Microsoft: Time to adjust your position

On April 25th after a drop in Microsoft shares, I recommended to buy Microsoft. I got busy with a Project and didn't track the stock. If you had bought Microsoft then in 22-24 range, it is time to prune your position. I would take 1/3rd off the table. I think it is still expected to rise to about 35-37 over the next 12 months as the PE adjust itself to 22-23 time the Jun 2008 EPS at the current estimate of 1.7. I would guess Microsoft is going to exceed the analyst estimates. Here is the three avenues of growth as I mentioned in my prior posts.

1> XBox 360: Main growth driver for financial year ending June 2007. Achieved critical leadership position in second half of 2006
2> New Office and Vista: Main growth drivers for June 2008 and beyond as the system stabilizes and corporations start adopting the OS.
3> Windows Mobile: This will add revenues to both the financial yeas ending in June 2007 and June 2008. I expect to see the tide turning towards Windows Mobile in 2007 and the momentum coming in 2008.

So, why am I preaching to take 1/3 off the table. Two reasons.

1> I like cash more than paper money.
2> I think the broader market is going to fall (Yes I still feel we will drop below 11500) and microsoft is going to fall with it.

In fact, for advance players, I would expect you to have a put on broader market instead on selling.

I will elaborate on point 2 in my next post early next week. Till then Happy Thanksgiving and have a great weekend. I am now mostly cash except some shares of my employers and two international mutual funds in my retirement account. I might have put that money to some use if I had time to look for for some other international index funds.

Market Overview: I s*&^&%$ up

Okay, let me start my saying that I have been horribly horribly wrong about the market.

Normally, I am the most optimistic person in the group (my group have a blog Renewable Sources - Check in my profile) regarding the market and I still am in the long term. But, in the short term, I believe that Dow is way above what it should be and it will pull back to 11200-11500 within the next two quarters.

In fact, I have put my money where my mouth is by being almost all cash in my non retirement portfolio. I only own few stocks of my ex-employer and that too because I feel it is highly undervalued and is a right takeover target. More about that in another post. Last 6 months, I was busy with my day time consulting work followed by a 6-7 weeks travel to India to visit my family and Europe for work and learning french language. I didn't track the market on a regular basis last 2-3 months, but I was always looking for a pull back and keep a tab on it 2-3 times a week. There wasn't any big one to let me enter comfortably

I think market is just zooming up due to momentum and is not based on any solid foundation. Few reasons that I will elaborate in next posts

1> Weak Housing market
2> Slowing consumption
3> Hiring pull back by corporations

And like all things in life, these three will feed off each other to form a spiral down. I know the main points above have been in the press for a long time. I hope I will be able to create a concise story of what is going to happen that will result in a pull back of the scale that I am talking.

Finally the market gets it

Last time I made a quick speculative Dow Jones Industrial option play, I used my regular brokerage account. This time When the market reached 11613 just before the Fed meeting annoucement, I decided to place a put option. To save on taxes, I tried to use my retirement account for the trade. I put a trade for November put for 117 on Dow at the then rate of 2.10 and then walked away. I planned to close/half the position on Friday after making a quick profit of 20-50%.

It seems my retirement account doesn't allow speculative bid - I have yet to call them and find out the reason. They rejected my order. By the time I got to know about it. Dow was around 11580 and I gave up.

Now the reason why.. If you have read my last two post you know that I am bearish on the US market in short term (6-8 months). Here are the links to the blog posts.

Now what prompted me to take action. I believe that most people in the market believe that there will be a slowing in the economy. The difference is opinion is whether it will be a soft landing or a steep thud. Even though spat of good news has helped push the market very near the two peaks to keep in mind (11670.19 on May 2006 and around 11750 during the 2000 boom). With the coming downturn at the back of their mind, most investors will rush to take profits if we do cross those peaks.

Unlike the last time, when I had strong belief of a quick turn around (up in that case), I was not sure when that market will go down. This was the reason I placed order for November puts that gave me some breathing room and have some time on my side. I missed the opportunity with market around 11500+ now. I have yet to call my broker and ask the reason why my order was rejected.

I am still medium term bearish and will place some puts if market goes up again. I don't believe that to be a case in next 7-10 days so till then I will lay low and keep watch.

Macroeconomics of a slowing economy (Part II)

Today was the last date for the 3rd estimated tax payment date (September 15th). As I paid my estimated taxes today, I couldn't help but think about another aspect of economic demand government consumption.

With the kind of fiscal indiscipline we have seen in the last six years (Both necessary and otherwise), I think we will see a controlled government expenditure during the next two years of Bush presidency. In a way last six years GDP has already borrowed some growth in the government expenditure from the next few years.

