Saturday, April 29, 2006

Hall of shame - new entries

Pfizer failed to listen to shareholders again. Fund managers failed to act on behalf of shareholders, yet again. $65 million a year for an executive who has only created pain for investors ? And on top of that some $80 million in pension ?
All along, the company, like other majors, has been turning into an army of drug-peddlers, pushing drugs for invented conditions and advertising drugs like cars.

I wish that atleast $135 million of the $145 million, was spent in sub-Saharan countries where thousands die every day because drug companies refuse to help with a cheaper version of an AIDS drug. Or that the money was spent in curing real diseases, like TB, that kill millions, instead of spending on drugs for lifestyle diseases. But then again, the latter pays I guess, even when the long-term what they neeeffects are unknown, and even when only incremental enhancements are made available to keep the cash register ringing longer and longer.

Have these executives no shame left ? Are they even human anymore ? They seem to have turned into green-cellulose digesting monsters. How many yachts does one really need ? The executives with their greed and callous disregard for shareholders' sentiment, the directors with their wilful negligence and complicity, and the fund managers, with their apathy, put even the most barbaric of corrupt third-world bureaucrats and tinpot dictators to shame. At least the bribes seem to be indexed to local quality of life, inflation and purchasing power!

SEC Chairman Cox says that requiring fund executive pay disclosure is worth considering. Heck, it is and it has been for years. With an estimated 78% not performing better than the market, why do we need so many fund managers ? To keep editors at Barron's busy ? To keep golf courses full ? Fund executives' pay and funds' votes have to be disclosed - there is just no other way. As it is, they are skimming millions from people who see their retirement money eroding away. What took Cox so long to wake up ? When will this become a reality ?

There were more reports of options-related actions that indicate backdating of grants. Is it any wonder that the practice is so widespread! Shouldn't there be a three-strikes clause to take these dangerous people, along with the directors who approved the actions, out of boardrooms for good ? It is time for a war on thugs, just like the war on drugs, but this time the guys who steal millions need to be locked up and disenfranchised. Then again, did they ever vote or do they just buy favorable legislation ?

Finally a page of useful material on executive compensation, or more specifically, how even after earnings restatements, it is impossible to take back the earnings-tied bonuses/grants of the past, from executives. The restatements are obvious signs that earlier targets were not met and were mostly accounting trickery. Shouldn't it also be obvious that payments resulting from those lies should be returned ? Try telling that to a greedy executive! We need more regular pieces like this one.

Frankly, I believe that any executive who takes in more than 10 to 15 times the compensation of an average employee has no feelings for fellow humans anymore. I truly believe that Josef Mengele would have had more human qualities in him than these executives. As recent disclosures show, many have given themselves retirement packages that will pay them more in, get this, one day than an average American gets in a year! We need a catharsis, in the form of hundreds or thousands of these offenders being given life sentences or worse.

I love Microsoft

Did I say that out loud!

I love the stock that is, especially after the pullback today. I have been planning to write up on some small but interesting changes in Microsoft's attitude lately.
  • Microsoft seems to have finally realized that its customers may want to run Linux in addition to Windows. They are now ok with it!
  • Microsoft has also bought a few small companies in gaming and advertising recently.
  • It is also finding ways to turn its research projects into real products by acting as an incubator of startups, which likely will be acquired eventually.
  • There are some real changes like Windows Live that look great and could do a lot to help Microsoft depend less on Windows/Office for revenue down the road.
  • Give MSN search a try - it is almost as good as Google, and in some ways slightly better.
  • Finally, Microsoft seems to be willing to listen to its users more and (so far) has not put any limits on blogging by employees.

Given the potential for another one-time dividend payout, and also the real possibility that the regular dividend will be hiked substantially, the stock is now a good buy for any long term portfolio.

Thursday, April 27, 2006

Transmontaigne update

Transmontaigne today received a new offer of $10.5/share in cash, from Morgan Stanley. As I noted here, the initial offer was for $8.5/share from Morgan Stanley which was bettered by an offer of $9.75/share from SemGroup. I had also noted at that time that a higher offer was likely. Today's offer of $10.5/share is a 65% premium over my average cost. A still higher offer is in the offing I guess, with the shares now trading at around $10.85!
Higher and higher, please!

