Gaurav - Seeking Alpha 'Gaurav' Tag RSS Syndication from SeekingAlpha.com SeekingAlpha.com http://seekingalpha.com/author/gaurav Now Public, Verisk Should Show Higher Growth http://seekingalpha.com/article/166141-now-public-verisk-should-show-higher-growth?source=feed 166141 Verisk Analytics (VRSK) had its IPO last week. Barron's mentioned over the weekend:

The company's business bears resemblance to the likes of Visa and the Chicago Mercantile Exchange - once-cooperatively owned, low-capital-intensity, high-margin growth businesses. There are also similarities to current market darling MSCI, a data and risk-modeling leader.

]]> Tue, 13 Oct 2009 05:09:02 -0400 Gaurav Verisk Analytics (VRSK) had its IPO last week. Barron's mentioned over the weekend:

The company's business bears resemblance to the likes of Visa and the Chicago Mercantile Exchange - once-cooperatively owned, low-capital-intensity, high-margin growth businesses. There are also similarities to current market darling MSCI, a data and risk-modeling leader.


Complete Story »]]> MXB V VRSK Gaurav Inflation, Deflation and Commodity Prices: How Emerging Markets Matter http://seekingalpha.com/article/163482-inflation-deflation-and-commodity-prices-how-emerging-markets-matter?source=feed 163482 Sometimes I really wonder why bulls on everything else are perma-bears on commodities and commodity stocks. That such high return ratios for commodity stocks cannot be justified. I don't think they realize that if commodity prices were to collapse, we will get outright deflation. The only thing holding the world up right now are high commodity prices.

That makes me wonder - all this recession and not even one scare of CPI deflation (not asset price deflation)!! Or is that a 2010 story?
The simple reason to invest in emerging markets is - there is structural inflation here. Somewhere like Brazil, where we get 7% inflation and an appreciating currency - if one can time the currency swings right - is the best. Economic theory would suggest currency depreciation in an inflation-heavy country. What we see is currency depreciation in potentially -ve inflation countries and appreciation in +ve inflation currencies due to capital flows. This is such a better way to generate returns.
]]> Fri, 25 Sep 2009 15:00:43 -0400 Gaurav Sometimes I really wonder why bulls on everything else are perma-bears on commodities and commodity stocks. That such high return ratios for commodity stocks cannot be justified. I don't think they realize that if commodity prices were to collapse, we will get outright deflation. The only thing holding the world up right now are high commodity prices.

That makes me wonder - all this recession and not even one scare of CPI deflation (not asset price deflation)!! Or is that a 2010 story?
The simple reason to invest in emerging markets is - there is structural inflation here. Somewhere like Brazil, where we get 7% inflation and an appreciating currency - if one can time the currency swings right - is the best. Economic theory would suggest currency depreciation in an inflation-heavy country. What we see is currency depreciation in potentially -ve inflation countries and appreciation in +ve inflation currencies due to capital flows. This is such a better way to generate returns.

Complete Story »]]> EWZ Gaurav How to Play Medical Tourism http://seekingalpha.com/article/160782-how-to-play-medical-tourism?source=feed 160782 Barrons had over the weekend a story on medical tourism (subscription required). It had mentioned Apollo Hospitals in that context, besides a host of Singapore and Thai providers. Now this is a theory that has been around for a decade, and indeed the Indian hospital companies might have benefited in the past few years because of this. And they might benefit more if US insurance companies start reimbursing patients for more procedures carried out in India. But this is just the sideshow story.

The real story is the shabby public health infra in India, and the opportunity for private players. If we look at what Fortis is paying for Wockhardt, Apollo would look a no-brainer. But then, we know that Sardarji screwed the Japs with Ranbaxy (RBXLF.PK), and the money is burning a hole in his pocket. So we shouldn't take it as an indication of what a hospital is really worth.

]]> Thu, 10 Sep 2009 05:22:35 -0400 Gaurav Barrons had over the weekend a story on medical tourism (subscription required). It had mentioned Apollo Hospitals in that context, besides a host of Singapore and Thai providers. Now this is a theory that has been around for a decade, and indeed the Indian hospital companies might have benefited in the past few years because of this. And they might benefit more if US insurance companies start reimbursing patients for more procedures carried out in India. But this is just the sideshow story.

The real story is the shabby public health infra in India, and the opportunity for private players. If we look at what Fortis is paying for Wockhardt, Apollo would look a no-brainer. But then, we know that Sardarji screwed the Japs with Ranbaxy (RBXLF.PK), and the money is burning a hole in his pocket. So we shouldn't take it as an indication of what a hospital is really worth.


Complete Story »]]> RBXLF.PK Gaurav WSJ Sees Holiday Trouble in Weak Back-to-School Sales http://seekingalpha.com/article/159544-wsj-sees-holiday-trouble-in-weak-back-to-school-sales?source=feed 159544 WSJ is out with an article Wednesday on weak back-to-school sales (subs required). Now who knows what it means for holiday sales - but people will extrapolate. And one can expect more noise, more articles, and more confusion around holiday sales as Sep. grows into Oct. This is probably going to be one big factor which keeps global markets on its toes - which is why I took money off some of the riskiest names I had last week.

Unfortunately, these stocks - Nilkamal, etc. - are up 10% since then. Indian mid-caps/small-caps are still running strong even though the bigger indices have turned. Probably these are the best stocks to long-short. They don't rise until the large caps are well and truly up (see May 2009), and they don't fall till the large caps have been taken to the cleaners.

