In the women rhythmic gymnastics event, the Israeli team choreographed the last 60 second or so of their last routine on "Dhoom Taana" from Om Shanti Om. They finished 6th. Very strange indeed!!
In 2004 Olympics, China won 73 medals and India won 1. In 2008 Olympics, China won 100 and India 3. Indian Olympics is a much higher growth story (growth of 200%) compared to a maturing Chinese story (growth of only 40%). Giving a 200x multiple to India's 3 medal count (there is a huge runway of growth left) and a 6x multiple to low growth China medal count story (this is a cyclical peak due to home country advantage, besides how much more can they go to), we come to a valuation of 600 for both. India has finally caught up with China!!!!
Tuesday, August 26, 2008
Wednesday, August 20, 2008
Freddie Mac
It seems Freddie Mac is going out of existence soon. For a $2bn market company (as of now, when stock has fallen another 20% after being massacred throughout the week), how does it raise $10 bn? Bush administration is going to be forced to do something dramatic just before it bows out of the White House.
I just saw the fight that really launched HBO (and the cable TV industry) in 1975 on ESPN. Thriller in Manila - the fight between Ali and Frasier - was the first live telecast using satellite. Gerald Levin was the brain behind this. He was also the CEO of Time Warner 25 years later when it merged with AOL - the largest M&A deal ever.
I just saw the fight that really launched HBO (and the cable TV industry) in 1975 on ESPN. Thriller in Manila - the fight between Ali and Frasier - was the first live telecast using satellite. Gerald Levin was the brain behind this. He was also the CEO of Time Warner 25 years later when it merged with AOL - the largest M&A deal ever.
A Verizon takeover of Vodafone
A speculation here. The biggest M&A deal in the world of the next 4 years is going to be a Verizon takeover of Vodafone. Verizon might then divest its landline business and become a global wireless operator - somewhat on the lines of what Vodafone did to Mannesmann at the beginning of the century.
It all boils down to Verizon Wireless - in which Verizon owns 55% and Vodafone owns 45%. It is probably the best wireless operator in the world with a churn of sub 1.2% and is a crown jewel. Because of the way Verizon has manipulated the situation, Vodafone's stock has become relatively undervalued, while Verizon has become relatively overvalued.
Here is why. A lot of telecom investors are focussed on dividend yield and free cash flow yield. Verizon controls the board of Verizon wireless and it has argued against Verizon Wireless paying a dividend to its parents to reduce its leverage for years. This works fine with Verizon. It consolidates Verizon Wireless, so the consolidated cash flow statement includes all of Verizon Wireless's cash flow (including Vodafone's piece of it). So the free cash flow calculated using cash flow statement overstates Verizon's free cash flow power. Besides, as debt reduces at Verizon Wireless, it makes consolidated leverage at Verizon look better (if one forgets to count minority interest as debt).
Vodafone has no such luck. It carries Verizon Wireless as an investment on its balance sheet. Because it doesn't receive any dividend from VZW, its cash flow statement doesnt include any benefit from VZW, and so its free cash flow is understated. Whatever free cash flow Vodafone generates today, it is from its properties other than VZW, and it is from this that it is paying out its dividend.
So on a free cash flow yield basis, Vodafone is cheap. A big cause of it is VZW. Verizon can capture this discount. Pound has started weakening, and if it continues to weaken further as UK falls off, UK takeover targets will become attractive in the next 3-4 years. Someday, Sprint will get its act back in US and it will become difficult for VZW to grow by churning Sprint subs. Growth in US wireless through domestic M&A will be difficult - after Alltel, there is hardly anyone of scale left to acquire. VZW will spend 2-3 years integrating Alltel. That is when Verizon will pounce on Vodafone.
It all boils down to Verizon Wireless - in which Verizon owns 55% and Vodafone owns 45%. It is probably the best wireless operator in the world with a churn of sub 1.2% and is a crown jewel. Because of the way Verizon has manipulated the situation, Vodafone's stock has become relatively undervalued, while Verizon has become relatively overvalued.
Here is why. A lot of telecom investors are focussed on dividend yield and free cash flow yield. Verizon controls the board of Verizon wireless and it has argued against Verizon Wireless paying a dividend to its parents to reduce its leverage for years. This works fine with Verizon. It consolidates Verizon Wireless, so the consolidated cash flow statement includes all of Verizon Wireless's cash flow (including Vodafone's piece of it). So the free cash flow calculated using cash flow statement overstates Verizon's free cash flow power. Besides, as debt reduces at Verizon Wireless, it makes consolidated leverage at Verizon look better (if one forgets to count minority interest as debt).