Hit #94

NetIQ (NTIQ), the performance management software company, is being acquired by Attachmate WRQ for $495 million in cash.

The deal values NetIQ shares at $12.2, a premium of 10.3% over my average cost per share of $11.06.

NetIQ has been rumored to be a target for a while, as it belongs to the class of the tech living-dead, with close to $5/share cash in hand. Management could have gotten a better deal for shareholders, but that is being overly optimistic!

Previous hit - Navigant (#93)

Hit #93

Navigant International (FLYR), a corporate travel services operator, is being acquired by Carlson Wagonlit Travel for $510 million in cash. The offer, of $16.5/share is a premium of 36.5% over my average cost of $12.09/share.

There are now just a handful of public companies left in this sector. I think we will see that shrink soon!

Two related companies, Ambassadors Group (EPAX) and Ambassadors International (AMIE), look interesting, but they aren't cheap. I will wait! Both have a good amount of cash in hand, and should be attractive at a 30-40% discount to their current price.

Previous hit - Serologicals (#92)

Tuesday, April 25, 2006

Hit #92

Serologicals (SERO) is being acquired by Millipore for $1.4 billion in cash. This buyout values Serological at $31.55/share, a premium of 137% over my average cost of $13.3/share.

I will have more to write about this sector soon - there are a lot more bargains in this neglected space.

For long term buy and hold owners, Millipore (MIL) is a good stock to own, especially so on any pullbacks from here.

Previous hit - Manugistics (#91)

Hit #91

Manugistics (MANU) is being acquired by JDA Software (JDAS) for around $210 million in cash. This offer, of $2.5/share, is just a 4% premium over my cost-per-share of $2.4.

My cost-per-share would have been much lower, but for the initial purchase of a lot at around $6/share!

There is more to come in the supply chain software sector. JDA is getting Manugistics cheaply, and there is a small chance of another bid emerging. I would have preferred a stock swap with a substantial premium!

There will only be 2 players left in this field eventually, Oracle and SAP. JDA may remain as a standalone third player, but unlikely. JDA itself looks like an attractive buy today. Manhattan Associates (MANH) and SSA Global (SSAG) are also not expensive now.

I had mentioned Manugistics as a target a few times in the past, including in a post when QRS got bought and later in a post on possible targets for IBM.

Also worth watching - Lawson (LWSN), Retalix (RTLX) and QAD (QADI).

Previous hit - Russell (#90)

Next on Buffett's plate ?

Warren Buffett bought Russell (RML), a few days ago, scoring another hit for me. With over $50 billion ready for deployment, there must be other targets out there waiting to be picked up.

I will play the guessing game and list all the potential candidates I can think of.
  • Gap (GPS): Buffett is invested in Gap. At its current price, buying outright might be a great deal.
  • Given his interest in insurance / reinsurance, some or all of these may make for bargains now - Arthur J. Gallagher (AJG), 21st Century (TW), Aspen Insurance (AHL), Montpelier (MRH), EMC Insurance (EMCI), Seabright Insurance (SEAB), Platinum Underwriters (PTP). Aspen and Montpelier became cheap after the 2005 mega hurricane season.
  • H&R Block (HRB): Another current holding. The pullback following Spitzer's investigation has made it cheap enough to be bought outright ?
  • New York Times (NYT), Dow Jones (DJ): These look cheap now. With current holdings in Washington Post and Gannett, Buffett may decide to buy out one of these.
  • Utilities/Coal/Nuclear energy: With the repeal of PUHCA, it must be easy to build a large utility empire now. I made some suggestions in a post on the KeySpan takeover. Coal/nuclear plays are expensive, fueled by investor interest in alternative choices, but wait till they become bargains.

Monday, April 24, 2006

Hog havens

I have recently posted on the current online video craze. Mercifully none of these companies are public, limiting the bubble and the damage. But one thing is for real - bandwidth demand is back!

The overbuilding of pipes to match the predicted bubble-era bandwidth demand led to a glut, and then gutted all the players sending a few into bankruptcy. The circle is complete, and it has been quick.

There is definitely a surge in bandwidth demand, what with Desperate Housewives and other shows now available for download. Will this one last ? It is likely to be more permanent compared to the last time.

