Smart Investing

Biotech - Way to go

2008-07-26T13:51:00.000-07:00

In this tough market what is looking good? Practically all sectors are beaten down, in a downtrend and are not in any way showing signs of a revival. There may be intermediate rallies in the short term (like the banks which rebounded almost 50-100% from their lows) but those would just be traps for investors. The real problems of the economy which are built on years of mismanagement of the credit and housing markets, would not go by so easily.

There is one sector though which although risky is hitting new highs and may buck this downtrend. And the better part is the more the economy worsens the better it can turn out. And that sector is Biotech. If you look at the HOLDRS Biotech ETF which is near a 3 year high and looks to shine in the current market. It's top 10 holdings contain mega biotechs including Genentech, Gilead, Amgen, Biogen Idec and more. Normally in a recession economy biotechs do well. And this time it looks no different. But it maybe that we are right at the start of a cycle that can take the biotechs to their next level. A lot of these companies have strong drug pipelines. And the sector as a whole has languished in recent years.

A note of caution though. The whole sector is at a multi-year high and in no way broken out to start a new upturn. So critical resistance levels are near and it may take sometime for the sector to break out from there. But I am optimistic that it will do so looking at the current trend. The BBH would enter a resistence level at around 205-210 which is it's 2005 high. And currently it is in an overbought state. So except some consolidation in the near term. But over a period of 3-6 months there is a possibility that it may break out to new highs.

Disclosure: I do not hold position in BBH or any of the stocks mentioned here.

The Bubble Century

2008-06-22T20:55:00.000-07:00

There is a hot debate going on currently regarding oil prices. Is it fundamental or speculation? It seems like we have enough people on both sides. The ones who are looking from outside at the spectacular rise in the prices mostly think it is the speculators. And Wall Street is crying hard telling everybody that it is not the speculators. They say "it is the demand fools, don't you see". But then the biggest oil supplier in the world, Saudi Arabia, is saying, we don't see the demand. Where is it? Anyway, oil prices have risen more than 30% just this year, and more than doubled since the start of 2007 when crude was trading between 60-70$ a barrel.

Whom do you believe? I don't think in today's world anybody is believable. There are enough people out there profiting nicely from this fiasco. And as always the people who run the mill are paying the price. Does it matter whether it is speculators or the fundamentals. The only thing in their hands is to pay what is asked.

Probably this had to occur in one way or the other. And still it seems the sky is not falling. The only thing happening is patience being tried. Personally I feel this is not about fundamentals. Everywhere you see today you find bubbles. Bubbles everywhere. As George Soros puts it in his latest book The New Paradigm for Financial Markets, we are living in a Super Bubble era. Although his super bubble spans the world economy nevertheless it is a bubble he is talking of. At start we had the Internet Bubble, then came the Real Estate Bubble (or should I say the Credit Bubble which stoked the fire for the Real Estate Bubble), and now we are seeing the same is commodities. You have the bubble in food prices, oil prices and on and on.

When the real estate prices were going up, people who should have acted, the Fed, the bank honchos kept on playing the game. This is what Citi's Chuck Prince said in July 2007 - "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing". And I think he could not have been more right. This is exactly what all the bank CEOs whether knowingly or unknowingly were doing till the music really came to a grinding halt. You are living the aftermath now. The most affected are the people who were induced into it. So why cannot this be going on in the rise in the oil prices. The "fundamental" guys can always say that that's what they saw before.

We are either in or on the verge of a transition from the Oil economy to some "other" economy. This other is in the evolution stages right now and no one knows for sure what that is. That unknown is the cause for exploitation. And this phase is going to be an ugly one. Ugly for the people who will have to live through it. I am sure our children are going to be a part of this pain. We can only hope if not we they would find a solution.

So back to the point. The market which has driven the prices so high is just trying to check the demand. Or so should I say. The price will keep on going up till it can. Till it gets so high that things really come to a stand still. Till the pain becomes so high we cannot endure it. And then we will be forced to give up our habit. And when that happens the market will automatically retract. It is natural. That is the fundamental rule, isn't it? In that case then, why you would say, do I feel that the speculators are at play? Because things are not always black and white. If that was not the case, what has changed today that has moved the pendulum so much on the demand side? Yes the supply is not increasing fast enough. And yes the demand (or expected demand) is on the rise. But it is not so much to justify such a rise in such a short time. That is why the Saudi's are also baffled, because they also do not see the demand coming yet. Clearly then the market is driving up the prices in expectations of the future. The future which it thinks is eventual. But we all know that that future is not coming tomorrow, not in the next few months or even years. So why is the market asking such a high price today? Well as it is being proven, because the forces are in it's favor. Because the consumers are hand-tied and are ready to pay the price what is asked. The market thus is tightening the grip as hard as possible to find where is the break point. Once that is know then we will again revert back to what would be sustainable.

And so the bubble in the Oil markets will also burst. And between today and that day it will have done the damage that every bubble does. Exploiting the weak and strengthening the already strong. When they say Capital markets are ruthless, this is what it is. It is something we have created. We will have to live by it!

Take some heart, there is light at the end of the tunnel.

Who pays for the blowups?

2008-03-17T23:49:00.000-07:00

As you can see the market eventually has come to terms with reality. I had been bearish about the market since September of 2006. Well, lot of people knew this was coming. And the bank executives also would have probably known about it. But who wants to pull the trigger on oneself? Who wants to kill the goose laying golden eggs? Even if you know this goose is going to die soon, isn't it worth to get as much possible till she is alive! That's what I guess everybody thought and kept playing on.

But somebody is going to pay for this for all this? Who else other than the American tax payer! The poor middle class guy who has no time to know nor cares, the guy who except owning IRAs and 401ks knows nothing about what is going on with the big money. I have to admit I am one of them. And if not we then it would have to be taken from our children. To make things look better the emergency tax relief (few hundred dollars) is soon going to be in the mail. And the people who created this mess, soon are going to walk free with millions for them and their heirs. Don't you see all the bank executives who have stepped down, their banks written down billions of dollars, will be enjoying millions in severence packages, early retirements and the like. Will they be prosecuted? Absolutely not. What can those poor guys do? They were just playing by the rules and the nasty market turned on them right?

