Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent report to clients on Satyam Computer Services (SAY):

• • •

Markets witnessed a volatile trading session today. After opening in the red, markets quickly moved into the positive territory during the morning session. However, after nose diving in the red during the afternoon session, persistent buying activity led the indices to close well above the dotted line. The Sensex closed higher by around 60 points, while the Nifty closed higher by 5 points. Stocks from the mid-cap and small-cap indices ended marginally in the red. While stocks from the cement, auto and banking space led the pack of gainers, stocks from the realty and power sectors failed to garner investors’ interests. Rupee closed at 48.6 against the US dollar. The Asian markets closed on a mixed note. However, the European indices are currently trading firm.

Engineering stocks closed firm led by Praj Industries, Voltas and BHEL. Punj Lloyd has won an order worth Rs 2.6 bn for civil work on Sikkim’s first greenfield airport project. This project was awarded to the company by the Airport Authority of India ((AAI)) and is scheduled to be complete within a period of 24 months. The scope of this project will include construction of a 30 meter wide and 1.7 km long runway, taxiway, amongst other work for the airport. The airport is believed to be built at a height of 1404 meters above sea level. While the size of the order may be relatively low as compared to some of the other projects the company has won in the recent past, it is a positive development for the company considering it is the company’s first greenfield airport project in India.

Now, it's time for results and a lot of positions will emerge after results and weakness thereafter. The positions in Bharti and Nifty remain.

At this point, we're still doing a 10% return, over four months. Not exciting but I need to really understand weakness - it will be in individual stocks, not the index.

• Time: The Ponzi Scheme in Every Hedge Fund

Many assets — particularly those that unregulated hedge funds can trade — are not as liquid as stocks, so they do not always have a definite price on the market. Since a fund reports unrealized gains, it could easily get away with inflating profits. More specifically, the fund could use the most optimistic models to price its illiquid assets, which include mortgage-backed securities and other swaps.

Every year hedge funds do have to liquidate part of their profits in order to pay their managers, traders and other support staff. Fund managers typically keep 20% of (unrealized) trading profits. But first they must realize that 20% by selling the liquid assets. If a fund is overestimating the value of the illiquid assets, then its manager’s profit is grossly overestimated. In most cases, the profit is at least slightly overestimated because of slippage in the liquid assets. In other words, if a fund liquidated all profits, the supposed 20% taken out first would actually be larger than 20% of the total realized profit.

• FT: An oil-price cracker too late for some

The gasoline/naphtha (regrade) spread has narrowed to +30/mt versus a high of +120/mt last year. Front month WTI, meanwhile, was trading at $47.19 per barrel, with Brent (an increasingly better indicator because of Cushing storage issues - see this FT Alphaville story) at $50.36 per barrel.

. . . a recovery in crack spreads should suggest the elusive bottom may very well  have been reached in crude on the back of the market finding a new price equilibrium for the current greatly reduced demand for gasoline and naphtha in particular.

• Bloomberg: Shell Cuts Gas Spot Prices in India as Users Switch to Naphtha

Royal Dutch Shell Plc cut by almost 30 percent the price of natural gas to be sold in India this month because of competition from cheaper naphtha. Prices of naphtha in Singapore tumbled 69 percent last year, outpacing crude oil’s 54 percent decline.

The price of LNG sold in India has slumped from a record $23 per million Btu in September, the buyer said. No cargoes were imported in November and December, according to transmissions from ships captured by AISLive on Bloomberg.

I only had a copy of the front of the card - and the call center told me I would not be able to board. I was halfway to Devanahalli, I decided to take my chances. At the Indigo counter, the lady told me that it was good enough - all they were told was to ensure they had seen something where all the numbers were visible.

She also told me an interesting story: A customer had shown her a photograph of a card taken on a mobile phone! And that was fine, she said, because it met the rules. Hey, a reasonable use for technology to solve problems, despite regulation.

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Thanks very much for all your comments. I may not get the time to respond to each one but I do read all of them. Keep posting!

Fiscal stimulus announced last Friday evening boosted the market sentiments throughout the trading session. Buying activity intensified towards the end as indices closed well above the dotted line. The Sensex closed higher by around 340 points, while the Nifty closed higher by 80 points. Stocks from the Mid-cap and Small-cap indices also ended in positive territory. While stocks from the metal, energy and banking sectors managed to garner investors’ interests, stocks from the FMCG space remained out of favour. Rupee closed at 48.67 against the US dollar. The Asian markets closed in the green today. The European indices are currently trading firm.