]]> Wed, 02 Sep 2009 06:38:29 -0400 Gaurav WSJ is out with an article Wednesday on weak back-to-school sales (subs required). Now who knows what it means for holiday sales - but people will extrapolate. And one can expect more noise, more articles, and more confusion around holiday sales as Sep. grows into Oct. This is probably going to be one big factor which keeps global markets on its toes - which is why I took money off some of the riskiest names I had last week.

Unfortunately, these stocks - Nilkamal, etc. - are up 10% since then. Indian mid-caps/small-caps are still running strong even though the bigger indices have turned. Probably these are the best stocks to long-short. They don't rise until the large caps are well and truly up (see May 2009), and they don't fall till the large caps have been taken to the cleaners.


Complete Story »]]> Gaurav National Hydro Power Corporation IPO: Is Pricing Logical? http://seekingalpha.com/article/155013-national-hydro-power-corporation-ipo-is-pricing-logical?source=feed 155013 I am unable to understand the logic of the pricing of National Hydro Power Corporation [NHPC]. It is planning to raise close to $1bn from the markets soon. 30x PE, 2x P/B for a govt run 6% ROE company is crazy. One might be better off in 2018 putting money in RPower at Jan 2008 valuations rather than putting money in NHPC at Aug 09 valuations.

I had first looked at this company in May 2007, the last time it filed its DRHP in anticipation of an IPO. At that time, I thought this company would be a great short if it ever got listed, and I continue to believe so. Shorting this and going long NTPC (govt owned thermal power company) will likely make a lot of money if held over a long period of time.

]]> Mon, 10 Aug 2009 04:52:12 -0400 Gaurav I am unable to understand the logic of the pricing of National Hydro Power Corporation [NHPC]. It is planning to raise close to $1bn from the markets soon. 30x PE, 2x P/B for a govt run 6% ROE company is crazy. One might be better off in 2018 putting money in RPower at Jan 2008 valuations rather than putting money in NHPC at Aug 09 valuations.

I had first looked at this company in May 2007, the last time it filed its DRHP in anticipation of an IPO. At that time, I thought this company would be a great short if it ever got listed, and I continue to believe so. Shorting this and going long NTPC (govt owned thermal power company) will likely make a lot of money if held over a long period of time.


Complete Story »]]> Gaurav Glaxo Smithkline Consumer Benefits from Indian Consumption Growth http://seekingalpha.com/article/153832-glaxo-smithkline-consumer-benefits-from-indian-consumption-growth?source=feed 153832 There was a good article on GSK Consumer (GSK) two weeks back in Business Standard. 70% share in milk beverages market (50% Horlicks and 20% Boost) makes it a more dominant player in its category than even Colgate (CL) is in its category.

June qtr results were quite good for GSK, like for all other FMCG companies. GSK is at 20x and I have been thinking whether it is time to exit. The only reason not to sell is - Nestle (NSRGY.PK), Colgate, HUVR are all trading in high 20x - low 30x. Even the mid-cap Indian FMCG companies like Godrej are now trading at 23x. GSK is one of the cheaper FMCG stocks around!

]]> Wed, 05 Aug 2009 04:09:11 -0400 Gaurav There was a good article on GSK Consumer (GSK) two weeks back in Business Standard. 70% share in milk beverages market (50% Horlicks and 20% Boost) makes it a more dominant player in its category than even Colgate (CL) is in its category.

June qtr results were quite good for GSK, like for all other FMCG companies. GSK is at 20x and I have been thinking whether it is time to exit. The only reason not to sell is - Nestle (NSRGY.PK), Colgate, HUVR are all trading in high 20x - low 30x. Even the mid-cap Indian FMCG companies like Godrej are now trading at 23x. GSK is one of the cheaper FMCG stocks around!


Complete Story »]]> GSK Gaurav The Challenge Shared by Verizon and Anheuser-Busch Inbev http://seekingalpha.com/article/151691-the-challenge-shared-by-verizon-and-anheuser-busch-inbev?source=feed 151691 The situation at Verizon (VZ) and Anheuser-Busch Inbev (AHBIF.PK) is remarkably similar. Verizon's cash cow is Verizon Wireless, where it owns only 55%. However, it fully consolidates VZW. Similarly ABI owns only 61% of Ambev, which is the real cash cow. ABI too consolidates ABV.

The fully consolidated businesses at both companies - wireline in case of VZ, and ex-Ambev biz in ABI, is where the disproportionate amount of consolidated debt is. So looking at consolidated debt/EBITDA for both these companies is wrong, unless one adds the market value of the minority stake in subsidiaries to debt.
Similarly, the FCF yield for both these companies is vastly over-estimated. Analysts estimate ABI is trading at 10% FCF yield. That's incorrect. ABV doesn't pay off its entire FCF as dividends. So, the consolidated FCF looks much better than the real economic benefit to ABI. The real FCF yield is closer to 8% than 10%.
In Verizon's case, the FCF yield is even more exaggerated. Wireline biz doesn't generate any FCF today due to FiOS capex. The reported FCF is all from wireless, so it needs to be multiplied by 55% (VZ stake in VZW) to come to VZ's real FCF yield today.
Both VZ and ABI have to figure out ways to tap into the cash flow of their subsidiaries - VZ to fund its dividend (its wireline biz can't fund the dividend on its own today), and ABI to reduce its leverage. The best solution is if it happens in a way other than a dividend from the subsidiaries. If VZW or ABV pay a high dividend, the consolidated debt picture at VZ and ABI will look much worse, as there will be cash leakage to minority shareholders in the subsidiaries.
Disclosure: No positions
]]> Tue, 28 Jul 2009 02:59:54 -0400 Gaurav The situation at Verizon (VZ) and Anheuser-Busch Inbev (AHBIF.PK) is remarkably similar. Verizon's cash cow is Verizon Wireless, where it owns only 55%. However, it fully consolidates VZW. Similarly ABI owns only 61% of Ambev, which is the real cash cow. ABI too consolidates ABV.