Vodafone has no such luck. It carries Verizon Wireless as an investment on its balance sheet. Because it doesn't receive any dividend from VZW, its cash flow statement doesnt include any benefit from VZW, and so its free cash flow is understated. Whatever free cash flow Vodafone generates today, it is from its properties other than VZW, and it is from this that it is paying out its dividend.
So on a free cash flow yield basis, Vodafone is cheap. A big cause of it is VZW. Verizon can capture this discount. Pound has started weakening, and if it continues to weaken further as UK falls off, UK takeover targets will become attractive in the next 3-4 years. Someday, Sprint will get its act back in US and it will become difficult for VZW to grow by churning Sprint subs. Growth in US wireless through domestic M&A will be difficult - after Alltel, there is hardly anyone of scale left to acquire. VZW will spend 2-3 years integrating Alltel. That is when Verizon will pounce on Vodafone.
Monday, August 18, 2008
Oil, dollar and interest rates
I had thought in April that commodities will weaken as Fed ends its interest rate cut campaign, because that will support dollar. http://gaurav1.blogspot.com/2008/04/time-to-short-commodities.html. That didn't happen. Then I thought that probably Fed needs to hike interest rates to make dollar strong to kill commodities.
What has happened is different. Expectations on Europe have changed from rate increases to rate cuts. So the expected interest rate differential between dollar and Euro has narrowed, strengthening the dollar and weakening commodities. A valuable lesson. Relative interest rates are more important than absolute interest rates in the forex market, and by extension commodities.
There is a clear linkage between credit crunch and commodities through interest rates and forex moves. A lot of people think these are two seperate problems. They are not. All these demand-supply theories on commodities are BS in the short run, and not enought to explain oil prices going up from 100 to 145 in 3 months.
This is another evidence of the point made by Charles Kinderberger in "Manias, Panics and Crashes" - asset deflation moves from asset class to asset class and country to country - often through capital market linkages. Oil price spike caused by credit crunch has made sure that emerging markets weaken significantly.
What has happened is different. Expectations on Europe have changed from rate increases to rate cuts. So the expected interest rate differential between dollar and Euro has narrowed, strengthening the dollar and weakening commodities. A valuable lesson. Relative interest rates are more important than absolute interest rates in the forex market, and by extension commodities.
There is a clear linkage between credit crunch and commodities through interest rates and forex moves. A lot of people think these are two seperate problems. They are not. All these demand-supply theories on commodities are BS in the short run, and not enought to explain oil prices going up from 100 to 145 in 3 months.
This is another evidence of the point made by Charles Kinderberger in "Manias, Panics and Crashes" - asset deflation moves from asset class to asset class and country to country - often through capital market linkages. Oil price spike caused by credit crunch has made sure that emerging markets weaken significantly.
Tuesday, August 12, 2008
Commodity crack-up..
Commodities are cracking - finally. If it becomes a deeper slump over the next 24 months, there are going to be lots of issues with industrial companies and banks that are heavily exposed to steel, cement and other commodity companies. The swing factor for a lot of these commodities is China, and I have no clue about what is happening there.
In the immediate term, commodity stocks might fall a lot and start pricing in a very pessimistic scenario. One of the key learnings of the last 9 months is - nothing goes down forever. So there might be a quick trade here. But there is a global slowdown/recession, it is spreading, and high commodity prices dont fit in well with a theory of global slowdown. I think inflation is going to turn into deflation over 24 months. So need to be careful with commodities.
Sold out Aban at a loss of 30% - there are much better oil drillers available cheaply now with lower leverage, higher exposure to deepwater drilling, and better corporate governance. This stock didn't rally when oil was moving up in May June because Indian markets fell, and hasn't rallied since when Indian markets have gone up in July-August, because well oil has been falling. Now when Indian markets fall again, and their fall this time will have nothing to do with oil, this stock can crack up further. For a highly leveraged company, its stock price is paramount to its survival.
Why will India markets fall again? They have been rallying since RBI apparently surprised the markets with more tigheting than the markets bargained for - because oil is falling. Interest rates and inflation are high and they are not coming down for the next 5 months, and all you need is 5 months to turn the cycle decisively. Earnings estimates are way out of whack for all Indian companies.
In the immediate term, commodity stocks might fall a lot and start pricing in a very pessimistic scenario. One of the key learnings of the last 9 months is - nothing goes down forever. So there might be a quick trade here. But there is a global slowdown/recession, it is spreading, and high commodity prices dont fit in well with a theory of global slowdown. I think inflation is going to turn into deflation over 24 months. So need to be careful with commodities.
