Madhusudan Rao

Long/short equity, contrarian, value, special situations
Madhusudan Rao
Long/short equity, contrarian, value, special situations
Contributor since: 2007
To sum it up. Banks lend people against a collateral (home) and insure it with an insolvent counter-party. But a fall in collateral value is good for banks.
Lets just agree to disagree!
Well, you may be right. There may be better ways to play it. But the top 10 banks and mortgage lending institutions hold $ 1 trillion worth mortgages, thats 55% of the Canadian GDP. And the total household credit is near 97% of GDP. (
The "big 5" are a big part of this credit story and are under-capitalized. So is the CMHC. And the smaller players are even more exposed with lower equity base and more uninsured mortgages. Thats why their RoEs look great on surface but are a cause for concern.
Hi Timmies,
I agree with a lot of what you say. But I also live in Canada and I find the situation somewhat different. I find banks offering personal loans, 1% cash back and other incentives to circumvent the 20% downpayment rule (And this is also not anecdotal). I find banks somehow luring Canadians into buying a house and passing the monthly insurance costs to the borrowers. I believe that CMHC is not adequately capitalized to insure those mortgages.
If we follow a foreigner's rationale , it must be to store the money in the form of real estate. But if the real estate values crumble (due to lower credit growth or any other reasons, or a fall in CAD), then a foreigner will also try to exit like the citizens (speculators).
Playing the banks and other lending institutions is still a good idea, as long as CMHC is not bailed out. And even if it is, the shareholders will have to take some significant pain.
About default rates, there is always a first time. Never before 1999 was there a dot com bubble, never before 2008-09 was there an ABCP crisis in Canada. Never before were debt levels so high and interest rates so low either. Every new crisis appears to be bigger than the one before and as unexpected as the one before it. So fingers crossed!!
Blackberry is probably trying to capitalize on the perception that iPhone is for kids who do not know what to do with a mobile phone and Blackberry is for users who want to be productive. Hence the shift in focus towards producers (enterprises) rather than naive consumers.
Yes...Your assessment is very accurate. Google also plans to sell its self driving car away for free, because it will monetize it by displaying ads on the windshield. Even otherwise, people will be so hooked on to the Google glass that they wouldnt mind looking at those ads when the car is driving them to their destination.
Now thats a great business model.
Hi Orion
Thanks for the comments. My point is that Google is using the cash generated from ads to venture into too many segments without much success or a coherent strategy to monetize the "innovation". And at the same time, its cash cow is being targeted by many players. It does not seem (to me) to be a growth stock that it is perceived to be. (I would also like to write an article on how ineffective its ads and search is, but that would be too daring?!)
Sorry for the delay...I still believe the company is extremely risky. The company is creating financial maneuvering to increase short term profitability and dividends.
The sale of tender rigs that was booked as $1.2 billion profit is in exchange of shares of a company , not cash (valued at market price) as marketable security. The value of those shares are subject to changes.
The operating cash flows have fallen. And debt levels remain elevated. The interest expense has risen and inclusion of gains from derivative in net income is good for the short term but reversals are equally likely in future quarters.
But it is ok to stay invested as long as you recognize the risk.
Good luck
Sorry for the delay...I still believe the company is extremely risky. The company is creating financial maneuvering to increase short term profitability and dividends.
The sale of tender rigs that was booked as $1.2 billion profit is in exchange of shares of a company , not cash (valued at market price) as marketable security. The value of those shares are subject to changes.
The operating cash flows have fallen. And debt levels remain elevated. But it is ok to stay invested as long as you recognize the risk.
Good luck
It is up to you. My article is on SDRL. I cannot figure out industry wide i diversify and stay with conservative companies. ..You may have figured out what the game is, but I cannot...If it helps, my NE entry point was at $29.5 and it is about 0.7% of my portfolio.
Desperate to build a bullish case..There are too many talking points, no point in answering them..I dont think I can change your view...So lets agree to offense...cheers...good luck investing....
That is an interesting question. In 2007/08 a bottom-up screening process might have eliminated all the oil tanker companies due to high debt levels compared to Equity (with retained earnings). I looked into the 2007 annual financials of oil tanker companies (VLCCF, TK, NAT and Frontline) and I think Teekay had relatively lower debt levels.( 2 to 1) and conservative dividends.
Coming back to Offshore drilling (SDRL's industry), If one wants exposure, I think NE is more conservative. (I own very few shares of NE)
Your comments (and several others) are very insightful for all readers
So you are fine holding a stock that has not recovered even if the stock market has?!
Frontline Ltd is an oil tanker company owned/controlled by Fredriksen. The cash dividends were often higher than earnings, with high levels of debt. The stock fell from $64 in Sep 2008 to $28 in December. The board increased the quarterly dividend from $2.75 to $3 per share only to suddenly reduce it to $0.5 in Mar 09. (It was considered a growth company with high dividend yield).
The stock now trades at $1.9 with a quarterly dividend of 2 cents.
If I were a shareholder of SDRL, I would be cautious. It is a very risky investment. The board is very aggressive in both dividends and investments.
If you are certain about the survival of the company then, if possible, you might want to get exposure to the debt. You get a decent yield and first claim to its assets with lower risk.
I am not quite certain about its survival in its current form. I may write another article on the credit risk and probably the consequences of the interest rate swaps on the debt.
This might not be a good strategy. Suppose the company cuts its dividend and now the yield is 7% with share price of $8, does it gain credibility or lose it?
Due to debt and mis-management of cash-flows if the future prospects diminish and share price falls further then the dividend yield might rise to 12% again with share price at $6. How would you react?