So what do you think looking at the financial crisis of banks today? Well what the heck those guys were doing all these years? Printing loans rather than money! The Fed was more than happy to lend to them. And they were more than happy to entice poor buyers into terms they felt were sent by God to them. In those days everybody was happy. Home prices were bid up backing up the costly terms banks were underwriting the loans for. But then the banks forgot their own rules - that things don't go for ever. The executives thought that with tiered risk instruments, they can make only a few people burn keeping the rest safe. But that probably only made it last a bit longer and that's about it. The basic rule is even if you create a flawless truss structure to spread stress (risk in financial terms) if the weight of the whole structure grows too much the foundation itself gives way. And then it does not matter what kind of truss you built and how good it it. The whole thing has to come down. That's what you see happening now.

The Fed and the US Treasury are trying to solve the problem in a short term way. I strongly feel that this is creating a longer term problem that is going to make things worse in the future. At every turn the Fed is taking bold steps thinking that it knows and can control everything. But what was Bernanke doing some months ago? Telling everybody that he did not see the subprime mess hitting other parts of the economy. That all their indicators told them that there will only be a mild slowdown. And as you can see things have got sour on a dialy basis. So can the Fed be believed in what it is doing right now? I have my serious doubts.

Look what happened to Bear Sterns. An 85 year our investment mega house came down in days. The company that traded at 60+ bucks gets sold at a paltry couple of bucks a share!! Is this a joke or what?

For me this is like a hollywood movie. No less spicy. It is spectacular. Read "Black Swan" by Nassim Taleb and you will know. He rightly says that all bankers are suckers. And they really are.

I am not calling for dooms day here. We will eventually come out of this. Please forgive me for my harsh language. I am not frustrated. For me this is a vindication. I had expected this long time back. Finally we are facing it. I really had a very hard time understanding and justifying of what was going on. And now that we are back on earth it feels a bit at home.

Lets hope that good times are ahead and not so far!

Google going below 350

2008-03-08T18:04:00.000-08:00

So is going the headline at Barron's this week. Well I don't feel that you will see this next week or even in the coming months. But I see quite a high possibility of that happening in the next 6 months or so. If the economy languishes and Google misses on it's targets, then eventually people are going to stop paying any premium and even start discounting the stock. Well that would put it in that range.

The silver lining is that at that point Google shares would be discounted. Meaning a comeback would be almost inevitable. The only question would be how low can they go? This is a difficult nut to crack. If eps growth slows and is going to remain suppressed for sometime the multiple will shrink as well. And that can push the price targets down. Look at all the banking and real-estate stocks. As the bad news kept coming and hitting the revenues and earnings, analyst kept on reducing price targets. It has started for google now. We are down from 750 something to the 680 something. If they miss that may come down to the low 600s or even may fall to 550ish. But by the time this happens the stock might as well be playing in the mid to low 300 range.

So if you are thinking of investing in Google it would be prudent to wait. Wait not just a few weeks but at least a couple of earnings cycles, before the picture gets a bit clear.

Good luck!

Disclosure: I do own a small google stake.

The Hare and the Tortoise

2008-01-31T23:38:00.000-08:00

That's what comes to my mind looking at Google and Amazon today. Amazon has been building it's business and brand much longer than Google. Google gets the most attention and it's rise is much steeper than Amazon's. Amazon is all about delivering physical goods (the old way - shipping them to your door). And Google is all about delivering what cannot be touched - information. You can have other parallels for these two as well. Look at manufacturing and services industries. Walmart which is a purely services company topped the Fortune 500 list for several consequtive years overshadowing the big heavyweight manufacturing giants like General Motors and Ford. Walmart does not produce anything. It is just a delivery channel. This is quite similar to what currently we see with Amazon and Google.

The point I am trying to make is to underscore Amazon (not Google :) By being persistent in doing the old mundane things much much better in the new world Amazon is showing how tomorrow's business will be done using technology. It is not that Amazon is the only company doing that. But Amazon is the best available proxy to those kind of companies. I have been using Amazon for almost 8 years now. And even today the most things I buy from them are books and nothing else. But in my mind the barrier to entry for doing business with Amazon is today almost negligible. For me Amazon is as good or even better than the store a few blocks from my home. And with the variety of products that Amazon is keeping today it is just a matter of time that I would be doing most of my buying from there. I am not doing it today, but I can see the day coming.

A few days ago I bought two books from Borders because I just couldn't wait for them to be shipped and delivered. No not even overnight although I would have been ready to pay for it. I wanted the books NOW! So I paid about 120 bucks for the books. I had already researched the books on Amazon. The Amazon price for the two books was a mere 70 bucks. I had no choice but to return those books back to Borders and get them from Amazon. Which I did.

Okay I have to disclose that I do own a few shares of Amazon as well as Google. But I am not writing this post to drive people to buy Amazon. Please be your own judge and do your own research. Both Amazon and Google are companies who are going to shape the world we live in.

Volatility confusing even IBD!

2007-08-09T17:56:00.000-07:00

Looks like the recent volatility in the markets is confusing even the top investing newspaper in the United States. For the past 5 days not a single day has passed that the Dow has not seen a more than 200 point swing. The paper in question is Investors Business Daily. I assume you follow the paper - if not am doing a good PR for them - it's a good paper for sure! Anyway, I am amused how they have reported their "Big Picture" column in the paper recently. To keep the story short "Big Picture" column tells you the current market stance. Whether the market is in bull run or bear run. The indicator shows the market as "in confirmed rally", "under pressure", "in correction" etc. And they have a set of rules how they arrive at that conclusion. One of the rules is - their discretion :)

Here is how they reported their Big Picture column -
August,1 - Market in correction
August,2 - Day 1 of attempted rally
August,3 - Day 2 of attempted rally
August,6 - Market in correction
August,7 - Market in confirmed rally
August,8 - Market in confirmed rally
August,9 - Market in confirmed rally
August,10 - Rally under pressure

Oops! What is going on here? I did not expect such a reputed newspaper change stance so frequently. Markets sometime are calm and sometime volatile. But why try to predict something that can change the next day. If tomorrow the market goes up again are they going to say "Market in confirmed rally" again? Give me a break. Wouldn't it have been wise to just advice investors that current outlook is dicy and come up with some stance that tells "Market in confusion" :) That will at least help investors who do not want to take risk to leave the market alone.

