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Thread: Market Risk

  1. #1

  2. #2

    Default Re: Market Risk

    Drillinto, maybe you could share your thoughts on this topic.

    I was under the impression the thread starter was supposed to stimulate some discussion by sharing their thoughts.

    Why did you start this thread?

  3. #3

    Default Re: Market Risk

    Quote Originally Posted by stockGURU View Post
    Drillinto, maybe you could share your thoughts on this topic.

    I was under the impression the thread starter was supposed to stimulate some discussion by sharing their thoughts.

    Why did you start this thread?
    Good question. I liked the summary on Market Risk and wanted to share it with the forum participants...

  4. #4

    Default Re: Market Risk

    Sociopolitical Risk involves the impact on the market in response to political and social events such as a terrorist attack, war, pandemic, or elections. Such events, whether actual or anticipated, affect investor attitudes toward the market in general, resulting in system-wide fluctuations in stock prices. Furthermore, some events can lead to wide-scale disruptions of financial markets, further exposing investments to risks.

    Country Risk is similar to the Sociopolitical Risk described above, but tied to the foreign country in which investment is made. It could involve, for example, an overhaul of the country's government, a change in its policies (e.g., economic, health, retirement), social unrest, or war. Any of these factors can strongly affect investments made in that country. For example, a country may nationalize an industry or a company may find itself in the middle of a nationwide labor strike.

    A very good example of Sociopolitical and Country Risks is the Republic of Guinea(West Africa). Following major political upheaval a new government was recently installed. This government will now review ALL mine deals:


    Bottom line: Stick to OZ !

  5. #5

    Default Re: Market Risk

    For an engaging introduction to the oddsmakers:

    "Against the gods. The remarkable story of risk"
    by Peter L. Bernstein
    Publisher: John Wiley & Sons, Inc. (1998)

    No one should miss it.

  6. #6

    Default Re: Market Risk

    When considering risk [usually measured by standard deviaton/variance], even in a market context, one should always consider DOWNSIDE risk rather than risk as a whole. If you don't believe the returns on stock X are normally distributed [and if you are trying to buy undervalued companies etc. you probably don't] then one should adapt their view of risk accordingly. For example, if you're investing in a company with a mining project in African country XYZ and the political climate in XYZ is so bad that it just cant get much worse, then although the actions of XYZ's regime are very unpredictable [i.e. a high degree of risk], most of it is on the upside!

  7. #7

    Default Re: Market Risk


    From Our Risk Analyst From Risk Bureau
    April 25, 2007

    The fact that Laos is one of the world’s few remaining communist states makes it fairly unique and possibly helps explain its status as one of the poorest countries in East Asia. Although it lacks the dynamism of some of its neighbours progress of sorts, albeit from a very low base, has been made as a result of the authorities’ willingness to encourage private enterprise. Thus impressive average annual growth rates of six per cent between 1988 and 2006 was achieved, although its currency lost more than nine-tenths of its value against the US dollar during the 1997 Asian financial crisis. Very gradually, things have begun looking up for the Laotians, although the investors’ watchword should be patience.
    Do not expect change to occur overnight. The Lao People’s Revolutionary Party, the ruling Communist Party, is the only legal party in the country, and not surprisingly, in the April 2006 elections won virtually all the seats in Parliament. Consequently, corruption is rife among the rank and file of the Party. According to the Asian Development Bank, approximately 25 per cent of Laos’s budget is unaccounted for each year. Transparency International ranks the country 111th out of the 165 countries it rates.
    Equally problematic for foreign investors is the country’s abysmal infrastructure. The catalogue is fairly dispiriting: the road system is basic; electricity is restricted to a few urban areas, while there is a very limited telecommunications system. Indeed, electronic banking was until very recently unknown, until the country’s first private local bank, Phongsavanh Bank, opened a point-of-sale electronic database and an ATM. Not surprisingly, Laos remains reliant for financial support on foreign donors and institutions, with the International Monetary Fund leading the way. Its heavy reliance on subsistence agriculture, dominated by the cultivation of rice which accounts for half its GDP and employs some 80 per cent of the population has been the pattern, although having acquired Normal Trade Relations status with the US in 2004 has meant lower tariffs for its exports.