The fully consolidated businesses at both companies - wireline in case of VZ, and ex-Ambev biz in ABI, is where the disproportionate amount of consolidated debt is. So looking at consolidated debt/EBITDA for both these companies is wrong, unless one adds the market value of the minority stake in subsidiaries to debt.
Similarly, the FCF yield for both these companies is vastly over-estimated. Analysts estimate ABI is trading at 10% FCF yield. That's incorrect. ABV doesn't pay off its entire FCF as dividends. So, the consolidated FCF looks much better than the real economic benefit to ABI. The real FCF yield is closer to 8% than 10%.
In Verizon's case, the FCF yield is even more exaggerated. Wireline biz doesn't generate any FCF today due to FiOS capex. The reported FCF is all from wireless, so it needs to be multiplied by 55% (VZ stake in VZW) to come to VZ's real FCF yield today.
Both VZ and ABI have to figure out ways to tap into the cash flow of their subsidiaries - VZ to fund its dividend (its wireline biz can't fund the dividend on its own today), and ABI to reduce its leverage. The best solution is if it happens in a way other than a dividend from the subsidiaries. If VZW or ABV pay a high dividend, the consolidated debt picture at VZ and ABI will look much worse, as there will be cash leakage to minority shareholders in the subsidiaries.
Disclosure: No positions

Complete Story »]]> AHBIF.PK VZ Gaurav Thoughts on Coca Cola's Earnings http://seekingalpha.com/article/150133-thoughts-on-coca-cola-s-earnings?source=feed 150133 From Coca-Cola (KO) earnings:

  • Russia’s unit case volume declined 9 percent in the quarter, reflecting the impact of a continued challenging macroeconomic environment. Russia is struggling - this might impact Philip Morris (PM) and British American Tobacco (BTI) due to downtrading.
  • Unit case volume growth in Northwest Europe was partially offset by weakness in Spain and Eastern Europe due to significant macroeconomic challenges in those regions.
  • Strong unit case volume growth of 6 percent in the quarter was led by a 6 percent increase in Mexico, a 5 percent increase in Brazil and a 6 percent increase in Argentina. Latin America is up 6% on volumes in 1H - that's good news for the other beverage companies.

Mexicans are just behind Americans in per capita consumption of carbonated drinks and obesity rate is ahead of US - amazing for a developing country.

]]> Tue, 21 Jul 2009 10:11:28 -0400 Gaurav From Coca-Cola (KO) earnings:

  • Russia’s unit case volume declined 9 percent in the quarter, reflecting the impact of a continued challenging macroeconomic environment. Russia is struggling - this might impact Philip Morris (PM) and British American Tobacco (BTI) due to downtrading.
  • Unit case volume growth in Northwest Europe was partially offset by weakness in Spain and Eastern Europe due to significant macroeconomic challenges in those regions.
  • Strong unit case volume growth of 6 percent in the quarter was led by a 6 percent increase in Mexico, a 5 percent increase in Brazil and a 6 percent increase in Argentina. Latin America is up 6% on volumes in 1H - that's good news for the other beverage companies.

Mexicans are just behind Americans in per capita consumption of carbonated drinks and obesity rate is ahead of US - amazing for a developing country.


Complete Story »]]> KO Gaurav Hindustan Unilever's Struggle http://seekingalpha.com/article/149660-hindustan-unilever-s-struggle?source=feed 149660 ET had an article yesterday on how Hindustan Unilever [HUL] is struggling in all its business lines, whether it is soap or toothpaste. In its previous conf call, HUL clearly mentioned that without market share, profitability is impossible in the long run. Colgate (CL) is reporting blockbuster results by having sales growth while at the same time cutting ad expenses. Ad expenses are down as ad rates have taken a big hit in the last year - both because of excess media inventory as well as reduced ad expenses by other industries which are struggling (financial services etc).

HUL doesn't seem to be succeeding so far in whatever they are doing to stem their share loss. Is a more aggressive HUL here? They can either cut prices or increase ad and promotion expenses aggressively, or both. Or they might not do anything despite what they say - which would be good news for Godrej Consumer and Colgate.
Zee reported results two days back. Their subscription revenues are now more than ad revenues - that is something I didn't realize would happen so soon. Ad revs are down massively YOY, and that is probably the case for a lot of media companies right now in India. Can there be a sudden ad upsurge in India?
What is a good media play in India? Problem with Zee is that it is not what it seems - it will be investing in DishTV and WWIL whenever they run into problems.

Disclosure: No positions

]]> Sun, 19 Jul 2009 09:16:49 -0400 Gaurav ET had an article yesterday on how Hindustan Unilever [HUL] is struggling in all its business lines, whether it is soap or toothpaste. In its previous conf call, HUL clearly mentioned that without market share, profitability is impossible in the long run. Colgate (CL) is reporting blockbuster results by having sales growth while at the same time cutting ad expenses. Ad expenses are down as ad rates have taken a big hit in the last year - both because of excess media inventory as well as reduced ad expenses by other industries which are struggling (financial services etc).

HUL doesn't seem to be succeeding so far in whatever they are doing to stem their share loss. Is a more aggressive HUL here? They can either cut prices or increase ad and promotion expenses aggressively, or both. Or they might not do anything despite what they say - which would be good news for Godrej Consumer and Colgate.
Zee reported results two days back. Their subscription revenues are now more than ad revenues - that is something I didn't realize would happen so soon. Ad revs are down massively YOY, and that is probably the case for a lot of media companies right now in India. Can there be a sudden ad upsurge in India?
What is a good media play in India? Problem with Zee is that it is not what it seems - it will be investing in DishTV and WWIL whenever they run into problems.