It looks like the newspaper editors are using the discretion component of their decision making ruleset rather liberally. I have asked them some clarification regarding this. Lets see what they reply!

Google, Yahoo eyeing Rediff

2007-07-16T00:12:00.000-07:00

So I wasn't far off in my last post. Looks like people who snapped up Rediff since last Wednesday weren't so naive. They had some knowledge of something going on. Hindustan Times is reporting that Google, Yahoo may be in talks of a aquisiion of Rediff. It would be very interesting to watch Rediff tomorrow. Over the weekend Barrons has reported that the shares of Rediff are overvalued.

Full Disclosure: I own a small stake in Rediff.

Rediff is found, finally!

2007-07-12T18:30:00.000-07:00

For the past few days something is going on in the Indian online space. You can see that the two Indian companies listed on NASDAQ, Rediff(REDF) and Satyam Infoway(SIFY) have just exploded. Since last earnings of Rediff where they tripled their earnings till about tuesday (July 10th) Rediff was hovering between 16 to 19 for months. And similarly Sify was hovering between 7 to 9 after they had a bad last quarter. Sify even got a downgrade from Kaufman Brothers in January. But since Wednesday (July 11th) around midday Rediff started on the upside with increasing volume. And now helped with today's rally, and almost 25 times the average volume for the past 3 months, it sits with a gain of about 40%. That in less than 2 days.

That is just incredible. I am pretty sure there is something going on there. And my blog entry will try to speculate on it. I will concentrate on Rediff and leave Sify by the side. At least for Rediff I don't see any piece of public information that has come which justifies a 40% jump in valuation. There is a news about it's iShare platform. But I don't think that is so great and there are better competitors like Dekho Na. But then people (somebody) suddenly had an unravelling and thought that Rediff was worth much more. And volume tells that this somebody is somebody with deep pockets. Cause 10 times volume on day 1 as compared to previous day and then 3 times that volume the next day pushing the stock up 40% won't come just like that. So I am a little perplexed with this jump. Somebody may have some insider knowledge about the company on the basis of which they are betting right now. They cannot even wait for earnings which come out in a few weeks.

So what can it be?

* Point 1: Rediff may have been approached by somebody either for a buyout or for getting in a significant stake.
* Point 2: Rediff may be in for a extremely good earnings quarter. The rupee has appreciated more than 10% and majority of Rediff revenues are in rupees not dollars. That definitely will help Rediff in terms of earnings.
* Point 3: Rediff may be thinking of listing on the Bombay Stock Exchange (BSE). Ajit Balkrishnan, CEO of Rediff, has said that although Rediff does not need cash (it is already sitting on piles of it) the market conditions are good and an IPO does not seem a bad idea. If that is the case then no-doubt it's current investors would want a good valuation.

Now all these above points are very speculative. And they are circumstancial. As I already said there is no current public news that warrents a 40% jump in price in a matter of days. But the fact that it occured does justify some speculation about the reasons.

But what about Rediff as a company? From what I have gathered over following it for more than 2 years, Rediff has a extremely strong brand in India and abroad. Technologically they are not doing the great things that you would want them to do. But nevertheless they still have been successful in giving enough material to their users to make them stick to them. And when you tie this in with the 30% or so growth in Internet usage in India with a 9+% GDP growth, rapidly rising middle class, immediately you can see that potentially you can get a tremendous spurt in revenue and earnings from such companies like Rediff. With over 90 million internet users predicted to be there in the next couple of years what else a company would want other than to be in a position like Rediff. That obviously increases it's potintial to make deals with the major plays like Yahoo, Google and Microsoft. And who knows the Indian biggies like Reliance etc. may also jump in to buy a stake where they currently do not have any specific knowhow. Right now the possibilities in India are endless. But that does not mean Rediff will deliver. And although the recent jump may or may not be on the basis of real value, it's future earnings and growth obviously will decide whether it will head on towards the 40s and more or come back to the upper or lower teens!

Here is a little backdrop with my Rediff coverage. I gave Rediff a Smart Buy opinion in February 2006. Since then the stock was absolutely a dud. It went rapidly to about 33 and then came back below 20. It had another round till about 25 or so and then crashed to less than half of that to around 11. And today you see it sitting around 26 again. That is quite a ride. And although Rediff has been consistently giving good (not excellent) results, it's growth, revenue wise is not phenomenal. Rediff turned profitable in 2006. And it has shown very good earnings growth last quarter (earnings more than tripled last quarter from 2 cent to 7 cents).

Regardless the reasons it looks like Rediff has been found and I am sure you will hear at least some buzz about it soon!

Full Disclosure: I do own a small stake in Rediff and Sify.

Climax Top for Cummins?

2007-04-27T15:09:00.000-07:00

Is this a climax top for Cummins (CMI)? I have been following this stock for quite sometime now. And as you can see I was foolish not to invest in it on the long side. It has more than tripled in just about two years. Anyway, to be frank, I got it wrong. And if you have been following my writings in the past you I don't have to say anything more. There doesn't seem to be a place in this market for any bears. They are just getting crushed one by one. For now, though. We may be at an inflection and although I don't want to put a timeline we may have already begun that.

