Hedge fund bears at year high as US default fears loom

NEW YORK: Hedge funds, whose bearish bets on stockshave held their returns to half the Standard & Poor's 500 Index in 2013, pushed short sales close to the highest level of the year just as the US budget impasse spurred a doubling in volatility. Rising bets against equities sent a gauge of manager bullishness compiled by ISI Group within 0.2 point of its lowest reading in 2013 last week.

Short sales have backfired as the S&P 500, up 19% this year, posts one of its broadest rallies on record. The embrace of bearish trades has squeezed returns for professionals and is one reason stocks have repeatedly rallied in 2013 amid slowing economic and profit growth, according to Cambiar Investors and Pension Partners. Rather than falling, shares that investors have shorted the most are up 38% since January, a consequence of forced buying during rallies by speculators who borrowed and sold them, data compiled by Goldman Sachs Group Inc. show.

Economists clash on theory, but will still share the Nobel Prize

WASHINGTON: The economist Robert J Shiller in 2005 described the rapid rise of housing prices as a bubble and warned that prices could fall by 40 percent.
Five years later, with home prices well on the way to fulfilling Shiller's prediction, the economist Eugene F Fama said he still did not believe there had been a bubble.
"I don't even know what a bubble means," said Fama, the author of the theory that asset prices perfectly reflect all available information. "These words have become popular. I don't think they have any meaning."
The two men, leading proponents of opposing views about the rationality of financial markets - a dispute with important implications for investment strategy, financial regulation and economic policy - were joined in unlikely union Monday as winners of the Nobel Memorial Prize in Economic Science.
Fama's seminal theory of rational, efficient markets inspired the rise of index funds and contributed to the decline of financial regulation. Shiller, perhaps his most influential critic, carefully assembled evidence of irrational, inefficient behavior and gained a measure of fame by predicting the fall of stock prices in 2000 as well as the housing crash that began in 2006.

The glory of financial markets

The year that has gone by has been one of the best for the Indian financial markets. The equity markets, of course, have hogged the limelight, growing 13% from the May 17 crash.

On Friday last, the BSE sensex closed at 6602.69 and the NSE at 2080.5 points, their lifetime highs. Going forward, some of the major positives that should see the equity markets thrive are the end of the textile quota regime, reforms in the banking sector, introduction of product patent laws in the pharmaceuticals sector, and government's thrust on infrastructure development in the country.

At the beginning of 2004, inflation was at around 5.57%; currently, it's at 6.5%. On the face of it the difference between these two figures is not large.

However, during the course of the year, the rise and fall of inflation, week after week, was keenly watched and factored into by the financial markets. With interest rates continuing to rule low, the rise in inflation was a matter of concern for the government.