The Big guys love the small ones.. !

There's been a lot of talk of M&A in the Indian banking sector recently. Just today the Mint came out with an article stating that larger private sector banks in India are considering purchase of smaller banks.

Essentially the trade idea is to go long small banks with a view that they'll get sold at 4x book..most of them are currently trading at 1-2x book. simultaneously, one can short larger pvt sector banks which are trading between 3-4x book.. The trade should yield between 33% to 100% depending on basket selection..

The main problem with the trade is timing. There is a great deal of uncertainty over when the merger activity in the pvt banking space will expedite. That will determine the annualized yield on the trade.

I'm going to be analyzing this trade in detail over the next week or so.. and am looking to put it on my account depending on the results..

NIFTY Valuations…

I was recently looking at NIFTY valuations as defined by PE, PB and Dividend Yields..

         

On a PE basis, 24 seems to be the upper band since late 2009.. from the current levels, that indicates a potential 10% upside before serious valuation based selling pressure emerges.

Since 1999, the PE high preceding both the dot-come and the sub-prime crashes was around 28.. and the PE low in the 10-12 zone..

         

Data from NSE

Technorati Tags: NSE,NIFTY,PE,Valuation,Indian Markets

The Chinese Revaluation

Interesting.. investing !

From the WSJ,

Betting on the Bad Guys
Cartoonist Scott Adams's personal road to riches:
Put your money on the companies that you hate the most
When I heard that BP was destroying a
big portion of Earth, with no serious discussion of cutting their dividend, I
had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy
their stock. And so I did. Although I should have waited a week.
People ask
me how it feels to take the side of moral bankruptcy. Answer: Pretty good!
Thanks for asking. How's it feel to be a disgruntled victim?
I have a theory
that you should invest in the companies that you hate the most. The usual reason
for hating a company is that the company is so powerful it can make you balance
your wallet on your nose while you beg for their product. Oil companies such as
BP don't actually make you beg for oil, but I think we all realize that they
could. It's implied in the price of gas.
Scott Adams
I hate BP, but I
admire them too, in the same way I respect the work ethic of serial killers. I
remember the day I learned that BP was using a submarine…with a web cam…a mile
under the sea…to feed live video of their disaster to the world. My mind
screamed "STOP TRYING TO MAKE ME LOVE YOU! MUST…THINK…OF DEAD BIRDS TO MAINTAIN
ANGER!" The geeky side of me has a bit of a crush on them, but I still hate them
for turning Florida into a dip stick.
Apparently
BP has its own navy, a small air force, and enough money to build floating
cities on the sea, most of which are still upright. If there's oil on the moon,
BP will be the first to send a hose into space and suck on the moon until it's
the size of a grapefruit. As an investor, that's the side I want to be on, with
BP, not the loser moon.
I'd like to see a movie
in which James Bond tries to defeat BP, but in the end they run Bond through a
machine that turns him into "junk shot" debris to seal a leaky well. I'm just
saying you don't always have to root for Bond. Be flexible.
Perhaps you think
it's absurd to invest in companies just because you hate them. But let's compare
my method to all of the other ways you could decide where to
invest.
Technical Analysis
Technical analysis involves studying graphs of
stock movement over time as a way to predict future moves. It's a widely used
method on Wall Street, and it has exactly the same scientific validity as
pretending you are a witch and forecasting market moves from chicken
droppings.
Investing in Well-Managed Companies
When companies make money,
we assume they are well-managed. That perception is reinforced by the CEOs of
those companies who are happy to tell you all the clever things they did to make
it happen. The problem with relying on this source of information is that CEOs
are highly skilled in a special form of lying called leadership. Leadership
involves convincing employees and investors that the CEO has something called a
vision, a type of optimistic hallucination that can come true only in an
environment in which the CEO is massively overcompensated and the employees have
learned to be less selfish.
Track Record
Perhaps you can safely invest in
companies that have a long track record of being profitable. That sounds safe
and reasonable, right? The problem is that every investment expert knows two
truths about investing: 1) Past performance is no indication of future
performance. 2) You need to consider a company's track record.
Right, yes,
those are opposites. And it's pretty much all that anyone knows about investing.
An investment professional can argue for any sort of investment decision by
selectively ignoring either point 1 or 2. And for that you will pay the
investment professional 1% to 2% of your portfolio value annually, no matter the
performance.
Invest in Companies You Love
Instead of investing in companies you hate, as I
have suggested, perhaps you could invest in companies you love. I once hired
professional money managers at Wells Fargo to do essentially that for me. As
part of their service they promised to listen to the dopey-happy hallucinations
of professional liars (CEOs) and be gullible on my behalf. The pros at Wells
Fargo bought for my portfolio Enron, WorldCom, and a number of other much-loved
companies that soon went out of business. For that, I hate Wells Fargo. But I
sure wish I had bought stock in Wells Fargo at the time I hated them the most,