    If the Laotian authorities play their cards right, the country’s reliance on agriculture could be reduced and balanced by investment in the hydropower and mining sectors. Its natural resources include timber, gypsum, tin, gold and gemstones. Oxiana, which operates in Australia and Laos, met its production targets producing 60,803 tonnes of copper cathode last year and 173,524 ounces of gold. In March, the Thai company, Bapu Power, a subsidiary of the country’s largest coalminer Banpu, announced its intention to find a partner to invest jointly in the Hong Sa Lignite mine and power plant project in Laos in which the Laotian government will be “one of the shareholders”.

    Vientiane has thus far approved 118 projects to explore and mine for various metals. It has issued licenses to some 66 companies, 33 of which are 100 per cent foreign-owned. However, of the 118 approved projects, only 36 have begun exploration and mining, which has necessitated the establishment of a government special task force to monitor compliance.

    Meanwhile, China’s Sino Hydro, has entered into a joint venture with Laos’s State Electricity Enterprise to build a fifth dam on the Nam Ngum River, which aims to produce electricity for sale to Thailand by 2011. Equally, Laos intends building 29 hydro-power projects operational by 2020 in order to sell some 5,000 megawatts of electricity to Thailand’s EGAT by that date. A provincial delegation from China’s Yunnan province arrived in Laos in April. Among the items on its agenda was a request for permission to build a five-star hotel in Luang Prabang, designated as a world heritage site; and the delegation put down a marker for investment in iron ore excavation in Laos as well as planting crops to produce biodiesel.

    Very gradually therefore, foreign investors are taking note, and the government has begun to play its part. Policy changes in the pipeline should help spur growth. A value-added tax (VAT) regime, expected to start in 2008, will streamline the government’s hitherto inefficient tax system. Construction will be a strong driver of the economy especially as hydroelectric dams and road projects come on stream. The fact that Laos is taking steps to join the World Trade Organisation ought to improve the business environment.

    Forecast = Steady as she goes
    For a poor country still wedded in theory at least, to Communist principles, Laos has had decades of wasted opportunities. Nevertheless, ever so slowly, the authorities appear to have come to the realisation that it needs to attract foreign investment especially in the mining and hydropower sectors which might help drag the country out of poverty. It is beginning to appear that the Communist rulers and foreign investors’ interests have begun to dovetail; although the latter would be advised to be patient. Laos has slumbered for generations and its awakening will at best be slow and at times painful.

    • A communist state gradually welcomes foreign investors
    • Hydropower and mining sectors offer interesting prospects

    Source: www.minesite.com

  8. #8

    Default Re: Market Risk

    Q & A with Peter Bernstein (Foremost risk expert)


  9. #9

    Default Re: Market Risk

    One alternative tool to assess Market Risk: the magazine cover indicator

    Last edited by drillinto; 8th-May-2007 at 07:59 PM. Reason: incomplete wording

  10. #10

  11. #11

  12. #12

    Default Re: Market Risk

    Risk managers are starting to focus on the environment


  13. #13

    Default Re: Market Risk

    The risky diamonds...

    June 21, 2007

    The Saga Of Cape Diamonds Gets Odder And Odder
    Source: www.minesite.com

    So the saga of Cape Diamonds goes on. A book will be written about it before long and the title would have to be ‘Sex and Stupidity’. These seem to be the main themes to date and none of it does any good to those poor punters who thought they were getting a straight deal at the time of the IPO just about a year ago when the company raised £13 million at £2.50/share. Last December the shares were suspended at the company’s behest as it was apparently unable to assemble its results for the period to June 2006. Now the shares have been relisted, with a notable lack of fanfare, and were trading at 65p yesterday. Phew!!!! No wonder the men from NASDAQ were able to claim that AIM was little more than a casino.

