Erasing Loses Overnight!!!

Hats off to Reliance Power management for making an unprecedented move and hope the bonus ratio will justify this eulogy. Well, bonus shares will be issued to non-promoters who hold 22.8 cr shares currently ie 10.1%.

If the bonus ratio is 1:1 then the cost of acquisition for retail will be Rs 215 (down from Rs 430) and if it is 1:5 it is Rs 358. The figures for QIB stands at Rs 225 and Rs 375 respectively (down from Rs 450). Last week, the price seemed to have seen support at Rs 350 and most of the fund managers said that they see value at Rs 340-Rs 350 levels. It is only at a bonus ratio of 1:4 will retail investors just, about break even and any ratio more than that would be a real bonus. At ratio of 1:4, retail investors will lose about 1% while QIB will lose 5%. At ratio of 1:3, Retail sees 5% profit on their allotment while QIBs just break even. As the main reason for issuing of bonus shares is to prevent nominal loses, the bonus ratio could be greater than 1:3.

Calculations:
Cost of Acquisition for QIB: IPO~Rs450, 1:5~Rs 375, 1:4~Rs 360, 1:3~Rs 337, 1:2~Rs 300, 1:1~Rs 225
Returns for QIB: 1:5 ~ -8.5%, 1:4 ~ -5.2%, 1:3 ~ 0.3%, 1:2 ~ 11%, 1:1 ~ 41%
Cost of Acquisition for Retail: IPO~Rs450, 1:5~Rs 358, 1:4~Rs 344, 1:3~Rs 322, 1:2~Rs 287, 1:1~Rs 215
Returns for Retail: 1:5 ~ -4.3%, 1:4 ~ -0.8%, 1:3 ~ 5%, 1:2 ~ 16%, 1:1 ~ 48%

Do I enter now?

Do I enter now?This is the question that is bogging the people irrespective of whether one has lost a fortune in the Jan-Feb correction or one who is sitting outside the market. They would be very few, one in a million, who might have sold in Jan08. He (or She) might be laughing away to glory and I salute him for the foresight. It needs guts to sell when everyone is making money by the loads or atleast that is the perception. However, for not so lucky, the fall has been immense and gave no time to exit.

Coming to the more important question of whether one should enter now. There is no easy answer to this but I believe that there is more pain in left in US economy and as we are coupled with US it is relevant for us. Here are my arguments:

First: It was initially the banks that announced write downs. Now it is the insurers. Just about $200bn have been announced in write downs and there are indications that the figure may be less than half of what we will eventually see. We could hear more from hedge funds across the globe and banks from other countries like Japan and China.

Second: When a finance minister of Germany says that his estimation of write downs is over $400bn I would take him very seriously. Infact he might just be understating.

Third: When Fed is cutting rates so aggressively, one can clearly see that they believe that the pain in US is immense and I think one should respect that. When the President is putting money into tax payers pocket, one can understand the magnitude of the problem at hand.

Fourth: It will take a couple of quarters before the effect of monetary policy is seen in the release of economic data. Unless we see the change in trend of retail sales, housing sales and GDP growth we have no reason to believe that the health of the US economy has improved. Remember, the average of a US recession is about 10 months. In 2001 and 1990 it was 8 months and in 1981-82, it was 16 months. As economists put it, US is still not into a recession but on the verge of going into one.

As Benjamin Graham would suggest, in these kind of markets, one should have 25% of networth in equities and the rest in debt instruments or gold. For those invested in the markets, one strategy is to sell unconvincing stories on rallies to bring the equity level to 25%. There will be enough data points in the course of time to suggest which ones are the screaming buys. When any stock reaches that level, it is the time to make staggered buying. That’s the way to make money.

Ahead of Reliance Power IPO

Everyone is trying to answer one big question today (08th Feb 2008). What should I do on Monday (11th Feb 2008) when Reliance Power is listed? There seems to be two options evolving. One, to be a flipper and move into power stocks. Two, to move out of power sector completely into more lucrative ones like financials, telecom, consumer durables and cap goods. Have a look at how valuations have changed from the close of IPO on 18th Jan 2008 till date (08th Feb 2008). Reliance Energy has come down from 35.9 times to 32.5 times. NTPC from 23.9 times to 20.1 times and Tata Power from 46.8 times to 43.7 times. The valutions though taken a beating do not look attractive at all.

There have been a few people who have been accumulating over the past week as suggested by the delivery volumes. I suppose they are doing with full knowledge. I say this because other indicators do not suggest that to be a wise move. On the F&O front huge short positions have been accumulated in all three major power stocks. These stock prices have taken a beating ahead of such an important listing in the history of the markets. The sentiment on the sector is negative even though most hope for a good listing gains from the IPO. Market watchers suggest the above two strategies - move out of Reliance Power - move out of power sector. For more enterprising ones, short power in F&O.

Piggy back on fund buying??

Tata Sons bought Praj industires at Rs 252 in Sep 2007. The current stock price is Rs 170. Is it a right investment now?Reliance MF buys CCL Products at Rs 291 in Sep 2007. The current stock price is Rs 190. Is it s good time to buy?

One of the favorite ways to make a shopping list is to look at stock prices that are at a discount to the level at which funds have entered. While this may work in many cases, it may also fail in many. This is purely because of market conditions. While in Sep 2007 the mood was gungho with FII money coming, the time horizon funds may be looking would be lower. But once the markets turn bearish as they did now, the business fundamentals of the stock owned kicks in. All the assumptions made earlier will be questioned right from cost of capital to terminal value. Most importantly the embedded stories that are not entirely known to the market. Remember, most mutual funds do not out perform the market. So, should we have faith in their judgement. Though most talk about long term, the reality is that the churning is high in the funds. For all you know you may be stuck with a security dumped by your anchor fund. Hence, it is pertinent for one to understand and have belief in fundamentals of the stock before buying it - be it at a discount or a premium, be it for long term or short term.

Microhooooooooooo.......

Global web search market shares:
Google 77%
Yahoo 16%
Microsoft 3.7%

Points for acquisition:
Expansion of R&D
Gain Operational efficiencies
Opportunity for Microsoft to build its online business (some hope for the loss making internet business with increased inventory)

Points against acquisition:
With slow down the ad revenues might get effected
Intention of Jerry Yang to turn around Yahoo which is coming along on expected lines
Microsoft has no history laying off employees after acquisitions. Will synergies emerge?
Clash of cultures

Possible effect on Aftek Infosys (has 49% stake in a german search firm Arexera), Infoedge & Northgate Tech