So the CMI chart amazes me. Especially in the last week or so went from about 70 something to a high of about 107 something today. That is a return in excess of 50% in less than 10 days. And not that shares were languishing for years and suddenly went ahead. Even before the stock started this runup around 70ish was up almost 16% for the year. That is a staggering 62%+ return ytd.

But just look at the last few days of trading (from April 23rd to be pricise). Look at the tremendous surge in volume. Especially Monday, Tuesday and today on Friday. I feel the stock shows the signs of a climax top. What that would mean is the stock would not see the 107 for years to come and soon start it's journey back to earth. Now that is just a guess. There is a possibility that it can come back up and keep it's uptrend intact. But looking at the precipitious volume on what it has rocketed up tells me that we may be at a top.

What do the fundamentals for CMI tell us? Maybe they are sparkling. Company has beaten and upped guidance much higher than even what analysts were expecting. But then don't all the companies who are at the top shine fundamentally? That is the reason why they are there in the first place. So keeping the optimism one could definitely argue if this is the top or the begining. It would be interesting to watch. And I will be doing just that.

Full disclosure: I do not own CMI nor am I short the stock.

Growth getting expensive at Google

2007-02-11T01:14:00.000-08:00

What is happening to Google stock? Isn't it surprising that when the market is hitting new highs every other day, if not everyday, Google stock is languishing. And you cannot blame the earnings which almost doubled from last year from $1.54 to $3.18. So there is definitely something that the market is uneasy about. If you look a little deep you will find not one but several reasons why the market might be worried.

1. Google has become massive in an extremely short time - Look at Google's market cap. At 140 billion it is just about half of that of behemoth Microsoft. And look how tough growth looks at Microsoft. As Google is getting bigger it will increasingly find growth tougher to find however good their business model is. The more money you make, especially in such a short time as Google has done, more eyes are turned to see if they have done or doing anything wrong to get there. There are lot of companies (with deep pockets) after Google trying to see if they have violated any laws (and YouTube is only worsening the situation). If nobody else can stop them, once you see Google being accessed by "everybody", won't the government go after them, just like they did after Microsoft, with the premise of monopoly?

2. Google's next stop which is Media is a harder nut to crack - Google caught everybody by surprise making money selling sponsored ads. Nobody thought that would be such a lucrative business. But it is as everybody has now realized (or at least looks like that for now). But every market saturates and so will be with Search. Google is now venturing into Media land. But this space is totally different. Here Google is facing big mature companies like News Corp., Disney, Sony Pictures, Viacom, NBC Universal, USA Interactive and even Time Warner who are there from ages. The business model is qutie mature. Margins are cut-throat. In such an environment Google is now faced with the uphill task of not only penetrating these markets but making good money as well. Will they be able to do it? It is difficult to say. After looking at the success of Google, News Corp. was sharp enough to snap up MySpace.com quite early on. So the media companies have become alert and looking for every opportunity. Even if they can work with Google, they are going to see that they get a great deal cause they own the content, and they know what Google can do with that content.

3. Easy money has been made and now growth has got expensive - Google has said in it's quarterly statement that capital expenditure will continue to be heavy for the forseeable future. That is imperative to Google's growth and management understands that. Even so the company has been spending significantly for the past year, you can see that the returns are quite mundane. Google is finding tough to penetrate markets other than search - No other product launch by Google has been a splash and still Google's only significant source of revenue is it's sponsored ads program (AdWords and AdSense). That is telling since if Google cannot find it's next growth driver soon, it wouldn't be far to have a deadend for the road to growth. No wonder the market is heeding to this.

4. Google is facing tough competitors in it's own field - Is there anything that Google is trying to do that Microsoft is not after? I don't think so. I bet Microsoft has all eyes on one thing - how to beat Google. And same it is with Yahoo. Not only that, there are plenty other startups who are vying to become the next Google trying out different things.

But with all this said, is it that Google is doomed? Well, every company has competitors. And every company has challenges that make it's future success questionable. The thing/s that will drive Google is/are not what you are seeing but those that you probably haven't seen yet. They are in the making. Remember, Google is the company of the new age, the internet age. But the market has no patience whatsoever to wait till they get it out and it starts driving their revenue/earnings up. So Google may go in hibernation for a while, it may take a breather after it's solid run, building up energy for it's next stretch. Till then there is only one thing it's investors can do - have patience.

Welcome 2007

2007-01-09T23:52:00.000-08:00

Happy New Year!! What a splash it was! I am sure you know what I am talking about. The iPhone; sure enough. Steve Jobs rattled everybody with Apple's new creation. Even with all the expectations, the hoopla, the rumours, the real thing went far beyond anything people had expected, to say the least. If you haven't read about it, the iPhone is simply remarkable. Go check it out. It pumps in fresh air in the crowded space of the "zillions phone/smartphones" today in the market.

Okay well, the iPhone is great. But would it help Apple investors? The stock just jumped more than 8% today. Should I say anything more. Well, what about people who are going to jump in tomorrow? Is the water going to be warm and safe? At least most analysts are gaga about that. They are assuring the investors that the water is going to be very warm. Many have price targets above $100.

I think that the iPhone will be a great hit. But I also think there is a "will" factor. Let me explain that. The iPhone was shown today. Nobody is going to have a clue till what, about 5 months from now. From now till then lets see what we have - two earnings cycles (one as early as next week), a big stock options probe yet to be fully sorted out, the weak consumer pinched by housing (are they going to have the will and money to buy the $499-$599 thing), slowing demand across the globe (aren't commodity prices sliding, if not crashing?). And by the way, along with this, there is the short memory of the markets - forget the iPhone and heed the earnings report they would say next week (who cares what happens in 5 months from now).

The bottom line is - Apple is a great company, but you will be happy on the sidelines for now than jumping in. Too much speculation drives a stock nuts, which is what happened today (and recently) and may keep on happening for a while. The real time to bet on Apple is when all the hype dies down and it settles peacefully - how about after a correction. Then you can gear yourself for a yearend showdown! (I hope you don't forget 2006).

Did Google overpay for YouTube?

