JP

America’s biggest bank, admitted last week it lost $2 billion on a derivatives trade that its chief executive, James Dimon, called “flawed” and “poorly reviewed.” Its shares have tumbled in response.

And that presents an opportunity for the bank to make its money back and then some.
J.P. Morgan’s appetite for complex credit bets is matched by an appetite for its own shares. In March, when the company announced a dividend increase, it also authorized a $15 billion stock repurchase program, with $12 billion of the funds earmarked for this year. Companies buy back shares in an effort to make remaining shares more valuable, thereby putting their surplus cash to use for investors.
Whatever J.P. Morgan loses on its soured trade — the bank warns it may lose an additional $1 billion before unwinding the positions — it also stands to save plenty by carrying out its share repurchases at a lower price. It could take the bank one quarter, maybe two, to make its money back in savings, reckons Marty Mosby, an analyst with Guggenheim Securities.
Consider: The $2 billion trade loss is offset by gains on other trades, resulting in a $1 billion net loss so far. J.P. Morgan will be able to use this loss to offset other profits for tax purposes, effectively making it a $650 million loss after taxes.
Mr. Mosby expects JP Morgan to repurchase 60 million shares this quarter. He notes that the stock price has fallen by $10 to $36 and change since the end of the first quarter. (The Wall Street Journal first reported on the massive derivatives trade on April 5.) The discount may thus save the bank $600 million on its repurchases — nearly enough to offset that $650 million after-tax loss.
If the stock price stays at its current level for the rest of the year, J.P. Morgan could save much more than it lost.
Of course, whether that savings on share repurchases ultimately proves a good deal for investors depends on JP Morgan’s stock price recovering in future years. As the surprise trade loss illustrates, Wall Street’s earnings estimates for complex banks should be viewed cautiously. But the estimates bode well for J.P. Morgan shares.
A $1 billion net trading loss during the second quarter would reduce earnings by around 17 cents per share. Analysts over the past week have already lowered their full-year consensus estimate by 27 cents. Nonetheless, J.P. Morgan’s earnings are expected to rise to $4.71 per share this year from $4.48 last year. Early forecasts for next year call for earnings of $5.55 a share.
If those estimates prove anything near accurate, and if the stock price responds to future earnings growth — two big ifs — J.P. Morgan’s massive loss may turn into an even larger gain by this time next year.

Macroeconomics of European Disunion

Wolfgang Münchau makes a point that isn’t new, but still gets overlooked too often: the euro area is, for practical macroeconomic purposes, a single unit — and one that doesn’t really do all that much trade with the rest of the world. Aggregate euro area policy, monetary and fiscal, should therefore be subject to more or less the same rules that apply to the United States.
Yet because monetary union wasn’t accompanied by political union, the continent as a whole is pursuing what amount to insanely restrictive policies. Here we have an economy with massive unemployment and inflation that is too low by any reasonable standard (Europe, even more than America, would do a lot better with a 4 percent inflation target):

Yet what we see is sharply restrictive fiscal policy:

And the ECB isn’t even trying to offset this fiscal drag with expansionary monetary policy, in part because of fear of adverse reactions to possible higher inflation in Germany.
We can and often do get bogged down in the details of country analysis, not to mention the difficult politics of the situation. But every once in a while it’s worth backing up and thinking about the fundamental craziness of aggregate European policy.

Buying gold may be riskier than it looks

A weak economy and a cloudy outlook in the financial markets have sent investors flocking to gold. Before you take the plunge with what’s left of your savings, take a closer look at what’s making the metal sparkle.