How do you go about playing this upsurge ? Here are some picks. You are warned - many tend to be speculative. Watch your step.
  • Arbinet (ARBX): provides a platform for trading bandwidth. Shares look cheap, but a power struggle may keep them there for a while. I had mentioned in an earlier post on investing in exchanges.
  • Telkonet (TKO): broadband over powerlines. This has a large potential, especially when you consider that DSL is the only reason you need a phone line into your home today and that most phone companies don't provide naked DSL. I can't wait to get rid of AT&T!
  • Seachange International (SEAC): server systems for digital storage and on-demand/interactive tv. Seachange is well-positioned to profit from a mass move to on-demand and ip tv. Also Concurrent Computer (CCUR) and C-COR (CCBL) are worth watching.
  • Verizon (VZ), AT&T (T), Vodafone (VOD): Will net-neutrality end ? If so, these players will benefit. Verizon has also invested heavily in capacity upgrades in recent years and could succeed in delivering tv-over-IP better than the others. Vodafone has been rumored to be a target for private equity groups. All three have attractive yields.
  • KVH Industries (KVHI): A niche player. Among the few providers of mobile internet for marine and recreational vehicles.
  • RealNetworks (RNWK): With $800 million in hand after the Microsoft settlement, they must try really hard to lose. Napster (NAPS) is a takeover bait too, though it needs to work on its user experience before becoming as attractive as RealNetworks.
  • Tivo (TIVO), Netflix (NFLX): Along with RealNetworks, these two can provide some interesting services.
  • Salesforce (CRM), RightNow (RNOW): a nice circle of increased bandwidth making these services popular and that in turn driving bandwidth demand further.
  • Global Crossing (GLBC), Internap (IIP), Covad (DVW): These hot players of the boom period get a second chance.
  • Digital Music Group (DMGI), Loudeye (LOUD), Audible (ADBL): encoding and online audio content providers.
  • Seagate (STX), Western Digital (WDC), Sandisk (SNDK), Advanced Digital (ADIC), Overland (OVRL), Qualstar (QBAK), Ciprico (CPCI), Xyratex (XRTX): storage and backup for all that content!

My picks - Arbinet, Seachange, KVH, RealNetworks, WDC.

Dude, who the hell puts a sell on Dell!

Dell (DELL) got a rare sell from Citi analyst Richard Gardner! The good news - a sell on Wall Street is sighted less often than a bird of paradise in PNG! This is something to drink to (this is not a sober post unlike the earlier one)! The bad news - like so many sell calls, this one comes too late. Investors who followed this brave (!) analyst, would have bought high and sold low - doesn't smell like a formula for minting money!

The ugly truth - even in the post-Spitzer era - there are considerably more buy and outperformance ratings than sell and underperformance ones. Most analysts just aren't independent enough to tell it like it really is. At the same time, they still can move markets, with funds likely moving in and out based on these calls, costing small investors and postponing their retirements indefinitely.

How long before this analyst is shown the door ? Sell on Dell - what was he thinking!

As far as I am concerned, it is time to buy. I am putting my money where my mouth is - I am buying a few Dell shares this week. Thank you for giving me a great entry point!

Dell has work ahead of it, but I can wait while I accumulate. Dell is making the right moves. The recent acquisition of Alienware is a step in the right direction. Dell also seems to be working on improvements to software downloads from its site.

Dell will have to start shipping AMD servers to win back the enterprise market. It has been rumored for a while, but at this point, Dell needs it as much as or more than AMD!

Dell can also afford to go after Lexmark (LXK). Lexmark is an interesting buy right now.

I own some AMD shares, bought at around $11.4/share - will be holding onto them for a long time. Along with Dell, I plan to buy a few Lexmark shares this coming week.

I also own a large number of Intraware (ITRA) shares. Spot the connection (or should that be link!) to this post ?

While on undervalued tech picks I should again point out that both Oracle (ORCL) and Symantec (SYMC) are good long-term buys now.

Here is hoping that the analyst tribe goes the way of the dodo - I am unable to see what service they render to society.