2006-10-17T10:27:00.000-07:00

Absolutely. $1.65 billion is some money. And for a company like Google which is right at the innovative edge, who can seemingly do anything (that' what people are betting right?), to shell out that much for some company which is not even profitable, is less than 2 years old and has significant legal issues the price is way way too much.

Then why did Google pay that up? The answer can come from this link where just last year Google raised about 4 billion in by selling new stock, just one year after it went IPO. Phew! IPO price $85, secondry price $396. Wow! So people were ready to shell out significantly more quite soon. And Google realized that it better cash in when the time is opportune. When they raised the money they had no clue what to do with it! Other than to say they would use it for operations and aquisitions. But investors did not care. They thought Google will use their money wisely. Time will tell whether that was a good use of the money.

So Google sitting on that cash pile started to do what they wanted. To Innovate. And came Google Video, Google Checkout, Google Finance, Google Books etc. etc. But probably none caused any stir up. All the new things they did are far from even coming close enough to give the next boost to Google compared to the cash cow Adsense.

So now what do they do. Obviously find for aquisitions. They found one by taking a 20% stake in AOL. But isn't AOL a forgotten story? So what next? Aah! they found that in YouTube. But why would have Google hastened to buy YouTube rather than to improve upon it's Google Video? Don't they have a strong enough brand that can attract all sorts of demographics to come to them. Don't they have the most powerful tool today on the internet that nobody does better? What happened to their innovation, all the smart people they hired?

The answer is multifold -
* Google had no clue before and probably still does not about what would and would not work. If they knew why didn't they buy YouTube last year when they just raised cash and YouTube was less than a year old? That would have got them a great deal right! This highlights tells us the contantly evolving and extremely noisy atmosphere that the web has created. It is a ever changing place. What works today may not work tomorrow. And what seems useless today may become extremely valuable tomorrow. And that is one rational that I give in saying why Google overpaid. The risk is too high for so much price to pay.
* Another one is MySpace. MySpace showed Google that they are not invincible. And when analysts started rumbling that MySpace could be worth billions soon, Google executives probably thought that if they wait now it may be too late. Just as what happened with Microsoft and Yahoo who could have bought Google ultimately cheap in its early days had they realized its potential.

Looking at all this the picture is quite clear. Google had to buy YouTube at whatever price it gets it due to pressure to grow, not lose the boat and use it's (seemingly) easily obtained cash pile. YouTube was bought using those investors money who payed $396 for Google last year. The stock today is $420, a mere 5% appreciation. The market is up more than this return.

What does that tell for Google's future? It tells that things are going to get a lot tougher for Google and the heat is now on and is only going to get stronger. What YouTube is giving Google is more Ad space. That Google has to shell so much money tells that Ad Space is getting very expensive. Are there going to be equivalent revenues (increases) to justify this? The other thing Google will soon have to learn is that even if it could have innovated one great thing, it is very difficult to constantly keep doing that in as profitable a way as people are expecting from it.

All this said, Google is still a great company with a lot of smart people. They are with us and will be with us for a long time to come. Innovation is what brought them to life and that is what will keep them alive. They are not on a path that is impossible. It is only a little harder and going to get so more in the future. I wish them all the best in their journey!

Dow hits record, Big Deal

2006-10-03T18:36:00.000-07:00

In my previous post I have put in my sentiment of today's markets. Bearish. But I have to admit that once the bulls are in they just charge. In fact they are trying to net in the bears and pull everybody with them. I just ask how long?

This wall street article gives you a pretty good indication. The Dow hit a record today. But where is the market - the S&P 500? For it to reach a peak it has to go uphill another 14.5%. Phew! would be tought aah! And the Nasdaq - needs to more than double to capture it's peak. So how should we see today's Dow record. I would say with a grain of salt. If not anything else it may be a trap. The Dow only has 30 stocks in it. It is just a symbolic index not the real one. And as you can see the real market has yet a long way to go for the peak.

So what I would suggest my readers. Don't get carried away with the Dow peak. Keep your eyes and ears open and run for the exits the moment you see or sense rumblings. The volcano can erupt anytime. And unless you are far off till then, it can engulf you in no time!

Keep in mind
*we are in the fourth longest bull market since 1900
*economy is slowing
*housing is going to be a big drag soon on the slowing economy
*oil is low - but just needs one trigger to shot back up

The odds against any major upside are quite stark. Good luck.

Doesn't it look fishy?

2006-09-21T09:51:00.000-07:00

This is September. The weakest month historically for the stock market. We are at the beginning of the start of a (presumeably) prolonged housing market correction. we are in a very prolonged bull market that started way back in March 2003 (more than 4 years). And yet the S&P 500 just hit a new high for the year. Man! This gives me shivers. What is the market thinking?

All my research tells me that if not thinking gloom, we definitely not ought to party. Times will be quite tough ahead and probalby stay like that for quite sometime. And I am not alone. S&P Research is with me. Even they feel that either they are extremely pessimistic or Wall Street is extremely optimistic . Goldman Sachs has repeatedly said in their reports, that housing is potentially going to be a big drag on the economy and currently the effect has just started to trickle in.

Okay - one big reason why the market is so optimistic would be oil. That nobody can argue has seen a dramatic 22% fall in about two months. And boy nobody was expecting it. This was supposed to the storm season right? And where is Katrina or Rita? We haven't had a single storm even threaten the east and we are already more than half way into the season (and I wish that it remains so not only this year but all years in future). This is obviously very good news both for the people and the markets. That means no disruption in the supply of oil - that probably was reflecting in oil prices when we started the season.

But here is my reasoning. When oil was hitting new highs few months ago, did anybody care that much? I don't think so. If that would be the case we would have seen the slowing of the economy - drying up the demand for oil. But consumers seemed ready to absorb the higher oil prices, albeit with a bit of frustration. So when oil prices are now down what difference it would make. From my perspective the rise in oil prices does not seem to affect the consumer outlook that much. At least in the near term. They call it inelastic demand. And another way to look at it would be, oil prices have come down because demand has dropped due to the slowing of the economy!