People might argue that what will stop Bush adminitration to keep spending through the next two years. I have two arguments in it's favor. First recent hires by Bush shows that next two years the monetary policy will be based on fiscal discipline. Also, Bush is not as strong in the Capitol as he was after September 11. So we will be seeing more democrats as well as republicans speaking out and at odd with Bush.

I will delay the post on investment strategies in a slowing economy. I think there is another important issue that needs to be addresses regarding the recent uptrend in the stock market.

Macroeconomics of a slowing economy

We have had a great rally in the last 3-4 years, now all signals point to a slowing economy. Actually, I should correct myself: We are in a period of mixed signals, but I view this as nothing but a transition from growing economy to slowing economy. If we wait for clear signals, we may have lost the boat.

Housing is slowing with home stock going down. With housing down consumer spending will decrease as consumers can not finance any more debt and will be thinking about saving (Who American, No Way!!!). Additionally, recent reports have shown that more CEOs are withholding capital investment than are thinking of increasing it. So, with consumer spending - one that contributes 65% to the total economic spending - slowing and business not ready to picking up the slack, overall demand growth will be difficult to sustain.

The above logic may fail as we have an unpresedent low unemployment rate. So, consumer income can provide a growth avenue to sustain consumer spending growth. But, I think unemployment rate has nowhere to go but up as we are at or below the natural unemployment. Additional income growth can only come from increased labor rates which finally hits the reason why we invest - corporate profits.

Another argument is that recent reduction in comodity prices and especially oil prices will give consumers more money to invest. I disagree with this argument as first we will not see any effect of these oil prices on our neighbourhood gas pump anytime soon. Also, recent events have proved , at least to me, that US consumer spending is not very sensitive to the oil prices in the range $55-$75.

So, if you agree with me that the economy is going to slow down. how should we change out investing strategy? This issue will be tackled in another post later this week.

Speculative contrarian investing (Part II)

As I was working I placed some quick orders and lost $100 on an ordering mistake. By the end of day Friday I was alreay down $250-$300 on an investment $1500 for 10 call options at 107.

I waited patiently (actually I was nothing but patient). When you have your hard earned money on the block you can not be patient. The weekend was the worst (based on the investing emotions)I have had in my last seven year in the market. Even worst than that during the 2000 market crash time.

Monday I was again at the client site. By the end of business Monday market was 10747, but I was down $350 because my deadline (July 21st) was 4 days and fast approaching. Unless market goes above 10850, I will be in red on Friday evening. I held on for another day.

Tuesday was great, oil uncertainty was dying down and market close 10799 and I was in black. I made some stop loss orders and waited for another day. Wednesday afternoon I chekced hoping that my triggers woudl have materialized, instead market was way up due to Fed's comments. My original investment was worth $3200. Like any conservative (For the first time you hear the word conservative in these two posts!!!), I sold 5 options for $1600 and put a stop loss order at $1400.

For the first time I too a sigh of relief. I have made $70+ ($100 - trading cost) profit in 3 days and have a potential to make another $1400. By the end of the day, my other $1400 was filled and I made about $1450 on an initial investment of $1500.

I would let you take your own views on this experience, but personally I liked the ride..... and not just because I made money

Speculative contrarian investing

It's ironic. After explaining virtue of disciplined investing and portfolio diversification, I am doing an about turn.

I have not been tracking market actively since my May 21st posting. I would check my stocks once a week. As I already have my triggers set, I can be away and not worry about my stocks. On Friday the 14th July, I just checked the market and found that Dow was down from 11133 to 10750 in 3 days of trading because of Oil, Middle East and Alcoa . I checked the options prices and after doing some analysis, decided to invest in options expiring next friday July 21st.

This was very speculative bet. A safer option would have been Aug options as market would have come back by then for sure. What prompted me was that oil was temporary increase due to middle east. And I didn't see the conflict escalatiing to Iran and affecting world oil market.

1> Israel was already busy with it's operation in Palestine and Lebanon. So, there was no chance of Israel opening a third front. They have already spread thier air force and army thin due to this twin deployments.
2> Iran, needs oil due to the bad business climate and will not enter on it's own. Also, there was no need to get more attention of the world cummunity when they can persue their goals secretly through aiding south Lebanon fighters.
3> US was already taking the attack from international community for standing-by as Israel was bombarding Lebanon. They wouldn't want to get involved with Iran. If US was not involved in Afganistan and Iraq, they might be tempted to use this as an issue to tackle Iran.

So, I was expecting for things to normalized soon in less than a week. That means oil comes down and market booms. The other issues that had investors nervous like economy going in big thud are not a big concern for me. Though long term, I would be planning for a small recession this huge drop was an opportunity , at least to me, that I couldn't pass up.