    Now we see that a company called Golden Hope has invested £1.52 million net in the company at a price of £1 per share to give it a 4.62 per cent holding. Nice to be able to find someone willing to lose their money so fast and congratulations must obviously go to Masoud Alikhani, the chairman of the company, and Manie Silver who is still hanging in there as chief executive. In January, it will be remembered, the three non-executive directors, all of whom were in office at the time of the IPO, resigned. They were accountant John Vergopoulos, deputy chairman Robert Stubbs and Andrew Coxon, who was a De Beers career man, and it would be as well to remember these names in case they crop up anywhere else. During this recent fund raising Masoud and Manie had no help from them, nor from the fragrant Ms Chapman and Baret Communications

    In place of these doughty placemen we now have Joe Madungandaba as finance director. As he is joining from CI Holdings, the ultimate parent of Wheatfields which owns 25.6 per cent of Golden Falls, the subsidiary of Cape Diamonds which operates the Elandslaagte diamond mine, it is strange that he did not step forward earlier. After all it was apparently the tardiness in preparing financial results that caused all the problems in the first place. Joe is joined by Sharon Sasson, a male lawyer based in Israel who will be a non-executive director The first of the two non-executives will be Anna Mokgokong who is described as a ‘leading business lady, recognised as such by awards from around the world, including the UK, Australia, France, Spain and Italy.’ How delightful, and for good measure she is co-founder and executive chairman of CI Holdings. Lastly in comes Oren Lubow, another lawyer from Israel.

    Mr Cofman-Nicoresti, the corporate finance man at WH Ireland’s office in Birmingham who changed his name some time between the listing of Cape Diamonds and its share suspension, might give some thought as to whether any of these incomers is genuinely independent and therefore in a position to represent the long suffering shareholders. They have seen their £13 million (£11.8 million net) disappear in a single year, judging by the new funding, and the announcement about this gives no details on Golden Hope Ltd. And while we are on the subject of communication the AIM authorities might like to pick up on the fact that the last announcement on the company’s website as of this morning is for a sale of a diamond last December. So Manie and Masoud have not bothered to keep shareholders informed even while they continued to spend the company’s money.

    When the company originally listed it claimed that the Elandslaagte mine, which is just north of Kimberley in the Northern Cape was already in production. The money was apparently being raised to extend the defined resources of these pipes, and install the processing capacity and infrastructure to support a higher rate of mining. Indeed the latest operational update confirms that commercial production using the interim phase one crushing, screening and rotary pan plant began on 1 October 2006. This pan treated 413,725 tonnes to produce 3,673 carats of diamonds. In late December 2,117 carats were sold for an average price of US$515/carat and then another parcel was sold in April for only US$301/carat. It would be interesting to know the sizes of these diamonds as otherwise the information is pretty useless. The total funds raised from the sales amounted to US$1.5 million and doubtless analysts will be comparing this performance with what was indicated in the prospectus.

    The excuse that crushing by the pan plant was restricted due to the hardness of the ore sounds pretty thin. Manie Silver is said to be an experienced diamond man and surely he knew about the ore before he started the operation. Shareholders will have a chance to quiz him about this at the Annual General Meeting which is due to be held at the Marriott Hotel in Grosvenor Square at 11 am on Thursday 26 July 2007. What they will also want to know is exactly how the money has been spent to date and what has been achieved. They will also want more information on the financing facility of £3.5 million arranged with the IDC of South Africa and the facility for £4 million arranged with Empimex Diamonds, an Israeli diamond company. For good measure they might ask if Messrs Sasson and Lubow have any connection with Empimex.

    It is bound to be a long and heated meeting, but before Masoud can bring it to a close he should also explain why shareholders are being asked to approve the issue of up to 10 million shares and 5 million warrants “ to facilitate, when necessary, raising further finance by issue of shares.” This poor old cow has already been milked of a total of over £20 million including the financing facilities. If she cannot produce adequate milk in the form of diamonds it might be better just to put her out to grass. Shareholders may not want to face this possibility but they should remember that one well known diamond analyst told Minews at the time of the listing that he was not happy with the deposit at Elandslaagte. Makes you wonder why certain fund managers, who had access to this opinion at the time, still invested in the company. Doubtless all will be revealed in ‘Sex and Stupidity’.

  14. #14

    Default Re: Market Risk

    The East Asian financial crisis was 10 years ago.

    Dani Rodrik's paper deals with the enduring costs of that crisis.