Sold out Aban at a loss of 30% - there are much better oil drillers available cheaply now with lower leverage, higher exposure to deepwater drilling, and better corporate governance. This stock didn't rally when oil was moving up in May June because Indian markets fell, and hasn't rallied since when Indian markets have gone up in July-August, because well oil has been falling. Now when Indian markets fall again, and their fall this time will have nothing to do with oil, this stock can crack up further. For a highly leveraged company, its stock price is paramount to its survival.
Why will India markets fall again? They have been rallying since RBI apparently surprised the markets with more tigheting than the markets bargained for - because oil is falling. Interest rates and inflation are high and they are not coming down for the next 5 months, and all you need is 5 months to turn the cycle decisively. Earnings estimates are way out of whack for all Indian companies.
Monday, August 11, 2008
Catching the bottom
Barrons has this excellent reason for why no one can catch the bottom...
"THERE'S A REASON THAT STOCK PRICES ALWAYS BOTTOM BEFORE the economic news turns for the better -- and it isn't all about the "wisdom of crowds" working its information-processing magic in the crucible of the market.
It happens partly because a struggling market, in its impatience, tries to anticipate the turn so often, with bottle-rocket rallies, that eventually it turns out to be right.
It's easy to tell the false dawns from the real ones, of course. Just wait a year or two, and it'll be clear in retrospect. Divining it in real time and anticipating the anticipatory is a good deal tougher."
"THERE'S A REASON THAT STOCK PRICES ALWAYS BOTTOM BEFORE the economic news turns for the better -- and it isn't all about the "wisdom of crowds" working its information-processing magic in the crucible of the market.
It happens partly because a struggling market, in its impatience, tries to anticipate the turn so often, with bottle-rocket rallies, that eventually it turns out to be right.
It's easy to tell the false dawns from the real ones, of course. Just wait a year or two, and it'll be clear in retrospect. Divining it in real time and anticipating the anticipatory is a good deal tougher."
Wednesday, August 06, 2008
The risk is volatility
In financial theory, volatility of an asset class is considered as a proxy for its investment riskiness. The risk is captured in the discount rate. So, to value on asset, the formula is
V = Sum of {C(i)/(1+r)^i}, i = 1 to infinity, where
V is the value of the asset,
i is the year,
C(i) is the cash flow in year i,
and r is the discount rate, calculated as
r = r(f) + Beta * {r(m) - r(f)}, where
r(f) is risk-free rate,
Beta is associated with volatility,
and r(m) is the market return
This way, rising volatility increases discount rate, reducing the value of asset.
However, it ignores the impact volatility has on cash flows - the numerator of the equation above. The incidents of the last few months makes me believe that volatility impacts not only the denominator by increasing discount rate, but also the numerator by impacting cash flows.
Take the instance of Indian IT companies. Last year they were hit because rupee appreciated suddenly. They took on derivative positions, in some cases excessively. So, this year, they are getting jacked when rupee is depreciating. Last year, Indian importers didn't take forward cover, thinking rupee will appreciate forever. This year, they are getting hit.
The point is - volatility makes decision making difficult. If oil price rises to $145, should an airline hedge or not? Should a steel maker plan to massively expand capacity today or not - when there are some tentative signs that China is slowing? If people say that they will not make a decision till volatility subsides, that itself hurts overall growth. One man's savings is other man's income.
So, more than oil prices etc, I think it is volatility itself that will restrain global growth. The animal spirits are sagging - India and China had their share in the last few months and now it is Brazil's and Russia's turn - and they are essential for any boom to continue.
V = Sum of {C(i)/(1+r)^i}, i = 1 to infinity, where
V is the value of the asset,
i is the year,
C(i) is the cash flow in year i,
and r is the discount rate, calculated as
r = r(f) + Beta * {r(m) - r(f)}, where
r(f) is risk-free rate,
Beta is associated with volatility,
and r(m) is the market return
This way, rising volatility increases discount rate, reducing the value of asset.
However, it ignores the impact volatility has on cash flows - the numerator of the equation above. The incidents of the last few months makes me believe that volatility impacts not only the denominator by increasing discount rate, but also the numerator by impacting cash flows.
Take the instance of Indian IT companies. Last year they were hit because rupee appreciated suddenly. They took on derivative positions, in some cases excessively. So, this year, they are getting jacked when rupee is depreciating. Last year, Indian importers didn't take forward cover, thinking rupee will appreciate forever. This year, they are getting hit.
The point is - volatility makes decision making difficult. If oil price rises to $145, should an airline hedge or not? Should a steel maker plan to massively expand capacity today or not - when there are some tentative signs that China is slowing? If people say that they will not make a decision till volatility subsides, that itself hurts overall growth. One man's savings is other man's income.