Saturday, April 22, 2006

A few sobering and contrarian thoughts

  • Oil at a new high ? Sure. Oil at $100 in a year ? Not so sure. I can't see anyone making a case for the price to go down, so I am sticking my neck out risking a whacking. Various oil price forecasts seem to take into account only the supply, or rather the lack of it. How about the other side of the equation ? What if demand, in what is still the most important market, the US, falls ? I feel that a dramatic housing slowdown, well on its way now, will cut demand enought to bring oil back down to - hold your breath - $10 again, from around $70 now. Oil hysteria has now reached a stage where uneconomical alternative energy choices are being hyped daily by the media. Known oil reserve estimates may be overly optimistic, but what about newly opened reserves in regions formerly closed to exploration (Libya and Western Africa come to mind) ? The high oil price has finally led to one desirable effect - more orders for rigs, especially deep-sea ones. When many of these come online, will the market be able to take the supply ? What if oil-sands / oil-shale sources become extremely economical, boosting supply in the short-term ? I am asking questions that no one seems to be asking. As someone who reads practically every financial publication, I can say that there is fear in taking the non-consensus view. But what do I have to lose ?
  • High oil price did have one positive effect. Bringing some much-needed focus on oil executives' compensation packages. Exxon pay packages have been downright indecent - some spillage there! Unfortunately most media outlets either ignore this, and some even defend it. In an industry concentrated on extracting and selling a natural resource, and where the most innovative new thing involves finding new methods to torture indigenous peoples or to payoff local dictatorial thugs, the compensation packages just don't make sense. One executive's pay over five years can, and this is no exaggeration, eliminate drinking water problems and provide medical coverage for the whole of Nigeria!
  • The Iran premium built into oil prices is also something that can disappear in case of an outcome that deviates from most expectations. As a nation made of people who genuinely believe that their country deserves a better place in the world, Iranians must be as fed up with the nut ruling them as the rest of the world. A bloodless coup by pragmatists/moderates will likely find large internal support. Will it happen ? We all can hope for it! Iranians definitely deserve a better ruler and a better place in the community of nations.
  • Is high oil having some impact ? Definitely. I personally have cut back on unnecessary driving. I have reduced my coffee intake further. I have even gone so far as to contact support at Zipcar to ask if they have plans for commuters with last-mile problems when using mass transit. Zipcar support did not respond to my original email, and on a second, somewhat upset followup, replied in a way no customer service department ever should! As for the reduced coffee intake, I am happy not to spend $4 on a latte, where most of that $4 leeches up to some overpaid executive - it wasn't right to buy them in the first place! And alas, going to a Starbucks is not a joy anymore either - in most places the service these days is disgusting and the cafes unclean!
  • While on cafes, the Starbucks alternative, Peet's, is a bit more tolerable, but the recent rapid expansion may have done more harm than good. I closed my positions in both a while ago, though as I said here, I will consider getting into Peet's if I see a better growth story. For now, Tim Hortons (THI), which started trading recently, is a better long term bet. Caribou Coffee (CBOU), which went public a few months ago, looks attractive with lots of insider buying, but be aware that this company, along with many others, are feeling some heat because of their Middle East connections. Truth be told, you will be surprised how many other companies, whose service you use daily, have petro-dollars backing them. Unless you are willing to starve to death, shunning companies based on such criteria isn't practical. If you are ok investing in Domino's Pizza (DPZ), Caribou should definitely be alright.
  • If mainstream media is to be believed, there is an online video revolution out there. If only Youtube showed how to make money, I would be impressed. These new sites are only more friendly ways to download amateur content - content that was always available if you knew how to use IRC! Let them embed ads in them and see what happens to their popularity. Every business plan seems to involve ad dollars - how many ads have you clicked intentionally lately ?
  • The Google juggernaut goes on. But finally its rivals have woken up from their stupor. Recent news about eBay, Yahoo and Microsoft collaborating with each other to fight Google should give you a taste of what is to come. Google better have a way to make money from something other than ads! Original, in-house content will help too.
  • Talking of Google bubble, what will be the surest sign of a top ? How about Google bidding for New York Times ? Remember AOL and Time Warner ?
  • Last week's rally inspired some. I would have felt the same way but for the accompanying rally in gold and silver. I think the metals will have a upper hand, and the market is in for a sharp pullback. Timing the market is not what I recommend, especially if you own individual stocks. But if you are in major indices, now is a good time to consider moving to cash and if you are brave, some of that to bonds even.
  • Danger from an unexpected quarter this week - Sweden decides to move more of its reserves to euros! Of course, the talking heads won't have the same biased tone when Sweden is doing it. But when a Middle Eastern or Asian country does so, prepare yourself for some interesting remarks. Did anybody prevent a Swedish company from buying an American company yet ? Where is Schumer when you need him!
  • Gauging customer service response: As with Zipcar I mentioned earlier in this post, I have in the past tried to gauge investment desirability by mailing to or talking to customer service / support. One such episode, along with the fact that I was ready to redeploy the cash after a 100% gain, was what got me to close my Starbucks position. I still use this method routinely. With a similar intent, I visit malls/retail outlets, and have made some interesting calls. The people-watching opportunities are an added bonus!

