Straddle and gain

Recently RCOM hived off its tower business to GTL infra. Based on rumors and news items available on the issue the existing shareholders of RCOM will get shares of the GTL infra in the ratio 1:3. As I write this RCOM is trading at INR 200 and GTL is at 48. This means that the telecom business of RCOM is available at an unbelievable price of INR 56 (Current price-price of 3 shares of GTL).

RCOM is also planning to acquire a cable company and then de-merge the BIG TV (DTH service) business. The market leader DISH TV is at INR 45. Hence it wont be inappropriate to assume that the BIG TV will get a price closer to INR 20. If this is reduced from the net figure of RCOM ie INR 56 then the telecom business valuation is even lower at INR 36 (net price-DTH business).

Now this is unbelievable. Therefore I see following two possibilities:

1. The share swap ratio will be at 1:2 as against the rumored 1:3 (still the RCOM stock price will look tempting) or
2. The GTL infra will correct heavily from here to compensate for the interest burden it will have to take post this deal.

Therefore I propose following:

Go long on RCOM (as it is available for a very cheap value) and simultaneously short GTL infra. There is a hidden straddle in this strategy (short GTL and long GTL, which will be factored in RCOM value) thereby taking the advantage of cheap valuation of RCOM. This looks to be a very good risk free money making avenue.

Kindly post your comments on this. If you believe that my observations are wrong feel free to correct me.

Don’t forget to consult your advisor before investing any money based on my strategy.

PS. please accept my apologies for remaining absent from blogging.

Trend is Friend

I am a firm believer of the Fundamentals and not very fond of technicals. But when i invest in a market at 20 PE i doubt whether i am still a fundamental Investor. I am not a lawyer but i fight my case strongly. So at this level too i can justify my actions. I can use various theories thrown in by the big bulls in the market. This gives me a lot of support.

Previously they (news anchors on various channels, bulls et al) talked about markets touching new highs like 28000 etc. Markets did not oblige and went down. Now the language has changed. They dont talk about insane targets and at every level they say it may not cross this but will find a support at 15000. This gives me a lot of support (again).

I find myself in a big conflict zone here. I ask myself everyday that if markets are always doing what you expect least then why am i investing at current levels? Since the downside risk is less? or is it because i have not learnt anything from the past?

And if nothing is certain then what i am doing in the market is nothing but stupidity. But then i look at the current profit figure in my portfolio. I then wear a coat of lawyer and make this announcement- Trend is my friend.

One more thing, October is a dangerous month to speculate in stocks. The others are, August, January, March, September, May, December, February, June, April, November and July.

Be careful, Cheers!!

Bee Movie

May be this isnt a space to talk about Global warming. May be this isnt a space to be philiosophical.....but i stretch my limits.

Someone has rightly said that 'One death is a tragedy and a million is statistics'. Recent swine flu pandemic is an eye opener for us. Its not how many died but rather our response to such issues. May be there is too much going on in my mind, may be i am bit zapped by last night movie on HBO ' Bee movie ' and another news in today's daily that bee population is reduced by 40% due to phone towers. What happened to our friendly sparrow? may be the same. Why have we lost our sensitivity to such issues? If 'An inconvenient truth' cannot make us senitive then this space is too small to do that.

In coming years falling crop production or the politicaly correct way of saying this will be 'the growing middle class population' in the country will consume more in turn that will drive the prices up for agri produce. Companies that are green and/or catering to this sector like Bajaj Hindustan, Jain Irrigation, GG Dandekar just to name a few will command huge premium over the market. If you are a long term investor investing in agri based company would probably be the best option.

As it stands today, market has appreciated by more than 80% from its lows. Would be better if we rely more on performance than on the liquidity.

Disclaimer: Stock mentioned here are only examples and do not gurantee any future success.

Singh is King

"Politicians are like diapers.  They both need changing regularly and for the same reason"

Finally we have a government that’s not using coalition crutches and with it comes the much needed stability.  Now we don’t want the Government to talk about the great sacrifice Madam made or skills and strategies of RRG. Now we want a Government that does something for the middle class. We don’t want subsidy burdens, we don’t want farm loan waivers, and we don’t want employment guarantees. We want better infrastructure and living conditions. We want a government that is pro economy and not pro market. If Atalji did it in 5 years then Dr MS can do the same. Both have a clean personality and great vision. We also need market reforms and need to stop illegitimate foreign fund flows (or at least attempt to distinguish those) . We want privatisation to continue. China has infrastructure and we have reforms, thats why they will be always ahead. We need to take a lesson from them.

Many have already predicted that a gap up opening of 1000 points is possible on Monday. But to believe that Dr MS will be able to decouple the Country in a day will be bit naïve.  Market rule is ‘buy on rumour and sell on news’. So Caution is desired.

Oh one more thing, definition of insanity: doing the same thing over and over again and expecting different results.

