I believed Mumbai was indeed the rudest city in the world on a relative scale. I presumed, a worldwide reputed magazine publisher ought to have dispensed adequate efforts on R&D and the survey must have been backed up by evidences.

But a one-off incident on a typical weekday, on my way to the office gripped my attention. The Mumbai Indian within me woke up and then my random thoughts pondered over ‘the rudest city’ chapter of June 2006…

The incident goes something like this:
There was this old lady in my bus waiting impatiently to buy a ticket with a Rs.100 note. The TC refuses to give her the ticket and tells her to produce a lower denomination note. An argument ensues and she gets even more impatient each time. Both of them ran out of change and therefore out of options. Finally the TC even suggests that she travel ticket-less on the pretext that being an old lady, she could get away with some excuse if got caught. But she was getting all the more tensed. Finally, becoming aware of the apprehension of the old lady, another lady bought the Rs.10 ticket for her. The old lady could only repay Rs.2 but the smile and relief on her face articulated her gratitude all the more. Rather than being passive and unresponsive, the lady did show her concern towards her and thus her involvement. This was just a simple episode of the routine daily life series. Not so important yet so significant an event to make an impact on one’s life.

These are human responsiveness to circumstances. The crisis situations during the Mumbai floods of 26th July 2005 and the Mumbai train bombings of 11th July 2006 also have highlighted the healthier face of humanity that Mumbai displayed. I am not stating that Mumbaikars are the ‘helpful’ and ‘rising to the occasion’ lot of people and that deeming Mumbai as the rudest city should be condemned. The incident could have occurred anywhere in the world. But terming one city as rude vis-à-vis another should be validated.

In fact, Mumbai has its share of grey shades too. The displeasure expressed by Yuvraj Singh (captain of the Kings XI Punjab team) after their victory over the Mumbai Indians in Mumbai during an IPL match corroborates the fact. Cheering and rooting for the home team is but natural, but what would you call slamming, reproving every move of the non-home team? I had witnessed the Mumbai Indians versus Kolkata Knight Riders match at Wankhede. The other team had to only settle with the boos and cat-calls of the crowd. Shoaib Akhtar gets Tendulkar out and what he gets to hear is a series of foul and offensive terms from the roaring mob. All he could do is turn to the crowd and give a helpless expression of ‘Isn’t that what I’m supposed to be doing? Isn’t that what I’m getting paid for?’ It was indeed a sad sight. My heart reached out to them. But it was a mere hundred like me against thirty thousands.

And now somehow, with the Mumbai Indians not having qualified for the semi-finals, hopefully we can expect a neutral crowd, a good match and the best team winning, keeping in view that both the semi-finals and the final are going to be played in Mumbai.

On the other hand, the Bangalore crowd seems most matured. Chennai, Hyderabad, Jaipur too are sporting enough. But the Eden Gardens, Kolkata crowd bears some resemblance to Mumbai’s. Mumbai too like Kolkata, is highly fanatical and obsessive as far as the State is concerned, evident from the latest MNS’s and Shiv Sena’s ‘Mumbai aamchi aahe’ and ‘Vada-Pav’ moves respectively in Mumbai. Actually, the ‘Vada Pav’ is, a great initiative – converting Mumbai’s roadside stalls into a business chain a la McDonald’s. Imagine the amount of employment it would generate for an aam aadmi, or rather for a marathi manoos considering the MNS’s orders to grant jobs equally to all (read Maharashtrians).

It so happens that the Readers’ Digest survey declared New York as the politest city followed by Zurich and Toronto. But as far as my knowledge goes and also from hearsay, Japan is one of the politest countries in the world. But Tokyo or any of the other cities, did not find a place anywhere on the list. Ironically, Asia was termed to be the rudest continent. ‘Asians lacked courtesy’! Courtesy has only one definition irrespective of the region, though they don’t realise that the gestures and expressions tend to differ.

