Saturday, March 18, 2006

M&A week and other updates

This past week got M&A on the front-pages a few times. I believe this is when small investors start noticing the profit potentital in premiums paid out. Out there in Europe, which is around 2 years ahead in this cycle, M&A has reached bubble proportions - it will be over soon.

I have been planning to go to 50% cash, from the previous 22% level, in my 401K. Instead I have switched to 100% cash. The euphoria and the recent evidence around re-emergence of retail investors is scary. I will wait on the sidelines for a while. My M&A focused investing is not impacted by this. At this stage in the interest rate cycle, a credit event usually shows up. Given that, and the yield curve inversion, I believe that my risks are reduced by going to cash. Moreover, like UAE announced recently, apparently in retaliation for the aborted ports deal, other countries may start announcing that they will convert part of their dollar holdings to euros. That has the potential to impact rates and yields in the most unexpected ways.

I recently sold most of my Rediff (REDF) shares. The shares of this Indian portal have gained more than 300% since I bought them following the post-election scare. I am holding a token number of shares should Rediff remain a target for Yahoo, but that seems remote now. I will be holding onto my other Indian investments. At this point, a 15-20% correction in the Indian stock market seems very likely. That would be a good point to buy some of the infrastructure/banking stocks. Japanese and Chinese stocks look more attractive today than Indian stocks.

The Middle Eastern stock markets have retreated spectacularly over the last few weeks, with 20-30% falls in major exchanges. Even with these pullbacks, markets like Egypt, Tunisia, Palestine and Dubai, have returned more than US exchanges over the last 3 years. Of course, most investors outside these countries wouldn't dare to invest, given the bias resulting from the way media reports events in these countries. Words and phrases like pot holed roads, caste system and corruption are gratuitously thrown in when reporting on these countries (check out today's Barron's feature on Rediff for an example - what a waste of valuable ink and newsprint!). Wonder if it will make any difference if these countries start formalizing corruption into lobbying practices and codify caste system into a Jim Crow legal framework. Maybe that will qualify more countries for entry into the G8! Think of all the investors who will jump in then. Wonder what a Dubai version of Ebbers will look like!


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