Thursday, July 24, 2008

Did the financials make a bottom?

It’s always good to hear experts commenting on business cycles, economy, markets and commodities. Most unfortunately tend to be wedded to their ideas.

If a known talking head changes his or her viewpoint, it especially pays to listen to their arguments. A cheerful Nouriel Roubini talking about 1500 on the S&P 500 would jolly well crush the shorts (naked or otherwise). In a similar vein, Jim Rogers talking up $60 a barrel oil would probably have oil executives jumping off rooftops, not to mention becoming a brand new target for the Middle East hit men.

Anyways, Michael Kahn, Barron's excellent technical analyst, and a skeptical bear, had written earlier about finding no bottom in the financial sector. A week later, he’s changed his opinion, thanks in part to this excellent chart.

That sure looked like a capitulation bottom. While he is still talking of a long healing period, and a possible retest of the lows, at least one bear seems to have retracted his earlier opinion.

Yup. You heard that right. The bottom for financials is in.

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Wednesday, July 23, 2008

The Qualcomm Nokia deal.

The media is abuzz with the settlement between Nokia and Qualcomm, the two telecom giants. They've had a long running acrimony over royalties on wireless patents. This deal is obviously big for Qualcomm because it validates their patent licensing business model. A 15 year deal covering the gamut of 3G and 4G technologies should remove any litigation uncertainty from both the stock names. Reduction in litigation expenses are obviously a bonus for both sides, and should boost margins and income in possibly difficult economic times ahead.

While much will be written about the pros and cons of this deal as more details emerge, commentary from this article caught my eye.

Why Qualcomm could be the big winner here:

“This is a huge win for Qualcomm,” said analyst David Marchesani, of Quality Growth Management in Rancho Santa Fe. Marchesani said the length of the deal and the number of technologies covered were noteworthy.
“You don't have to wonder whether they're going to have to go through all the same stuff again in three, four or five years,” he said. “This resolves a lot of uncertainties. And the market hates uncertainties.”

Reasons which favor Nokia:

Comments from a Nokia executive suggest that the company will pay less than the 5 percent royalty Qualcomm typically charges manufacturers. “We are happy to have a rate structure that will not slow down growth and innovation in the industry,” Nokia Chief Financial Officer Rick Simonson said. “We're not going to disclose the rate structure, but I will say 'mission accomplished.' ”

“We got a deal that was financially beneficial to Nokia,” he said. “It was worth it.”

It'll be interesting to see how the two stocks react tomorrow. Both are up after hours.

Full Disclosure: Opinions expressed are my own and do not represent any official view. Long QCOM.

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Thursday, July 3, 2008

India: The bear case

BusinessWeek is out with a great article on the grim prospects for Indian equities and the economy over the next year.

To summarize:

  • 10% of India's GDP would be spent on fuel subsidies, fertilizer subsidies and stupid farmer loan-waiver programs. That's a recipe for inflation.
  • There's been ZERO reforms over the past four years (!!).
  • There's a risk that global investors who had set up base in India might leave.
  • Communists in the ruling coalition are against globalization and industrialization.
  • Elections will handicap the administration from acting decisively.
  • Growth is hitting systemic choke points.
Chetan Parikh sums it up nicely: "We will lose years".

I kind of disagree that things were different six months back. Most of these signs were still there; only the perception has changed.

I'd commented in November 2007 that the the Indian market was going through a speculative blow off. Technically it was a classic top. Breadth had declined, and the majority of the advance in equities had been led by a few names. Markets churned around 20,000 on the index, broke through a few times, failed, and rolled over.

I'd also written about the emerging markets hoopla back in September 2007. Here's what I wrote about India (you can check the article for my view on the Chinese bubble) :

Emerging markets: one doesn't see the point of investing in emerging markets, with their high PEs. We need risk premium dammit!

Today, you can invest in the US(and Europe) with their reasonable PE ratios. There needs to be a risk adjustment in valuations, regardless of their "growth fundamentals". Let’s not forget, the Communist Party of India is still in alliance at the center. The possibility of them screwing things up is just very very high. This is very similar to how multinationals got banned from India in the 1970s, relegating India to the ‘Hindu rate of growth’. The recent posturing on the nuclear deal is a good example of their potential nuisance. India needs nuclear power if they have to maintain their growth rates. If CPI succeeds, the growth prospects of an infrastructure constrained, energy constrained, and corruption constrained India would surely need to be revised down.

The risks in India are under appreciated. A repricing of risk in the Indian subcontinent is due.

Also, in a little known and often overlooked event, IMF downgraded the historical growth contributions of both India and China by as much as 40% back in January 2008.

To conclude, while I really liked the article, I disagree with the assertion that things have changed in six months. The signs have been there all along for every one to see. If anything, this could be an indicator that all the negative domestic news has finally been priced into the market.

Full Disclosure: None

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