According to news reports, the magazine sent its undercover reporters to 36 cities in 35 countries in the world. The parameters for the survey were:

• whether the people kept the door open for the reporters while entering a building;
• whether the salespeople in a store thanked the reporters on a purchase;
• and whether they were helped in collecting flying papers when they intentionally dropped a folder full of papers at a crowded place.
  

These might seem necessary but not sufficient enough parameters of judgement. There should be clear-cut judgement factors tailored to the region-wise customs and mannerisms being followed. It somehow doesn’t define itself as an ‘inclusive’ sample when the population is the entire world comprising 195 countries. It doesn’t cover half the population considering 1 city represents 1 country. It may also be termed uneven - it included 2 cities from Canada (see list alongside - courtesy:Readers' Digest). It may have been a convenience sampling. And there is no stated theory to verify how the sample is an actual representation of the population.

So irrespective of the nature of the sample, one has no say on the inference of a survey. Moreover, the magazine overtly stated that the survey was unscientific. Tagging Mumbai, or for that matter any city as the rudest city is acceptable provided the findings can be substantiated by an efficient and effective sample frame. Such unsought-for steps in the name of surveys are only avoidable rather than creating rift between cities, countries and continents.

Spend and Let Save…

Classical Economists have always been advocating the doctrine of saving, not just to provide for personal future benefits but also for the benefit of the country’s economy. But as times change, so do people’s perspectives. And thus, the Economic theory has undergone a paradigm shift towards what is now known as neo economics...

The Indian economy is also gradually advancing towards the culture of Spend More-Save Less. With diverse insurance and loan schemes available, people’s future needs are provided for. The burgeoning middle-class having more and more disposable income has become the potential target for the manufacturers of consumer durables and non-durables. With a plethora of retail shops, supermarkets and hypermarkets replacing the old mom-n-pop shops, individual customer needs and conveniences are all taken care of. Everything from cakes to clothes is available under one roof. Even the non A and B SEC segments have started living out of their wallets. Everyone is plunging into living a higher standard of life. This has in turn resulted in foreign retailers eyeing the Indian markets for their share in the pie. With retail giants like Wal-Mart and Marks and Spencer venturing into the Indian lucrative markets, the consumers are now more into the buying blitz. The cycle thus continues… More retail FDIs, more known brands, broader sphere of selection, more insatiable demands and finally more credits.

Taking illustrations from the two major giants - Japan and the US, each adopting a saving culture and a spending culture respectively, we can study the impact of each of them on the economy.

Japan comprises old working population. Their modus operandi is thus simple, conventional, mainstream and orthodox. The Japanese are hard-working, less risk-taking and believe in saving rather than spending. Every move of theirs is planned with substantial calculations and analyses. This started ever since the country was devastated in 1945 by the US bombings in Hiroshima and Nagasaki. Their growth curve post World War II has been tremendous. Their well-planned avenging strategy on the US is much evident from their ‘dumping’ policy in the 1980s and 1990s. Their automobile sales targeted the US markets in such a way that they sold their automobiles at much lower prices than the automobiles manufactured in the US. As a result, GM and other American automobile manufacturers suffered distressing losses. They also disallowed US access to Japanese markets.

Like many other Asian nations, Japanese exports have always surpassed the imports. They enjoy an annual trade surplus. Yet their economy is considered to be not very strong... To inculcate a spending culture, the Japanese government also reduced the deposit rates and even charged the savers (negative interest rates), but people’s outlook did not change. They preferred saving in deposits to even holding back the money with themselves. Neither the trade surplus nor the domestic savings have helped the economy.

Au contraire, the US government provides the citizens with Social Security schemes – future life securities, employment securities…even unemployment securities! Reassuring schemes as these left no reason for people to save. Thus, the US is one of the countable few nations flourishing on credit culture. Contrary to Japan and many other countries, the US has banked mainly on imports. They have an annual trade deficit. Their investments in other countries is also far less than others’ investments in the US. Yet, the economy is expanding and is believed to grow stronger... The US economy is thriving on the back of the savings of the rest of the world. Countries like Japan, China and India invest most of their forex earnings through exports, etc. in the US Treasuries which in turn help US consumers' spending.

