Monday, February 23, 2009

Independent in trouble

WSJ reported the other day that Independent News and Media - the Irish newspaper company - is in trouble because of its debt load, and might be looking to sell assets. Independent owns a 21% stake in Jagran Prakashan - one of the three listed newspaper companies in India. 

Newspaper companies in India have been badly hit in India because of overexpansion, ad slowdown, spiralling newspaper prices and depreciating rupee. But unlike the West, there is no secular pressure on the Indian newspaper industry. E-commerce is not developed at all in India due to low penetration of credit cards. And without e-commerce, it is unlikely that internet advertising takes off in a big way. There could be an interesting play in Jagran Prakashan stock if the stock gets hit because of this.  

Thursday, February 19, 2009

Greenspan's speech

Greenspan's speech at the Economic Club of NY on Feb 17 has two very interesting points, which I agree with:

a) Stock prices drive economic activity, not the other way around. A 10% change in stock prices has been associated with a 3% change in real capital expenditure in the same direction, going back to the 1920's.

b)  The crises will end when stock prices start moving up. This is a very important point. 

Almost everybody says that stock prices precede economic recovery by 6 months. I think the converse is true. Stock prices move up - for whatever reason - and if the trend gets sustained for a few months, they pull the real economy out of its doldrums. That is why price momentum is extremely important. 

This was the unfortunate logic  I used last May to turn bullish for a brief period of time. I was like - it doesn't make sense, but if the markets are rallying (post Bear Sterns bailout), it will itself take care of the problems.  Thankfully I didn't lose a lot. 

This is an excellent blog that someone has started - ZeroHedge. Highly recommended for anyone who is interested in credit markets. 

Wednesday, February 18, 2009

Correlations break

Some of the correlations seem to be breaking up. Risk aversion is rising, so dollar is stronger against Euro. But it is also rising against the Yen. Dollar-Gold inverse relationship has broken up in the last two months. 

Comcast is trading at 10% FCF yield. It is becoming quite tempting. 

China Russia sign $25 billion pact

WSJ is reporting China and Russia have signed a $25bn 20 year pact. Russia will supply 300,000 barrels per day in exchange for this $25bn. Something like this is what I wrote yesterday, when I suggested Kazakhstan should go to China and sell stake in some oil field. Now that big bro Russia has shown the way, other Eastern European countries will follow suit.

300K barrels per day = 109mn barrels a year. At a 9% discount rate - remember China is investing in 3% treasuries today - this would suggest a $25 oil price assumption. At a 15% discount rate - to put Russia geopolitical risk etc etc - we get $37 oil price assumption. Clearly Russia is reconciled to the new reality.

Russia in 2008 is different from Russia in 1998. It still has ton of forex reserves to buy time till the end of this year, where it could do deals like this to shore its forex. Ruble has been a  one way bet in the last two months, but Russia is far from collapse compared to other East European countries. What Putin needs to do is to convince Russians not to convert their rubles into dollars en masse, because then we get a self fulfilling prophecy.  

RBS Bonus Policy

 Deferred awards: Staff who are essential to the bank’s recovery and who might otherwise be at serious risk of leaving, and who remain with the Bank will receive a deferred award for 2008. The deferred award will be released in three equal annual instalments beginning June 2010 and payable in sub-ordinated debt of RBS i.e. not in cash.

Some bond investors have been suggesting to get involved in banking capital structure above where the govt is invested. Still, investors are worried - as they should be - and yields are now 20% on banking pref stocks. Now employees are also becoming involved in the capital structure. 

The more constituencies get involved in the capital structure, the more complex this entire nationalization issue becomes. Can the govt. come back and tell employees to zero their debt in 2010? The argument that employees have nowhere else to go won't remain true forever. 

Voluntary Capital Stock Destruction Programme

Governments around the world are keen on throwing trillions of dollars out of the window, and economic advisors and lobbyists of all stripes have an idea of how to best waste that money. So I thought I will also contribute to this. 