Tuesday, April 18, 2006

M & A sideshow

  • Goldman Sachs intends to stop putting its own money to fund hostile takeovers. This follows negative reaction to some of the deals it got involved in, in UK. The merger boom in Europe is near its end, with merger news forming a significant backdrop to daily market movements. I had posted earlier about the increasingly hostile reaction to some of the players involved. Will Goldman end up looking like Citi in Japan ? A few bows won't hurt and can work wonders on arrogance! Goldman played similarly uncomfortable roles on multiple sides of the NYSE/Arca deal, as I noted. Regulators in the US have largely ignored such involvement so far, but I just can't believe that these deals could be free of conflicts of interests.
  • KKR goes to India! Flextronics's largely India-based software unit is being bought by KKR for $900 million, the first of its kind, software-LBO deal, in India. Will not be the last! I had noted increasing takeover activity in India here. Patni Systems (PTI) looks like a sitting duck now, given all the recent deals. And how long will Flextronics stay public - it now makes for a good private-equity takeout target, with the non-core business sold off.
  • Indian interest rates remain unchanged, but reserve requirements have been tightened. This should cool the real-estate market, and the stock market too. Easy credit was partially responsible for the double-bubble.

More reading material

I have added a few more books to the existing pile on my reading table. I will review these in detail as and when I get done, but I thought an advance notice will be of interest to some of you.
  • Harvesting Profits on Wall Street: by Ron Muhlenkamp: Reading Muhlenkamp has always been enlightening, compared to a number of other managers who make routine appearances in various money magazines. The book also has something else going for it - great layout and general presentation.
  • Investing in nanotechnology: A no-hype book that catalogs various nanotech companies - pure plays, as well as potential beneficiaries in other areas. I have started making some long-term investments in this sector.
  • Fooled by randomness - The hidden role of chance in life and the markets: by Nassim Taleb. I have mentioned this being on my to-read list before.
  • Vagabonding: The uncommon guide to the art of long-term world travel by Rolf Potts : While not directly related to investing, I believe that there is nothing like travel to learn and open up your minds. I have made some posts before about using my road-trips for making investment choices. This book, and the next one, are also somewhat philosophical in nature. An exhilarating book - I was half-way through on my first sitting!
  • The Art of Travel by Alain De Botton: A travel and philosophy classic.
Previous reading update.