Disclosure: No positions


Complete Story »]]> CL UL Gaurav CRISIL: India's Domestic Rating System, and a Closer Look at Ratings Agencies http://seekingalpha.com/article/148195-crisil-india-s-domestic-rating-system-and-a-closer-look-at-ratings-agencies?source=feed 148195 CRISIL is 51% owned by S&P, and is S&P's subsidiary in India. It is the biggest player in Indian domestic ratings business, but is not a pureplay on it. Only 20% of its biz is domestic ratings, another 20% is outsourcing revenue from S&P global, almost 40% is financial research outsourcing (IREVNA), while the rest is consulting and advisory revenue. As ratings has a higher margin than other revenue streams, the contribution at the EBIT line is different: domestic ratings - 35%, S&P outsourcing - 25%, research outsourcing - 40%. Stock is currently at 15x CY09 earnings, so depending on one's view of IREVNA, it is either cheap or expensive. It is one of the stocks in India that I have continued to hold since 2007. If one is bullish on India and infra spending, then either CRISIL or Icra (Moody's sub, and this is purely domestic ratings) are probably a good bet.

One of the most surprising things since the financial crises exploded in August 2007 is that while various parts of the financial industry - banks, brokers, insurance companies - have seen their business models and ownership structure change irreversibly, the rating agencies continue to exist and do what they have been doing for the past 100 years. There are some half-hearted proposals here and there to change the way rating agencies work, and there are some shorts now (Einhorn) targeting rating agencies. But there doesn't yet seem to be a regulatory or legislative urgency to change anything in the way ratings systems work. The question is: if equity markets can work without ratings, why can't debt markets?
Recently, BIS published a report titled "Stocktaking on the use of credit ratings" (hat tip: Prof Verma). What is clear is that ratings are used more pervasively in the US than in any other country. If Fed was to decide that it will stop using credit ratings in its decision making process and instead recruit a team of in-house credit specialists (for example, to figure out eligible collateral for TALF), that would be a death sentence for the rating agencies.
If this team of in-house credit specialists were to make their ratings public, it would become an FDA style agency for the credit markets. This is what rating agency bears say should anyway be the case, because today we have government designated monopolies earning non-regulated returns.
There is however, a very big risk with a government owned rating agency. If the ratings of the government agency turned out to be bullish or faulty, and they will at least once in the next 100 years, then investors will go to the US government to be reimbursed. So, if the Fed decides to set up a team of in-house credit specialists, its recommendations would likely remain private.
What is the benefit of rating agencies to investors? Maybe rating agencies help reduce costs in the sense that not all bond funds, banks etc. have to hire smart credit analysts to buy bonds. However, that is extremely undesirable as we can see. Ratings create a false sense of security.
Net net, till the regulators decide to do the hard work of analyzing bonds and loans to calculate the capital cushions of various financial institutions, I don't think rating agencies go away. Having more NRSROs won't reduce S&P and Moody's dominance in the next 2-3 years. What can certainly change is the way these companies are compensated. That is something that doesn't seem to be happening today, but it can change anytime.
]]> Sun, 12 Jul 2009 02:19:17 -0400 Gaurav CRISIL is 51% owned by S&P, and is S&P's subsidiary in India. It is the biggest player in Indian domestic ratings business, but is not a pureplay on it. Only 20% of its biz is domestic ratings, another 20% is outsourcing revenue from S&P global, almost 40% is financial research outsourcing (IREVNA), while the rest is consulting and advisory revenue. As ratings has a higher margin than other revenue streams, the contribution at the EBIT line is different: domestic ratings - 35%, S&P outsourcing - 25%, research outsourcing - 40%. Stock is currently at 15x CY09 earnings, so depending on one's view of IREVNA, it is either cheap or expensive. It is one of the stocks in India that I have continued to hold since 2007. If one is bullish on India and infra spending, then either CRISIL or Icra (Moody's sub, and this is purely domestic ratings) are probably a good bet.

One of the most surprising things since the financial crises exploded in August 2007 is that while various parts of the financial industry - banks, brokers, insurance companies - have seen their business models and ownership structure change irreversibly, the rating agencies continue to exist and do what they have been doing for the past 100 years. There are some half-hearted proposals here and there to change the way rating agencies work, and there are some shorts now (Einhorn) targeting rating agencies. But there doesn't yet seem to be a regulatory or legislative urgency to change anything in the way ratings systems work. The question is: if equity markets can work without ratings, why can't debt markets?
Recently, BIS published a report titled "Stocktaking on the use of credit ratings" (hat tip: Prof Verma). What is clear is that ratings are used more pervasively in the US than in any other country. If Fed was to decide that it will stop using credit ratings in its decision making process and instead recruit a team of in-house credit specialists (for example, to figure out eligible collateral for TALF), that would be a death sentence for the rating agencies.
If this team of in-house credit specialists were to make their ratings public, it would become an FDA style agency for the credit markets. This is what rating agency bears say should anyway be the case, because today we have government designated monopolies earning non-regulated returns.
There is however, a very big risk with a government owned rating agency. If the ratings of the government agency turned out to be bullish or faulty, and they will at least once in the next 100 years, then investors will go to the US government to be reimbursed. So, if the Fed decides to set up a team of in-house credit specialists, its recommendations would likely remain private.
What is the benefit of rating agencies to investors? Maybe rating agencies help reduce costs in the sense that not all bond funds, banks etc. have to hire smart credit analysts to buy bonds. However, that is extremely undesirable as we can see. Ratings create a false sense of security.
Net net, till the regulators decide to do the hard work of analyzing bonds and loans to calculate the capital cushions of various financial institutions, I don't think rating agencies go away. Having more NRSROs won't reduce S&P and Moody's dominance in the next 2-3 years. What can certainly change is the way these companies are compensated. That is something that doesn't seem to be happening today, but it can change anytime.