  15. #15

    Default Re: Market Risk

    Stick to OZ...

    Political Risk: South Africa

    By Our Risk Reporter from Risk Bureau
    July 03, 2007
    Source: www.minesite.com

    South Africa is something of a paradox. On the one hand, it remains one of the most attractive investment environments in Africa. On the other, the country faces some daunting challenges, including organised and violent crime, profound social divisions which the controversial Black Economic Empowerment Act (2004) has sought to tackle but which is degenerating into a free ride for a privileged few. In fact, South Africa is going through a transition. After more than a decade in power, cracks are beginning to appear in the ANC’s governing coalition. How it handles these disputes will be a key test of the strength of South African democracy.

    President Thabo Mbeki has been in office for more than seven years and has cultivated a reputation as a technocrat. Economic growth has often been impressive, a basic form of welfare state has been constructed, international investment has been encouraged. However, this moderate approach has never been popular with the ANC’s left wing and its allies. For all the government’s success in maintaining racial harmony and economic stability, there are still millions of South Africans who feel that the promises of the `rainbow nation’ have not been kept. As the Mbeki era draws to a close – a new ANC leader must be elected by the end of the year – these issues have begun to shape the debate over the country’s future.

    Looking at South Africa from the perspective of the foreign investor, it is useful to acknowledge that the country’s profound social divisions impacts on business. The post apartheid era promised much, but has yet to deliver. Large and medium sized businesses in the private sector remain largely controlled by Asians and Whites, to the frustration of many black politicians. Affirmative action legislation is often resented by white professionals, who feel unfairly disadvantaged. The use of the law to resolve racial inequalities, while understandable, creates other problems for investors. In January, the codes of good practice for black economic empowerment came into force. Under the new scheme, companies are assessed not just on black ownership, but also on the ethnic composition of managers and staff, the level of training they receive, whether they assist black entrepreneurs, and the amount they spend on social programmes and what part of their procurement goes to “empowered” suppliers.

    Firms are assessed on these criteria which are then used to grade them. Mining companies will be expected to meet empowerment targets if they are to retain their mining rights. Which explains why, in March, three Italian mining companies filed an international arbitration case against South Africa, arguing that the government’s positive racial discrimination laws were in violation of investment treaties with other countries.

    The finance minister has acknowledged the BEE’s shortcomings, which need to be reformed because it has led to abuses. Thus, traditionally white-run businesses have resorted to transferring stakes worth billions of rand to new black consortia; red tape has increased, and the policy has been seen as being advantageous to a select group of “oligarchs” with links to the ruling ANC.

    In June, the nationwide strike call by COSATU, which represents 60 per cent of the country’s public servants, highlighted the simmering tensions within the workforce, and its growing disaffection with the ruling ANC, once its `soulmate’ during the apartheid era. The great divided has been sparked by the union’s demand for a 12 per cent increase in wages, the government has offered 6 per cent, while an official body has recommended that President Mbeki should receive a 57 per cent pay rise! Equally, union leaders accuse the government of ignoring the workers and the poor while providing for foreign investors and the business community.

    Arguably, the most debilitating aspect of doing business in South Africa is the growing perception that crime is spiralling out of control. South Africa has one of the highest peacetime homicide rates in the world, comparable only with Jamaica and Brazil. The government and police are reluctant to comment, while President Mbeki continues to insist that it is merely a `perception’ that crime is out of control. Crime and the threat of crime impose a particularly heavy burden on business. Even if properties are not robbed or employees attacked, the expense involved in preventative security is considerable.

    While the catalogue of challenges is daunting, the announcement, in February, of South Africa’s first ever budget surplus, is encouraging. The finance minister informed parliament of a 0.3 per cent surplus in the 2006/07 tax year, with an anticipated rise to 0.6 per cent in 2007/08. Businesses can expect the phasing out of a secondary tax on companies.

    Forecast: Something of a paradox
    South Africa’s progress has been impressive, yet the continued existence of profound social divisions within society, and the phenomenally high levels of crime take the shine off its achievements. Foreign investors find the bureaucracy galling while the BEE favours those with political clout.

