Investors find myriad ways to bet on falling market If regulators think they can stop all betting against financial stocks by banning short selling, they might want to think again.
Following the emergency bans, investors have found myriad ways to bet on a falling market -- whether it's shorting proxies for the financial sector, shorting bonds, or buying index options. "The way of the capital market has always been to innovate. This is dangerous ground ... but people will try and find a way to make the market tilt a little more in their favor," said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London. Stock market regulators across the world, led by Britain and the United States, have introduced curbs on short-sellers, who borrow shares and sell them in the hope of buying them back at a lower price to make a profit. The restrictions, which mainly apply to financial companies or those with financial arms, are part of regulatory attempts to calm panicky markets. It didn't take long for alternatives to surface. "Investors are realizing that the easiest way is to sell the proxy plays that have exposure to the financial sector," said Darren Sinden, sales trader at Lite Financial in London. "Another route is to sell the investment trusts that have large holdings in banks, and hope that the discount to asset value will widen, though liquidity is an issue." STILL POSSIBLE Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ In the United States, some hedge funds are closing out existing short positions in financial stocks and using equity derivatives to replace them, according to bankers. "The SEC has not banned (all) trading in derivatives in these stocks, so it's still possible for people to take short positions," said James Angel, associate professor of finance at the McDonough School of Business at Georgetown University in Washington. The SEC has banned anyone other than market-makers from opening new short positions using derivatives, but this is hard to police, market participants said. That is because these trades can be done in the unregulated over-the-counter market. Banks are required under the SEC ban to make sure that any transaction they complete with a customer does not increase the customer's net short position -- but there is no hard and fast rule for how the bank should ascertain this. "The SEC has what I call a 'don't ask, don't tell' policy... however, most market makers don't ask," said Angel. BUYING PROTECTION Another way around the short-selling bans is to take out bank credit default swaps (CDS) -- the cost of insuring against debt default. If you expect a company to suffer, you could buy protection against it defaulting in the CDS market. Investors stand to gain if spreads widen for any reason. Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ "Then perhaps also there might be certain contracts that you can run based upon how Euribor or also sterling Libor are performing if you are not comfortable with how the banking structure is overall," Pope added. "You might be able to take some over-exposure upon where Libor will go." Key interbank Euribor lending rates hit a fresh set of highs on Thursday on money market anxiety about whether lawmakers will pass a $700 billion plan to bail out the U.S. banking industry. Other methods around the bans include buying put options on indexes -- or betting that a whole index will be dragged down by financial stocks. This is less effective than in the past because the weight of financial stocks in indexes has diminished. Data from derivatives exchange Liffe, owned by NYSE Euronext, also shows that puts on index options have, on average, decreased since the short-selling ban. REAL BEST Then there are straight bets. BetsForTraders.com, a website that offers fixed odds financial betting, says it has seen a surge in the number of bets placed against banking stocks following the bans, with the more popular stocks being Royal Bank of Scotland, Lloyds TSB, Barclays, Goldman Sachs, Citigroup and Morgan Stanley . Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ "We get a lot of people in the City, and see several email addresses from investment banks. There's lots of business from Asia and continental Europe," said Ryan Kneale, market analyst at the 18-month-old website, adding that its biggest accounts ran into "six figures." Spread betters, regulated by Britain's Financial Services Authority, said they were not offering shorting opportunities on financials. Finding companies whose shares rise and fall with the financial sector is a popular alternative to shorting. "We've been shorting Thomson Reuters, for example, and Man Group has also been heavily sold," Lite's Sinden said. Thomson Reuters' Markets division provides news and information to the financial sector. Man Group is a hedge fund manager whose shares have lost 18 percent this week. Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ A source close to Man Group said it had asked the FSA for coverage under the ban. Thomson Reuters declined to comment. Investors are looking for even less direct ways of reducing exposure to financials. "The other possibilities are selling groups like Michael Page, Hays and Adecco, or looking for companies that were service providers to Lehman and Merrill," Sinden said. Most members of the ET awards jury who participated in a lively discussion on India's prospects in the backdrop of a global slowdown felt the economy will grow by 7% to 8% in 2008-09. The chairperson of the ET jury and global head of Pepsico, Indra Nooyi, chose to link India's fate more directly with that of the United States. She said India's GDP would most likely grow at 6% higher than that of the United States. So, if the US growth rate is, say 1% in 2008, then India's GDP should grow at 7%. In effect, Nooyi clearly believes in pretty much a linear coupling of growth between India and the US. The head of global markets for Deutsche bank, Anshu Jain, was optimistic that India could post a GDP growth of up to 7.5%. So were other jury members such as Stanchart Global Head Peter Sands and HDFC chairman Deepak Parekh. Indeed, what was interesting was a general note of optimism among these business leaders about India's domestically driven growth story. Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Union minister for commerce and industry Kamal Nath too pointedly argued that India will grow even bigger as a "parking lot" for global investments. It is here that consumer demand will grow consistently over the next few decades and give the best return on investment. Of course, the debate over how much India is coupled or decoupled with the United States economy remains a hotly contested subject. If Indra Nooyi is to be believed there is a one-to-one relationship between the two. Sure, there are many who do not subscribe to this. They claim India may be coupled in a short to medium term, but is certainly decoupling in the longer run. However, there seems to be a consensus that in the short to medium term India, and indeed other fast growing emerging economies, will get hit by a US recession. Even if India's GDP growth decelerates by 2-3 percentage points, it is bound to cause pain. Businesses will have to undergo belt tightening through 2008 and 2009. Let us face it. The unprecedented growth party of 2003-08 could not have gone on forever. However, even as the three big OECD economic blocs — US,EU and Japan — gradually slip into a recession, the only beacon of hope is provided by the growing markets of India, China and the other emerging economies. -- Visit site at – http://investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Forums- http://forums.investorline.co.in/ Iwebs Open Source Web Publishing Platform - http://webs.investorline.co.in/iwebs/ --~--~---------~--~----~------------~-------~--~----~ Get latest market updates & search internet right from your browser-download our toolbar here- http://investorline.ourtoolbar.com/ Visit our site at – http://investorline.co.in/ Newsroom: http://newsroom.investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Journal - http://research.investorline.co.in/ Newscatcher- http://catcher.investorline.co.in/ Interested in Financial Planning-Let us Contact you- http://spreadsheets.google.com/viewform?key=pb_z4f1_zGMg4iBBFT3-SWQ&email=true If you like the site then promote it here- https://www.freetellafriend.com/tell/?url=http://investorline.co.in/blogs/news Create your own free blog on- http://investorline.co.in/blogger Visit this group at http://groups.google.com/group/india-investor -~----------~----~----~----~------~----~------~--~---