Complete Story »]]> Gaurav Thoughts on Consolidation in International Telecom Market http://seekingalpha.com/article/147547-thoughts-on-consolidation-in-international-telecom-market?source=feed 147547 Everybody is speculating how TMobile UK might be paired with one of Vodafone (VOD), O2 or Orange to consolidate the market. One analyst speculated VOD might acquire T-Mobile UK and give Deutsche Telekom (DT) its underperforming Turkey biz (Telsim) + cash. DT has a stake in OTE, a Greek mobile provider. So this will give DT a way to expand its Balkan footprint.

There is another attractive combination for DT. That is with Telefonica (TEF). It can sell TMobile UK to Telefonica [O2], and acquire O2 Germany from Telefonica. O2 Germany is ranked fourth in Germany where EPlus is executing very well. Telefonica will be better off consolidating the UK mobile market, and DT will be better off consolidating the German market.
The synergies in such a transaction will be far higher than in any other combination, and for all the players, including the ones not participating in the deals. Vodafone will benefit because not one but two of its main European markets (UK and Germany) would get consolidated.

Disclosure: No positions

]]> Wed, 08 Jul 2009 04:47:06 -0400 Gaurav Everybody is speculating how TMobile UK might be paired with one of Vodafone (VOD), O2 or Orange to consolidate the market. One analyst speculated VOD might acquire T-Mobile UK and give Deutsche Telekom (DT) its underperforming Turkey biz (Telsim) + cash. DT has a stake in OTE, a Greek mobile provider. So this will give DT a way to expand its Balkan footprint.

There is another attractive combination for DT. That is with Telefonica (TEF). It can sell TMobile UK to Telefonica [O2], and acquire O2 Germany from Telefonica. O2 Germany is ranked fourth in Germany where EPlus is executing very well. Telefonica will be better off consolidating the UK mobile market, and DT will be better off consolidating the German market.
The synergies in such a transaction will be far higher than in any other combination, and for all the players, including the ones not participating in the deals. Vodafone will benefit because not one but two of its main European markets (UK and Germany) would get consolidated.

Disclosure: No positions


Complete Story »]]> DT TEF VOD Gaurav Thoughts on 'The New Paradigm for Financial Markets' by George Soros http://seekingalpha.com/article/146932-thoughts-on-the-new-paradigm-for-financial-markets-by-george-soros?source=feed 146932 I am currently in the middle of this short fantastic book by George Soros. I haven't read any of his other books except the first few pages of Alchemy of Finance in 2003, from where I picked up the concept of reflexivity (i.e. prices can impact fundamentals and earnings). This is Soros' paradigm for financial markets:

"Instead of being always right, financial markets are always wrong. They have the ability, however, both to correct themselves and occasionally to make their mistakes come true by a reflexive process of self-validation. That is how they can appear to be always right."

Some other key points are:
a) While the methods of scientific enquiry have proven successful in physical sciences, it is incorrect to use them to the same extent in social sciences - because of inherent uncertainty and indeterminacy.
I recently read an article arguing that financial markets collapsed because economics doesn't use some superior mathematical techniques that have been used elsewhere for some time. Many people argue that better risk management techniques will make sure a crisis like this doesn't recur. That is incorrect - because risk is also a function of leverage, and not merely the volatility of the underlying cashflows. An inherently more risky financial product is less risky when bought with no leverage. Conversely, if people believe in "a great moderation in the volatility of inflation" (Greenspan and Bernanke) - and by implication cashflows, they will lever everything up more - so the system ends up with more risk. Uncertainty in participants' actions makes the future indeterminate in social sciences. Light, on the other hand, doesn't change its speed.
b) The Enlightment tradition focuses solely on the cognitive function and not on the manipulative function. "The philosphers of Enlightment put their faith in reason, they saw reality as something separate and independent of reason, and they expected reason to provide a full and accurate picture of reality". This philosophy has served physical sciences well for centuries. In security analysis, this is equivalent to constructing a DCF and a WACC to figure out the price.

"The postmodern approach goes the other extreme - by focusing on the manipulative function and treating reality as collection of often conflicting narratives, it fails to give sufficient weight to the objective weight of reality".
In security analysis, this is the equivalent of saying all DCF is non-sensical. Or something similar to what the world leaders are attempting right now - "let's talk our way out of this recession."
The truth lies somewhere in between. Sometimes, financial theories work - and sometimes they do not. The trick lies in identifying the turns. Because "the behavior of markets is best regarded as a historical process". A long-term investor might not get the same prices when theories start reworking as when they stopped working. The movement of prices during the chaotic period might have irreversibly changed the fundamentals - like US regulators panicking on seeing financial stocks falling and seizing WaMu etc.
Where I disagree with Soros is when he extends this theory to politics. Soros gives the example of the Bush administration as following the dangerous post-modern philosophy, and how it not merely recognized that truth can be manipulated, but promoted the manipulation of truth as a superior approach. But haven't politicians done this throughout history and in all countries. Goebbels did it in WWII. Even De Gaulle was manipulating when he kept insisting "I am France (Je suis la France)" - when France was under German occupation and De Gaulle was living in the UK.
The difference between politics and economics is - while it well accepted that politicians manipulate, it is not recognized that markets can be manipulated as well. Because the manipulators are us, ourselves. The manipulation might be passive and not active because no one person controls it. But to the extent that the biases of thousands are able to turn imagination into reality through the market mechanism, it indeed is manipulation.
]]> Sun, 05 Jul 2009 04:33:34 -0400 Gaurav I am currently in the middle of this short fantastic book by George Soros. I haven't read any of his other books except the first few pages of Alchemy of Finance in 2003, from where I picked up the concept of reflexivity (i.e. prices can impact fundamentals and earnings). This is Soros' paradigm for financial markets:

"Instead of being always right, financial markets are always wrong. They have the ability, however, both to correct themselves and occasionally to make their mistakes come true by a reflexive process of self-validation. That is how they can appear to be always right."