Now let us look at the other guy who can affect consumers and the economy - in a bigger way. The housing slowdown (or bust I should say). All major builders have warned of a slowdown. All housing reports (Starts, Inventories, New Home Sales, Existing Home Sales) point to the same direction - down. And keep that aside. If you are living in metro areas where prices have shot up crazy, don't you see too many "Open house" signs on the weekends. At least that you cannot miss! People could very recently borrow large sums in home equity and then spend it at a relatively low interest rate. That probably kept the economy humming. Now no longer is this possible. Not only can you not borrow easily (since your house soon won't be worth that much, and interest rates also are not that attractive), but whatever you have borrowed probably will have increased rates, plus your ARM might just be ending and you would need to shell out hundreds of more bucks every month to cover the higher interest rates. How much you save a month when a gallon of gas comes down by 15%?

Altogether I feel that the market has gotton too optimistic about the future picture. People are overlooking the looming danger of the housing slowdown and focusing on the short term reduction in oil prices. I feel soon the truth should come out. And it may well be in the favour of the current expectations. But I feel we are in for a surprise. Time will tell of course.

Send your child to Harvard (Part 1)

2006-07-11T23:37:00.000-07:00

I am a father of one and soon going to be father of two! As an Indian father, I can swear that excellent education is one of the top priorities for me. And I am sure it is like that for many parents. Todays education costs as we see them are mind-boggling and they are only going to go up, by the time our children become ready for college. So what can we do to help them.

As an investor when I thought about this, I realized I can increase the chances that I do not need to worry about my child's higher education expenses by doing somthing rather simple right now. Here I outline a strategy that can give you a fairly good shot of raising enough money that would make life quite easier for you and your child if he/she goes to pursue the elite education class.

Step 1 - Open an Educational (Coverdell) IRA account with your broker. Anybody can contribute into the account (after tax money) with the maximum of $2000 a year. Withdrawls can be made oenalty free and tax free towards any "qualified tution program". For detailed information refer to IRS Publication 970, Tax Benefits for Education chapters 7 and 8. The important thing to note is you do not pay a single dollar of tax on any and all gains earned on the money invested in the account (unless of course you withdraw money for non educational purposes or after the child reaches 30). Deposits can be made till the child turns 18. And if the child does not need the money it can be transferred to another Coverdell account for maybe a sibling, even the child's children or grandchildren!

Step 2 - Religiously fund the account with $2000 a year.

Step 3 - Invest these funds in potentially promising companies. Here you can choose the investments of your choice. You can either choose excellent profitable companies that have tremendous growth prospects or emerging technologies companies whose stocks are worth pennies. Given the fact that you would need your money in about 8-10 years you have a extremely good chance of getting a multifold return on your investments even if few of the investments that you do click.

In the second part of my blog I will suggest investment ideas and options for such a strategy. I myself am currently using this approach for my child and have already found it working great. I hope you find it of some help as well!

Google added at Apple's expense?

2006-03-29T07:49:00.000-08:00

This is a follow up for my yesterday's blog. The following TheStreet.com article supports my thesis that Apple may be at a bargain today.

Apple Is Sliding Toward the Bargain Bin

And I feel that it's Google's addition to the S&P 500 at the end of this month causing so much slide in Apple shares. Probably fund managers are swapping their Apple stake for Google's. I had read that this may happen with Yahoo but my firm belief is that it is Apple that is getting hammered. And Jobs selling Apple shares would be helping also. Look for a nice bounce next month for Apple when all this bloodshed ends!

Are apples sweet these days?

2006-03-28T06:55:00.000-08:00

About three months ago I put up a bear case against AAPL. Apple's stock was $72 then. As I had written then, I was a bit late to proclaim that. Apple went on another 20% (to about a $86 high) by mid January before finally retreating. But it did retreat though. Today you can get apples for around $60.
So what do I feel today. I feel you are getting a sweet deal for Apple today. Below 60 is a good price to enter Apple. But beware that it may take sometime for the stock to really turn. My timeframe to look at is by the end of the year. From today till that time you have 3 earnings cycle. So you can expect a lot to go on inbetween. But I feel if you get in Apple today below 60 and sit tight till the end of the year, a decent return is almost guaranteed. Some of the reasons I feel that way -

This is Apple's 30th year. Expect something coming up.

Microsoft has moved Vista to next year. Macs may get a leg up on PCs a bit more for the christmas season.

I think seasonality has drawn Apple down than anything else (although the seanonality has not ended yet).

No significant competitor has yet come up for the iPod and I don't see anything significant coming this year. Microsoft is busy in Vista, Sony busy in PS3. There are news that Nokia would come out with something but I think Apple itself has the iPhone in works!

So I am turning my stance on Apple(s). I have got some for myself. Hope I could open them up by the end of the year and smile :)

Ready for the tech slump?

2006-02-03T08:19:00.000-08:00

Even if the market is so unpredictable, it is surprising how seasonality trends are mostly adhered to. And after quite a few years watching the market I have realized that keeping that in mind definitely helps.

According to the Stock Trader's Alamac February is bearish for techs (Internets especially) and bullish for Natural Gas.

For the current year, I feel, we are going to see the same. Most of the major techs have reported so so if not bad earnings and given a poor forcast. Plus the holiday season is over and Internet traffic is down. So the first two quarters are seasonally slow for internets. No wonder investors would not want to wander their path. Prepare for weakness across the sector.

As early as today you will see quite a few bargains in tech land (Google or Yahoo or Apple yada yada). But don't be hasty, or you will end up in pain. There is plenty of time till the next earnings. And before that you will get lot of good opportunities. So for now just sit tight and enjoy the fall. Sweet deals will be coming your way soon. Have patience till then!

Smart StockTip: Buy Rediff.com

2006-02-02T06:01:00.000-08:00

Rediff.com (Symbol: REDF) came out with it's earnings today. They are just great. Revenue up 48%, margins increased from 62% to 75%, EPS increased a mind boggling 1.23 from -1.18 a year ago.