What would you do if you were not to spend?
You would deposit your money in banks or in any other avenues for investments. Your money in turn would be used by these institutions to give credits and loans. In other words, you are saving so that others can spend! Give it a thought…This is precisely what capitalist countries like the US have banked on.

To get more into neo economics, here is what Dr. Jagdish Bhagwati, an Indian-born Economist in the US, a Professor of Economics at Columbia University has to say. ‘Don't wastefully save. Start spending, on imported cars and, seriously, even on cosmetics! This will put all nations on a growth curve. "Saving is sin, and spending is virtue." Before you follow this neo economics, get someone to save so that you can borrow from him and spend.’

So go ahead guys… spend...

……but not your money… :)

All’s fair in love and war?

‘If you can’t win over her, kill her’- that’s what seems to be on the minds of people in love these days. In fact, it’s ignominious to identify them as lovers. People no longer seem to understand the sanctity of love.

Talking of love, the Taj Mahal should certainly light up your mind, now that it’s become the talk of the town. The sheer radiance of this marble-clad massive mausoleum basking under the sunlight or its sparkling reflection rippling through the adjacent Yamuna river by the moonlight are inspiring enough to make one fall in love. The Mughal Emperor Shah Jehan made this architecture over the tomb of his beloved wife Mumtaj Mahal to exhibit his eternal love for her.

On the one hand, we talk about voting for this epitome of immortal love to bring it into the new Seven Wonders of the World, and on the other hand we hear about people resorting to killing their love in desperation. Well indeed, love has diverse definitions; that’s the parody of life. Anyway, the news channels are making big business either way!

Cases of people slaying down their own fiancées have increased multi-fold. It’s almost become an everyday episode. It was barely a couple of months from now when this 24-year-old software professional Kaushambi Layek, a TCS employee was murdered by her boyfriend at a suburban hotel in Mumbai. And now it’s this girl, Sushma Nikam who was brutally stabbed to death by her ‘lover’ on the busy streets of Thane amidst all the passers-by rushing to their workplaces. But despite their busy schedules, the otherwise-always-on-their-toes Mumbaikars did find the time to watch the ‘tamasha’, though they refrained from coming forward to the victim’s rescue. Due respect to the one lady who lent a helping hand – laudable! (I think everyone should start wearing ‘choodiyan’, if that makes one brave!) The victim was stabbed 21 times by the attacker in broad daylight, and that’s precisely the kind of social situation where we prefer to stay mum and stand as oblivious onlookers. Well, no one can be blamed. The sight would have been gruesome enough for anybody to think of taking instantaneous action. Picture ourselves witnessing such cruelty. We never know how we would react given the same circumstances - terrified…petrified…mortified…stupefied? A real situation is not an ideal situation! But people will be people – great talkers, little doers, especially when it comes to condemning each others’ doings. And the Press will be Press, when it comes to dramatizing the audience's reactions to add some spice to their hottest selling news!

Anyway, returning to my point, I was mentioning the different dimensions of love, or is this a typical case of pure love versus lust? Cliché as it may sound, but that’s the fact! Desire - want – get – acquire, these are the thoughts occupying people’s minds. Whoever said, one should learn to give in love. Forget giving one’s own life, even that’s an offence punishable by law! But taking away someone else’s life? This only confirms that we show no concern for anybody but our own selves. Self contentment is all that matters and we can stoop to any level to acquire that, though that may account to somebody else’s grief.

Can we still call ourselves humans or are we turning into callous and cold-blooded creatures, heartless hooligans? All said and done, one thing is confirmed – ‘All’s fair in love and war’, and people seem to have taken that a bit too literally. When this was phrased, little would the author have expected that there would be a phase, where love would lose its face following this very adage. And with many more ‘lovely’ centuries to go, even God might not be able to answer where mankind would lie and where humanity would be…