Cheers!!

 

  

Big NANO

Last week NANO booking closed with humongous number of applications (close to 0.2 million bookings as per official  report). Confusion over the booking procedure, unavailability of test drives and uncertainty over delivery schedules did not stop buyers from booking the car. So what's so special about NANO? A. its from the trusted powerhouse of the country and B. its unbelievable price tag. When economic times are good, you may be inclined to shop with little regard for price. But when conditions turn bad, as they have, it’s another story. 

What is more astonishing is the fact that other OEMs are still not taking any inference from this. Commodities are at rock bottom prices but that has not prompted the OEMs to slash prices. If there is such a crazy demand for NANO or for its price tag then instead of complaining about the downturn in the economy and sluggishness in the demand, OEMs should take some pro-active measures. People generally don't have time for big honchos of OEMs who are always helpless or complaining. They will just go ahead and book NANO.

The only justification for a high-priced model is self-image and the illusion of prosperity. The value of these qualities is overrated. NANO is therefore a refreshing way to look at the recession. Kudos to Mr TATA.

Something for my regular readers, “The stock market depends about as much on technical analysts as the weather does on weather forecasters.” Just be careful with 'May 09' series.

Game theory

A new game called ECONOMY was launched last year in the market. The game had an atrocious price tag on it. Top heads of companies, fund managers and some influential people bought this game (only they could afford it to be honest). Game developer Mr. anonymous (name changed on his request) said that he had high hopes from the game but sales were dismal owing to bad economic conditions.

Now, as a layman, I meet these executives, heads, and fund managers on various channels. They are all very smart people and believe that they have mastered the game (ECONOMY). When I hear them speak I get convinced that they are the masters of it. They may not have all the information on the ground but they have the position, and that’s what matters.

My father always said that stock recommendations or even IB is like a bollywood movie. You have to create a story and on top spice it up with whatever you can. I would apply this wisdom to economy. With so many channels around and 24 hours of software requirement (shows) you need people who can talk. Most of them are good story tellers. Just the way you try and predict the climax of a movie  they predict the ECONOMY.

But the major concern is everything is based on what is happening today. A fundamental analyst on these channels gets a minute and the poor fellow talks at such a fast pace that you feel someone is holding a gun on his head. If you can make out anything from what he says it would be something from the following: “ …cement sector is slowing down”, “…pharma is a safe bet but affected by the slowdown”, “…auto sector won’t make a comeback for next 18 months” etc.

But on the other hand these self styled GURUs called Technical analysts (who btw get a significant footage) would say that if THIS level is breached next target is THAT. Or if THIS support is broken then the next one is THAT. Put a stop loss at THIS and THAT etc. But fortunately or unfortunately market is not concerned with a technical expert and it listens to the fundamental analyst. If we do the same we would also gain something from it.

Just to be on the safer side I asked Mr Anonymous, the game developer, what was in the box? He said due to slowdown he could afford only the box and there was nothing else in this game called ECONOMY. But since these top people paid hefty amounts to buy it they kept mum on this to justify the move. So there was nothing in the ECONOMY back then and there is nothing in it even now. But those who have mastered the game now think otherwise.

I asked Mr anonymous what is he planning to do now in the market. He replied, “We're not ready to start buying yet. We'll keep our powder dry until we think prices are as low as they'll go”. I could not agree more.

Shock wave

In last one month stock markets have moved up significantly and all of you who read my blog regularly are asking the same question WHATS GOING ON??? 

I was also shocked for some time with this movement but very soon I recovered from it as I realised that its peculiar of markets to surprise you every now and then.

So what has really changed in last one month? I decided to take a walk....I met heads of some top banks in my region. Following are the key points from these discussions:

Lending is either down or almost NIL in some sectors. 

Term loans are no more a fashion statement for banks. 

WC facilities are offered but here again the AUTO sector is a big NO. 

And on top of this they all agreed that they are expecting the numbers down by at least 20% in some major sectors and it could be even worst in sectors like Real(?) estate. 

Before I conclude anything on this, let me draw your attention to the fact that in 2009 we almost had ZERO ipos hitting the market. Buy-back offers are in fact doing the rounds in the market.

To sum up, either there is no money in the system (LOANS OR IPO) or when there is money its not put to the best use (as companies are using it for BUYBACK). Thus the perception in banks, companies or market in general is not so positive.

So everyone is shocked by this move. I am sure that there are many who lost the money in this uptrend and very few must have made some money. So for me i am ready to bet that with result season just round the corner and elections not so far, at least in India, we should have a major correction from the current level.

I firmly believe that its ECONOMY that drives the market and not the other way round. Therefore i regret to say that if you are seeing the markets in Driver's seat, it time you apply the emergency breaks.

For more: esiddharth.blogspot.com

(PS please consult your advisor for financial decisions. )