Rediff could be one of the blowout stocks of 2006!

Rediff.com - the next Google?

2006-01-25T06:47:00.000-08:00

Today when I woke up and started my daily routine - watching CNBC - I was startled. I saw Rediff.com (Symbol REDF) shares up more than 20%. I hurriedly started my computer and checked what was going on. I know for sure there were no earnings cause they just reported last month. So there was something else. To my surprise it was Cramer! Yesterday Cramer highlighted the Indian web portal company. To quote Cramer - "(Rediff.com) may even be the Indian Google".

Now that is insane I thought. The guy has become so popluar that any stock that he recommends the day before goes up at least 5% easily the next day (take the case of ZOLT). That makes me feel uncomfortable. It means too many amatures are watching his show and blindly believing him. Not to say that Rediff has problems. Cramer has lot of people behind him doing good research. Only after a company passes that does Cramer comes and trumpets it on his show. But a stock jumping so much just because he called shots for it is discomforting. I feel all those people who do that are just plain foolish. They might get burnt hard.

A few things about Rediff. My opinion about Rediff is that this is a very good company. It has just turned profitable and it is poised for excellent growth. I don't think it is the Google of India as Cramer put it. I use the site. And it is not the best site that is out there. But it is used by a lot of Indians - most of my friends use it pretty regularly and from their feedback it is a really useful site. No doubt it is one of the most popular site in India. I had already mentioned the stock in one of my previous posts. My guess is the stock can easily hit $40 by the end of the year. But before it does that, it has to show good earnings.

So how should you play this one. I think if you are not into it already then better wait. Don't go with Cramer mania. The earnings are quite far and the stock may settle down a bit. I think 15-18 is a good range to enter the stock. But your best bet is to wait till the earnings. If the earnings are solid - buy it at whatever price you get. You will be in good shape.

Finally, the blow comes...

2006-01-21T00:41:00.000-08:00

The market finally came to its senses today. Or so I feel. I thought this would happen way back but I think the year-end binge lasted a bit longer! Until yesterday the market tried to squeeze in good news out of whatever it can. But finally today it woke up. And not just woke up - it woke up screaming. I had thought that when oil rises above $66 a barrel it would be hard for the market to ignore. That's what you could see today. Suddenly all the fears came running. Earnings not good at Citigroup, GE. Apple, Yahoo, Ebay giving poor forcasts. All this finally took a toll on the market.

I should not be laughing today. I lost a chunk of money. I am in Google. And you know what happend to it today. Biggest percentage drop ever for the stock and that too on the biggest ever trading volume. But I was expecting it. So there was no panic. In fact, I took the opportunity to add some more to my position. I feel such a blow is good before earnings. It should temper the expectations a bit. That's what I am hoping for.

Optimism rages on...

2006-01-06T07:39:00.000-08:00

Optimism in the markets is getting stronger and stronger. Things are improving for short sellers by the day. Although the markets have gone higher in very strong volume most of the week, I still am a bit skeptic about how long is going to last. Next week should clear up the clouds. Even when the jobs data has come out weak, the markets are looking for indications that that would make the Feds to stop raising interest rates. This is a typical optimistic view of bull markets, when the markets try to squeeze positive news out of anything. Keep in mind that oil is creeping up. When oil goes about $66-67 towards $70, would the markets still take it as positive? I doubt. The reality will sink in eventually and that I feel is not too far.

Potential industries for shorting:

Airlines
Freight
Techs

On a side note, Goldman Sachs has increased the price target on Google to $500 (they have done so for Yahoo as well with it's price target at $50 with about 20% upside potential). Watch out for their earnings out in a few weeks.

A start with a BANG

2006-01-04T01:05:00.000-08:00

The stock markets started 2006 with a really big bang! All major indexes up more than 1%, with most up more than 1.5%. A sleepy start transformed into a solid cheer after the Fed meeting minutes were released and seemed to make clear that the central bank's 18-month campaign to raise interest rates will happen sooner rather than later, the markets went rampant. It was as though the market was waiting for some positive news to celebrate the New Year.

So should we open up the champagne bottles? We would be tempted to do that. If on the first day the markets jump more than 1.5% we are really looking for big gains for the year, isn't it?. Why not jump in with everything we have? Right! Are you kidding? Today is just the first day of the year. And more than anything I feel it may be a trap. Well, the feds policies have been predicted by many. And I would say they were anticipated and reflected in the markets already. So what was this enthusiasm about? I really don't know.

Maybe people got a little bit excited about Google's $600 price target by Piper Jaffray analyst Safa Rashtchy. Maybe they cheered about some rumour about a possible tie-up between Microsoft and Yahoo. Or maybe they just wanted to celebrate, a bit of a hangover after the holidays! Hey, but you need to wait. Google's price target is for the end of the year and there are 4 earnings calls inbetween. Last quarter earnings season is just round the corner and so is, historically, a weak period for the techs. And yes although there is nothing coming out yet to say things may be bad, I feel one should wait nevertheless. Visibility is good, impatience is bad. You have a whole year in front to use your discretion. And by the way this rally happened on the face of oil jumping more than $2 a barrel. I feel something is fishy around.

According to the Stock Traders Almanac, the last 35 times the first five days of January have been positive on the S&P 500, the index posted full-year gains 86% of those times. Let us see what the next 4 days have in plate for us.

So although I cheer today's BANG I will be watching for a THUD at least for a couple of weeks. If the market can maintain it's positive bias few weeks into the earnings season then I would change my bear stance. Let us see how long does the Bulls hangover last!

What to look for in 2006?

2006-01-01T17:20:00.000-08:00

In 2005 the market barely moved. The S&P500 gained 3%, the Nasdaq a mere 1.37% while the Dow edged down 0.61%. As some analysts have already been saying the bull market that started in 2003 is aging. And I kind of agree. Although there is a lot of optimism for 2006, it may end up being no different than 2005 or even worse.