Some other key points are:
a) While the methods of scientific enquiry have proven successful in physical sciences, it is incorrect to use them to the same extent in social sciences - because of inherent uncertainty and indeterminacy.
I recently read an article arguing that financial markets collapsed because economics doesn't use some superior mathematical techniques that have been used elsewhere for some time. Many people argue that better risk management techniques will make sure a crisis like this doesn't recur. That is incorrect - because risk is also a function of leverage, and not merely the volatility of the underlying cashflows. An inherently more risky financial product is less risky when bought with no leverage. Conversely, if people believe in "a great moderation in the volatility of inflation" (Greenspan and Bernanke) - and by implication cashflows, they will lever everything up more - so the system ends up with more risk. Uncertainty in participants' actions makes the future indeterminate in social sciences. Light, on the other hand, doesn't change its speed.
b) The Enlightment tradition focuses solely on the cognitive function and not on the manipulative function. "The philosphers of Enlightment put their faith in reason, they saw reality as something separate and independent of reason, and they expected reason to provide a full and accurate picture of reality". This philosophy has served physical sciences well for centuries. In security analysis, this is equivalent to constructing a DCF and a WACC to figure out the price.

"The postmodern approach goes the other extreme - by focusing on the manipulative function and treating reality as collection of often conflicting narratives, it fails to give sufficient weight to the objective weight of reality".
In security analysis, this is the equivalent of saying all DCF is non-sensical. Or something similar to what the world leaders are attempting right now - "let's talk our way out of this recession."
The truth lies somewhere in between. Sometimes, financial theories work - and sometimes they do not. The trick lies in identifying the turns. Because "the behavior of markets is best regarded as a historical process". A long-term investor might not get the same prices when theories start reworking as when they stopped working. The movement of prices during the chaotic period might have irreversibly changed the fundamentals - like US regulators panicking on seeing financial stocks falling and seizing WaMu etc.
Where I disagree with Soros is when he extends this theory to politics. Soros gives the example of the Bush administration as following the dangerous post-modern philosophy, and how it not merely recognized that truth can be manipulated, but promoted the manipulation of truth as a superior approach. But haven't politicians done this throughout history and in all countries. Goebbels did it in WWII. Even De Gaulle was manipulating when he kept insisting "I am France (Je suis la France)" - when France was under German occupation and De Gaulle was living in the UK.
The difference between politics and economics is - while it well accepted that politicians manipulate, it is not recognized that markets can be manipulated as well. Because the manipulators are us, ourselves. The manipulation might be passive and not active because no one person controls it. But to the extent that the biases of thousands are able to turn imagination into reality through the market mechanism, it indeed is manipulation.

Complete Story »]]> Gaurav Cinemark Holdings: The Advantages and Disadvantages http://seekingalpha.com/article/146858-cinemark-holdings-the-advantages-and-disadvantages?source=feed 146858

I had purchased Cinemark (CNK) at $8.90 at the end of April when Swine flu broke out in Mexico. 20% of CNK's EBITDA comes from LatAm (mainly Brazil and Mexico), so the fears were justified at that time.
1H09 has been spectacular for US theater exhibitors with box office gross up approx 13% yoy. In 2H09 though, the company will face difficult comps from The Dark Knight, which was released in July 2008. And come 1H10, it will face difficult comps from a great 1H09. So the question is what should one do? Here is a list of the positives and negatives:

Advantages:

]]> Fri, 03 Jul 2009 07:16:04 -0400 Gaurav

I had purchased Cinemark (CNK) at $8.90 at the end of April when Swine flu broke out in Mexico. 20% of CNK's EBITDA comes from LatAm (mainly Brazil and Mexico), so the fears were justified at that time.
1H09 has been spectacular for US theater exhibitors with box office gross up approx 13% yoy. In 2H09 though, the company will face difficult comps from The Dark Knight, which was released in July 2008. And come 1H10, it will face difficult comps from a great 1H09. So the question is what should one do? Here is a list of the positives and negatives:

Advantages:


Complete Story »]]> CNK RGC Gaurav Why I'm Long Cognizant, Short Infosys http://seekingalpha.com/article/140855-why-i-m-long-cognizant-short-infosys?source=feed 140855 Cognizant (CTSH) has historically gone 10%-20% faster than Infosys (INFY), and continues to do so - if we go by the guidance of the two companies for 2009. Until last year, its stock was trading at substantial premium to INFY. Since then, the differential collapsed. In the last two weeks, INFY has been trading at 10% premium to Cognizant. My guess is that the Indian markets are on a tear and are pulling Infosys India stock along, so the INFY ADR is duly obliging. However, Cognizant is not listed in India. So CTSH doesn't have something similar pulling it forward.

Whatever factors impact INFY will impact Cognizant to the same degree. If tech spending recovers, INFY will benefit, and so will Cognizant. Rupee appreciation hits both. US protectionism hits both. Amongst the Indian outsourcing companies, CTSH probably does the best quality of work - if one were to go by the number of IIM grads that chose CTSH over INFY, Wipro (WIT) or TCS.

