The case of the fake blood testing machine developed and marketed by a dream startup, called Thernos, is going to trial this week. The alleged fraud was so simple, it is almost laughable. Theranos said they have developed a blood testing machine which would take a small prick of blood and test for a whole host of things. For a while, it seemed to work. VCs and PEs, senators and university professors alike, thronged to the scene and threw millions of dollars. Except, it was all a big farce. The machine didn't do any of it and the results were just fake. And like that, hundreds of millions of dollars was lost.
If the Who's Who of Silicon Valley couldn't figure it out, what chance does a humble retail investor have? Well, better than you'd think. Sound financial decision making based on fundamental theory (nothing fancy) will get us a lot farther in our lives than we can imagine. Don't believe it? Keep a tab on us!
IN THIS WEEK'S NEWSLETTER
News in brief
In less than 200 words - Cash or Card?
Cover Story - Statistical Arbitrage Trading (Free Money?)
NEWS IN BRIEF
India posted record GDP growth of 20.1% year-on-year in the second quarter of calendar year 2021 (Apr – Jun’21). That however hides the full picture because GDP contracted in the year ago period by a record 24%. Famous statistician Pronab Sen was quick to point out that Indians have much less income than they did in 2019. He added, “Is that good or bad news?”. You tell us Pronab, you tell us.
Shoppers Stop was on the news this week following their decision to divest their subsidiary Crossword Bookstores.They realised they just weren’t very good in doing Crosswords 😉 The company sold 51% ownership interest in Crossword Bookstores to their franchisee ABH. Shoppers Stop delivered 273% y-o-y revenue growth in the June quarter, which to be clear, is a very small fraction of their 2019 revenue performance.
Credit Suisse called out Havells India Ltd. & Voltas Ltd. in its equity research report this week as best positioned in the consumer durables market. The research report from the bank suggested that the “consumer duration sector is a Rs.6-Lakh crore opportunity with a 15% CAGR (FY20-FY25E)”. The bank expects Havells to deliver 20% CAGR over the next 3 years, thanks to a revival in switchgear and cables. The report was upbeat on Amber Enterprises too.
12-18 year olds in India will start to receive an anti-COVID jab from next month with what is being called the world’s first DNA based COVID vaccine. An experimental, domestically developed vaccine, the drug was developed by Zydus Cadila in collaboration with the government’s department of biotechnology called ZyCoV-D vaccine. It will be administered in 3 needle-free doses.
Inflation in the eurozone hit its highest level in a decade in August 2021. Shortage of semiconductors & shipping lines, price inflation in commodities in pushing up the prices paid by consumers. Broad consumer prices were 3% higher in August y-o-y, much higher than the 2.2% inflation recorded in July. Like most central bankers around the world, the ECB has also suggested that this spike in inflation is only just temporary. Only time will tell.
IN LESS THAN 200 WORDS
Cash or Card?
The National payments corporation of India (NPCI) this week released transaction statistics on the UPI platform for the month of August. And the numbers were staggering. UPI logged 3.55 Bn. transactions in August, an all-time high! Here is a look at how the humble payment system has grown since its inception in FY2017.
If UPI were a business, VCs and PEs would be scrambling to invest in it. Too bad for them, it is owned by the RBI and is not up for sale. But service providers like WhatsApp Pay & Google Pay are obviously getting involved in developing applications that communicate with the platform.
Here is a look at how UPI based transaction volume stacks up against cash-based transactions – like ATM withdrawals and Micro-ATM transactions.
Total financial transactions in the country doubled during the FY15-FY21 period. Cash transactions also did. But UPI based transactions went from next to nothing to about a quarter of all financial transactions made in the country. It is no surprise then, that banks just aren’t adding any more ATM machines. Over the last 7 years for which data is available, ATM machine count in the country went up by a CAGR of just over 2%.
All of this has ramifications for how we should think about the future, the kind of businesses we should choose to invest in, the impact a currency-free world would have in our professional and everyday lives.
The country stock index that has returned the most over the last 3 and 5 years is the Taiwanese index. It has clocked a CAGR of 22.65% over the last 3 years and 19.65% CAGR over the last 5 years. One stock in the Taiwanese index contributed a lot to these fat figures. Can you name it? (Hint : It is at the centre of the semi-conductor shortage we are facing now)
Statistical Arbitrage Trading (Free Money?)
Statistical arbitrage is a family of trading strategies that exploit arbitrage opportunities to generate alpha. What is arbitrage, you ask? Well, in simplest terms, arbitrage is free money. If you can generate a dollar of profit without risking your own cash nor taking any market risk, that dollar earned is due to arbitrage. Theoretical finance asserts that nobody can make a dollar like that. Practitioners tend to disagree.
A very simple application of statistical arbitrage is the mean reversion strategy. In this application of statistical arbitrage, we adopt a market-neutral trading strategy of going long one stock while going short the other. The equity pair is typically selected based on the correlation of their monthly returns.
For instance, given that HDFC Bank and Kotak Bank are large, private banks with a good financial track record, we would expect that their fundamentals will grow in tandem, and consequently, the return on their stocks will have a high positive correlation.
Given such a pair, any short-term divergence observed in their stock returns can be expected to be quickly corrected. So, if the price of HDFC bank runs up too quickly, then we would expect that it would either correct or that the price of Kotak bank will catch up to it. In such an instance, we go long Kotak bank and short HDFC bank. When we have a sufficiently large portfolio of similar equity pairs, given similar betas (market exposure) of those equity pairs, the trade & portfolio itself is expected to be market neutral (no risk).
“There’s simply not enough human beings to fill all the open positions,” Brian Devine, Sr.VP, ProLogistix (logistics staffing firm that works with Walmart Inc.) in response to an announcement by Walmart that the company will add 20,000 workers to supply-chain operations this year.
“Can my next ad be: please don’t install my app?” PhonePe CEO Sameer Nigam in response to a question on how he would lower his market share to adhere to NPCI’s guidelines on market share. He is got enough moolah, he might just do that!
"The authorised officers will be able to take steps to provide essential food items at concessionary rate to the public by purchasing stocks of essential food items,"Sri Lankan President Gotabaya Rajapaksa in reference to the actions being taken to tackle the economic emergency in the country.
ANSWER TO QUIZ
also known as Taiwan Semiconductor Manufacturing Company is the biggest component of the Taiwanese stock market index. The company's stock price has gone up by nearly 4 times in the last 5 years and that is excluding dividends.
THOUGHT FOR THE DAY
Munger's fish wisdom
An interesting perspective by Cathie Wood’s ARK invest’s report on “Are Social Media Apps the new EVERYTHING stores?” Ark-Invest
Where do you stand on smart-locks? Do you reckon they are safe? Here is a perspective. WSJ Video
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