With the recent upheaval in the economy and dire predictions for the future (debt and all), I want to shift more of our investments in our 401(k) into precious metals (gold/silver). Most financial people I talk to and our fund manager almost scoffs at this — like I'm a weirdo "gold/precious metal bug," and I'm not. I just want to protect our 401(k) after the disastrous hit it took last year. What are some funds I could buy?
—

Investment managers shouldn't be scoffing at anyone these days. And you don't have to be a "weirdo gold bug" to benefit from buying precious metals.
Investors have been piling into gold for good reason, and there’s nothing wrong with the logic behind the case for buying. Gold has traditionally done very well in times of financial upheaval because of its perceived safety.
The price of gold typically rises when the value of paper money falls. As the Federal Reserve and U.S. government have flooded the world with paper money to try to revive the global economy, gold bulls argue that it’s only a matter of time before inflation returns. Surging prices for goods also push gold prices higher.
All of these conditions have helped spark big demand for gold, which creates additional upward pressure on prices. But keep in mind that gold prices can fall sharply with little notice. So while it may provide a useful hedge, it’s not a great place to stash your entire nest egg.
Investors who did so in the late 1970s learned the hard way why gold can be so risky. As inflation raged, gold prices doubled in the 10 months that ended in October 1979. Governments appeared powerless to stop the corrosive price spiral. Interest rates remained high because anyone lending paper money worried about its rapid loss of value. By January 1980, gold prices had doubled again to hit $850 an ounce.

But investors began fleeing gold two years before inflation was fully tamed and the economy had recovered. The collapse of gold prices left gold investors badly burned for a long time.
It would take nearly 20 years to reach the 1980 peak again. During that time, gold had lost 70 percent of its value from peak to trough.
Despite its reputation as a great hedge against inflation, gold hasn’t done a very good job there either. Let’s say you had waited for the crash after the 1980 bubble and bought at the low of $481.50 on March 18, 1980. Adjusted for inflation, that ounce of gold should be worth $1,265.43 in 2009 dollars.
But the price of gold has yet to hit that mark. (In just the last few weeks, the price of gold has fallen 8 percent from its peak of $1217.40)
The Fed's unprecedented moves to keep short-term interest rates at zero by flooding the system with cash is certainly cause for concern.
There’s little evidence of inflation in the economy today; the large excess capacity in housing, manufacturing capacity and labor markets are creating a big damper on prices. But if central bankers wait too long to mop up all that money, it could spark a fresh outbreak of inflation.
If you’re worried about inflation, there may be better ways to hedge. The price of metals like copper will likely rise if the global economy picks up and demand increases, especially in the developing world. (The same is true for oil.) For individual investors, there are a number of funds or ETFs that offer you a diversified basket of commodities.
If you’re worried about hedging against a more serious financial calamity, it’s far from clear that gold would be a safe place to protect wealth. Some readers have suggested that a rapid decline in the dollar, for example, could bring a return to the conditions a century ago when countries pegged the value of their currency to a fixed weight in gold.
That's highly unlikely. Countries dropped the gold standard because as global trade imbalances increased, floating rate currencies provided an important source of relief from the economic pressures that build sometimes between countries or regions. (Those cross-border pressures are now weighing on European central bankers, for example, as they try to coordinate policy among the many different economies that share the euro.)
All of the above applies to investing in gold. If you're worried about an end-of-the-world, global financial collapse creating a dystopia worthy of a Hollywood blockbuster, stashing gold in a 401(k) may not be your best strategy. For one thing, when you go to get your gold, you'll owe taxes and penalties, assuming there's still a government to collect them. If that's your main concern, you're better off burying some gold coins in the back yard. (We'd never call you a "weirdo" for doing so, but that's not exactly what we'd call investing in gold.)
It’s true that if we were to have another global financial panic, it’s likely that the price of gold would surge. If you’re worried that might happen, by all means park some of your savings in gold so you’ll sleep better at night. But before you do, take stock of the risk that you may lose money if the economy continues to improve and inflation remains tame.

soros

QUESTION: Europe is still in deep recession. What are we doing wrong? What is it that we can learn from the United States to overcome the crisis?

SOROS: First of all, the euro crisis is a direct consequence of the financial crisis that started in the US in 2007. And it has to do with the design of the eurozone, which is fundamentally flawed. The global financial crisis revealed some of those flaws, though some are not properly recognized even today. So the US is, in fact, doing better. Europe now has to solve its own crisis, which is, of course, a combination of a financial crisis and a political crisis.

ROB Shiller he is the best in the world

Robert shiller in Yale is inspiration to students in the developing world , i dont think he knows that,  i am his student though not directly i have listened and read him closely.