So, more than oil prices etc, I think it is volatility itself that will restrain global growth. The animal spirits are sagging - India and China had their share in the last few months and now it is Brazil's and Russia's turn - and they are essential for any boom to continue.
Tuesday, August 05, 2008
The bull and bear dilemma
Alan Greenspan starts his article in FT today with the following sentence - "The surprise of recent months is not that global economic growth is slowing, but that there is any growth at all". That is precisely the reason why bulls and bears alike are being challenged.
For, when one puts on the bear hat, one can argue that credit destruction should have caused things to fall apart. Unfortunately for bears, that hasn't happened. Amongst all the doom and gloom, US is still growing at a snail pace. China still continues to grow - and it was the reason given behind the commodity price spike.
So, should one then become a bull? If the once in a century credit crunch results in just a 20% decline in equity markets, why should one ever not be in equities? To that, the bears will argue - just wait and watch. The real destruction will start now as China and India slow, and capital to western financial institutions becomes scarce.
There are various dilemmas in investing right now:
a) Should one invest for quarters? Suppose a stock like Bharti falls to 14x PE today when it is growing at 20%+. I can say with reasonable confidence that the next 12 months are going to be fairly good, and the next earnings report will be solid. I dont know what happens after that -competition heats up, inflation hits rural India causing subscriber addition to slow down etc. Should I buy for the next qtr? The risk is that the stock doesnt recover in the next 12 months. Or for that matter PSU banks. Chances that they report good numbers over the next 9 months is good, after that who knows. How should one think about investing when next qtr might be good but 2 year out might be bad?
b) Should one buy stocks that would be the last to fall? Stocks like Colgate, P&G etc? If things dont fall apart, one will end up making money in these - their multiples have also compressed, although not that much. And if things become really bad, one wouldnt lose much (hopefully)
c) Should one invest on reversion to the mean? The amazing thing of last few months is - whatever has fallen has come back, and whatever has risen has fallen back. Banks fall, then rise, then fall again, then rise. Commodites were going one way, now are going the other way. India was going down, Brazil was going up - in the last month Brazil is down 20% and India is up the same. The risk with this is - one never knows when the mean reversion happens. People were shorting oil at $120 in May, they would be only even now. Besides, what is the mean? Still, this is worth exploring.
Wednesday, July 30, 2008
Growth and commodity prices
What has helped US avoid a recession so far? Exports - to the fast growing emerging markets, read China, India etc.
What has caused commodity prices to go up? a) Loose monetary policy, b) China's growth - it is still growing at 10%+. I was looking at the presentations of various commodity companies - Mittal, Rio, BHP etc - and they all start with China and end with China.
In the previous commodity cycles, did prices fall because excess supply came up, or did they fall because demand didn't materialize? I dont know - my guess is demand growth was much lower than expected, so excess supply got created because suppliers were betting on a higher growth rate in demand.
Is it possible that China slows down just enough for commodity prices to fall, but still grows at a good enough rate to keep US out of recession? For this, Chinese growth will need to shift from investment led growth to consumption led growth. Whether it can happen at all, or if the pass can happen smoothly is a million dollar question.
Have Olympics distorted investment demand patterns in China in a big way this year? We will soon find out.
What has caused commodity prices to go up? a) Loose monetary policy, b) China's growth - it is still growing at 10%+. I was looking at the presentations of various commodity companies - Mittal, Rio, BHP etc - and they all start with China and end with China.
In the previous commodity cycles, did prices fall because excess supply came up, or did they fall because demand didn't materialize? I dont know - my guess is demand growth was much lower than expected, so excess supply got created because suppliers were betting on a higher growth rate in demand.
Is it possible that China slows down just enough for commodity prices to fall, but still grows at a good enough rate to keep US out of recession? For this, Chinese growth will need to shift from investment led growth to consumption led growth. Whether it can happen at all, or if the pass can happen smoothly is a million dollar question.
Have Olympics distorted investment demand patterns in China in a big way this year? We will soon find out.
Monday, July 21, 2008
Fooling some of the people all the time
I have been reading this book by David Einhorn - the most outspoken of the Lehman shorts - and it is terrific. I would highly recommend it to anyone who wants to spend a lot of time investing, for the following reasons.
1. This is probably the only book out there on how to build and research the short case on a stock. 99% of the investing books out there devote their attention on buying rather than selling.
2. This is a very good read for any bank analyst as to how financial companies can fudge numbers if they dont do mark-to-market (MTM). By avoiding timely writedowns and pushing NPAs out in the future, financial companies can engineer their stocks to remain high and raise additional capital at these inflated prices, so that problem loans become a small part of the overall capital base.
