Tumbling WMT is healthy sign for the economy, isn't it?

We were given fictitious $250,000 to invest in 5 securities by our professor during one of the electives of the grad school. Investment Analysis it was. The objective of our portfolio was to preserve our capital. Those few lucky securities chosen by us were WMT, FDO and healthy weight on treasury bills. Based on our security selection and objective, I wonder any one cannot assume what period it was. Right? Yes, it was the midst of catastrophic recession which started in the 2007.

The best performance of WMT and the worst performance of NASDAQ Composite Index relative to each other during last 5 years, took place during the recessionary period. And that is the reason why we love to consider WMT as a recession-proof stock. But if we observe the charts now, NASDAQ composite and other market indices are quickly approaching to the higher returns. These are the signs of early expansion which are not preferred by discount stores like Wal-Mart who have been reporting consecutive decline in sales. Their stock is pretty much down from where it was during the great recession. If that is not enough, recent hike in gas prices and inflation have worsened  the outlook for the discount stores.

Wal-Mart has been trying various strategies to regain their momentum despite of negative correlation with the markets:

• Recently, they have announced to acquire Kosmix which discovers social content by topic. This acquisition may bring Wal-Mart to the new age of social media influence on electronic and mobile commerce. When a retail mammoth taps the Silicon Valley, it has to be something strategic. And these are the impediments behind the expansion of WalmartLabs. 
• Few days ago, they tested their online grocery store. This may have been game changing event if consumers easily adapt to this service. It can definitely give Wal-Mart some edge over its peers.
• After successful entry in the Chicago market in the 2006, Wal-Mart began to think over the New York City market which has high barriers for entry. And based on poll results in the early 2011, New Yorkers showed positive response to embrace Wal-Mart.

... and if these help them perform well and beat the market, do we have to remove WMT from the list of those recession-proof stocks?

Head to China and Enhance the Ubiquity

Rumors. Rumors. And more rumors. Once you are on the top of the tree, you will likely to hear all sort of rumors surrounding you. Social media is the new, intangible household material and the most bullish industry sector. Rumors follow it. Facebook rules that industry. More rumors follow it. News feed is considering Facebook deal with Baidu to reenter China as blockbuster rumor. Facebook may have dealt with some local social network to enter China again after it was banned in the July 2008. No news has been confirmed by either Facebook or Baidu. But I can see handsome & strategic implications behind this.

As of June 30, 2010

Facebook undoubtedly reigns the social networking. It has becoming more ubiquitous with every sunrise. But because of China's ban on Facebook, it is still unexposed to the biggest Internet usage market in the world. If Facebook collaborate with some local social network there as stated in the news, it may have been turnaround for them. Facebook may be household name in the market of nearly 1.5 billion people. And this Chinese Presence may help Facebook to flourish revenues and amplify its already whopping valuation. If such thing happens before Facebook's possible IPO, I   can imagine some record setting numbers for IPOs.


After these rumors, we should not be surprised to see manifold bankers to visit Mark Zuckerberg and other considerable heads of Facebook every now and then. The Chase is going to be earnest and pungent...

"Let's assemble new Netflix." says Dish TV?

OK. I had knocked the right door when I heard about the bankruptcy filing of Blockbuster back in the last year.   Looking at the swaggering stock performance of Netflix over the last two years, I thought of a potential deal of buying Blockbuster. And Dish TV has finally done it. With that, an array of acquisitions in media & cable industry continues.

I believe the impetus behind this $320mm deal is:

• Blockbuster has phenomenal collection in their library and it used to reign the movie rental market cleanly just before Netflix started to expand exceptionally.
• Looking at such potent parameters, distressed value of $320mm seems like a handsome investment.
• Subscribers do not need broadband connection to play content offered by Dish TV. This factor may become critical after AT&T and other broadband providers start putting "already announced" cap on internet usage.

If you cannot compete with expeditious NFLX, you have to build new NFLX. I will not be surprised if Dish TV has this gimmick behind the scenes.

"Trust Me" Factor & Portfolio Management

I was working and listening to the news yesterday evening and suddenly a tag line popped up saying Breaking News. It was about David Sokol's resignation from Berkshire Hathaway Inc. Why was it breaking? Because this is the man who was considered as successor of Warren Buffet at the company. This is the man who made the Netjets story. Since yesterday, I have been hammered by these news "Sokol's shocking exit", "Buffet's surprised by David's resignation" and so on. Among all, a news about Berkshire Hathaway's stock valuation appeared and that caught my attention.

It is about "Trust Me" factor.

• Inherent in the stock value of companies like Berkshire Hathaway Inc.
• Such investment vehicles do not have manufacturing or retail operations and this is why they are able to deliver much needed transparency in their financial disclosures to the investors.
• Because of such business nature, they have minimal accruals and accrual based earnings. As we know, the lesser the accrual based earnings and the higher the cash earnings are, the greater the quality of earnings is. In other language, when the accrual component contributes the least in total earnings, we get the earnings of the greatest quality.
• Forecast of greater quality of company's earnings will always have positive correlation with stock price or its valuation and this is the reason why we cannot consider this factor as trivial.

Should some PhD in multi-factor analysis or in quantitative methods can substantiate a theory on this factor, then is it likely to be employed by portfolio managers in their multi-factor models? In such models, sensitivity to this theoretical factor should be higher for portfolio composed of securities from companies like Berkshire Hathaway like the same way in macroeconomic model where sensitivity to recession factor is higher for Ford Motors and lower for Walmart. 