Software stocks ended on a firm note led by Tech Mahindra, Infosys and HCL Technologies. However, the stock of Satyam Computers ended deep in the red due to speculative news of it merging its business. As per a leading business daily, the rationale behind the same is due to the threat of being acquired by a domestic or overseas company, including private equity firms. As such, the company’s management is exploring the option of a merger with another software company. The management of Satyam has scheduled a board meeting on January 10 and is expected to address the issue of the dilution of the promoters’ stake and increasing the number of independent directors.

More than 25% of gold’s annual supply flows originate in the recycling of scrap. The global recession has now generated another recycling process altogether: the purchase and sale of jewelery items and gold bars entering the marketplace due to declining household wealth.

Gold bugs should take cognizance of the alarming pre-weekend announcement by the Bombay Bullion Association that gold imports into India, the world’s biggest gold consumer, fell 81% year-on-year in December 2008, as purchase orders through the complex gold chain (village-to-city) came to a virtual standstill. Indian gold imports for 2008 as a whole are estimated to have fallen by 47%.

• NY Times: The End of the Financial World as We Know It

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him.

Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

• Kiplinger: A Bargain Hunter Stands Tall

We spend a lot of time thinking about what could go wrong with a company — whether it’s a recession, stagflation, zooming interest rates or a dirty bomb going off. We try every which way to kill our best ideas. If we can’t kill it, maybe we’re on to something. If you go with companies that are prepared for difficult times, especially if they’re linked to managers who are engineered for difficult times, then you almost want those times because they plant the seeds of greatness.

The free cash a company generates divided by its market capitalization. If we can get a double-digit free-cash-flow yield, I’m interested, especially if we can’t kill the company and especially in a world of 3% or 4% risk-free yields.

• Bloomberg: India’s Recovery Hinges on Stimulus, Rate Cuts, Ahluwalia Says

India’s next administration needs to cut interest rates and unveil more stimulus packages to revive an economy growing at its slowest pace in six years, the prime minister’s top economic adviser said.

Exporters in India have cut about 65,500 jobs as recessions in the U.S. and Europe, the nation’s biggest markets, damp overseas demand. Industrial production fell 0.4 percent in October, the first decline in 15 years, and exports plunged 9.9 percent in November after falling for the first time in seven years the previous month.

During 2008, I posted a bunch of articles on why I was bearish on real estate in India - especially residential 2/3 BHK apartments in Tier I and II cities in India. I also wrote about my bearish outlook for steel & cement prices. I haven’t changed my mind for 2009 (except that I am equally bearish on commercial real estate), and would like to add a relevant position to the Rs 500,000 (5 lakh) virtual portfolio.

Unfortunately, there are no cement futures traded on any commodity exchange in India. There are also no sector-specific indices that I can short. So I have had to pick a cement stock as the representative for my outlook on the sector.

The first trade in my 5L Virtual Portfolio is: Short India Cements January 2009 Future (1 contract) @ 105.

This is a single stock future, and unfortunately the NSE has quadrupled the lot size for the March 2009 contract from  725 to 2900. So the current contract value is ~ Rs 75,000 but will go up to Rs 300,000 in March. I doubt I will keep the position after February F&O expiry, but given that earnings season is coming up, I think the short trade is worth a try.

Take a look at the charts I posted here - Cement production, consumption & price trends. One word comes to mind: China! The astounding growth since 2004 in both production & consumption is directly related to Chinese economic growth - including their infrastructure investments and real estate boom. The spate of negative economic news of late does not bode well for the Chinese cement industry, and similarly for the Indian cement industry.

What is amazing to me is the fact that cement prices have barely dropped from their peaks in India, while most other commodities have tanked - locally & globally. Consider the chart below:

Cement cost ~ Rs 150 per 50-kg bag in late 2005. It almost doubled by mid-2008, and is now down to Rs 230-250 per 50-kg bag. Given the massive RE boom during this period, and the inevitable slowdown in 2009, cement prices have at least another 25% to go on the downside.

I find it hard to believe that any government bailout or interest rate reduction in India will support demand enough to offset the huge supply additions by cement companies in recent years. While several projects have been cancelled or delayed, there is still enough new capacity coming online in 2009 & 2010 to make cement companies think twice about resisting price cuts.