If you look at the Windstream 10 yr Bonds/Debt , the Yield is about 6.9% and the spread between 10Yr US (supposedly risk free) and these bonds is 4.7%. This yield spread is significant. It signals that the debt itself is very risky.
My point is you cant stay with this firm for dividend yield with a 5 year perspective.(even if dividend is cut)
thank you so much for the comments...
Thanks a lot for reading my article and writing the comments. I know that Amazon is the partner, but since it was not explicitly mentioned in the annual report that it accounts for 40% of AR , I chose not to put that in the article.
But this also means that a significant fraction of the growth in revenues came from the partner. And this increases the concentration risk of revenues.
Like any other retailer in US, Amazon runs on negative non-cash WC and very high inventory levels (compared to APs). Any impairment to the inventory and they are not good for their debts.
This works as long as there is credibility. I agree that at this point the trade partners seem to trust Amazon.
I completely agree with your concerns. And thats why I have suggested to watch out for lack for revenue growth or even falling revenues as an indicator of weakness in the business model.
The company makes money by selling monthly subscriptions to customers who wish to order USPS stamps online. It also makes money by selling Photostamps and supplies. Eric Kim has written an article on the business.
It is difficult to say whether my sentiment is based on my position or my position is based on my sentiment :-)
Hey, thanks for the reply...I hope I am wrong...
Well I got the info from CBC.....but thats even worse (5 percent down)...If you can still get a house for 5 percent down, then this is 2003-04 in Canada and 2008-09 will come! This whole scheme works until it stops working...Atleast the refi has been limited to keeping 20 percent home equtiy.
Also about CMHC:, just because banks' mortgages are insured does not mean they will get paid without shareholder's taking some losses. Refer to cynic's comments. Remember a lot of those BAC mortgages insured by Fannie mae. And the shareholders did take a loss.
All I am saying is the banks are too dependent on the real estate going higher and higher, just like in US. And it is very difficult to assess how big the losses could be...BAC, Citi were also raising dividends 2-3 years before collapse
Canadian Banks are very risky because of the new HELOC rules, mortgage rules and not to mention the ballooning consumer credit in Canada. It will be harder for people who have bought houses on mortgage to find a new buyer because the new buyer has to pay more down (20 %) and has less time for amortization (from 30 to 25 years). And these loans WILL go bad.
The loan loss provisions for Royal Bank are very very low ($350 million) for the "assets" . Even if only 5 percent of the "assets" go bad (totally bad), then half the market cap from Royal bank may be wiped out. Dont believe the Tier I capital ratios. Loading up Canadian Bonds or bonds insured by CMHC is not TIER I capital. The politicians will be forced to make the shareholders take some losses to save face (like the person above commented). Stay with the preferred shares if you have to invest in canadian banks. This is probably 2005-06 for Canada, but 2008-09 will surely come soon!
This is simply amazing...I think I can learn a lot from you. You are a guru!!
Great article. I am surprised that very few people are willing to listen and consider an alternate view.
I personally dont believe that apple products offer value for the money. But it is amazing that people are willing to pay a lot for a product like iphone/ipad every time there is a incremental development in the product. Maybe people are very comfortable with higher levels of student debt,consumer debt and mortgage
As far as stock price goes, it is time to re-consider a bullish position when everybody believes that it cannot go down.
In my opinion, you should not use 30y or 10y bond yields as an estimate of inflation expectations. The fed is in the market buying those bonds and bringing the yields down. That is like Fed hitting someone on his head and saying "look he is falling". A better estimate of inflation ( and probably inflation expectations) is the money supply and credit growth. And since the US is a net importer, you should look at the money supply of the largest trading partner. Probably thats how you get the correlation between chinese money supply (and stock market) and the silver prices.
Buffet has sold a lot of "puts" on Nikkei and collected the premiums. He has vested interests. There may or may not be a buying opportunity here, but it should be kept in mind that he has an interest in propping the Japanese stocks up!
Well...This is not my maiden article.
1. I had suggested in the past that INFY will outperform IBM (and it has)...
2.HP post acquisition will do better than IBM (and it had) until Hurd got fired.
3. I recommended that Coach will reach $55 and it has.
At that time though, I didnt know how severe the recession actually was. So I now feel that it is best not to invest in US. This new party is going to last another couple of years at best. (It might rise on a nominal basis though)
And what about you, do you have any thoughts of your own, or you are just in the business of criticizing others?
You are right...The US Economy would have gone down significantly. The stock market and high-yield bonds would have gone down and stayed there for a long time. Unemployment would have been (and should have been higher)..And other jobs would have been created in the long run (5 to 10 years). By pumping in the USD, the FED seems to be suggesting that the pre-recession asset prices are justified. But that is not correct. Fed is just postponing the inevitable.
And as you have pointed out, Mr. Buffet is doing the right thing for the shareholders, but his letter seems to thank Uncle Sam for different reasons.
I was referring to the Software engineers' (resources salaries) and not average salaries across the company. My apologies for the confusion. Please note that this also may have increased to about 2.5 to 3 lakh p.a (starting salaries).
Thanks for your feedback. I beg to differ on the basic premise that the intrinsic value of a stock is calculated based on P/E ratio. The intrinsic value should be calculated based on the future cash flows to equity (FCFE) discounted at an appropriate rate. My article was an attempt to make an assessment of the Indian IT Stocks as an investment idea, taking into consideration the fact that IBM had performed well in the past one year, whereas Infy and TCS had not.
A deeper analysis is definitely a great idea.
Thanks for bringing this to my notice. To confirm, I did mean Tata Consultancy services.Will ensure that such errors do not occur again