    • Profound social divisions and high crime rates remain to be tackled
    • Tensions between the moderate and radical wings of the government likely to come to a head

  16. #16

    Default Re: Market Risk

    There is no magic formula for forecasting equity crashes

    By Tony Jackson / Financial Times / July 24 2007

    Even among those perennially sunny souls, the equity strategists, there is a touch of gloom around. The credit game is up, it seems, so the equity game cannot be far behind. It is only a question of time, and not much of it.

    Yet the Dow went through 14,000 last week and the S&P 500 hit an all-time high. Granted, that is in depreciated dollars. But it still seems a funny way to express apprehension.

    Let us look closer at what some of the strategists are saying. The most popular bearish argument comes from Morgan Stanley. In simple terms, it says equity markets tend to crack on average six months after credit markets do. This time round credit first weakened in February, so mind out for August.

    For all I know, it might indeed work out that way. The trouble with the argument, though, is that no rationale is offered for how the mechanism works. We have only an average drawn from selected historic observations.

    The markets have always been drawn to the magic of fixed periods, for reasons that elude me. Chartists are fond of the Kondratiev cycle that says depressions occur every 50 years. But Kondratiev’s theory was based on data from the 16th to 19th centuries. Why should the economy of the internet work to the same timetable as that of the oxcart?

    Morgan Stanley points to the way credit spreads widened ahead of the crashes of 1987 and 2000. But today, credit and equities are more closely connected.

    Credit and equity analysts sit alongside each other at the investment banks. Hedge funds routinely short a company’s equity while going long of its bonds, or vice versa. It is no longer a matter of two separate investment communities viewing the world differently. The same community is observing the two asset classes and drawing different conclusions.

    Why? A possible – if familiar – explanation comes from one of the few bullish banks still around, Citigroup. In recent years, we have seen “one of the biggest arbitrage trades in financial market history” – the massive use of cheap debt to buy cheaper equity. The arbitrage gap still exists, so the bull market is intact.

    Citigroup flourishes a chart showing the global earnings yield on equities and a notional global BBB bond yield. At the last market peak in 2000, the bond yield was nearly 9 per cent and the earnings yield only just over 3 per cent. No wonder, as Citigroup observes, that private equity didn’t join that particular party. The sums didn’t remotely add up.

    At present, the yield on both has converged to about 6 per cent. This is not quite a steal any more, but is not that different from the conditions of the past two-and-a-half years. Citigroup hazards a guess that for the arbitrage train to be derailed, BBB bond yields might have to rise by two percentage points, or earnings yields fall by the same amount.

    BBB bond yields have certainly been rising, through a combination of higher real yields and wider spreads. But 200 basis points is not on the cards quite yet. As for an earnings yield of 4, that would involve the price-earnings ratio rising from its present 17 or so to 25, which is a very bullish scenario.

    So everything is all right, then? Well, not really. The price of money is only one factor in the equation. Another is liquidity – which, as they say, is only another name for risk.

    And there are all kinds of tell-tale signs that lenders are becoming more risk-averse. In such times, the wall of money argument becomes meaningless – think of the Japanese equity market after the 1990 crash.

    One other word of warning. Citigroup takes it as a bull point that, whereas in the last bull market, all the big acquisitions were for equity, today they are still predominantly for cash. But when trouble hits, that could be profoundly bearish in itself.

    At the peak of the M&A cycle, companies inevitably overpay. Think of two examples last time, Vodafone and Marconi. The first used equity, the second debt. The first survived and the second was destroyed.

    One of the props for the credit markets just now is the absence of corporate defaults. Just wait, though, till some of those big cash mergers start turning turn ugly. I distrust pat formulas for when the credit bust will hit equities. But I don’t doubt it will – eventually.

  17. #17

    Default Re: Market Risk

    Top U.S. Market Timing Newsletters Remain Bullish


  18. #18

    Default Re: Market Risk

    BRE-X scandal (Canada) still stands out as a red flag for the mining industry


  19. #19

    Default Re: Market Risk

    The trader who went to lunch and never came back


  20. #20

    Default Re: Market Risk

    Credit markets leave banks saddled with £250bn of debt


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