Tuesday, June 30, 2009

A Bollywood superstar's blog

My friend Ed who has been on a world tour for the past one year has finally penned his much anticipated entry on his blog here. Maybe I will see him dancing behind Kylie Minogue in Blue.

Saturday, June 27, 2009

Unaccustomed Earth

I have been reading this book of short stories by Jhumpa Lahiri. All of them are similar, and after a point of time uninteresting. That doesn't mean I have stopped reading the book. But then I have read Surendra Mohan Pathak's novels till the very end a large number of times, so it is more a comment on my stupidity than on her brilliance.

When 2009 began, I decided that I will reduce my reading of financial and business fiction/non-fiction. As I read WSJ, FT, blogs, earnings, 10-Ks and Qs as part of work, I felt I need to diversify away my reading at home.

Time to take stock at the mid-point of the year. Books read so far in 2009:

1) Kite Runner
2) Shantaram
3) Freedom at Midnight - this is a real gem
4) Is Paris Burning?
5) Bankers who broke the world - finance history - can't avoid it.
6) Unaccustomed Earth - almost over

Tuesday, June 02, 2009

Long CTSH, Short INFY

Cognizant has historically gone 10%-20% faster than Infy, and continues to do so - if we go by the guidance of the two companies for 2009. Till last year, its stock used to trade at substantial premium to Infy. Since then, the differential collapsed. In the last two weeks, Infy has been trading at 10% premium to Cognizant. My guess is - Indian markets are on a tear and are pulling Infosys India stock along, so INFY ADR is duly obliging. However, Cognizant is not listed in India. So CTSH doesn't have something similar pulling it forward. 

Whatever factors impact Infy will impact Cognizant to the same degree. If tech spending recovers, Infy will benefit, and so will Cognizant. Rupee appreciation hits both. US protectionism hits both. Amongst the Indian outsourcing companies, CTSH probably does the best quality of work - if one were to go by the number of IIM grads that chose CTSH over INFY, Wipro or TCS. 

Cognizant has grown faster than Infy in the past, and it will grow at least 10% faster than Infy in 2009. I think CTSH will again start trading at a 10%-20% premium to Infy after another 2 quarterly reports. Infy will report next in mid-July, Cognizant in August. So probably by Oct Nov is when CTSH will reassert its premium. 

Monday, June 01, 2009

CTSH Long, INFY Short

My first long short in my personal account. Lets see how it works. Portfolio right now:

a) PM - This is my fav play on EM currencies. 

b) CNK - Bought when Swine Flu hit Mexico last month and the shares swooned. Is the content cycle in 2010 as good as the one this year? Probably time to exit after 2Q results, which are going to blow out consensus. I actually like this company - they seem to execute better than AMC and Regal.  

c) TWC - 11% FCF yield ex the tax benefits. Cable video gross margins are going down + they need to market to compete against DTV - unemployment is a concurrent indicator for cablecos and telcos. But if wireline telco companies can generate lots of cash when they lose 10% lines each year, I am sure cable can with 1%-2% sub loss. 

d) VNV, UZG - debt securities of Viacom and US Cellular

e) VWO - Vanguard emerging market fund. This is the beta. 

It is an extremely defensive portfolio (55% cash) with hardly any cyclicals - too bad for me. Probably it is another 5 years before I figure out how to price commodities, and I am in no hurry.  

Return of the Friedmanites..

Suppose commodity prices keep going up. The closed mines will open up as soon as selling price crosses their cost of production. However, because demand would not have come back to the same degree, their production will go into inventories - unless the cost of production also moves up so that the mines remain unprofitable. That would require some giant scheme so that the general price level in the world economy goes up. In particular, wages need to go up, which doesnt seem likely looking at the state of world affairs.

So, production goes into inventories. There are no end buyers. Do prices go down, or bulls keep arguing that China will take care of the inventories in a year? Does dollar weakness keep commodity prices high which leads to stockpiling of inventories. 

The key to inflation is not output gap. It is commodity prices, at least in emerging markets like India. The last year was the year of Keynesians. I think Friedmanites are going to get an opportunity to strike back very soon. How exactly we get inflation - I am not very sure. Investors are taking Libor + 50bps funding provided by the brokers to take a flyer on everything risky.   


If emerging market stocks run another 20%-30% from here, I am pretty sure oil will follow. The same logic that investors are using to bid up asset prices - liquidity from the Fed - can and is being used to bid up oil prices. 

The thing is - there is no theory to figure out what the price of a commodity should be. For stocks, one can use DCF or some other intellectual justification. What should one use to figure out the price of oil? Supply is more than demand today. So should oil fall to $50 or $40. Why not $10? An economist will say - well the price of oil should be such that demand is met over the next few years and oil exploration companies are able to earn their cost of capital. If oil companies make excess profits, than price of oil is high. Needless to say, this logic has zero practical applicability. 

Markets are open right now for both equity and debt, and the Fed will be hoping that investors calm down a bit. Because if they don't, by their very actions, investors will cause inflation to happen. It might not happen in US as much where commodity prices are not a big part of CPI, but it will definitely happen in emerging markets like India.