because Wells Fargo itself performed great. See how this works?
Do Your Own
Research
I didn't let Wells Fargo manage my entire portfolio, thanks to my
native distrust of all humanity. For the other half of my portfolio I did my own
research. (Imagine a field of red flags, all wildly waving. I didn't notice
them.) My favorite investment was in a company I absolutely loved. I loved their
business model. I loved their mission. I loved how they planned to make our
daily lives easier. They were simply adorable as they struggled to change an
entrenched industry. Their leaders reported that the company had finally turned
cash positive in one key area, thus validating their business model, and proving
that the future was rosy. I doubled down. The company was Webvan, may it rest in
peace.
(This would be a good time to remind you not to make investment
decisions based on the wisdom of cartoonists.)
But What About Warren
Buffett?
The argument goes that if Warren Buffett
can buy quality companies at reasonable prices, hold them for the long term and
become a billionaire, then so can you. Do you know who would be the first person
to tell you that you aren't smart enough or well-informed enough to pull that
off? His name is Warren Buffett. OK, he's probably too nice to say that, but I'm
pretty sure he's thinking it. However, he might tell you that he makes his money
by knowing things that other people don't know, and buying things that other
people can't buy, such as entire companies.
People Love Berkshire Hathaway
And That Has Done Great
I'm not saying that the companies you love are
automatically bad investments. I'm saying that investing in companies you love
is riskier than investing in companies you hate.
Second, take a look at Berkshire Hathaway's
holdings. It's a rogue's gallery of junk food purveyors, banks, insurance
companies and yes, Goldman Sachs and Moody's. The second largest holding of
Berkshire Hathaway is…wait for it…Wells Fargo.
(Disclosure: I own stock in Berkshire Hathaway for
the very reasons I'm describing. And my first job out of college was at Crocker
National Bank, later swallowed by Wells Fargo.)
Let's talk about morality.
Can you justify owning stock in companies that are treating the Earth like a
prison pillow with a crayon face? Of course you can, but it takes some mental
gymnastics. I'm here to help.
If you buy stock in a despicable company, it
means some of the previous owners of that company sold it to you. If the stock
then rises more than the market average, you successfully screwed the previous
owners of the hated company. That's exactly like justice, only better because
you made a profit. Then you can sell your stocks for a gain and donate all of
your earnings to good causes, such as education for your own kids.
Having absorbed all of the wisdom I have presented
here so far, you are naturally wondering if I have any additional investment
tips. Yes, and I will put my tips in the form of a true story. Recently I bought
something called an iPhone. It drops calls so often that I no longer use it for
audio conversations. It's too frustrating. And unlike my old BlackBerry days, I
don't send e-mail on the iPhone because the on-screen keyboard is, as far as I
can tell, an elaborate practical joke. I am, however, willing to respond to
incoming text messages a long as they are in the form of yes-no questions and my
answer are in the affirmative. In those cases I can simply type "k," the
shorthand for OK, and I have trained my friends and family to accept L, J, O, or
comma as meaning the same thing.
The other day I was in the Apple Store,
asking how to repair a defective Apple laptop, and decided, irrationally, that I
needed to have Apple's new iPad. The smiling Apple employee said she would be
willing to put me on a list so I could wait an indefinite amount of time to
maybe someday have one. I instinctively put my wallet on my nose and started
barking like a seal, thinking it might reduce the wait time, but they're so used
to seeing that maneuver that it didn't help.
My
point is that I hate Apple. I hate that I irrationally crave their products, I
hate their emotional control over my entire family, I hate the time I waste
trying to make iTunes work, I hate how they manipulate my desires, I hate their
closed systems, I hate Steve Jobs's black turtlenecks, and I hate that they call
their store employees Geniuses which, as far as I can tell, is actually true. My
point is that I wish I had bought stock in Apple five years ago when I first
started hating them. But I hate them more every day, which is a positive sign
for investing, so I'll probably buy some shares.
Again, I remind you to
ignore me.—Scott Adams is the creator of "Dilbert."

Euro update !

The Euro's been one hell of an instrument to trade ! Yesterday's weakness was a result of negative comments coming out of Eastern European economies.. esp Hungary. News has it that the IMF steering committee head indicated that the IMF is underfunded compared to its bailout commitments.. and senior IMF officails are 'unofficially' visiting Hungary..

Euro has been taking support at 1.2150 for quite some time.. a decisive move below 1.2150 on EURUSD, 110 on EURJPY and above 1.42 against the CHF will indicate crisis part II is beginning.. untill then, we're in no man's land. One can speculate (as indeed I am inclined to) that the levels will break, but when is anybody's guess. Further, a sharp sell-off in risk assets will happen only if the breakdown is a step function (as opposed to an orderly decline that the ECB might want to see).

Bill Gross on Rating Agencies !

Excerpt from a very interesting article by Bill Gross of PIMCO on rating agencies...

Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!