3. It is important to understand the true economics rather than the last quarterly financials - whether on the short side or the long side. I have not read a better account of financial forensics.
4. A short idea can also take a long time to play out. The investing philosophy is thus short and hold, rather than buy and hold. As the natural tendency of stocks is to go up, it is risky. So, one needs to be absolutely convinced of the investment thesis to do short and hold, much more than one is convinced on a long idea.
1. This is probably the only book out there on how to build and research the short case on a stock. 99% of the investing books out there devote their attention on buying rather than selling.
2. This is a very good read for any bank analyst as to how financial companies can fudge numbers if they dont do mark-to-market (MTM). By avoiding timely writedowns and pushing NPAs out in the future, financial companies can engineer their stocks to remain high and raise additional capital at these inflated prices, so that problem loans become a small part of the overall capital base.
3. It is important to understand the true economics rather than the last quarterly financials - whether on the short side or the long side. I have not read a better account of financial forensics.
4. A short idea can also take a long time to play out. The investing philosophy is thus short and hold, rather than buy and hold. As the natural tendency of stocks is to go up, it is risky. So, one needs to be absolutely convinced of the investment thesis to do short and hold, much more than one is convinced on a long idea.
Wednesday, July 16, 2008
An exchange traded debt sell off?
According to Quantomonline, there are 119 debt securities that are listed on the stock exchanges. I have put their ticker symbols below.
It seems as if there was a sell-off in the exchange traded debt of various securities yesterday, starting sometime around 10 am. AIG, Comcast, CBS, ING, AT&T - financial/non-financial debt all sold off. Someone must be liquidiating.
Now I know inflation is heating up and all these long duration bonds are most sensitive to interest rate changes. But how can one explain that AFE - AIG's senior unsecured debentures maturing in 2034 - are yielding 12%, while its 6-1/4 senior unsecured bonds maturing in 2036 are yielding 7.2%. Even its 2067 bonds are yielding 8.7%. Or for that matter - CCS, CCT and CCW - all Comcast unsecured bonds maturing somewhere around 2055 have different yields. CCS is yielding 8.7% and CCT and CCW are yielding 8.3%, while its 2038 bonds are yielding 7%.
Here is the list to make the portfolio on yahoo or google finance.
AAR ABA AEP-A AFC AFE AFF AKF AKT ALF ALQ ALZ ATT AVF AZM BGM CCS CCT CCW CEG-A CPV CRP CSB DFP DFY EHA EHB EHL EMO EMQ F-A FCJ FCY FCZ FGC FGE FSB FSE GAH GAJ GAR GBM GEA GEC GED GEG GEJ GEP GER GFW GFZ GJM GKM GMA GMS GMW GOM GPD GPJ GPM GPU GPW GRM GUL GUQ GXM HGM HTB HTN IJD IKJ IKL IKM IKR IND INZ ISG ISP LNC-G MLG MPJ NRC NRN NRU NXY-B OUI PFK PFX PHA PLV PMK POH PRD RBV RGM SBCKP SVJ XGM SGZ JSM ISM OSM TDI TDA TVE TVC UDM UZV UZG VNV WRS XCJ
It seems as if there was a sell-off in the exchange traded debt of various securities yesterday, starting sometime around 10 am. AIG, Comcast, CBS, ING, AT&T - financial/non-financial debt all sold off. Someone must be liquidiating.
Now I know inflation is heating up and all these long duration bonds are most sensitive to interest rate changes. But how can one explain that AFE - AIG's senior unsecured debentures maturing in 2034 - are yielding 12%, while its 6-1/4 senior unsecured bonds maturing in 2036 are yielding 7.2%. Even its 2067 bonds are yielding 8.7%. Or for that matter - CCS, CCT and CCW - all Comcast unsecured bonds maturing somewhere around 2055 have different yields. CCS is yielding 8.7% and CCT and CCW are yielding 8.3%, while its 2038 bonds are yielding 7%.
Here is the list to make the portfolio on yahoo or google finance.
