The above graph shows the growth of industry in US. See the two big ones, Energy and Financials

Lets concentrate on Financials. The companies that form Financials are banks and Broker dealer firms like (Morgan Stanley, Goldman, Merill, Lehman, UBS, CSFB etc)

They all are growing at 40% y-o-y, which is amazing. They open offices in emerging economies and reap good profits.

When Indian stock market peaked, they sold and booked profits leaving the retail investors licking the wounds.

In other words, the bull made its money by being a bear. 😉

I heard from a friend that Goldman Sachs recently put 100 PhDs in a single hall and challenged them to come up with high performing derivatives. Its clear that these folks are going to rip off the common investor. After all trading is a Zero Sum game. A buy and a sell. 

Here is a FT artcile on  Derivatives activity linked to share falls

"The recent sharp falls in stock markets appear to have been exacerbated by an unusual wave of derivatives activity on the part of hedge funds and big banks, traders yesterday indicated.

In particular, some banks and big investors appear to have been forced into selling large amounts of equity futures because they have been acting as counter-parties to large, leveraged bets on the direction of stock market volatility in recent months – and these bets are now unravelling because volatility has increased sharply.

This forced selling has hurt equity futures index prices on markets such as the London International Futures Exchange – and depressed the value of cash equities as well, some observers suggest."

Derivatives which these guys come up with can be mind blowingly complex. Look at the complexity involved in the below OPTIONs transactions

When a dealer sells a put or a call to you, he's gotta go out and sell stock (if he sells a put) or buy stock (if he sells a call). When he does that, he's only hedged in delta-space so long as the spot price does not move.

Now, let's assume the dealer is short a put and sells stock. When the stock price goes down, he's gotta sell more stock to stay hedged (the put delta goes up as stock goes down, therefore I gotta sell more delta against that put you bot). On the other hand, when the stock price goes up, he's gotta buy stock back to stay hedged (the put delta is going down – getting closer to zero – as spot moves up, so he needs to hold less short stock against the put). Either way, when the stock moves, he's gotta sell as the market goes lower and buy as the market goes higher to stay delta neutral (flat). That sort of position is a short gamma position. So you can be short gamma and short delta by being short options (puts or calls, it does not matter, it is all chicken) and having spot move up, and you can be short gamma and long delta by being short options and having spot move down.

Now, what's interesting is that as vol moves up the dealers are getting shorter vega. That means their vega position has 'gamma.' And, as vol moves down, they are getting longer vega. It may make sense to think of a dealer being short a strip of options. And, as strike prices move lower away from spot, that dealer get short more and more options the further you go down. That sort of position would get you shorter more vol and vega as vol goes up and prices move down.

Yes, its sometimes better to invest elsewhere 😉 

I didnot know that Jim is the co-founder of Quantum Fund with George Soros but what I did know is, Jim is one of the straight speaking, smart investor. Here is a sample from his latest interview to CNBC.

Q: So you are not buying India only because of the government or is it because of valuations?

A: The market has gone through the roof and I missed the move in India. It is like copper going straight up. I am bullish on copper but I am not buying copper. India is going straight up but I am not buying India right now.

Other thing is that there is a huge number of foreigners flocking into the Indian market. The foreigners are always wrong, when they flock into a market. I have been investing for 40 years. When the Australians started buying Spain or the Japanese started buying Argentina or the Americans started buying Germany, it was the end of the move. Right now, foreigners are pouring into India and it is always a very bad sign.

Q: What is the call on the dollar?

A: Sell it. Do not own US dollar, it is a terribly flawed currency. We are going to see the demise of the US dollar currency in the next decade or so.

U.S. Stocks Drop the Most Since January

UK's FTSE suffers biggest one-day loss since 2002

European Indexes End Lower

Asian Stocks Snap Longest Retreat in Seven Months

This is one of the dullest time in Global markets we have witnessed for a long time now. Volatility is huge and risks are rising.

I hope to write more about Emerging markets in my next post.

An option is as it sounds, you put money down today giving you the option of buying or selling something at a specified price during some future time period. For example, I might pay $10 today to hold a $50 ticket to a concert being held next week. I have no intention of going, I am entirely indifferent about the band, but I believe prices will increase due to high demand and there is a chance to make a big profit. To be clear, when I show up I will still have to pay the full $50 for the ticket, the $10 premium just gives me the option to do so.When I show-up at the concert, the ticket will be waiting and I pay the $50 for the ticket. If I don't show up, I lose the $10. The $10 is the price of the option and the $50 is the strike or exercise price. If on the day of the concert prices go up to $200, I can exercise the option, get the ticket for $50, and resell the ticket for a $140 gain.

But what if the price unexpectedly falls to $40? Then I would not want to exercise the option. If I do, I will lose $10 on the resale of the ticket and $10 on the option for a total of $20. In fact, for any price less than $60, I would be unwilling to exercise this call option (a call option is the right to buy, a put option is the right to sell at the strike price during the specified period). Stocks and other financial assets work the same way. I purchase the option to buy or sell a stock during some time period in the future at the strike price.

Tip : Economists View