Synergy, Strategic Buying and Anti-trust--- A Big Telecom Deal

Couple of weeks ago, I tweeted about Sprint's takeover of T-Mobile USA news. I could not understand the "synergy" behind that looking at the Sprint's market share. But during the weekend AT&T shook the wireless telecom industry by agreeing to buy T-Mobile from Deutsche Telekom for $39 billions- almost at 75% premium. This is the largest telecom deal since 2004. And with this, AT&T will lead the US wireless telecom market which is currently being led by Verizon.

Source: Bloomberg

  Big deals always bring the Department of Justice, anti-trust laws and FCC to the picture. So, regulatory approval is really imperative here.

• Per widely used theoretical concept of Herfindahl- Hirschman Index (HHI), anti-trust challenge is likely.
• AT&T has one of the biggest lobbying powers in the Washington DC to get this deal considered as "done deal", though regulatory approval may take really long time.
• Looking at the pre and post market shares of leading carriers, Verizon is not likely to be concerned about this deal unlike Sprint, who will still rank 3rd, but this time it will be by distant margin.
• Sprint may prefer to acquire Clearwire Corp to increase its market share since it has already some stakes in Clearwire. 

Source: Bloomberg

• In order to avoid potential anti-trust case, AT&T have to improve its services and to make some serious promises to please the Obama Administration. But T-Mobile is already the lowest rate carrier in the market and declining the rates any further will be a critical area to think upon for AT&T.

Customers of T-Mobile, please have patience. When I showed this news to my sister, the first reaction I got from her was "wow, we can get iphone now..." You will, certainly. There are some better phones and services are waiting in the backyard once AT&T gets green light from the Capitol.

                                                                                                                                                                        

Betting on Internet & Social Media...

A bullish social media industry

I tweet, visit Facebook on the go and network through LinkedIn almost every day. I often locate myself through Foursquare. But Groupon? I have never used it and am not planning to use it even though there is so much buzz around this 2 year old company which has given the new definition of "daily deal market". While there has been so much talk on the streets regarding social media companies going public, two of them- LinkedIn and Groupon have announced their potential IPOs in the 2011.



LinkedIn & Groupon both have different business models (please note that Groupon has not been able to explain their exact business model). LinkedIn specifically emphasizes on "professional networking" and the other is focusing on "discounted deals covering food, electronics, tickets, gifts and counting...". Though not accurate, but they have got vast difference in their valuations as well. On the personal front, I have been a big fan of LinkedIn and so I can be bias about my insight on Groupon. But certainly, Groupon's whopping valuation of $25 billions is eye-popping and dubious to me. Because:

• Daily deal market is pretty crude and fresh for valuation analysts. Immaturity of this industry is one of the impediments behind mighty valuation numbers.
• A new industry and particularly new company is often valued by venture capitalists and I believe that their perspectives are always overstating.

Here are few things I want to enunciate about Groupon's atypical growth story which is not new to anyone who knows what Groupon is:

• A year ago from now and a year after its inception, it was valued slightly over $1 billion and now it is valued as $25 billion company. 
• Hot off the press. They successfully drew around $950 millions last year in funding from venture capitalists.
• Recessionary environment and looking for discounted deals are positively correlated with each other. And that beautiful correlation helped Groupon to be a bull.
• It has been hiring employees and adding clients/ merchants all around the globe to its portfolio.
• Presence in 35 countries with immense competitive presence in China and South Korea, which is the most active daily deal market.
• Almost doubled their subscriber base in last 3-4 months.

......................... And there is "NO COUPON" for Groupon's IPO price or its valuation!!

8.9, Earthquake, Tsunami, Japan, Economy and the US

"Jasmine Revolution" began in Tunisia in the early 2011 and it rippled across the Egypt, Libya, Bahrain and the other middle east countries. I believe that's what we have been listening to and watching since last two and so months. And suddenly, a 8.9 magnitude quake and tsunami hit the Japan- the world's third largest economy. Though Japan is located on one of the most active geological fault lines, it experienced one of the biggest quake in its history and the most severe after the Kobe. The worst situation this quake followed by tsunami created is  "The Nuclear Explosion". And the country is trying hard to prevent its spreading along with other rescue efforts.

Looking at Japan's standing in the world economy, the ripple effects of this natural calamity are as horrified as expected. It may likely to impair nascent economic recovery in the developed markets. I have come across few areas where the US have some potential or immature impacts from this disaster.

• Borrowing cost of US Treasury securities: Japan needs handsome capital to trigger reconstruction and recovery efforts though Bank of Japan has recently infused cash in to the economy following the quake. As Japan is the second largest holder of US Treasury securities after China, it may sell those to get capital it needs. In that case, borrowing costs or rates may be increased to lure investors in the global markets. On the contrary, investors have responded by huge sell off globally and by dumping the risk assets. Their demand for safe haven- US Treasury securities seem to be increased.
• Money managers' holdings: Money managers across the globe will likely to face short term losses from their holdings in Toyota, Canon, Hitachi and other Japanese companies. These losses are strictly being considered as short term because of global presence of these companies.
• Pharmaceuticals: Japanese pharmaceutical market is the second largest market after the US and it is expected to grow at the highest rate among the developed markets. For example, Pfizer gets his $5-$10 billions of revenues from Japan alone. Such a high correlation could slow down the industry growth.
• High end retailers: Japan is one of the huge market for high end products. To name a few, US based retailers like Tiffany, Callaway Golf, Coach may be the worst hit high end retailers in the first two quarters of this year because of potential squeeze in consumer spendings in Japan.
• Tourism: Based on some news & research, Japanese travelers contribute approximately 20% to the tourism in Hawaii. Looking at the potential ebb in spending patterns in Japan following this disaster, Hawaii tourism may likely to see some fall.

I wish and pray for their safety and well-being.