Wednesday, January 7, 2009

Bookkeeping: Starting HDFC Bank (HDB) on Satyam (SAY) Scandal

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This market remains treacherous and as I said yesterday I was standing near the door with one foot out of the party as things were just getting silly... commodities were flying for no reason other than it was their turn to be run up by hedge funds on "global growth is back" and technology was flying for... well no reason. In case you missed it Intel (INTC) was out with another pre-announcement. They warned not too long ago, so this is a warning on top of another warning - but never fear, the economy will be rebounding in "6 months".
  • The company slashed its fourth quarter revenue forecast to $8.2bn, less than two months after it cut its outlook to $9bn, plus or minus $300m, from $10.1bn to $10.9bn.
I found this blurb below interesting and aside from all the warnings and "pulled guidance" for 2009 I expect to see in the next 5 weeks (earnings season) I am going to be curious how many large cap companies announce large losses on investments - after all a dirty secret is the difference in "operational earnings" and "total earnings" in corporate America. Just as we saw in China in 2007 many companies have been making "investment gains" that have nothing at all to do with their core earnings....(although the situation was far greater in China where many companies were making half their earnings from stock speculation)
  • Intel also said it expected a net loss in equity investments of up to $1.2bn, up from an earlier expectation of a $50m loss.
Time Warner (TWX) also warned... (don't forget Alcoa from last night)

I said yesterday let's start the countdown for when the first CNBC anchor says "well I guess it's not all priced in after all" - looks like it took less than 24 hours.

And most fun of all is the info out of India - we have an Enron situation with Satyam (SAY) which is one of their outsource companies.
  • The chairman of India's Satyam Computer Services Ltd. quit Wednesday after admitting the company's profits had been doctored for several years, shaking faith in the country's corporate giants as shares of the software services provider plunged nearly 80 percent.
  • The company's balance sheet -- riddled with "fictitious" assets and "non existent" cash -- contained a $1 billion hole that could no longer be concealed after a deal intended to save the struggling company was scuppered, Chairman B. Ramalinga Raju said in a letter to the board.
  • "It is one of the biggest frauds the Indian capital market has seen. People have been taken by surprise by the gravity of the event," he said. "After overstating profit and understating debt, the company's net worth is zero."
What is amazing is this company tried to do an "insider deal" by buying two construction firms partly owned by the founders... this has NOTHING to do with their core business so it was a strange deal. Shareholders had a revolt at this and the company relented. In retrospect this was a front - they were just trying to think of a way to hide this fraud.

See, it is awesome when America exports its innovations to the world - the world is learning from us! American capitalism exported is "working!" Thankfully, unlike American shareholders who like to be rolled over as we kneel in worship at our CEO superstars - Indian shareholders puked on this deal with the 2 construction firms.

That said, I've been highlighting the Indian banks - I am going to use this opportunity to begin a starter position in HDFC Bank (HDB) - it is down 11% on the news which is completely unrelated, other than its a mark against India governance. Of the two banks I've been highlighting I like the business model of HDB better and both stocks (IBN being the other) have fallen exactly to their 50 day moving averages.

I'm starting with a 1.5% stake in the $67.10s... if the market falters I don't expect this name to hold this average but I won't be cutting back too much since I have a huge cash horde and have sold a lot of names, and exposure into this rally the past two weeks. I closed both Indian banks out of the portfolio in mid July - so a half year later, we are getting one of them back.'

Another way to play this is Cognizant Technology (CTSH) or Infosys (INFY) - among a number of other Indian outsource firms. Satyam's business has to go somewhere and both these stocks are up today, and the charts are looking positive as they break above resistance.

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As for the market, S&P 920 is the key level which we are currently below. But the bulls are persistent and already trying to ignore the Intel news, along with the ADP jobs report and whatever else they can ignore. Obama will be on CNBC @ 3 PM with an interview so that should be worth at least 4000 points on the Dow so we could be up 40% by 3 PM as Obama weaves his magical words. (ok not really) I don't think President Elect Midas can plug every hole in a quickly faltering world economy - but let's respect the price action.

I don't like to buy stocks or have a lot of exposure going into earnings reports because it's such a gambling situation - you can lose (or gain) 10, 20, 30% overnight. That's not for me - although it appears a lot of retail investors love that game. I guess it's easier than visiting Vegas. The monthly jobs report is akin to an earnings report on the entire market - we'll have a knee jerk reaction to a number that will revised in 30 days and is inaccurate as heck in the first place. But that's the way the casino works. We know the news will be bad - it's just a matter of seeing how the market digests the news. I will keep repeating this earnings season is going to be putrid so I just cannot see the market ignoring the bad earnings reports coming for 5 weeks in a row. But let's see what the market does with the Friday report first... the close at 4 PM on Friday will be very important to me (S&P 920 will have to be held for me to remain "bullish" - ahem) - after that the earnings season mine field will begin in earnest.

Long HDFC Bank in fund, no personal position


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