This and that

A mix of unrelated stories that don't take a post-space by themselves.
  • Democracy on trial again: In a post earlier I had detailed Morgan Stanley's version of shareholder-friendly democracy. The same is set to happen at Citigroup tomorrow. If you are an optimist, good luck!
  • A story on monopolies being created via mergers, in the health insurance / benefit managers sector. While a link to increased costs is not obvious from this study, I can't help but conclude that cutting the excessive payouts in deals, like this one, may save a few thousand lives! Unfortunately, most federal and state regulatory agencies seem to be in a stupor. And fund managers - hmmm - haven't I covered that one before ? They sound more like apologists.
  • I had noted a few months ago on how bank mergers don't usually lead to a better customer experience. Here is the official version of it! As a customer, you get smaller loans at higher rates. And oh, you also get fatter swines up in the ivory towers.
  • Tax day turned out to be a memorable one for Symantec what with the IRS sending it a billion dollar bill! The underpayment is related to the Symantec/Veritas transaction, something that I disliked for many less interesting but practical reasons. Symantec shares look extremely attractive now.
  • In other tax news: H&R Block, with a 2.2% dividend, is an attractive long term play. The stock got hit when Spitzer filed a suit over H&R's retirement accounts (hint : these accounts didn't necessarily help you retire unless your financial needs decreased over time from your initial investment). As with many such suits, this one will get settled with no one being punished. Ofcourse, the stock will recover.
  • A few weeks ago I had posted about chasing stocks and understanding risk, taking Barron's picks as examples. An update - Greenhill has continued climbing, and ITG hasn't gone anywhere. Not exactly the forecast that followed from Barron's features. While Barron's could still end up being right, this is just not meant for small-time investors, who cannot afford to spend all their time in researching or stressing over their investments. Most investing publications are just not courageous enough to pick beaten-down or otherwise cheap stocks. Standing out from the crowd doesn't come naturally to us. Take another pick from Barron's this week - HP (HPQ). The piece predicts a 20% or more upside, but the truth is that most of the upside came over the last year or two. You should have bought HP at $15 (I did) when no one wanted it - there was also a nice dividend to be had. Now that HP is close to $35, I see a number of recommendations. If you have large sums to play with and can get in and out easily from huge positions, there is still money to be made, but if you have just a few hundred or a few grand at the most, you should be looking elsewhere.
  • Idol (idle) worship: By now, I have probably bored you to death with stories of executive overcompensation. But please bear with me - I am still trying to understand. One explanation for tolerance, so far, towards such gross robbery, is the promotion of idol worship by various media outlets and other mouthpieces (like fund managers). There is hesitation to name names when things go wrong - even in those rare circumstances when someone gets axed, they go out in style, with an exit package to die for! When things go well, like in a typical turnaround story, everyone goes gaga over some executive, when in fact the turnaround may already have been in progress earlier, but wasn't visible. This is especially true in large companies employing thousands - a single executive cannot bring about such a change, that too in a few months. There is excessive fawning - something that gives an executive an excuse to make hay while the sun shines and milk as much as possible from the coffers, with board members and money managers as accomplices. This has to stop if we are to ever see a change. While in the rest of the developed world, the ratio of average compensation of a regular worker to an executive is in the 1:10 to 1:20 range, it is an astounding 1:140 in the US. What skills are being rewarded here ? The ability to lie on one's resume ? The knack to sell stocks while publicly maintaining that all is well with the company ? I must be missing something - please tell me what it is.

Hit #90

Warrent Buffett's Berkshire Hathaway announced today that it is acquiring sports apparel/footwear maker, Russell (RML) for $580 million in cash.

I had mentioned Russell as a candidate in this post following rumors of a J. Jill takeover (which did materialize later). I did end up buying some shares, just last week!

The offer, of $18/share is a 30.53% premium to my average cost of $13.79/share. The offer still undervalues the company. While a Buffett deal is done only on friendly terms, I believe there is room for a better price for investors. I do hope that fund owners object to this bid on price.

Update: Recent filing shows that the CEO opposed the sale and felt that the company would be a lot more valuable given more time. But the Board seemed to have made up its mind. Who cares what shareholders think!

Two other similar potential candidates I mentioned here and here, are still worth buying. They are Cutter and Buck (CBUK) and Ashworth (ASHW). I bought a few CBUK recently and will be considering buying some ASHW soon.

A few recent IPOs also seem like good investments, provided you don't mind paying a bit more and you are ready to buy more on any pullbacks. These are mainly growth stories, and eventual takeover targets. They are Under Armour (UARM), Volcom (VLCM) and Crocs (CROX).

Previous hit - Portal (#89)

Hit #89

Portal Software (PRSF), the billing software maker, was acquired by Oracle last week, for $220 million in cash.

The offer values Portal at $4.9/share, a discount of 67% to my average cost of around $15/share. Luckily, as I mentioned here, I had closed out my substantial position in Portal while I still had some gains. The gains from the earlier sales more than offset this loss from the few shares that I held onto hoping for a turnaround.

As I also detailed in that earlier post, it will be hard to find another company that has done so badly for shareholders. The executives though cashed out with perfect timing, with a handful selling more than a billion dollars worth of stock before the tech bust.

Oracle has again done a great deal. By moving up into applications, Oracle is positioning itself for some superb growth down the road. Like I said in this post, I still recommend Oracle as a great buy and hold right now. There will be a few positive earnings surprises - you can wait till upgrades that usually come too late, or you can buy now!

In the billing sector itself, I see a few more takeovers. The targets listed here, Amdocs, Convergys, CSG Systems, Boston Communications, aren't cheap anymore.