Housing prices remain the most critical variable in the current mess. Unless housing prices bottom, especially in the US, there is no end to the banking system convulsions. There is a relatively cheaper way - cheaper as in less than a trillion dollar way - to achieve this.

The median price of a US home is around $200K. If the US govt buys 1 mn homes at an average price of $200K and destroys them, it will cost the govt $200 bn. If that doesn't support house prices, the govt should buy another 1mn homes at $200bn, and destroy them.  If even that doesn't work, spend another $200 bn to destroy another 1mn homes. By that time, we would have probably taken care of all the excess inventory in housing, and put a floor on prices. Also, investors who have lent money to these 3 mn. houses through the securitization route would have recovered a decent amount of money, so they would also be better off. 

Now if this destruction is distasteful, govt can do something else - buy 3 mn homes and quarantine them, and announce that under no circumstance will these houses come to market till 2025.   By 2025, however, these unoccupied houses would anyway have become uninhabitable, and any new owner would be destroying them and rebuilding a new house. So, my preference is voluntary capital stock destruction.

There are many precedents to this idea. These precedents are called wars. The only difference is that in a war, it is somebody else who does the capital destruction. Here, we would be doing it ourselves. In a war, the GDP of a country usually increases.  

Basically, we would be digging a hole where one was filled in the last few years to increase nominal GDP, so that cash flows get generated and debt burden becomes manageable.

Now why somebody won't suggest this idea in serious policy discussions where economists are happy to blow up $2 trillion is beyond my understanding. 

The Eastern Europe Blowup

This is a true horror show happening. Maybe Kazakhstan should go to China and ask for $50bn in return for profit sharing in some future oil field. If Chinese can put $19 bn in Rio Tinto, they can also surely invest in oil fields. A communist country is becoming capitalist in a major way.    

There was a time two years ago when perceived risk was much lesser than actual risk. Now probably, we are in a phase where perceived risk is much higher than actual risk. for e.g. if all corporates are going to delever, then the actual risk of corporate bonds of strong companies is lesser than the perceived risk.   

Friday, February 13, 2009

Charter files for bankruptcy

What should have happened in 2001 has happened in 2009. Idearc, RHD, Univision several tv stations, radio companies and newspapers are in trouble. CBS should cut its dividend to 0 soon. 

The new Charter equity (whenever it is issued) will be interesting. Under the new capital structure, it might just become free cash flow breakeven ($13 bn debt = $1.3 bn interest expense + $1.3 bn capex = $2.6bn drain, and EBITDA should be $2.4-$2.5 bn in 2009). It will remain highly levered at 5x debt/EBITDA, so there might be an interesting play here. 

If there is one thing I am bullish on during the recession, it is broadband. It is probably the last thing that an unemployed person is going to cut - he/she needs to browse for jobs. Innovation on the Internet continues, and as new bandwidth hogging applications come up, consumers will take higher broadband speeds. WSJ had an article the other day as to how unemployed people are spending more time on the Internet to kill time - it is the new entertainment medium of choice, like movie theatres in 1930s. Broadband growth rates will be slower than before, both because of economy and a maturing broadband market, but I don't think we will see declining broadband connections anytime soon. 

DVD sales are declining while movie theatres attendance remains resilient - are movie theatres getting negotiating leverage back against the studios? - will need to check this one out.

Wednesday, February 11, 2009


WSJ today has a nice article on local TV station biz. And another one on the difficulties facing Clear Channel. This is the reason why I think CBS will run into trouble later this year. What this article doesn't mention is that networks like CBS, NBC, Fox and ABC make zero money - all the money is made by the tv stations. Disney also owns some tv stations, but its exposure to the troubled segments of the ad biz is lower than the rest of media companies. 

Reliance ADAG is still in JV with DreamWorks - the initial media reports suggested that this JV might also suffer. With Disney taking 10% distribution fee (instead of 8% with Universal) and DVD sales plummeting, it is hard to see how Ambani makes money on this. 

Washington Post is quite interesting - its newspaper business is declining, but the decline is lesser than peers. It also owns a cable business, and its education business (Barrons etc) is also quite strong. Need to look at it more closely.

