Saturday, September 30, 2006

From here..

I predicted correctly that oil prices could fall in Sep to $60, and so the markets will move up. The wrong bet i made was that I moved into emerging markets - thinking they are a high beta play on US markets. Well, it turns out that Dow is near an all time high now, while the emerging markets funds have moved hardly at all.

It is actually not that surprising. I had feared as much when I bet on emerging market funds last month. There were two reasons for my fear. First, emerging markets actually benefit from a high price of oil and other commodities, as that it what they export primarily. So buying them for a falling oil price doesn't make sense. Second, the funds that I bought were actively managed funds, and not index funds. Any manager worth his money has been overweight oil stocks over the last 3 years, so a fall in oil prices was bound to hurt.

I am still afraid of investing in the US markets. It almost seems that the bullishness that gripped the market in May has returned. A big surprising rally has already happened in the last 2 months, since the day Bernanke went to Congress in July and gave his sanguine testimony. Could there be a further year-end rally? Yes, and no. Oil prices have fallen, but one reason is seasonality. If winter is normal and demand for heating oil is high, inventories would fall and prices rise.

I guess I will hold on to Motorola. The company is gaining market share world wide, and once they stop their stepped up investments in distribution in India and China, their margins could move up.

Dresser Rand is more tied to oil prices. The stock has moved down about 8% since when I bought it, but its FCF yield is 10%, which is great. I actually dont know how to think about industrial companies across business cycles, so this is risky.

The stocks that are interesting at this time.

a) Sprint - A broken company with severe merger intergration issues with Nextel. At 5x EBITDA, this wireless company is cheaper than the wireline telcos, which is insane. Question is: How does Sprint merge two disparate technologies in EV-DO and I-Den? Is the merger itself fundamentally flawed, unlike Cingular-ATT Wireless, which both used GSM. Sprint has been broken for 8 months now, so maybe I will wait for this quarter earnings, where they could lose subscribers, before moving in.

b) Yahoo - Another broken company. Have had a series of misses this year - pushed out search algorithm deployment, lowered their 3Q06 guidance. 40% of Yahoo revenues come from the real estate and financial services vertical, which could be more prone next year. The stock is pretty much dead for the rest of the year, and 2007 could see a slowing US economy. But search algorithm fix should be around the corner now. Besides, advertising continues to move online, and as long as Yahoo maintains its market share, things should turn out well.

No comments: