Sprint - next merger target ?

There was a news item about D. Telecom is looking at possible takeover or merger with Sprint Nextel. I am sure lot of you may have missed this item in the flood-gate of news (and blogs) on Yahoo Microsoft.

However if you are interested in next takeover saga, start looking at Sprint for following reasons:

• Stock is down from above $20 to $8. It went all the way down below $6 when I noticed the stock (and took a small position)
• It is # 3 in US wireless market with over 40 million subscribers
• Have excellent service provider network
• Have a good but tired brand
• In last few quarters, it has been struggling and hence stock got crushed
• Provides an excellent opportunity as merger or takeover target

Now let's see what price Sprint could get sold:

• It has enterprise value of $42-44 B with debt at $22 B
• With revenues of $40B and revenue multiple of about 2, it can command enterprise valuation of $80B (ATT has EV/revenue multiple of 2.5 and Verizon has 1.5). At 1.5 multiple, it can command valuation of $60 B giving stock price of about $13-14 at low end and $20 at high end
• Alltel which got bought by PE at $27B has about 11 million subscribers. This results into valuation of 2500 per subscriber. Sprint has 40 million subscribers. However the churn rate is high for Sprint subscribers. So if we apply 1500 to 2000 per subscriber, it comes to similar valuation of $60B to $ 80B ($14-20)
  
• Of course there are quite a few risks such as regulatory approval, mgmt churn, subscriber churn, heavy capital investment needs. But without risks there are no gains

So if you are willing to take risk, Sprint would be a good buy at $8 with potential return of 50% in 18 months

/Shyam

Steve called Jerry's Bluff - what's next ?

Steve called Jerry's bluff and stayed to his word that he is not going to pay a dime about what's Yahoo is worth to Microsoft. As I wrote in previous post, accordingly to our calculations, Microsoft's walk-away price for Yahoo is $36 (after which it becomes dilutive for Microsoft for more than 3 years). Of course Jerry or his advisers did not know the concept of "not a dime above" or they wanted this negotiation to fail.

I am sure there would be quite a few un-happy Yahoo employees (and shareholders and call option holders) when Yahoo opens below $25 on Monday. In particular many employees were looking for $1.5 Billion retention bonus Microsoft was planning to allocate (which works out on an average to over $100 K per Yahoo employee)

I think the game is still not over - Yahoo will fall below $25 - big Yahoo shareholders would start putting pressure on Yahoo board. I was very surprised that Jerry Yang was doing all the negotiations and Roy Bostock, chairman of the board was no-where in the news regarding negotiations. Looks like Yahoo needs to beef up their legal department

In all this saga, Google seems to be coming out as winner for following reasons:

• Does not have to worry about formidable competitor for some more months since Microsoft still has lot to catch up
  
• Yahoo coming to embrace Google search technology - basically giving up on search advertising
• Many key Yahoo employees getting frustrated and going to Google
• Google stock getting another jump due to its formidable lead on fast-growing market

Good luck Yahoo and Jerry Yang in their pursuit of another deals - most likely this saga is going to continue for few more months !

/Shyam

Yahoo Microsoft M&A Analysis

As part of our M&A class for MBA, we did project on Yahoo and Microsoft merger. Since this game is entering final innings this weekend and our class is over, here are the highlights:

• Initial offer: $31
• Recommended deal price: $34
• Walk-away price ("not a dime above" price): $36
• No other serious contender
• Deal will be completed

For complete details of in-depth analysis, check it out at:

Microsoft Yahoo Merger Analysis

Let's see how close is our analysis - we will know on Monday

Have a good weekend!

/Shyam

Yahoo/MSFT and Dow at 13000

Another week is over - quite exciting week and I was glad that quite a few of my predictions were correct.

• Dow is over 13000 (would cross 13500 by Summer 08)
• Yahoo/Microsoft deal is getting finalized close to 35 ( would most probably get done over weekend) - I was surprised to find out that May 30 calls were selling for 60-70 cents on Friday session. Upside-to-downside reward/risk was nearly 4:1 (potential reward of 400% vs risk of losing all money) - we know that markets are not efficient in short term
  
• Financials had one of their best week in last few months (8% weekly return in UYG)
  
• Emerging markets came in very strongly especially India, China and Latin America (7% weekly return on UUPIX)
  
• GDP came in at 0.6%
• Fed rate was cut by 25 basis points

Next week's predictions:

• Yahoo agrees to friendly merger with Microsoft between $35 to $36. Since it may happen over weekend, there would not be any opportunity to play call option strategy on Monday.
  
• Dow, Nasdaq goes sideways and remain range bound with exception of one or two days of good returns
• Oil stays around $110-115 range and Gold around $850-900 range
• Financials retain the gains made over last few weeks

Now that Dow is above 13000, I would recommend start taking profits on your stock investment and mutual funds and keep some cash on hand - we may see a bump (and buying opportunity) in late May/June 08

Have a good weekend !

/Shyam

Yahoo Final Price ?

Yahoo Microsoft has really entered into final game with Microsoft showing inclination to raise the bid ($33) and Yahoo shareholders giving an indication what price ($37) would be acceptable to them. Since there is about $4 difference, it is likely that final deal would be reached at $35 raising total bid to about $50 B+ as I initially predicted in January.

How to play into this game ? One can buy May 30 (55-60 cents) or Jun 30 calls (.90 to $1) potentially doubling the money in next few days or losing all (if Microsoft withdraws the bid).

With GDP showing positive growth (0.6%) and interest rate cut by another 25 basis points, all the foundation is set for markets to get some foot-hold. So if no other major shoe drops in financials, markets are heading higher and would touch 13500 in summer.

Emerging markets are also showing some life with Latin America, China, India all growing nicely in last few days.