Heading into January I feel the market may become bearish. Right now all the major indexes have dipped to around their 50 day moving averages. That actually looks to be a good support if the market would bounce back (nonetheless, since volume was quite thin because of the holidays I don't think that such support is reliable). But I suspect that would happen. I don't see any major driver for the market on the positive side except that the Fed may stop raising interest rates. But that seems to have been already priced in. All eyes would be on Bernanke's policies and until the market clearly understands his stance it would be weary to make big moves on the upside. So far Bernanke has been perceived as all positive and there have been no jitters in the market. But the market has yet to see him in action. I am sure there will be surprises for the market and the switch from Greenspan to Bernanke may not be a very smooth ride.

So my take is before going up we are going to first go down. I would say we are looking at atleast a 5% correction. It is hard to predict how long this correciton may last, but it could go on for a few months. So if investors jump in too soon in January they may get burnt and may have to wait for a while till they can see some returns. Especially watch out the techs. The technicals on those stocks have gone a bit bad recently.

For me I am going to play safe. I have already got out of all of my speculative trades. I am only holding my longterm commitments. It is not that I am going to stop trading. But whatever I will do I will watch every move of mine very carefully and step back if things go wild.

Having said that I still do think that there are some industries and stocks that could make you money. Right now one industry high on my list is Natural Gas. Natural Gas has dipped in the end of December after making a record touching $15 per million BTUs. According to a report the U.S. National Weather Service had said for the last week of December that demand for heating fuels could be 25% below normal, with natural gas heating demand almost 28% below average, as most of the country will see unseasonably mild temperatures. That triggered a selloff and Natural Gas prices dipped to 4 month lows before recovering a bit at the end of the week. I feel this bearishness may last for sometime during which time there might be good opportunities to enter the Natural Gas plays. My favourites are

Chesapeake Energy (symbol:CHK)
X T O Energy Inc (symbol:XTO)
Canadian Natural Res Ltd (symbol:CNQ)
Devon Energy Corp (symbol:DVN)

You may see some of the small firms being bought out by the big oil companies like Exxon, BP, Shell etc., which are desperately looking out to increase their reserves. So potentially an investment early on may become quite rewarding. But a note of caution though is that these stocks tend to be very much news driven like the Biotechs and one needs to follow the stocks pretty carefully and do good research beforehand.

More to come later! Stay tuned!

A Bear's case against Apple

2005-12-31T11:38:00.000-08:00

2005 was spectacular for Apple (symbol:AAPL). The iPod just rocks. With the runaway success of the iPod, Apple stock has skyrocketed about 225% in 2005. I myself adore the iPod. I have gifted 4 iPods until now and plan to buy one for me soon.

But, how long will the iPod boom long? Anybody can guess it won't be forever. I feel that should happen in 2006 itself!

The way I see it is - the iPod is nothing but a sleekly designed pocket accessory for playing music. To me it is just amazing that nobody else could deliver a device which is at least equivalent if not better than the iPod. After all it is just a simple MP3 player. One day - and I feel not so distant in the future - the iPod will have a daunting competitor. And perhaps so much so that it may threaten to wipe it out altoghether. And I don't mean that somebody has to come out with a better iPod. It may as well be a different technology altogether. You know how LPs were replaced by audio tapes, which were replaced by CDs, which now are getting replaced by the mp3 players. I predict that unfortunately the iPod is probably going to meet the same fate. You can argue that the iPod is still in it's early stages of popularity. And maybe you are right. But I feel today technology is changing extremely fast and product lifecycles have shrunk significantly.

This is just one aspect of it. From a different perspective, the iPod (brand) will itself age. Today everybody wants to own it and gift it. But eventually people will get bored from it. Today it is the thing to buy. One day it will be anything but it. With a lot of iPods around, it will no longer have it's appeal however beautiful it looks. It will soon fall out of favor. Did you see what happened to Nokia phones? They were once the hottest cellphones around. But then they went out of favor and today Nokia has completely lost it's edge. Nokia phones are just like any other phones. That's what happens with everything however good it may be. Will Apple itself have the alternative for it's iPods? It's not unlikely, but I don't feel it's going to happen.

Plus Apple is currently demanding a lot of premium for the iPod. The iPod has a 100% premium w.r.t an equivalent (in terms of functionality) alternative today. No doubt that the iPods are unique and no other product can match them in terms of design and asthetics. But then people will not like to pay that premium forever. So Apple should see peaking of sales or reduced margins eventually. That will hurt profits.

Hey but Apple has a seemingly unending product line all set for the next year. What about iPod cellphones, video blogging, vast video content accessible on the video iPod, faster macs on intel chips?
Yes, some of these may help extend the iPod life span (in terms of product cycle). But they themselves do not look like blockbusters like the iPod itself. If you buy an iPod cellphone would you like to again buy an iPod? So that would be complementary. So the iPod cellphones will eat into the iPod growth. What do I care if a mac has a PowerPC chip or an Intel chip, so long as it works fine. So to me as a consumer that is irrelevent. The switch is a strategic decision for Apple and I don't think there will be a big positive impact for Apple. It may end up having a negative impact if the switch over does not happen smoothly - at least in the near term.

So how should you play Apple? For now I am an Apple bear. I may be wrong to determine, this soon, that the iPod mania is over. Apple is still a great company with great products and they may come out with other products and services that may propel their growth. But I am skeptical about that. I am betting against Apple. I feel it is a good short candidate (I have already shorted it). Please note that there is no imminent threat to Apple as of now. My analysis tells me that the technicals for the stock have been deteriorating (past 2 weeks). A lot of analysts have put a hold on the stock. And as I have mentioned above, my thesis says that there is no significant upside to the stock after this huge runup. If anything, there may be a downside. And I am betting on that. For me right now it just looks like a trade. I intend to cover-up my position if the stock drops to the low 60s.

Stay Tuned!