AAR ABA AEP-A AFC AFE AFF AKF AKT ALF ALQ ALZ ATT AVF AZM BGM CCS CCT CCW CEG-A CPV CRP CSB DFP DFY EHA EHB EHL EMO EMQ F-A FCJ FCY FCZ FGC FGE FSB FSE GAH GAJ GAR GBM GEA GEC GED GEG GEJ GEP GER GFW GFZ GJM GKM GMA GMS GMW GOM GPD GPJ GPM GPU GPW GRM GUL GUQ GXM HGM HTB HTN IJD IKJ IKL IKM IKR IND INZ ISG ISP LNC-G MLG MPJ NRC NRN NRU NXY-B OUI PFK PFX PHA PLV PMK POH PRD RBV RGM SBCKP SVJ XGM SGZ JSM ISM OSM TDI TDA TVE TVC UDM UZV UZG VNV WRS XCJ
Tuesday, July 15, 2008
Loading up on CCS
Comcast is the largest cable company in US. Its leverage is 2.5x Net Debt/EBITDA ($30bn debt and $13bn EBITDA in CY08). Interest coverage is quite high at 6x (EBITDA/Interest). As it is a subscription based business model, it is quite recession proof. People might cut their video service as they are thrown out of their homes, or they will stop taking premium services. But the chances that this company goes into bankruptcy is close to 0, if their is anything close to 0 these days.
The company has various series of debt. One of the debt series - CCS - trades on stock exchanges like a stock. The company pays its interest like a dividend. The face value of this is $25. This is a 6.625% note due in 2056, but it is callable anytime after May 15, 2012.
Today, this has fallen a lot, for no obvious reason. Comcast stock and other debt of Comcast are trading just fine. At its current price of $19, the yield to call is 15%. The yield to call on other debt securities - depending on maturity and seniority - is not above 8%. The yield to call (rather than yield to maturity) is the right thing to look at, because if on May 2012, this debt is trading at today's price, Comcast will have every incentive to refinance the debt at the lower rates and pocket the difference.
I think this is one of the best investments out there. On a BBB corporate, one is getting a yield of a corporate in distress. I have bought some today at $19. Lets see how it works out.
The company has various series of debt. One of the debt series - CCS - trades on stock exchanges like a stock. The company pays its interest like a dividend. The face value of this is $25. This is a 6.625% note due in 2056, but it is callable anytime after May 15, 2012.
Today, this has fallen a lot, for no obvious reason. Comcast stock and other debt of Comcast are trading just fine. At its current price of $19, the yield to call is 15%. The yield to call on other debt securities - depending on maturity and seniority - is not above 8%. The yield to call (rather than yield to maturity) is the right thing to look at, because if on May 2012, this debt is trading at today's price, Comcast will have every incentive to refinance the debt at the lower rates and pocket the difference.
I think this is one of the best investments out there. On a BBB corporate, one is getting a yield of a corporate in distress. I have bought some today at $19. Lets see how it works out.
Dollar crosses 1.60 against Euro
The effect of Fannie and Freddie intervention on the dollar is here - dollar crosses 1.60 for the first time. But it is not that Euro should be strong against dollar - Eurozone is also struggling now. There is going to be competitive devaluation between dollar and Euro starting later this year.
If there is a way to get a fixed deposit in Chinese Yuan, that is probably the best investment right now. Even better would be middle eastern currencies that are pegged to USD. In an year where there are historic macroeconomic events occuring, the pegs could also be broken.
The debate right now isn't between a bull and a bear - it is between a bear and an ultra-bear.
If there is a way to get a fixed deposit in Chinese Yuan, that is probably the best investment right now. Even better would be middle eastern currencies that are pegged to USD. In an year where there are historic macroeconomic events occuring, the pegs could also be broken.
The debate right now isn't between a bull and a bear - it is between a bear and an ultra-bear.
Bharti- RCOM - MTN
The Bharti - MTN, RCOM - MTN saga has been going on-off for the last 3 months. Today ET is reporting that MTN is again sounding out Bharti after its failed talks with MTN. This is now smelling desperation rather than opportunity on the part of the various suitors, and might indicates one of these things:
a) Analysts and stocks are way too optimistic on the growth prospects of the Indian mobile companies. So Bharti and RCom are trying to use their stock to buy out other companies before the tide turns south.
b) Something similar could be said for MTN. It probably is looking to use its expensive stock as currency.
c) Is their really a strategic rationale to have an pan emerging markets mobile service player? There are hardly any revenue synergies in having a Indian subscriber as well as a South African subscriber. Cost synergies will be there - one can better negotiate with equipment vendors - but Bharti is big enough on its own to squeeze 90% of the cost savings out. There will still be different country headquarters etc, so how does one get SG&A synergies?
The stock chart of Vodafone says it all - stock is today where it was in May 98. Bharti would be better served by buying Idea or Vodafone India out if they really want to do a deal - reduce competitor, gain market share etc.
Monday, July 14, 2008
Fannie and Freddie continued...
It is a very confusing situation. If Paulson wants to avoid moral hazard, he has to extinguish current shareholders. He has done that once to Bear Sterns shareholders. Will he do the same with Fannie and Freddie shareholders? If these stocks stay where they are, there is no way these companies can raise the requisite equity. So treasury will step in, which will involve wiping out existing shareholders. Now logic might not work and Paulson might change tracks. But I will go with logic.