Fertilizer companies are really hot these days and one particular company Interpid Potash (IPI) whose IPO came at $32 looks pretty good. With projected revenues of $1B, it can command a valuation of about $5B - means it's stock can reach $70 (from current $48) in next 12-18 months. Other companies in these sector are Mosaic (MOS) and Potash (POT) are up by nearly 200% over last 12-18 months.

Good luck and good night

/Shyam

Dow back to 13000

Looks like markets are steadily marching upwards and should touch 13000 by end of May (could come as early as this week).

Most investors are feeling that worst may be over for financials and hence willing to make small investments. There could be few bumps along the way (similar to Jan or Mar) but in general, markets are heading higher for few months now.

Fed would be having their last rate cut this week (by 25 basis points) before it takes a pause.

Microsoft and Yahoo entering into final end-game but I was surprised to find no action on Monday morning. If Microsoft starts proxy battle with $31, they are likely to lose it. If Steve Balmer wants to win this, he should offer $35 as final offer and start a proxy battle - there are very high chances (close to 80%) that with $35, he would win the proxy.

What's the reco for this week:

MGI (moneygram) - This stock is still trading around 1.5 to 1.6 and could be a good long-term value since I see moneygram booths in Lucky, Walmart and other places. Could give nice return of upto 50% within 12 months

Good luck

/Shyam

Yahoo Microsoft End Game

Great article by Henry Blodget on this topic. Since we did a project on Yahoo Microsoft Takeover battle in our M&A class at Haas, it was interesting read. Check it out

http://www.alleyinsider.com/2008/4/yahoo_microsoft_playing_next_week_s_chess_game

My prediction is that with Yahoo's potentially strong earnings, Microsoft would agree to about $35 price and get the deal done

It would be an exciting week for sure:-)

/Shyam

Where are markets headed ?

Last week was a pivotal week with quite a few notable events in stock markets such as:

• Blowout earnings by Google and biggest gain (20%) in Google stock in one day. Just in March, Google stock came very close by my prediction about $399. Now it is heading higher and would cross $600 in summer 08
• Financials finally started showing upward trend with most of the stocks (and associated ETF) up by 10-20% plus
  
• DOW index is at mid-point (12750) of my short-term lower (12000) and higher targets (13500)
• Stock indexes in emerging countries except China showing recovery signs

So where do we go from here ?

• With major earnings due out in next 2-3 weeks, my prediction is that earnings would come out OK compared to worst earnings expectations and markets would remain stable and show slightly upward trend
• There would be one or two major misses (like Nokia) but would not impact overall markets in major way
• Financials and technology continue to show upward momentum
  
• Apple and Amazon should similar level of volatility as Google - my prediction is that both would have positive reactions to their earnings and could result in 8%+ jump in prices post earnings
• Yahoo/Microsoft tussle entering into crucial week with Yahoo reporting surprise earnings (on positive side) and Microsoft reaching its self-imposed deadline of Apr 26. If Yahoo reports good earnings (which they would most likely), it could go above $31 for first time since Microsoft's takeover offer
• I am sticking with my forecast of Dow reaching 13500 by Aug 08

So what are the recommendations to make some "green" ?

• MF Global - It operates as a broker of exchange-listed futures and options worldwide. It provides execution and clearing services for exchange-traded and over-the-counter derivative products. The stock went down from $30 to $10 due to trading by rogue trader losing $141 million. But now it is back up above $14 due to pre-announcement of good earnings. It could go upto $21 in 12 months giving 50% return. One can buy it between $12-$14 and sell covered calls for Jun 17.5
• ABK and MBI - these are the poster children of credit crisis. These credit insurance companies are going to report earnings in next 2-3 weeks with ABK reporting next week. If results are anything but worst as expected by market, these stocks would shoot up 20% in one week due to its heavy short covering. These are high risk stocks and should be considered only if your tolerance to risk is very high
• Finally, on mutual fund/ETF side, I am still for UYG, UUPIX. IN addition, I would start looking at MCHFX and MINDX. Both India and China markets are down by 20-30% and these MFs provide good entry point to get exposure to these markets
  

Good luck in investing

/Shyam

WaMu, National City, Yahoo and PE

As continuation on my recent posts, today's news about TPG planning to invest about $5B in WaMU (WM) and possible KKR investment in National City (NCC) seems to concur that smart money has started moving into financial/banking stocks. This could be start of bottoming out process. I think it's still time to get onto this gravy train and make upto 30-40% in 12-18 months. Of course there are risks to this approach since when Q1 results start coming out, it is possible that write downs could make these stocks go down once more. However as long as one believes that these companies are not going BK, they would survive and return decent returns. My recommendations are NCC at $9 and WM at $11-12.

Looks like recent trends in PE world is changing - now that many PE deals are falling apart (Clear Channel, Sallie Mae) and these PE firms still having lot of money to put to work, they have started investing in distressed assets like beaten down stocks. But then one can do on their own or just buy ETFs like UYG (ULTRA FINANCIALS PRO). Why should investors pay 2% mgmt and 20% carry to these PE firms when they are basically investing in publicly available stocks.

Finally Yahoo-Microsoft saga is building momentum. As part of my M&A course at Haas MBA, we did a project on Yahoo takeover and predicted some of events which are playing out this weekend. Here is my guess about events and final price:

• Yahoo to declare OK results for Q1CY08. Stock stays range-bound between $27-29
• As Microsoft deadline of Apr 26 approaches, Yahoo stock starts drifting down to $25 putting pressure on Yahoo board.
• Finally Yahoo board agrees to start some negotiations with Microsoft and both agrees to a buyout price of about $33
• If Yahoo board does not come to negotiating table by Apr 26, Microsoft starts a tender offer for Yahoo shares at $31 and starts a proxy battle (Microsoft wants to avoid this to make post-merger integration easier)

It would be exciting to see how these events play - as investor, you could make $2-3 per Yahoo share if you play it right. But why take so much risk when there are so many other opportunities available.

My recommendations in last post (UUPIX, FIDSX, BKPIX, VGSIX) are up from 10-20% since then. They still have more upside left for rest of year.

Good luck and good night

/Shyam

Disclaimer: I have positions in many of the recommendations mentioned in this post

Are Financials Ready to Roll ?

What a week with Bear Sterns getting sold for $2 to JP Morgan and within a week, the bid raises 5-fold to $10. Only in America, this can happen. With big banks like JP Morgan taking the plunge, Fed reducing rate by another 75 basis points and finally home sales starting to move (which was expected now that we are in spring season), I think we had seen the bottom. What are the best places to invest ?

If you are willing to tolerate risk and bumpy ride, I would recommend following sectors (and related mutual funds) to invest:

• Financials - they got beaten down so much, I think only way is to go up. You can wait a little bit and slowly build position in FIDSX or BKPIX
• Real Estate - one can get big returns when one is willing is take a bet and invest where no one wants to invest. Real estate would fit this definition. Already mutual funds in this sector have started showing good signs and they are up for the year. My recommendations would be VGSIX or REPIX
• Emerging markets: As you must have guessed, this is my favourite sector and with recent plunge in markets across the world, offers very good entry points. There are quite a few options available to get exposure to this sector. UUPIX, TABRX, MINDX or MCHFX give various options. Even new country focused ETFs like FXI or EPI are good way to get exposure to countries like China or India

While are are discussing various emerging markets, check out this cool mashup developed by couple of us. It gives a snapshot of world indices info

World Indices and Google Earth Mashup

Apple $99, Google $399

While I definitely believe that markets have bottomed out, I suspect that tech stars of past 3-4 years Apple and Google are in for a rough ride for next few months. Both are excellent companies and I love what they are doing in their fields. However as it happens to any momentum stocks, once growth slows down, these momentum stocks get punished on the down-side - same way they get benefited on upside when growth is good.

With no major catalyst of new products from Apple and paid-search clicks slowing down (along with overall economy slowing down), Apr would be interesting month for both companies. Stocks of both companies are already down by close to 40% and there are quite a few headwinds facing these companies.

My prediction is that investors would get an opportunity to buy Apple at $99 and Google at $399 sometime this year and when that happens, keep your "dry-powder (aka cash)" ready since it would be an excellent buying opportunity for long-term.

/Shyam

Did markets bottomed out already ?

Finally Oscars are over and as expected "No Country For Old Men" won best picture and directing Oscars. I had not seen the movie yet - would see when it comes on DVD. Democratic elections are heading into final phase and I think Mar 4 would more or less decide who will be candidate. Obama has the momentum and would be very likely Democratic candidate and eventually President of USA.

Now that Ambac and MBIA is coming out of ratings penalty box, banks and markets can start their recovery. I predict that Dow 11500 on Jan 23 was bottom and Fed interest rate cuts, tax-rebates would help markets to start heading higher and by summer it would be near 13500.

So what are the plays here:

1. Asyt: Looks liks its ex-CEO is working with PE to take it private at $6. So at current price of $4, it provides good play for 50% return
2. Aruba: At $5 it is steal considering it is #2 play in wi-fi networks and was trading over $20 not long ago
3. Solar stocks like SOLF, CSIQ: These stocks are down by nearly 50% from thei all time highs and with possible democratic president, oil at $100 and high growth rates provides pretty good entry point for long-term plays
4. Emerging markets mutual funds (UUPIX, MCHFX, MINDX, TABRX): Excellent entry points for another 10-15% return by end of year

That's all for now
Good night and good luck

/Shyam

PS: I may have positions in some stocks/MFs mentioned on this blog

Tech Bargains ?

As expected Yahoo rejected Microsoft offer. I think it is typical negotiation tactic and will play out similar to BEA/Oracle and both companies will split the difference and settle the deal at about $35-36 (just right at the magic number of $50B). Yahoo does not any way out - they had last 2-3 years which they wasted in adding any shareholder value. It would be fun to watch all the drama along the way.

In last few months, I was not tracking many tech stocks for active investments. But this year, techs are getting killed and once high-flying stocks are trading in single-digits. For example, SIRF which is leader in GPS chips is at $7 (used to be over $30). Aruba Networks which is only other player in wi-fi gear is trading below $5 (it used to be above $20). Granted that both these companies gave some serious revenue warnings but I think markets over-reacted to news and both these stocks would be up by 50% in next 12 months (and by the way, they are as attractive takeover targets as Yahoo was when it fell below $20)

Looks like Republicans are set with McCain as their candidate (conservatives don't have a choice) and democrats are still wondering who will be their candidate. Obama is gaining traction but he is no-where near half-way mark and most likely this race is going to go into Summer.

The hottest Indian IPO - Reliance Power listing was a bummer. It listed nearly 17% BELOW offer price of Rs 450. How quickly the fortunes change. I think Rs 350 gives a good entry point for Reliance Power

That's all for now
Good luck and good night

/Shyam

SuperBowl and SuperTuesday

What an exciting start of new month with one of the biggest deal announced with Microsoft bidding for Yahoo for $31. I think it's right move for Yahoo investors even though it will not work in long term (if you just count returns for Microsoft). I am doing M&A course with Prof Peter Goodson in my last semester at Haas. Mr Goodson does not believe in Synergy at all and he has challenged all students to show one major deal where synergy worked out for such deals. I agree with him.
My prediction about this deal is that Yahoo will try to put some blockers to the deal but finally will agree to slightly higher price of $34 (aka Oracle-BEA saga). Disclaimer: I own some Yahoo stock just before earnings and now I am happy camper:-)

Looking at similarly beaten down companies, I think following deal will make lot of sense. Bearing Point is one of the well known brands in IT and strategy consulting. I started following this stock few months back when it was trading at 5. Due to missed earnings etc, it came all the way down to $2. That makes it's enterprise value below $ 1B. With yearly revenues of above $3B, well-known brand name and contracts in hand, this could be a potential target for Indian companies like Wipro, Infosys, TCS or company like IBM. BE is publishing its quarterly results on Feb 6. I expect it to start going up towards $2.50 to $3

Finally financials and housing companies (not to mention bond insurance companies) reversed their direction. With Fed on its side, stocks or mutual funds in this sector will offer one of the returns in 2008. My recommendation is BKPIX (BANKS ULTRASECTOR PROFUND, INVE) or FIDSX (FIDELITY SELECT FINANCIAL SERVI). They are already up more than 10% from their lows in last 10 days.

Here are my few predictions:

• Patriots will win SuperBowl by 14 points
  
• Clinton will win Super Tuesday primaries narrowly. However it would still be far from securing the nomination
  
• McCain will seal Republican nomination (and Huckbee will drop out of race)
• Markets will continue to head higher with couple of 100 point swings on Dow

/Shyam

Disclaimer: Invest at your own risk and I do have positions in some of the recommendations I mentioned.

Wow - it hurts!

What a week - as soon as I wrote my last blog to take up some positions for 2008, market tanked by 4% and it's on way to crash another 4-5% when it opens up tomorrow. All world stock markets are down from 4 to 10% on Monday and Asian markets are again down on Tuesday.

Is it start of bear market (some indexes are already down by 20% - classical definition of start of bear market) or is it another buying opportunity similar to Feb 2007.

Stock markets have wiped out all the gains (and some more) of 2007 and trading like end is near. Here are my predictions (I am sure many of them would be wrong in few days:-)

• Markets will be very volatile for whole of week with triple digit moves on Dow (and possibly Nasdaq)
• Fed will reduce rates by 50 basis points definately by Jan 30. I won't be surprised if they lower the rates before market opens on Tuesday 1/22
• Stock indexes will go down in early week and then recover ground later this week to break even for the week. Dow will test 11800 this week

So what do we as investors do ? My recommendation is to selectively invest in indexes like MSCI emerging markets and little bit in mutual funds focussed on financial services.

VANGUARD TOTAL INTERNATIONAL ST (VGTSX) is excellent way to get exposure to developed as well as emerging markets and capture excellent gains provided due to volatility across the world stock indexes. Invest little bit of money every week in this for cost averaging

While it hurts to see portfolios down by 10-20% within first 3 weeks of new year, if you are long-term investor, this is an excellent opportunity to put more money to work.

Good luck and good night !

It's time to take some positions for 2008

My first blog update of 2008 - happy new year to all of you readers!
I was watching the ups-and-downs of market for last two weeks and finally decided to write after I got convinced that we have seen the worst in stock market. Now that Dow is close to 10% down from its peak and Nasdaq is back below 2500, how worse can it get. There are some signs emerging which confirm my theory that we are very near (if not at absolute bottom) of the market.

As promised, here is update on model portfolio I constructed at start of 2007 which has returned 15.7% compared to S&p returns of about 5.39% nearly beating it by 10%. Most of the contributors to this decent performance was mutual funds focusing on emerging countries and oil-sector. It's no wonder that my two stock individual stock picks (Cisco and Yahoo) were worst performers - other than real estate mutual fund.

Investment	Quantity	1/5/2007		1/1/2008
		Rate	Amount	Amount	%Gain
UUPIX	156	32.09	$5,006	$8,558	71.0%
FSESX	80	62.69	$5,015	$8,333	66.2%
FXI	47	105.94	$4,979	$8,011	60.9%
TABRX	397	12.61	$5,006	$7,563	51.1%
VEIEX	211	23.68	$4,996	$7,120	42.5%
VGTSX	573	17.46	$10,004	$11,934	19.3%
VDMIX	803	12.46	$10,005	$11,222	12.2%
VWEHX	804	6.22	$5,000	$5,300	6.0%
VFINX	77	129.87	$10,000	$10,407	4.1%
$$CASH	1	5000.00	$5,000	$5,000	0.0%
VSTCX	492	20.31	$9,992	$9,704	-2.9%
CSCO	527	28.48	$15,010	$14,266	-5.0%
YHOO	180	27.76	$4,996	$4,187	-16.2%
VGSIX	198	25.21	$4,991	$4,110	-17.7%
Total ($):			$100,000	$115,715

Now that market is near bottom, here is model portfolio for 2008 - my goal is to beat S&P by at least 2-3% by year end.

Overall distribution:

Stocks	$25,000
Domestic Equity	$32,500
International Equity	$32,500
Bonds	$10,000
Total	$100,000

Portfolio:

Investment	Name	Quantity	1/14/2008
			Rate	Amount
CSCO	Cisco Sytems	190	26.29	$5,000
AMZN	Amazon	60	82.87	$5,000
RDN	Radian	532	9.40	$5,000
PAY	Verifone	288	17.34	$5,000
CSIQ	Canadian Solar	231	21.67	$5,000
VEIEX	Vanguard Emerging	229	32.73	$7,500
VGSIX	Vanguard Real Estate	527	18.98	$10,000
VGTSX	Vanguard International	646	19.36	$12,500
BKPIX	Profunds Ultrasector Banks	299	25.07	$7,500
VFINX	Vanguard S&P 500	57	130.44	$7,500
UUPIX	Profunds Ultra Emerging	184	40.75	$7,500
TABRX	Templeton BRIC	270	18.51	$5,000
FSESX	Fidelity Select Energy Services	75	99.81	$7,500
VWEHX	Vanguard High Yield Corporate	1718	5.82	$10,000
Total ($):				$100,000

As you can see, there is higher allocation to financials since I believe that financials are at same stage as what tech was in 2002 and after some consolidation will have a good 2nd half of 2008

Disclaimer: I may have position in some of the stocks and mutual funds mentioned in the writing

Good luck and good night !

/Shyam

Recommendations with potential of 50% return in 2008

As we are getting closer to enter into 2008, I started thinking about potential stock recommendations which could return 50% by end of 2008. Due to recent turmoil in financial markets, even after markets recovering in last 2 weeks (S&P is up by 7% in last two weeks), there are still quite a few stocks which would fit the bill. Here are my recommendations.

Disclaimer: I may have positions in some of these recommendations

US Stock Recommendations:

1. VeriFone (PAY): This company's stock got penalized last week (down by 54%) due to accounting errors on how they accounted for inventory in first 3 quarters of 2007 even though they increased the revenue guidance. This company makes products which you come across almost everyday when you go shopping in malls or for groceries. They make devices which read your credit or ATM cards at the counter. This company is leader in that space. So fundamentally nothing has changed as far as business is considered. Credits cards are here to stay and shops are going to need these card readers. Markets have over-reacted to the news and provided with an excellent buying opportunity. Even with stock up by 9% on Friday 12/7, I would recommend this stock at 22 with price target of at least $ 33 by end of 2008
2. Radian Group Inc (RDN): Radian Group, Inc., through its subsidiaries and affiliates, operates as a credit enhancement company that provides credit protection products and financial services to mortgage lenders and other financial institutions. One would be surprised by this recommendation considering turmoil in sub-prime market. However My analysis is based on a simple fact: Is this company going to make it - means not going to bankruptcy ? With Fed and Bush Government on its side, subprime issue may have shown its worst. In that case, RDN is going to survive. Not too long ago, RDN was a merger candidate with its bigger rival (MBIA). With this simple binary analysis of "No BK", RDN is worth the risk at $11.78 with target price of $18 by end of 2008
3. With similar analysis as RDN, there are few general recommendations like Countrywide (CFC), Etrade (ETFC) and Circuit City (CC)

India Stock Recommendations:

1. Hexaware: This company got into trouble due to one of its employees forex derivatives trading - lax controls. The issue wiped out all its 2007 earnings but fundamentally business has not changed. At Rs 82, it has potential of returning 50% with target price of Rs 125 by end of 2008
2. India Foils: This is bet on continued commodity boom. Similar to Ispat Industries which jumped from 30 to 70 in matter of weeks, this stock could go from Rs 19 to over Rs 30 by end of 2008
3. Other general recommendations at current prices are Mindtree at Rs 500, LML at Rs 16, Tata Tele at Rs 55 and RS Software at Rs 45

Good luck and good night !

/Shyam

Whare are markets headed ?

After my trip to meet with Mr Warren Buffett, everytime I think about an investment idea, I take a pause and ask myself: What would Mr Buffett would do ? Hope I can make some wise decisions with this question.

November was an unusual month where markets went down (only 2nd time in 13 years markets have gone down in November). Is it good or bad ? After strong and volatile October, it's good for markets to get excesses out, get the correction (10% down from peak) and get ready for another high. With major banks taking big writedowns, companies like Countrywide, E*Trade and many builders trading like they are going to declare bankruptcy, finally Fed and US Gov have realized that this sub-prime issue is much larger than they originally estimated. Late last week, things have started lining up for some kind of arrangement to avoid recession due to sub-prime meltdown. With that context in mind, here are my predictions and recommendations (Disclaimer: I may have positions in some of the recommendations)

• Dow will touch 14000 and S&P 1550 by 2007 year end. Nasdaq will continue to show weakness due to uncertain technology spending by finance companies and will close between 2750 to 2800 by 2007 year end
• Fed will cut interest rate by at least 25 basis point and maybe upto 50 basis points
• Emerging markets would be back on their upswing with The Bank of New York Emerging Market index crossing 3600 (currently it is at 3413)

Recommendations:

• Some of the best buys are in financials. If you are brace enough to bug individual banking stocks, I would recommend Countrywide (CFC) between $10 to 10.50, Radian group at 10.50 and E*trade at 4.50
• However to avoid the fate of individual companies going BK, I would recommend BKPIX (Profunds ultrasector BANKS)
• On technology side, I would recommend Yahoo at $26 and VMware at $90
• Among Indian stocks, my out-of-the way recommendation is Ispat Industries at Rs 50 and India Foils at Rs 15. Both are plays on materials boom and could double in 18 months

Good Luck and Good Night !

/Shyam

Warren Buffett Trip

As part of Berkeley MBA, on Monday Nov 19, 2007, we had a trip to Omaha, Nebraska to meet with greatest investor of all time, Mr. Warren Buffett and I must say that we all were totally impressed by his intellect, sharp mind and simple life he is living. Students from Haas School of Business, UC Berkeley, London Business School and University of Arizona, Tuscon came to meet with him.

Here are some observations, tips we heard from him about investing and life and photos:

• Even though he is one of the richest person on planet, he was so simple, approachable and down-to-earth person. He came driving his old Cadillac, had lunch with all students, spent 4 and half hours and went back driving his car
• He is extremely sharp with numbers and still remember numbers about his investments, various macro-economic statistics and how he makes money on every 12th coke bottle consumed in the world
• Mr Warren Buffett is funny and extremely good speaker. We wer all surprised when he started his talk with a joke which no one expected he would make at his age (joke about investment banker and his wife)
  

Here are some of the simple investing tips he gave us:

• Don't leverage and invest
• Don't do options
• Do your own analysis - His favorite past-time is to read annual reports. He gave an example of how he invested in PetroChina after reading its annual report on plane to China and made cool $4 Billion in 3 years. Recently he invested in South Korean company Posco after going through its annual reports
  
• Invest in companies, sectors in your own circle of confidence. WB does not understand technology so he did not invest in technology even if Bill Gates is his one of the closest friend
• Don't go after momentum plays. Market is like psychotic drunk which keeps on changing prices every-minute. If you come up with a price after doing your own analysis, wait for stock to come to that price. Once it comes to that price, move fast and move in a big way.

Some of his tips about life:

• Choosing life-partner is most important decision on everyone's life. He/She has is the main driver for maximizing your potential
• Don't give up something you need for something you don't need
• He is strong supported in keeping inheritance tax. He believes that everyone should earn their living
• If you have to bet on someone's future earning potential, bet on yourself

His biggest investing success:

• Geico
• Coke
• Gillette
• Washington Post

His biggest investing mistakes:

• Not investing in Wal-mart when he had chance in Wal-mart
• Dexter shoes in which he lost $400 M (but he consider that as $ 4 Billion loss since he had to give 2% of Bershire Hathway which is worth about $ 4 Billion today)

He allowed us to take lot of photos and really enjoyed spending time with students. Hats off to Mr Warren Buffett

I am totally impressed with him. I try to follow him in some of the investing ideas but I realized that only thing which I have common with him is that like him I also drive 10 year old car:-)

October 2007: What a month

Finally October month is over and as every year, this year was no different as far as market volatility is considered. Let's see how my macro predictions are doing:

• India's BSE sensex crossed 20000 5-months before my target date
• HangSeng crossed 30000
• Fed reduced target interest rate to 4.5%
• Dow almost reached 14000 before today's fall of more than 300 points
  

So most of the predictions are on target. So where do we go from here.

With credit markets still in turmoil, expect quite a bit of volatility for next few weeks. Almost all big banks are issuing warnings, taking big-baths, creating cookie-jars for future quarters and in the process cleaning up their books. This is good for economy and that's why I love US financial system. Companies/Banks are not kept on life-support as zombies the way other economies. For example, Japan kept their banking system on life-support for whole of 1990's which impacted overall economy and had multiple recessions.

I think with Fed support, good job market and consumer spending and global growth across emerging countries, US economy should be able to whether housing downturn and credit turmoil and would be able to skirt recession.

My last two recommendations on Indian companies had done extremely well.

1. Reliance Petroleum already crossed 250 (almost touched 290) in less than 2 months
2. Reliance Natural Gas crossed 130 in less than 2 months

I would still recommend Reliance Petroleum at around 200 when there is correction in India's market. Idea below 130 looks great for potential return of 50% in about 15 months (target price of 200 by Dec 31, 2008)

This week I had to travel to RTP for work and had to live thru United horror story of waiting for 7 hours at Chicago airport and then staying night in Chicago.

My recommendation: DON'T TRAVEL UNITED if you have alternatives available. It's good that I had good novel with me. I finished "The Kite Runner" by Khaled Hosseini. Excellent novel and since it is partly based in Bay Area, I could relate to most of the locations. I would definitely recommend this. Planning to read his another novel "A Thousand Splendid Suns" over the holidays

Have fun !

Is this another time to buy ?

As every year, October month seems to be keeping up with its promise of being one of the most volatile month for stock markets. It started with a bang with Dow reaching record level on Oct 9 just to fall back about 5% in next 10 days culminating on 20th anniversary of famous 1987 crash!
What a day Friday was with all events like options expiry, India and China markets crashing and on top of it wide coverage of 20th anniversary of 1987 crash in mainstream media!

No wonder people got little scary and that's when it presents great buying opportunities. As I predicted in mid-Aug, I think this slide presents another excellent buying opportunities for long-term investors. My hypothesis is based on following analysis:

• Even though results from companies from financial and to some extent industrial sector are weak, other sectors like technology are producing very handsome results due to weak dollar and exports.
  
• Employment is still very strong with no major layoff annoucements outside mortage sector
• Emerging countries are still red hot with projected growths of 8-10% in India and China
• Consumer spending growth during holidays would be in about 3-5%
• Most importantly, Fed is on investors side. Looks like credit turmoil will take about 3-6 months to play out and hence Fed may have to cut rate by another 25 basis points either in Oct or Dec meeting. This should give another shot in the arm for markets

Based on these, here are my macro predictions about some of the critical markets around world

1. DOW will be back above 14000 by year-end
2. S&P will touch 1600 by year-end
3. India's BSE sensex will touch 20000 by Mar 31, 2008
4. Shanghai composite will resume its march and if I have to make very bold prediction, may touch 8000 by Aug 8, 2008 (when Olympics start)
5. HangSeng will touch 30000 by year end
6. Fed rate would be 4.5% by year-end

My recommendation would be to go for mutual fund or ETF round instead of individual stocks.

What a start: October

Typically October month is notorious for market volatility since all major market crashes have come in the month of October. But looks like 2007 October has started with a big bang with 2 big market rallies on Monday and Friday with Nasdaq jumping nearly 2.9% in one week. Next week earnings season starts in earnest and since there are no major pre-warnings, this earnings season should be pretty good.

International markets especially emerging markets are on fire with BSE sensex almost touching 18000. If I have to make bold prediction, I won't be surprised if BSE sensex touches 20000 by the time 2007 wraps-up. That would be more than 100% jump since I was in India in June 2006.

Even though Shanghai market was closed, all Chinese ADRs trading in US were highly volatile. One day, they were down by 5-10% and next day they were up by 5-10%. Is trading in Chinese stocks is becoming like gambling or fundamental landscape in valuations of these companies is changing? I hope it is later and Chinese govt will make sure that it supports stock market at least till Olympics in 2008 (one of my team member who is originally from China told me that number 8 is considered very lucky in Chinese culture)

Started reading Age of Turbulence by Alan Greenspan - interesting book especially for me since I like macro-economic factors impacting countries and economies. In Nov, MBA finance club has arranged tour to Omaha to meet Mr Warren Buffet. Myself and one of my friend are planning to go. It would be dream come true to meet greatest investor of all time!

Good night for now !

/Shyam

Model Portfolio 2007: YTD Update

Now that Q3 is over, as promised, here is readout on how the model portfolio (on paper) I constructed and published at start of 2007 year is doing.

Investment	Quantity	1/5/2007		9/30/2007
		Rate	Amount	Rate	Amount	%Gain
UUPIX	156	32.09	$5,006	57.85	$9,025	80.3%
FXI	47	105.94	$4,979	180	$8,460	69.9%
FSESX	80	62.69	$5,015	100.67	$8,054	60.6%
TABRX	397	12.61	$5,006	17.73	$7,039	40.6%
VEIEX	211	23.68	$4,996	32.75	$6,910	38.3%
VGTSX	573	17.46	$10,004	20.67	$11,844	18.4%
CSCO	527	28.48	$15,010	33.13	$17,460	16.3%
VDMIX	803	12.46	$10,005	14.28	$11,467	14.6%
VFINX	77	129.87	$10,000	140.61	$10,827	8.3%
VSTCX	492	20.31	$9,992	21.28	$10,470	4.8%
$$CASH	1	5000.00	$5,000	5000	$5,000	0.0%
VWEHX	804	6.22	$5,000	6.07	$4,880	-2.4%
YHOO	180	27.76	$4,996	26.84	$4,831	-3.3%
VGSIX	198	25.21	$4,991	23.86	$4,724	-5.3%
Total ($):			$100,000		$120,990	21.0%

I am extremely happy how my recommendations turned out with overll portfolio return of 21% over 9 months. In comparison major indexes are doing as follows:

Nasdaq: 11.8%
DOW: 11.5%
S&P 500: 7.6%

So my model portfolio is well on track to beat S&P by more than 3% points. Even during summer market turmoil in Aug, it was doing very well with about 2% above S&P. Here is recap of some of the best performers of this portfolio:

The portfolio got biggest boost from recommendations related to emerging markets like UUPIX, FXI, VEIEX and TABRX. It also got boot from timely recommendation in Fidelity Select Oil and Services (FSESX).

The worst performers (relatively speaking since they are also down only a bit) are no surprise - Yahoo and Vanguard real estate (VGSIX).

I am still bullish on overall composition of the portfolio and if markets trajectory remain upwards, it can touch returns of over 25% for 2007. Not bad for first year record

Next update on model portfolio would be in Jan 2008 with recap from 2007 and new model portfolio for 2008

/Shyam

Commentary on Markets

Finally long-awaited interest rate cut is here and that also came with big bang. For many folks and even for stock market which tracks every word of Ben Bernanke, this looked like surprise. IMO, this was very much expected move and one of the reasons I wrote my previous article "is it time to buy", it was clear that mid-Aug provided ideal opportunity to make some bets. Here is report-card on how my recommendations did over 5 weeks - pretty good record considering one returning over 50% and only one in negative (which is housing stock and looks like we have yet to find the bottom of housing market)

Symbol	Price on Aug 17	Price on Sept 21	% Gain
UUPIX	33.56	52.57	56.6%
FXI	119	168.48	41.6%
IBN	38	50	31.6%
APPL	117	144.15	23.2%
AA	32	37.4	16.9%
LLNW	7.56	8.47	12.0%
VGTSX	18.02	20.16	11.9%
BX	23	25.32	10.1%
FISMX	25.58	27.98	9.4%
FLVCX	30.96	33.57	8.4%
WCI	7.76	6.96	-10.3%

When I was watching CNBC, my 9-yr old son Yash asked me question about who is Ben Bernanke and why they keep on talking about him. I explained to him that after President Bush, Ben Bernanke is the most powerful person in the world and how his talk can move markets around the world. I was telling him that uncle Ben is going to give a gift on Tuesday Sept 18 (and I ended up explaining him how:-)

So now that rate cut is behind us and markets around the world has responsded enthusiastically, what's next ? Is it still time to buy or sell ?

Here are my predications:

1. US markets would close at least another 5% higher by year end putting DOW above 14000 and S&P closer to 1600
2. Emerging markets would continue to head higher with BSE Sensex closing above 17000 and Shanghai Index closing above 5600
3. There would be few more causalities due to subprime and housing markets but by year end, housing market would start showing some trend reversal with housing stocks rebounding by at least 10-15 % from today's levels
4. Technology and Internet stocks are going to have a great year-end finish
5. And most importantly, Fed interest rate remaining at 4.75% for rest of year

So with these macro-economic predictions, it is upto individuals if they still want to take fresh positions.