]]> Tue, 02 Jun 2009 07:51:46 -0400 Gaurav Cognizant (CTSH) has historically gone 10%-20% faster than Infosys (INFY), and continues to do so - if we go by the guidance of the two companies for 2009. Until last year, its stock was trading at substantial premium to INFY. Since then, the differential collapsed. In the last two weeks, INFY has been trading at 10% premium to Cognizant. My guess is that the Indian markets are on a tear and are pulling Infosys India stock along, so the INFY ADR is duly obliging. However, Cognizant is not listed in India. So CTSH doesn't have something similar pulling it forward.

Whatever factors impact INFY will impact Cognizant to the same degree. If tech spending recovers, INFY will benefit, and so will Cognizant. Rupee appreciation hits both. US protectionism hits both. Amongst the Indian outsourcing companies, CTSH probably does the best quality of work - if one were to go by the number of IIM grads that chose CTSH over INFY, Wipro (WIT) or TCS.


Complete Story »]]> CTSH INFY Gaurav My First Long / Short Trade: Infosys and Cognizant http://seekingalpha.com/article/140736-my-first-long-short-trade-infosys-and-cognizant?source=feed 140736 My first long short in my personal account: InfoSys long, Cognizant short. Lets see how it works. The portfolio right now:

a) Philip Morris (PM) - This is my favorite play on Emerging Market currencies.
b) Cinemark Holdings (CNK) - Bought when Swine Flu hit Mexico last month and the shares swooned. Is the content cycle in 2010 as good as the one this year? Probably time to exit after 2Q results, which are going to blow out consensus. I actually like this company - they seem to execute better than AMC and Regal.
c) Time Warner Cable (TWC) - 11% FCF yield ex the tax benefits. Cable video gross margins are going down, plus they need to market to compete against DTV. Unemployment is a concurrent indicator for cablecos and telcos. But if wireline telco companies can generate lots of cash when they lose 10% lines each year, I am sure cable can with 1%-2% sub loss.
d) VNV, UZG - debt securities of Viacom and US Cellular
e) Vanguard Emerging Market Fund (VWO). This is the beta.
It is an extremely defensive portfolio (55% cash) with hardly any cyclicals - too bad for me. Probably it is another 5 years before I figure out how to price commodities, and I am in no hurry.
]]> Mon, 01 Jun 2009 18:17:33 -0400 Gaurav My first long short in my personal account: InfoSys long, Cognizant short. Lets see how it works. The portfolio right now:

a) Philip Morris (PM) - This is my favorite play on Emerging Market currencies.
b) Cinemark Holdings (CNK) - Bought when Swine Flu hit Mexico last month and the shares swooned. Is the content cycle in 2010 as good as the one this year? Probably time to exit after 2Q results, which are going to blow out consensus. I actually like this company - they seem to execute better than AMC and Regal.
c) Time Warner Cable (TWC) - 11% FCF yield ex the tax benefits. Cable video gross margins are going down, plus they need to market to compete against DTV. Unemployment is a concurrent indicator for cablecos and telcos. But if wireline telco companies can generate lots of cash when they lose 10% lines each year, I am sure cable can with 1%-2% sub loss.
d) VNV, UZG - debt securities of Viacom and US Cellular
e) Vanguard Emerging Market Fund (VWO). This is the beta.
It is an extremely defensive portfolio (55% cash) with hardly any cyclicals - too bad for me. Probably it is another 5 years before I figure out how to price commodities, and I am in no hurry.

Complete Story »]]> CNK CTSH PM TWC VWO Gaurav Emerging Markets, Oil and Commodity Prices and the Possibility of Stagflation http://seekingalpha.com/article/140588-emerging-markets-oil-and-commodity-prices-and-the-possibility-of-stagflation?source=feed 140588 Stagflation

If emerging market stocks run another 20%-30% from here, I am pretty sure oil will follow. The same logic that investors are using to bid up asset prices, liquidity from the Fed, can and is being used to bid up oil prices.

]]> Mon, 01 Jun 2009 04:08:07 -0400 Gaurav Stagflation

If emerging market stocks run another 20%-30% from here, I am pretty sure oil will follow. The same logic that investors are using to bid up asset prices, liquidity from the Fed, can and is being used to bid up oil prices.


Complete Story »]]> DBC DBO USO VWO Gaurav Expanding Margins: Enjoy It Cautiously While It Lasts http://seekingalpha.com/article/139396-expanding-margins-enjoy-it-cautiously-while-it-lasts?source=feed 139396

SocGen confirms in Barron's what I was suspecting. While companies were beating EPS estimates in 1Q, they were falling short on revenue projections - i.e. margins were expanding. So margins were expanding between 2003 and 2008 when there was expansion, and margins are expanding now when there is contraction. That is not possible beyond a couple of quarters.
The next fall in the markets is going to come either from revenue / earnings shortfalls in 2Q (July), or if something happens in the commodity / currency complex (oil goes above 80 if dollar keeps falling). People are bullish and afraid to miss out on the wonderful 2010, and it is unlikely that a couple of bad macro data points are going to derail the optimism for the time being.
So, we need to enjoy while it lasts, with a firm eye on the exit door.
]]> Mon, 25 May 2009 03:51:50 -0400 Gaurav

SocGen confirms in Barron's what I was suspecting. While companies were beating EPS estimates in 1Q, they were falling short on revenue projections - i.e. margins were expanding. So margins were expanding between 2003 and 2008 when there was expansion, and margins are expanding now when there is contraction. That is not possible beyond a couple of quarters.
The next fall in the markets is going to come either from revenue / earnings shortfalls in 2Q (July), or if something happens in the commodity / currency complex (oil goes above 80 if dollar keeps falling). People are bullish and afraid to miss out on the wonderful 2010, and it is unlikely that a couple of bad macro data points are going to derail the optimism for the time being.
So, we need to enjoy while it lasts, with a firm eye on the exit door.