The survival of existing shareholders is contingent on stock going up. Stock price is driving the fundamentals. Interesting stuff. Don't think I will, can or should punt.
The survival of existing shareholders is contingent on stock going up. Stock price is driving the fundamentals. Interesting stuff. Don't think I will, can or should punt.
Fannie and Freddie worth punting?
Should I buy or sell Fannie or Freddie stock today? It is an interesting puzzle. On the positive side, US govt is now backing the debt of these companies. On the negative side, Paulson's track record with Bear Sterns shareholders will give a pause to punters in Fannie and Freddie.
This is what Paulson is saying in his news release:
"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction." So far in the news release, it seems shareholder survival of the troubled entity is crucial - this is not Bear Sterns.
and later:
"Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed."
Treasury is not buying equity today. They want the stock to go higher and see if these two can raise money through public markets. If the two stocks recover to $25 levels, there might be one new round of equity raise possible through public markets.
Are there brave people out there willing to put more equity into these black boxes at $25? My guess is - there are - at least for one more round. After that, if there is further need, US govt will be forced to step in and nationalize.
The point is - if Paulson wants to prevent shareholders from enjoying the benefits of his largesse, he needs to nationalize Fannie and Freddie today. If he is too worried about moral hazard, he should clearly state that Treasury will invest in these companies but at $1/share. From the opening of his press release, it appears he wants these two to remain public entities owned by shareholders.
I think this is like Lehman on March 18. I dont know about the long-term future of these companies. But the chances they double or triple in next 24 hours is high. There is a huge short interest in them, and short covering itself will propel them higher.
This is what Paulson is saying in his news release:
"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction." So far in the news release, it seems shareholder survival of the troubled entity is crucial - this is not Bear Sterns.
and later:
"Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed."
Treasury is not buying equity today. They want the stock to go higher and see if these two can raise money through public markets. If the two stocks recover to $25 levels, there might be one new round of equity raise possible through public markets.
Are there brave people out there willing to put more equity into these black boxes at $25? My guess is - there are - at least for one more round. After that, if there is further need, US govt will be forced to step in and nationalize.
The point is - if Paulson wants to prevent shareholders from enjoying the benefits of his largesse, he needs to nationalize Fannie and Freddie today. If he is too worried about moral hazard, he should clearly state that Treasury will invest in these companies but at $1/share. From the opening of his press release, it appears he wants these two to remain public entities owned by shareholders.
I think this is like Lehman on March 18. I dont know about the long-term future of these companies. But the chances they double or triple in next 24 hours is high. There is a huge short interest in them, and short covering itself will propel them higher.
Treasury and Fed back Fannie and Freddie
The treasury is increasing its lines of credit to the two mortgage giants. Also saying govt might take an equity stake in the company, if the companies request. Here is my take:
a) Bondholders: Definitely a plus for the bondholders. Fannie Mae and Freddie Mac debt is now treasury debt. This is moral hazard.
b) Equityholders: Isn't this an admission that the companies are undercapitalized, and might have difficulty raising money on their own in the debt market. If the Bear Sterns precedent is any guide, when Paulson forced Bear's board to accept $2, shouldn't the existing shareholders bail out - now.
There are so many people short these stocks that a short covering rally could easily double them in a day. If the stocks stabilize at $20-$25, raising capital at that price is also possible. This is a situation where the current stock price determines the fundamentals, not the other way round. These stocks can go to $0 and they can also go to $25.
Logic will say they should go to 0 - but logic has its limitations these days. I think that Paulson's idea on how to avoid moral hazard in Bear Sterns is going to come back and bite him someday.
c) Treasury bonds: Suddenly, there are many more treasury bonds out there. So yields should up. Still, Fannie and Freddie were always assumed to have govt backing. Don't think it should be a stomach churning spread widening.
d) Dollar: Do you really want to hold the dollar? This is not the last govt bailout. I think the real risk now is any unorderly fall in the value of the dollar. At some point, people will revolt against the printing machine.
e) Oil: If dollar is at risk of going down, oil is at risk of going up.
a) Bondholders: Definitely a plus for the bondholders. Fannie Mae and Freddie Mac debt is now treasury debt. This is moral hazard.
b) Equityholders: Isn't this an admission that the companies are undercapitalized, and might have difficulty raising money on their own in the debt market. If the Bear Sterns precedent is any guide, when Paulson forced Bear's board to accept $2, shouldn't the existing shareholders bail out - now.