Economist Robert Shiller has argued in favor of the "genuine beauty" in finance.

He believes that financial instruments can contribute to a better society because humans have an innate tendency towards generosity.

In an interview published by Credit Suisse he says that that finance recognizes "the egotistical side of human nature. This presents potential for conflict."

But these are things that he argues neuroeconomics will help shape in coming decade. Here is an excerpt from the interview:

You want to use financial instruments to contribute to a "good society," a better world. That sounds, diplomatically speaking, rather bold.

Not at all. During the last two years, many innovations in the sector have served to support the "good society." Social impact bonds in the UK, for example. Let's take the Peterborough Prison in northern London, which has extremely high rate of recidivism. The non-profit organization Social Finance reached an agreement with the government for a payment of six million British pounds if recidivism declines to a clearly defined level within a certain period of time. Social Finance then issued a bond. Using the capital raised, measures were taken with the goal of reducing recidivism. If the goal is met, the six million will be distributed to investors. That is a private solution to a public problem. There are numerous other examples.

Traditional theories of economics assume a rational, utility-maximizing person. One who is not necessarily interested in "good society.

Decades ago, the economist Kenneth E. Boulding showed how far removed we are from homo oeconomicus. People are much more dependent upon each other than the pure utility function would indicate. Generosity also seems to be an inborn trait, as Ernst Fehr at the University of Zurich has shown. People are generous and kind to people who they perceive as such. We want a society that reflects the golden rule: "Do unto others as you would have them do unto you." Of course, people aren't always good, but when generosity is fostered, they become better. Financial instruments can help with this, too.

Your wife is a psychotherapist. How do your ideologies differ?

She always thinks I need therapy (laughs). Seriously, my original understanding of economics has significantly changed and now includes more psychological components. We have been married for 36 years, we spend a great deal of time together, and we tend to read the same books. Right now, we are very interested in neuroscience, in particular in the subdiscipline of neuroeconomics. These approaches will shape our ideas in the coming decades.

...For example?

Ernst Fehr*, whom I just mentioned, scanned the brains of people playing an aggressive game. He found areas of the brain that are active during the feeling of schadenfreude. Many things are preprogrammed in our brains; we function much more automatically than we would like to think.

Back in 2011, Robert Shiller wrote of a coming Neuroeconomic Revolution. Neuroeconomists, he said, tried to develop economic theory by linking them to specific structures in the brain.

It appears he's increasingly convinced that this will be a very important area of study.

*Ernst Fehr is Professor of Microeconomics and Experimental Economics at the University of Zürich. He is known for his contribution to neuroeconomics and behavioral finance.

India Hydrocarbons

From pricing woes to hurdles in clearances and long-standing disputes, challenges the oil and gas sector in India faces are galore. Little wonder the country produced around 176.9 million

tonnes (mt) of crude oil in the 11th five-year Plan period ended March 2012 against a projected 206.8 mt. On the other hand, crude oil imports increased dramati-cally by 149 percent to 184.5 mt in a decade to 2012-13, making it a more complex story.

Most blocks auctioned out under the New Exploration Licensing Policy (NELP) are yet to start production. The major production booster came from Reliance Industries Ltd's KG-D6 block in 2009 but has witnessed a sharp declines in gas volumes over the last two years. Even the minor increase in oil production is due to the higher output from the Barmer fields, a pre-Nelp block,

in Rajasthan. In the last two years, the country’s natural gas production has also dropped at nine per cent on an year-on-year basis. The average natural gas production in 2011-12 was about 130 million standard cubic metre per day (mscmd) and was estimated at 117.8 mscmd for 2012-13. “We are going to become more dependent on imports.Even if there needsto be a slight increase in production, the government has to incentivise exploration activities.Moreover, the ownership issues and other disputes need to be sorted out

swiftly,” says R S Sharma, former chairman of Oil and Natural Gas Corp Ltd (ONGC). While the environment, defence and petroleum ministries are working on faster clearances for blocks, another battle is on between the finance,fertiliser and oil ministries —

over pricing. Suggestions made by the Rangarajan committee on pricing gas are facing heat from various corners.