Also need to look at Microsoft. Anecdotally, Windows 7 is a real improvement on anything Windows has offered so far. The replacement cycle for Vista never really happened. Microsoft stock used to run up in anticipation of new releases, but who knows what happens this year. 10% PC market decline, and mix shift to low priced notebooks is clearly -ve. 

Monday, February 09, 2009

Disney and DreamWorks

Anil Ambani is out of at least one hole - Dreamworks seems to be partnering Disney. Disney is the media stock that I would like to buy at some time. No newspapers or radio, and relatively little TV stations and network (ABC). ESPN is a monopoly in sports programming - and consumers want to see sports in live time rather than on DVRs. Parks are economically sensitive and will be hurt after a super run over the last few years - but there are no other good parks for kids besides Disney. With this distribution deal, they can increase the slate of movies on offer. 

Why doesn't any analyst cover Washington Post (WPO)? 

Lot of people in India keep talking that Anil Ambani is in a hole, though nobody know what that hole is. He timed the top of the market last year with his R-Power IPO in January. If he is in a hole, why are his companies still doing deals like crazy? 

Saturday, February 07, 2009

Some interesting stuff

1. Jeremy Grantham's interview transcript
2. Greenlight's 4Q08 letter: Click on the link on the last word of the post

Commodities, homebuilders and autos

Real estate and commodity stocks are similar - during boom times, both price and volume go up, and during the bear phase, both price and volume fall - creating huge swings in bottomlines and stock prices. So real estate is a commodity and a real estate investor can as well invest in steel.  

Real estate and auto are similar - they are the two biggest outlays in a consumer budget and are critically dependent on financing. So, both of them turn down when financing becomes tough.

Real estate and auto are dissimilar in one very important way - consumers view real estate as an investment item and auto as a consumption item. When I go and buy a house, my future outlook on home prices is one of the three most important factors driving my thought process - the other two being financing and my job/wage outlook. 

On the other hand, when I go and buy a car, I might try to time my car purchase to take advantage of some anticipated holiday discounts or tax reductions, but I will not bother to figure out what the price will be one year down the line. There are only two factors that drive consumer purchase decision - financing and job/wage outlook.

What all this suggests is that auto cycles are much more violent than real estate cycles. Globally, auto is in deep trouble because of flawed industry structure and mature demand. In India, where one can argue there is a lot of unmet demand, auto demand might bounce back quite sharply from depressed levels - I don't know what that depressed level is. 

Prices of cars doesn't vary as much as houses or steel year on year. So, in analyzing the auto industry, one needs to focus purely on volumes and market share. In commodities and homebuilders, one has to also focus on prices one year out - which is very hard to figure out. 

So, auto industry is relatively easier to analyse from supply demand perspective than the other two. What all this means is - there might be a lot of money to be made in the right Indian auto stocks by timing it right. 

DVD sales, Video Piracy and Media

Disney and News Corp reported sharp falls in DVD sales in the fourth quarter as consumers pull back on discretionary purchases. Netflix reported solid numbers - consumers are preferring to rent rather than buy. DVDs are the highest margin business for a studio - the disks are almost free and retailers don't take as much of a cut as movie theaters - so this will really hurt.

At the same time, broadband speeds are increasing in the US as the telcos and cablecos slug it out in the market. Consumers are looking to cut costs. Could we be looking at a step change in consumer attitudes towards video piracy? 

Media companies in US face huge challenges. Television stations and newspapers continue to see secular shift of ad dollars away to other mediums. Smart PE folks and Verizon have crushed yellow pages (RHD and Idearc) with debt loads. Radio has too many channels and too many ads on each channel for listener's comfort, and smart PE folks have been at work even here (Clear Channel). Movie studios face falling DVD sales. Cable networks are in relatively better shape, while Internet (Google) continues to take ad revenue share. 