Now let’s go the other way. GMAC, that only too recently near-bankrupt finance company, carries recentlyupgraded B ratings from the rating services. Profiles in courage for all three, I say! I mean the U.S. government has injected $20 billion of capital and owns 65% of the company. It’s the auto industry’s equivalent of FNMA and FHLMC, except those are AAA and GMAC is B with a “positive outlook!” For that, you can buy a GMAC two-year bond at 6½% (8% with what are called “smart notes” that Investment Outlookreaders can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!

Euro creeps up again...

After a vicious sell-off following the Spanish bank failure, the Euro has begun to recover. If this is intervention, then the Central Bank dealers have changed their tactics.. no more 100pip 'shock and awe' moves. However, the risk to the Eurozone remains.

The Swiss National Bank has been intervening in the EUR-CHF markets aggressively.. read post on FT Alphaville.

Real Estate in Spain has been a pain for some time to come. This can be the next damper in the Euro saga.. Watch out for news events linked to Spain.

RNRL vs Reliance? a 50% trade? - Update III

Ho boy.. lucky that we got out of the trade while RNRL was still at 45.. Mukesh and Anil Ambani patched up. Now this is interesting if you think about it.. How exactly does this help RNRL.. They were getting gas at $4.2..which they still are.. nothing else changes. RCom can now hug and be merry with MTN now; but that should take the market cap down not up if Bharti-Zain is anything to go by..

This is a mere sentiment booster.. I think RNRL's longer term valuation still should remain at 30 to 40 levels.. Don't buy.. Shorting an ADAG stock is not a feat for the faint hearted.. and anyway, the quick trading move is over as discussed in my last post.

RelInfra and Relcap (esp RelCap which is a steal at 650 levels) are good buys from the ADAG group at current prices..

Update: Long Equity/Short Gold.. Doubts creep in..

Just a few days back I had recommended a long equity/short gold strategy .. I'd like to revisit that stance.. We've made between 1% to 3% on that trade.. gold was at 1200-1220 levels .. and the SP500 was slightly lower..

I'd take the money off the table at this point.. The new trade's a long bull spread with Long 1x 2% OTM calls and Short 1.5X 5% OTM calls.. A naked futures position is not warranted at this point given the global market situation.

My expectation is that we'll move lower from here.. but the risk/reward is clearly in favor of a long equity position at this point. I'd still like to bet with the Central Banks (see previous article), just that my conviction levels are lower now.

Trade safe !

ps.. stay out of currencies.. they're a rigged game now.. and the house may not have complete control !

Wanna make money...? go long equity/short gold

We're witnessing historic times.. Just 18 months after the largest financial crisis since the Great Depression, speculators around the world are playing yet another end-of-world game.. and a game with higher stakes.

Here's what's happening.. Short Euro, Long Credit Default Swaps of the UK, France, PIIGS.. eventually the US and Japan. Short risk assets, move money into dollars.. but people are worried about the debt situation in the US as well so the natural end of world trade commodity - gold - should go up. These trades will payoff if the Euro collapses..and if it does, then one can move to other OECD sovereigns and play the same game. Greek, small as it may be, has become the unfortunate playground for the clash between Central Banks and Speculators.

Greek, which should ideally have been allowed to restructure its debt, can't be let to do that as the European banking system will then need to be bailed out. Fixed Income desks around Europe have been in the convergence trade since after the institution of the Euro - they go long high yielding bonds from countries such as the PIIGS and short the bunds to earn the spread (assumption was that credit risk of all euro countries is equal).. If the Greeks restructure their debt, banks in the Euro zone will have to take large hits on their bond portfolio which contribute towards their Capital Adequacy Ratio.. They will then need to be bailed out/recapitalized by the public sector. Markets will freeze and we'll see an uglier version of 2008 banking crisis as contagion will spread to other asset classes. In short, to avoid a really large, potentially unmanageable, bailout of the entire Anglo-Saxon financial system, private mark downs on Greek government debt needs to be avoided.

The reasons why I think the Central Banks can win this war against speculators on the currency front are simple

• they've got infinite capital (they can print), and they don't care about MTM. The P/L is not their target, nor is their compensation linked to the P/L
• they understand the stakes and they have the legal powers (which was not the case when the US authorities had to let Lehman go.. they understood the stakes but did not have the legal authority to save Lehman)

For the Central Banks and Governments to win against the speculators to win against the speculators, in addition to the interventions, they also need to cut debt to inspire market confidence in the longer term. Unfortuantely, the incentives created by the electoral cycle are misaligned with the economic cycle; cutting salaries now tends to cause governments to lose support while the sops associated with higher debts normally bring in more votes.

The immediate downside risk to global financial markets right now is not economic or financial activity;its political instability in Greece. If Greece decends into political and civil chaos, all bets are off. Best thing to do would be to wait till things settle down. If not, go as levered long as you can on equities for a really rapid 5% gain (and a 5% fall in gold)...