Now coming to India stock recommendations:

Reliance companies keep on marching higher and higher. Every company with Reliance name and Ambani connection is going higher. I won't be surprised if Ambani brothers become world's richest men in 10 years. For now, here are two recommendations from Reliance group:

1. Reliance Petroleum: This is building biggest refinery in the world and did IPO at Rs 60 about 10 months back. Today it is at Rs 154. Since there is so much under-investment in refinary around the world, this company has great potential. It is supposed to be going online in 2009 and I won't be surprised if it hits Rs 250 in 18 months (for 64% return)
   
2. Reliance Natural Gas: This is little-bit speculative play which have tripled from Rs 24 to Rs 76 in last 6 months (with 35% coming in on Friday Sept 21). However due to its Reliance and Natural Gas connection, it would easily cross Rs 100 in 12 months (for 31% return)

On US my recommendations are same as Model Portfolio I published at start of year in previous arcticles. I will be providing YTD returns next week when Q3 ends. Despite ups and downs of summer, I promise that it would be a positive surprise.

Reading wise, I am waiting for my Amazon delivery of Greenspan book - Age of Turbulence

/Shyam

Hidden Gems of Emerging Markets Investing

I am a student of macroeconomics and like to read about various macro-economic factors such as inflation, interest rate, labor productivity, education and how it impacts long-term prospects of a country. Based on such analysis, I like to come up with investing strategy and find out mutual funds, stocks or ETF and recommend them and invest personal money to test out these strategies (put your money where your mouth is:-)

Based on prominence of BRIC (Brazil, Russia, India and China) countries, I have been looking for ways to go beyond BRIC countries and look at other emerging countries. Countries in Laton America, Asia and Eastern Europe have been growing as fast or faster than BRIC countries and provide excellent investing opportunities.

Check out following article - top 3 countries are non-BRIC countries in emerging markets with Peru topping with 168% returns

Top 10 places to invest

However investing in one country or index poses significant risks due to political, social factors which are beyond individual investor's control.

So it is best to invest in a mutual fund focussed on large number of emerging markets. In my search for such mutual fund, I came across following two funds.

ULTRAEMERGING MARKETS PROFUND (UUPIX):
The investment seeks daily investment results that correspond to twice the daily performance of the Bank of New York Emerging Markets 50 ADR index. This fund invests at least 80% of assets to equity securities contained in the index and/or financial instruments that have similar economic characteristics as the index. This fund has YTD of over 32%. However this fund is only for investors who can tolerate swings of 10% in a DAY. But as long as your believe in macroeconomic factors of emerging countries, it provides excellent way to profit from it. I typically have a investing strategy of 35-50 for this fund means buy when it goes below $35 and sell when it goes above $50.

Vanguard Emerging Mkts Stock Idx (VEIEX):

The investment seeks to track the performance of the MSCI Emerging Markets index. The fund employs a passively managed investment approach by investing all or substantially all of its assets in a representative sample of the common stocks included in the MSCI Emerging Markets index. This index includes approximately 840 common stocks of companies located in emerging markets around the world.

This is fund for long-haul and provides an excellent way to get exposure to emerging markets at very low cost. It has YTD returns of over 22%. My recommendation is to invest in this fund with automatic investment plan which Vanguard provides.

With these two funds, even though you will not get returns of one country which may be above 100% in one year and down by 50% next year, they provide excellent diversification with lower risks and costs. It also saves you from tracking what's happening in political landscape of Pakistan or what new trick Venezuela's president Hugo Chavez is going to play

Happy (and safe) investing in emerging markets !

/Shyam

(Disclaimer: I am personally invested in both funds)

Scorecard of 11 Recommendations

In last post titled "Is it Time to Buy", I recommended 11 stocks. My post was so timely as markets have returned to normaly with discount rate cut of 50 basis points and Fed and Bush Government all assuring that they are not going to let market turmoil impact economy. Q2 GDP also came in very strong at 4%. Let's see how my recommendations did in last 2 weeks:

Recommendation	Symbol	Price on Aug 17	Price on Aug 31	2-week Gain	Target Price
Profunds Ultraemerging funds	UUPIX	33.56	45.41	35%	50
Ishares Trust FTSE/Xinhua China 25 Index	FXI	119	150.31	26%	150
WCI communities	WCI	7.76	9.32	20%	12
Apple	AAPL	117	138.48	18%	150
ICICI Bank ADS	IBN	38	44.45	17%	47
Alcoa	AA	32	36.53	14%	40
Limelight Networks	LLNW	7.56	8.25	9%	14
Fidelity International small cap	FISMX	25.58	27.68	8%	28
Vanguard Total International	VGTSX	18.02	19.43	8%	20
Fidelity Leveraged company	FLVCX	30.96	33.19	7%	35
Blackstone	BX	23	23.13	1%	28

As you can see from above table, all recommendations did pretty good with best returns by Profunds Ultraemerging Funds (UUPIX) returning 50% in 2 weeks with China based EFT FXI close second with 26% returns. Worst returns were by Blackstone just returning 1% in 2 weeks (still not bad if you annualized it:-)

So now question is: Is it still time to buy or is it too late ?

With clam returning to markets, global economy still firing on all cylinders and given fed interest rate cut, I think it is still not too late to invest in stocks and mutual funds. S&P is trading at its lowest forward PE in many years and as long as global economies (especially Europe and Asia) are doing great, I recommend putting additional money to work. Even at current prices, I stand by my earlier recommendations since at target prices I have for-casted, there is still some room to extract returns from these.

India Recommendations:

Along with global markets, India markets have also gone thru a roller-coaster ride and slowly coming to normlcy. My current picks in Indian stock markets are:

1. Hindalco (Rs 142) - strong aluminum player and its just matter of time when its valuations catches with world aluminium players. Target price if 200 in 18 months (returns of 41%)
   
2. Mindtree (Rs 560) - This was one of the high-flying IPO in Indian tech industry. It went all the way to 1000 and came back to below 600 due to rising rupee. It has potential to go above 900 in 18 months (returns of over 50%)

/Shyam