Complete Story »]]> Gaurav Hindustan Unilever: Interesting Times in Indian Market http://seekingalpha.com/article/137830-hindustan-unilever-interesting-times-in-indian-market?source=feed 137830 HLL (Hindustan Unilever) has decided to go for pricing to retain market share in soaps and oral care (toothpastes). HLL made a very interesting comment - in times of low commodity prices, new small competitors come up. I guess smaller competitors don't need to invest as much in working capital during times of lower commodity prices, so they become more aggressive.

I am pretty sure that what has started in soaps and oral care will slowly spread to other categories - investors won't get price increase, volume increase as well as margin expansion in these companies.
Procter & Gamble (PG) has a listed company in India - Procter and Gamble Health and Hygiene - through which they sell Whisper and Vicks. They also have a 100% subsidiary, through which they sell everything else. There seem to be serious corporate governance issues here - at a time when media costs are falling for all other FMCG companies, this company has a huge jump in media costs on no new product launches. The same is true for employee costs. I guess P&G India is booking its costs in the listed company, so that they can depress the share price and then delist it at a later stage.

Disclosure: No positions

]]> Fri, 15 May 2009 03:35:38 -0400 Gaurav HLL (Hindustan Unilever) has decided to go for pricing to retain market share in soaps and oral care (toothpastes). HLL made a very interesting comment - in times of low commodity prices, new small competitors come up. I guess smaller competitors don't need to invest as much in working capital during times of lower commodity prices, so they become more aggressive.

I am pretty sure that what has started in soaps and oral care will slowly spread to other categories - investors won't get price increase, volume increase as well as margin expansion in these companies.
Procter & Gamble (PG) has a listed company in India - Procter and Gamble Health and Hygiene - through which they sell Whisper and Vicks. They also have a 100% subsidiary, through which they sell everything else. There seem to be serious corporate governance issues here - at a time when media costs are falling for all other FMCG companies, this company has a huge jump in media costs on no new product launches. The same is true for employee costs. I guess P&G India is booking its costs in the listed company, so that they can depress the share price and then delist it at a later stage.

Disclosure: No positions


Complete Story »]]> PG UL Gaurav The Bull Argument for Oil http://seekingalpha.com/article/131643-the-bull-argument-for-oil?source=feed 131643 I have been looking at various consensus S&P EPS projections for 2010. Depending on which analyst it is, EPS is going up from $45-55 in CY09 to $60-$70 in CY10. Almost everyone assumes oil prices will be $70-$80 next year, up from $50 this year.

The bull argument for oil is - credit crunch has made new supplies difficult. So when global growth resumes, coupled with the natural field decline each year, the excess oil inventory and supply will be taken care of soon. And, it is a good inflation hedge.
What was unusual between 2003-2007 was that not only did global growth happen, but it lasted for a long time. For the oil bulls to be correct, not only should global growth occur, but it should continue for some period of time. If growth would instead turn out to be erratic, which is what I think is more likely, productivity improvements and climate change pressures might ensure that the time taken to work off the excess inventory and supplies is more than just a couple of years. Oil companies and national governments are still doing capex - it is down but not to 0.

Disclosure: No position

]]> Sun, 19 Apr 2009 08:09:56 -0400 Gaurav I have been looking at various consensus S&P EPS projections for 2010. Depending on which analyst it is, EPS is going up from $45-55 in CY09 to $60-$70 in CY10. Almost everyone assumes oil prices will be $70-$80 next year, up from $50 this year.

The bull argument for oil is - credit crunch has made new supplies difficult. So when global growth resumes, coupled with the natural field decline each year, the excess oil inventory and supply will be taken care of soon. And, it is a good inflation hedge.
What was unusual between 2003-2007 was that not only did global growth happen, but it lasted for a long time. For the oil bulls to be correct, not only should global growth occur, but it should continue for some period of time. If growth would instead turn out to be erratic, which is what I think is more likely, productivity improvements and climate change pressures might ensure that the time taken to work off the excess inventory and supplies is more than just a couple of years. Oil companies and national governments are still doing capex - it is down but not to 0.

Disclosure: No position


Complete Story »]]> DBO OIL USO Gaurav Fast Moving Consumer Goods Stocks: Best Hedge Against Inflation http://seekingalpha.com/article/131619-fast-moving-consumer-goods-stocks-best-hedge-against-inflation?source=feed 131619 Buying stocks with pricing power in a deflationary environment - especially when they are priced on deflationary EPS - might be the best hedge against an eventual return of inflation.

Like a lot of people, I have been trying to figure out the inflation-deflation conundrum. On the one hand, the output gap (capacity utilization in U.S. less than 70%) will suggest producers will find it hard to stick any price increases. On the other hand, if Fed and other central banks keep using this logic to print money ad infinitum, then at some point of time inflation will become a monetary phenomenon.

]]> Sun, 19 Apr 2009 05:40:14 -0400 Gaurav Buying stocks with pricing power in a deflationary environment - especially when they are priced on deflationary EPS - might be the best hedge against an eventual return of inflation.

Like a lot of people, I have been trying to figure out the inflation-deflation conundrum. On the one hand, the output gap (capacity utilization in U.S. less than 70%) will suggest producers will find it hard to stick any price increases. On the other hand, if Fed and other central banks keep using this logic to print money ad infinitum, then at some point of time inflation will become a monetary phenomenon.


Complete Story »]]> KO NSRGY.PK Gaurav