I think CBS (which makes most of its money from television stations and radio) will run into debt trouble, unless it stops paying dividend and issues new equity. Sumner Redstone reportedly had debt troubles last year - if he had to chose between CBS and Viacom, he will let go of CBS. So there might be some M&A involving CBS. Comcast-CBS, regulators permitting?
Cable companies might be a better bet than telcos for their defensive attributes - their triple play product helps consumers save money. Of all the cablecos, Mediacom is perhaps the most interesting, because it is the most leveraged.  Except for Charter of course, which will finally go bust - this is the company that probably exemplifies the credit bubble better than anything else. 

Friday, February 06, 2009


I think I figured out one fallacy in the crowding out theory - that government bond issuance will crowd out private borrowing. 

Investment dollars need to be borrowed from somewhere. That comes from saving. So at any point of time, one can argue S=I. If at that instant of time, government suddenly decides to borrow more, the private sector will need to do with less. 

However, we are concerned with the temporal movement of savings. That is how do savings S1 at time T1 change to savings S2 at time T2. 

Suppose the govt decides to do nothing. There is an implosion in the economy. The govt did not borrow at time T1, yet because of the economic implosion, savings S2 at time T2 are 0 (for argument's sake), so the private sector can't borrow at time T2.

On the other hand, if the govt does something and the economy doesn't implode, savings S2 will be higher than in the scenario above. While there will be government borrowing, because of higher savings, the private sector too will be able to borrow something.  

So basically, govt intervention should be such so that savings S2 at time T2 are higher than without government intervention.  

Wednesday, February 04, 2009

PM kitchen sinks 2009

2009 EPS guidance of $2.85-$3.00 vs $3.41 consensus. The most interesting thing is this - on an organic basis, EPS would grow 10%-14% from the $3.32 base of 2008. There is a $0.80 hit from currency, i.e. currency is hitting the bottomline by 25%. So, on the core biz, the company is quite recession resistant. I haven't listened to the conf call, but I think they are also kitchen sinking 2009 - I don't see how you get -10% EPS based on current exchange rates. They must be using the forward curve for rouble and all other currencies. 

More than any other company I have seen, this is the company impacted by dollar strength and euro/emerging market weakness. There will come a time to become a dollar bear. This is probably the best stock to buy at that time.  Also a great stock to test the purchasing power parity theory. 

On dollar strength, there is another observation. People are saying that gold hasn't moved much. That is true in dollars - gold is still at $900. But look at it in roubles, pounds and all the other junk currencies there, and it is probably hitting all time highs. Till three months back, gold was inversely correlated to dollar. That correlation seems to have broken. Considering that consumption demand in India has fallen off a cliff, investment demand should have picked up a lot - this is just a guess. 

In 1930's there was deflation in some countries and hyperinflation in some others. Probably a similar dynamic is going to happen in the next two years - there are definitely some countries that are going to get caught in the hyperinflation scenario.

Disclosure: Long PM

Monday, February 02, 2009

What is Bankruptcy

Some people were infuriated that I was suggesting a Satyam bankruptcy few days ago and had no concern for its 50K employees. A bankruptcy is different from liquidiation - bankruptcy helps the assets of the firm operate under a new capital structure. It is one of the best ways to ensure that assets and employee jobs of an old firm survive. Look at Lehman - most of its employees are even today employed with Nomura and Barclays. 

Now that L&T and many other are looking forward to acquire the company (without having a reasonable handle on its balance sheet or legal liabilities), a Satyam bankruptcy might not be required. I think L&T is making a wrong decision, but it is a good decision for me. If everybody were to sit at home and not buy or sell stuff, the economy would collapse even more. I like animal spirits in other people - I just don't want animal spirits in me at this time.  

Did I miss buying Satyam that day (was it Jan 9) when it fell under Rs 10? Considering that the stock is now around Rs 50, that assessment would seem to be correct. One of my friends was pretty sure that the stock hits Rs 50 as buyers emerge. But then, there have been too many of Fannie, Freddie, Lehman, AIG etc last year - stocks that go down because of bankruptcy fears and then actually go down all the way to 0. I am not really unhappy that I didn't 4x in Satyam.