There are so many people short these stocks that a short covering rally could easily double them in a day. If the stocks stabilize at $20-$25, raising capital at that price is also possible. This is a situation where the current stock price determines the fundamentals, not the other way round. These stocks can go to $0 and they can also go to $25.
Logic will say they should go to 0 - but logic has its limitations these days. I think that Paulson's idea on how to avoid moral hazard in Bear Sterns is going to come back and bite him someday.
c) Treasury bonds: Suddenly, there are many more treasury bonds out there. So yields should up. Still, Fannie and Freddie were always assumed to have govt backing. Don't think it should be a stomach churning spread widening.
d) Dollar: Do you really want to hold the dollar? This is not the last govt bailout. I think the real risk now is any unorderly fall in the value of the dollar. At some point, people will revolt against the printing machine.
e) Oil: If dollar is at risk of going down, oil is at risk of going up.
Sunday, July 13, 2008
Moral Hazard, Fannie Mae and Freddie Mac
Apparently, Hank Paulson is against bailing out the shareholders of the two entities - Fannie Mae and Freddie Mac (WSJ). His argument is that bailing out the shareholders will fan moral hazard. This was the same argument he used to suggest Bear Sterns be sold at $2.
However, he is forgetting about the moral hazard that is being created by bailing out the debt holders. Fannie Mae yields might actually tighten if the US govt gives explicit guarantee to its debt. Similarly, Bear Sterns bondholders benefitted when the bigger JPM took BSC over.
What Paulson and co dont want is for credit costs to jump up even more. If mortgage rates in US were to rise - they haven't really come down despite all the Fed cuts due to spread widening - housing will take a further beating. Paulson, Bernanke and co are deciding right now who wins and who looses.
However, he is forgetting about the moral hazard that is being created by bailing out the debt holders. Fannie Mae yields might actually tighten if the US govt gives explicit guarantee to its debt. Similarly, Bear Sterns bondholders benefitted when the bigger JPM took BSC over.
What Paulson and co dont want is for credit costs to jump up even more. If mortgage rates in US were to rise - they haven't really come down despite all the Fed cuts due to spread widening - housing will take a further beating. Paulson, Bernanke and co are deciding right now who wins and who looses.
Saturday, July 12, 2008
Oxicash
I remember reading 8 years ago - when I was still at IIT and the 3G spectrum bidding was happening at crazy valuations in Europe - that mobile will one day replace credit cards as the preferred way to pay. That obviously hasn't happened. People still prefer their cards or cash.
Now, it seems that Indian mobile companies are trying to push something similar. Airtel is touting mobile bill pay and cash trasfer using Madhavan and Vidya Balan as brand ambassadors. Today I saw an ad for Oxicash on television - a mobile payment gateway. In a country like India where mobile penetration is trending much higher than card penetration, it can be one of the most lucrative business opportunities if developed properly.
And its not only about the revenues. It can also save a lot of costs for mobile companies. At 250 mn subs and Rs 300 ARPU today, mobile companies rake in $25bn each year today. If they pay 2% to card companies, banks, merchants etc to collect all the money, it is a $500 mn annual drain on the bottomline. When India reaches 800mn subs in the next 10-20 years, the drain will be much much more. Lets see how these experiments turn out to be.
Now, it seems that Indian mobile companies are trying to push something similar. Airtel is touting mobile bill pay and cash trasfer using Madhavan and Vidya Balan as brand ambassadors. Today I saw an ad for Oxicash on television - a mobile payment gateway. In a country like India where mobile penetration is trending much higher than card penetration, it can be one of the most lucrative business opportunities if developed properly.
And its not only about the revenues. It can also save a lot of costs for mobile companies. At 250 mn subs and Rs 300 ARPU today, mobile companies rake in $25bn each year today. If they pay 2% to card companies, banks, merchants etc to collect all the money, it is a $500 mn annual drain on the bottomline. When India reaches 800mn subs in the next 10-20 years, the drain will be much much more. Lets see how these experiments turn out to be.
Thursday, July 10, 2008
Selling KBE
Fannie Mae and Freddie Mac are falling apart. This is that blow that can level financials for a long time to come. I wonder why Dow Jones and S&P are not falling more. Lost 30% on this in 2 months.
2008 is a seminal year in world history. Socialism is about to get a revival. Protectionist rhetoric is escalating. Govt expenditure is going to expand rapidly to contain the fallout from falling consumption and investment demand - worldwide.
2008 is a seminal year in world history. Socialism is about to get a revival. Protectionist rhetoric is escalating. Govt expenditure is going to expand rapidly to contain the fallout from falling consumption and investment demand - worldwide.
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