My hypothesis is that cement is one of the last commodities left to free-fall, especially in India. Moreover, prices have been the strongest in the South. One may attribute this to some infrastructure spending at the state-level or commercial/residential RE demand. But a combination of weak exports & slowdown in IT (Satyam, Microsoft, . . . ) can only mean one thing - rapid drop in cement demand in the South. Finally, companies that focus solely on OPC (ordinary portland cement) may get by due to infrastructure demand propped up by government spending. But those that derive a substantial chunk of their revenue from PPC (used for residential RE) have got to suffer.

Within the cement sector, India Cements looks like a good short candidate in the above context. The bear market rally since late October has seen some cement stocks rebound over 40%, but India Cements has shown poor relative strength. It’s focus on Southern India, combined with capacity expansion in 2009 make it vulnerable to large price cuts.

Even Friday’s interest rate cuts by the RBI and the second bailout package by the government are unlikely to revive the RE sector in any significant way. Low-income housing & road projects aren’t quite the pony that these stocks rode in the bull market.

Note: Obviously, there are several risks to this trade. The standard disclaimer applies to this - and every - position in the Virtual Portfolio.

PS: Follow me on Twitter for updates on positions.

IEB reader Durgesh Prasad, sent in this idea, via email to some of the IEB contributors.

In today’s slow economy, where government is trying its best to keep the real estate market rolling and attracting investors to invest in real estate market in order to keep market live, I had an idea through which it can be achieved by government without loosing anything. Presently, the deciding period of differentiating a CAPITAL GAIN as Short term or Long term is 3 years period. If one sells his new house in less than 3 years and incurs profit, the gain is termed as Short term capital gain. And if he sells his new house after 3 years and incurs profit, the gain is termed as Long term capital gain. Now there is no way to avoid tax in short term capital gain, whereas there is way to save tax in long term capital gain, if the profit incurred is re invested in another residential house of price more than the profit.

The above way of saving tax from long term capital gain will help in rotating money in market to some extent, as it will result in at least two transaction of selling and buying a residential property. Considering this advantage, if Government can REDUCE The differentiator period from 3 years to say 2 years, then the market player who might be waiting for next year to sell his house to re invest, may do it so today and in a way will improve rolling of transactions in Market. Government will not loose anything , but will just be helping in moving the selling environment for its public to one year sooner. ( later on when economy improves, the years can again be raised to original 3 years )

IEB reader Piyush Goyal (pgoyal77@gmail.com) sent in the following comment -

Good idea without working out Revenue ramifications for the Govt. - Decreasing revenue would lead to further increases in deficits. Not a desirable side effect of the Capital Tax change prescribed.

Real estate in India was a bubble that needed to be pricked and was rightly so in this current market turmoil. The bubble was largely an effect of $’s looking for homes. As $ flow reversed course (for a myriad of reasons including margin covers, unwinding large diversified derivative positions etc etc), the bubble burst. My guess is that the affordability index of residential properties reached heights never seen in the Indian market during this bubble and popping of the bubble was a good thing. The 3 year lockdown on Cap-Gains is a great policy that needs to remain. MY TAKE - Real Estate (Residential Real Estate) should in a country like India never become an investment asset. No more Cap Gain benefits, not even after 3 years holding period.

One school of thought blames the “CapGains Clause” and “Income Tax gains on Interest Payments” as the excacerbating cause of the bubble in the Real Estate space in US and the resultant crash.

As the situation around the globe/US improves over a period of 3-4 years, the tremendous amounts of $’s being printed by the US Fed will once again look for homes to park and India will once more be ripe for a bubble of sorts in the RE space.

India needs to manage not just this current slowdown but also the impending bubble that might follow. Monetary policy cannot be ad-hoc and directed towards one marketplace or another, but deliberate and planned affecting prices across the economy - It should not cause bubbles and rolling recessions, instead should be used to smoothen the growth rate of the economy/GDP to Trend Growth Levels. Price stability is tantamount not fixing a market or two.

The sincere thoughts of the writer are appreciated but slowdown in a sector (mostly irrelevant and excess prone sector like RE) cannot and should not be cause for myopic policy - Long Term (Medium Term at the very least) price stablity should be the goal of both Monetary and Fiscal policies.