Boston Communications (BCGI), while it still has a few legal issues to deal with, may be a good speculative bet. Its recent partnership with Convergys could end up as something more. Oracle itself is unlikely to settle for just Portal software, and may go after Amdocs (DOX) as well.

Previous hit - Lucent (#88)

Monday, April 10, 2006

On a borderless world

I ended up unexpectedly reading Kenichi Omhae's book on the coming borderless world - The Next Global Stage. I intended to only flip through the pages at the bookstore, but couldn't resist reading most of it right there.

There are some good examples of capital finding ways to work around artificial trade barriers. One of the most well-known examples, that has also been cited elsewhere, was the failure, despite all efforts by Japanese authorities, to stop the decade-long deflation. After zero/negative interest rates failed to put an end to deflation, Japan tried to pump cash into the economy. But even that didn't seem to help, with most of the money finding its way into higher interest rate economies like Iceland and New Zealand, boosting their currencies.

In the last few weeks though, things seem to have finally changed, with the central bank indicating an end to the pumping. The chilling fallout - dramatic fall in Iceland and New Zealand, along with a few other, currencies. Iceland's stock market also saw a huge drop. Will this end up being the equivalent of the 1997 Thai currency crisis, causing more ripples and some credit events over the next few months ? Very possible, given all the ways the trades are intertwined.

To understand such dependencies, and the more obvious impact of globalization on manufacturing / service / labor market areas, this book is a must read.

Sunday, April 09, 2006

Morgan Stanley and its august company

What is common to Algeria, Russia, Zimbabwe, Iraq, Egypt, Myanmar, Florida/South Dakota and Morgan Stanley ? Dysfunctional democracy!

While nation-states go through a lifecycle that has democracy thriving at one point and steadily degenerating at another, for investors dysfunctional is the only kind there is. Shareholder democracy is a sham even in those rare cases where measures are put to vote.

Take for example the recent 53% majority vote by shareholders of Morgan Stanley to have future grossly outrageous severance packages put to a shareholder vote. Morgan Stanley's stunning response - The board will take them into consideration. That's all we can tell you. That is some democracy. I am no seer, but I can tell you that the measure would be forgotten soon.

Most fund managers, probably the most overcompensated professionals, never put up a fight with companies they invest in. After all, they are playing with other people's money, and they are being paid enough to buy a new chalet every year. Why fix a good thing ? When on rare occasions funds do wake up, like this instance, companies just ignore shareholder sentiment. This is made easy as there are no SEC guidelines that require companies to submit to these measures.

For more on this, read David Weidner's piece at Marketwatch. If you are invested in Morgan Stanley, take a few minutes to call Investor Relations to let them know you are unhappy with the way things are going. You will be doing all shareholders a big service. Of course, unless IR gets tens of thousands of calls, it wouldn't even be noticed.

I had earlier made my own list of recent disappointments for shareholders.

On a slightly positive note, Coke's board will now get paid only if the company meets performance targets. What a concept! This is the first instance where a board is being held accountable, but hopefully won't be the last. Given the number of directors who seem to get a free ride, with most of them seemingly being paid for having a pulse with one foot in the grave, widespread adoption of such a performance-based pay will reduce the pool of available worthies to occupy boards. That should be better than the same members serving on dozens of boards.

Friday, April 07, 2006

The sites I frequent

Some of you have asked me to list my regular reads. I will save the full list for another day, but the most important/useful ones are here.
  • Mish's Global Economic Trend Analysis - good coverage of macro issues. Has been a housing bear for a long time, but with solid reasoning to back his stand. Indepth analysis - not something you find on the idiot box.
  • Daily Reckoning - a number of regular contributions by various commentators, including the unbeatable Mogambo Guru! Most features here are very original.
  • Safe Haven - More macro views. Mostly independent-minded contributors.
  • Jeff Matthews' blog - No particular pattern to link the posts here, but that is what makes it interesting. Thankfully, the earlier obsession with Overstock seems to be over!
  • Footnoted - shining some light on those SEC filings that companies don't want you to read. I wrote about this one earlier.
  • Angry Bear - occasional great posts on deficits, medicare, social security, pension obligations etc. Unfortunately, too many posts here are political in nature - not my cup of tea.
  • Daily Speculations - Victor Niederhoffer and Laurel Kenner write on rational analysis of patterns in the stock market and elsewhere. Must read if you want to understand how to keep emotion out of investing. I also recommend their book, Practical Speculation - noted in one of my reading updates post.
  • Two regular columns on Marketwatch - Mark Hulbert and Peter Brimelow. These two columns are along the same lines as Niederhoffer's writings.