According to the Rangarajan formula, the base price of domestic natural gas would goup to $8.8 a million British thermal unit from the $4.2 currently applicable for gas produced from the KG-D6 and a host of other fields.If the Rangarajan formula is implemented, the power ministry expects an impact of around ~43,360 crore annually,while the fertiliser ministry sees~16,992-crore annual subsidy

outgo. On the other hand, the finance ministry had even sug gested an alternative formula,which also takes into account well-head prices of suppliers inQatar, Oman, Abu Dhabi andMalaysia.

Even the industry players such as Reliance Industries Ltd,BP Plc, ONGC and Cairn IndiaLtd had expressed their reservations regarding the Rangarajan formula.“Additional activity in the  (exploration and production) sector would help Indiaachieve energy security and create a supply certainty for the government and consumersalike,” says Sashi Mukundan, country-head (India), BP Group Companies, and co-chairman of Confederation of Indian Industry’s national committee on hydrocarbons. “An energypolicy linked to market-determined prices would spur activity in the Indian E&P sector,bring in investment, along with cutting-edge technologies, and create supplementary employment."BP is RIL's 30 per cent partner in KG-D6. According toexperts, one of the major challenges the natural gas sectorfaces is the rapid drop in production from KG-D6, off the Andhra coast. The production from the block has declined to

17.3 mscmd, compared with the estimaed 80 mscmd. “KG-D6 isa huge disappointment. If pricing is an issue, it should be sorted out by the government immediately. There must be some policy changes and the government should show some political will,” believes Bhavesh Chauhan, senior research analyst at Angel Broking.Adds Sharma, the former ONGC chief: “While companies are seeking higher price, those in power and fertiliser sectors are looking for a lower pricing regime. I do believe gas pricingshould move towards market rates soon. Otherwise, it would dissuade further investment from coming to India.”

The recent clearances by the Cabinet Committee of Investment (CCI) has offered some hope to the industry. Till now, a total of 31 oil and gas blocks,worth investments of about $13.42 billion, have been cleared by CCI. “While pricing remains an area of concern, through CCI,the government has given fresh life to the industry. To attain energy security, clearances must be done on a faster pace,” says T K Ananth Kumar, director(finance), Oil India Ltd.

Sharpe and Fama

Expected return can be defined as follows: Consequently, in order to raise the long-term rate of return, it is simply necessary to increase the beta, considered as a new measure of risk. Besides the difficulty of measuring it with precision, the beta changes constantly, solely in relation to market fluctuations. Furthermore, use of beta assumes that the upside potential and downside risk are equal, although this is not necessarily the case in practice.It was demonstrated in 1992 by Fama and French10 that there is no relation between securities' return and their beta, which does not therefore seem to be a decisive factor. Ratios such as the Price to Earnings Ratio (P/E) or the Price to Book were much more effective in explaining differences in returns between securities. These results were confirmed in a study by Malkiel a few years later.11 Furthermore, “recurring anomalies between expected and actual returns, attributed to pockets of market inefficiency, are demonstrated by various empirical studies”. Thus, he identified that with an equal beta, the shares of small capitalisation companies got an average return significantly higher than large-cap stocks. Similarly, “growth companies' stock (low book-to-market ratio), for the same beta, got a lower return than value companies' stock (high book-to-market ratio)”.12 Certain risk factors are therefore not completely taken into account by the beta. It would seem that beta is not an adequate measure of risk, as other elements influence market risk; it depends on a large number of macroeconomic variables, such as interest rates, inflation, changes in GDP, etc. Other than the difficulty of selecting an index that can be regarded as representative of the market, the market rate of return is difficult to estimate and it is an ex ante return. At this stage, is it also worth noting that the CAPM is often used to determine the cost of equity, one of the components of a company's cost of capital. This is the rate of return required by shareholders, but it is difficult to estimate in practice.
I believe that investors should focus on the factors that influence price fluctuations and try to determine the forces that cause prices to rise or fall. Therefore, the sole criterion of volatility or reactivity in relation to the market is too simplistic as a measure of risk.