• Big Picture: Global Manufacturing Collapse

• Jayanth Varma: India in a ZIRP world

• NY Times: Risk Mismanagement

“Risk modeling didn’t help as much as it should have,” says Aaron Brown, a former risk manager at Morgan Stanley who now works at AQR, a big quant-oriented hedge fund. A risk consultant named Marc Groz says, “VaR is a very limited tool.” David Einhorn, who founded Greenlight Capital, a prominent hedge fund, wrote not long ago that VaR was “relatively useless as a risk-management tool and potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs. This is like an air bag that works all the time, except when you have a car accident.” Nassim Nicholas Taleb, the best-selling author of “The Black Swan,” has crusaded against VaR for more than a decade. He calls it, flatly, “afraud.”

Long, good read.

Hero Honda: Strength in auto is evident in this counter. This is largely a technical buy of a strong stock in a beaten down sector: Auto. I have strong hopes for rural auto buys, especially with dropping fuel prices, better roads and lowered interest rates. Hero Honda is a strong stock, and while the fundamental reason for the strength isn't evident, I'm listening to the price. 10% on this stock at 792.

Gold Bees: I'm just a sucker for this commodity - 10% exposure at 1339.

Aftek Infosys: This company trades at half its cash. With Rs. 30 of cash in the bank, and half yearly EPS of Rs. 9, it's tough to imagine the worst is yet to come. Still, the cash is parked in Portugal (of all places) and there is the danger of a shady past (involving Ketan Parekh and all). So, let's do a 2% bet on this stock at 14.20, with plans to scale in as we cross 16, 18, 20.

Yeah, this is a little unfair coming a day after a stimulus package and all. But I've actually bought these myself, and I have suggested them for accounts where I consult, and we've been buying for the last few weeks. So huge-ass disclosure: I'm quite hugely invested in these stocks.

Disclaimer: Do not follow this portfolio - it is virtual and while I do have positions, they do not reflect proportions I mention here. This is not advice. This is not meant to be for you - it is only an expression of my opinion for me. I know you already know this, but it's the legally correct thing to do.

Sadly he didn't make enough money from his predictions. But then, neither has Taleb I think (if you add up all the past years) and look where that got him. Interestingly, people seemed to be outraged and laughed at Peter, all while he was making sense: I can bet that the guys (and girls) who laughed at Peter on TV will not apologise or admit they were bullshitting - because they will say "hoocudanoode!" ("who could have known") Certainly, someone on their show did know, and they laughed.

Also read: Of Arrogance and Humility.

• PMO: Additional Government Measures for Stimulating the Economy

2 (c) NBFCs, dealing exclusively with infrastructure financing, would be permitted to access ECB from multilateral or bilateral financial institutions, under the approval route of RBI.

2 (d) In order to give a boost to the corporate bond market, FII investment limit in rupee denominated corporate bonds in India would be increased from US $ 6 bn to US $ 15 bn.

State Governments are facing constraints in financing expenditure because of slower revenue growth. To help maintain the momentum of expenditure at the state government level, states will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP), amounting to about Rs 30,000 crore, for capital expenditures.

And of course the RBI cut repo and reverse repo rate by 1% and CRR by 0.5%.

• Zeal: New Gold Stock Environment

The success of gold stocks indeed rides on the success of their underlying product, gold.  In fact the only environment to invest in a gold mining company, thus taking on the myriad of risks that come with it, is in a rising gold price environment.  But in order to take on these risks there must be incentive.  And the positive leverage mentioned earlier is the incentive gold stock investors long for.

Inherently gold mining profits should leverage gold’s gains.  And in a stable-cost environment margins should soar as the price of gold rises.  It is the realization and anticipation of stellar profits that attracts investors to gold stocks.  As a general rule of thumb I like to see at least 2x leverage, which is why the leverage seen in the last gold upleg was so disappointing.

• Bloomberg: SEC Said to Examine More Ponzi Schemes After Madoff

U.S. regulators working to untangle Bernard Madoff’s alleged $50 billion Ponzi scheme are probing other money managers suspected of using similar tactics, two people with knowledge of the inquiries said.

The U.S. Securities and Exchange Commission is pursuing at least one case in which investors may have been cheated out of as much as $1 billion, according to a person, who declined to name the manager and asked not to be identified because the probe isn’t public.