Thursday, April 06, 2006

The 640 billion dollar question

640 billion - that is the latest estimate of cash piled up among non-financial S&P 500 companies, and it is growing everyday. If you include financial companies, and expand to companies outside the 500, the amount is ofcourse much larger.

Add to this the amount with private equity investors - estimates range from 500 to 800 billion. Note that private equity groups have a much larger amount to put to work in deals with leverage. All in all, the most conservative estimates of such investable cash show a figure around 3 trillion!

So, while consumers are going further down the debt hole, corporate entities are sitting on the largest cash pile ever. This holds true for companies in Europe and Japan as well.

What has been the effect of this mountain of cash so far ? One clue - I read recently that last year more money was put to work by companies buying back their own shares than all of the money invested via mutual funds (I do not remember the comparison exactly - so please correct me if I got this wrong).

In addition, even companies that have cash can easily raise cash in the corporate bond market. This is exactly what Oracle and Cisco did recently, to fund their acquisitions of Siebel and Scientific Atlanta. In both cases, the buyers had enough cash to fund the purchases. Oracle has around 8 bilion in cash, and Cisco has around 14 billion! In fact, some observers see the Fed rate hikes as being aimed at breaking the corporate bond bubble and not the real-estate bubble.

What will happen to all this cash ? Buybacks will continue, but that is an ineffective use of cash, especially when the buybacks seem to just offset executives' gigantic stock grants and the eventual dumping. I am hoping to see more generous dividend hikes, and one time payouts. And ofcourse, when companies finally come out of their shells, we will see an all-out takeover bubble - I can't wait for it!

Monday, April 03, 2006

Indian Summer ?

The Indian stock market is in a bubble. When and how will it end ? My guess - soon, with atleast a 25% pullback.

But for a token number of shares, I have closed my positions in Rediff (REDF) and Sify (SIFY), with an average gain of around 200%. The ADRs are trading at a premium to the underlying shares on the BSE.

I will be holding onto all my shares in core/infrastructure/banking companies like ICICI (IBN), HDFC (HDB), VSNL (VSL) and Dr. Reddy's (RDY), though these will also retreat.

The bullishness on India has reached incredible levels - the same experts (!) who could only see cows on the roads two years ago, now seem to notice a strong regulatory/legal framework! Perception is all that has changed here.

Long term, India is still a great investment opportunity. For now, its growth will run into a major roadblock unless there is a massive overhaul of infrastructure. Ofcourse, infrastructure projects take a decade to show results.

Most of my Indian positions were opened following the scare after a change in government 2 years ago. I will now consider adding to my positions only on a significant pullback.

If you are heavily invested in India, I suggest moving some of your portfolio into Japan, China and Philippines plays.

With their recent purchases of Indian oursourcing outfits, R R Donnelley (RRD) and Electronic Data Systems (EDS), are good indirect bets on India. Among pure plays, Tata Motors (TTM) and Patni Systems (PTI) are the only ones that still look somewhat attractive. In both these cases, be prepared to add on any weakness.

Sunday, April 02, 2006

Hit #88

The Lucent/Alcatel merger is finally confirmed. The deal has been in the works for a while now.

The stock deal values Lucent at $3.01/share, a premium of 37% over my average cost of $2.2/share. I will be keeping the Alcatel shares I get in exchange.

I had recommended Lucent along with the other beaten down telecom stocks in this post. I did end up buying quite a few of these. Many have appreciated considerably since then, and aren't attractive anymore.

I was expecting Motorola to be the most probable buyer of Lucent, especially given the security projects that Lucent is so closely involved in. Motorola, with its cash pile of around $14 billion, must be considering a few acquisitions of its own.

This deal may run into another political storm despite the parties making some concessions to respond to such concerns. Hopefully the reaction this time from the political class and the general public won't be as dumb as the reaction to the ports deal.

Previous hit - Transmontaigne (#87)