Next issue what actually happened

Disciplined investing: Time to pat your back

First, I am not able to track the market as well as I can. I have found a 4 month independent consulting gig. It is a very exciting international customer study for a Heavy Equipment OEM, to develop process and system strategy to meet the requirements of various customer segments.

Anyway, if you have been following this blog, you would have taken advantage of the second opportunity that I recommended. I recommended PEIX (under 18.5) and ADM (under 35) on March 25th for 20-30% increase in the 4-6 months. My recommendation was based on a switch from MTBE to Ethanol. After a faster than expected run, I suggested a pruning on May 5th 2006 about 6-7 weeks after the initial recommendation. If you took the pruning and trailing stop recommendation, you would have gained 80-150 on PEIX and 25-30% on ADM. For about 2 months either return would have been good.

Now is the time to look somewhere else. I will try to be more active in future. Also, I am still awaiting my entry point in MSFT. I will keep you guys posted. I am going to be aggressive in future as the market pulls back. Waiting for your comments.

Alternative Energy pruning: Ethanol

In my March 25th post, I recommended two stocks PEIX (17.5 - 18.5) and ADM (35) primarily because of the the expected ethanol shortage suring MBTE phase out. Now it is time to take some of the profits off the table. Last month and half has seen PEIX almost touch 35 and ADM crossing 40. Both the shares trounced my conservative target for 4-6 months in almost a month and a half. One of the reason, might be the rising oil prices. Rising oil prices carry these alternative energy sources with them too for teh logic mentioned in previous posts.

I would prune the position to sell 1/3 of the PEIX holding. A conservative investor might sell 1/2 of PEIX and some ADM. I still like both these stocks for the long term, but PEIX has grown too fast too quickly. I favor selling PEIX as it is a volatile one product firm and I like cash profits more than paper profits. ADM on the other is a much bigger firm a negative ethanol due to easing of the oil prices will not affect the stock that much.

Here is what I suggest.

ADM put a trailing 8% trigger as it has already fallen 8-9% from the latest peak and at 8% it will breach the latest support. Adjust it to 12% if the stock reached 44.

PEIX put a trailing 8% (Same logic as above) adjust to 15% if stock crosses 37.

Time to take action on Microsoft

Over the next couple of weeks I will be tracking to find the right entry point in Microsoft. I would enter through an in the money Jan call option (today's price 3.30). Hoping to cash out in Oct -Dec time frame at about $5-6. for a 50+% pop.

Added May 3rd 2006:

After the stock dip with bad projections from MSFT, I will hold off time the selling pressure is released and volume returns to normal 80-100 million shares per day. In fact, this has give us a great opportunity to play MSFT options. I am also worried about by overheated stock market so I am going to play call on MSFT and puts on general market. I will keep you updated with my strategy as I sense an opportunity.

Time for the second dipping in Bird flu

After getting out from the GNBT last week, I have been looking at an opportunity to play the arrival of Avian flu expected anytime in US. Here are are various ways to play this.

1> Small Volatile Group: This is the group will have most impact and hence the biggest risk if you are proven wrong. Also note most of these companies (Except Embrex: EMBX) are cash guzzling with no income and future potential are all they are selling. This means that you need to "Gamble" a very small portion of your portfolio.

The group is EMBX,gnbt,HEB,BCRX. If you are reading my blog, you know I am in a liquidity preservation situation. Though, I can afford to lose my portfolio, I want to be conservative. So, I will be taking a bet on Embrex - the most stable in the group. I will write another post to discuss the merits for EMBX. In short try to get it as close to $12 as you can. If you are a little adventurous, I would suggest GNBT (as close to $3 as possible). They seem to have a very loyal fan (yes fan) following who are supporting it above 3.

2> Another play is to short chicken stock hoping bird flu will move people away from chicken and put downward pressure on their stock. Mind you this strategy is for short duration only 1-3 months as I think very quickly the fear of chicken will go away and long term all chicken stocks are very strong (healthy lean white meat trend)
Firms are
Sanderson Farms (SAFM)
Gold Kist (GKIS)
Pilgrim's Pride (PPC)

3> you can also bet increased consumption of Chicken's complimentary. It's a simple microeconomics theory. People try to get as close to maximizing the value they get from the basket of good they can afford. Now when Chicken is ruled out as an item. They will move to other forms of meat. Lamb, Beef and Pork. I think all three will experience an increase in demand that may last longer than avoidance from chicken, There is a reason for this stickiness to other meat explained in the domain between economics and psychology - non rational decision making. Without going into detailed theoritical base, I will just say that find stocks of firms dependent solely on these other forms of meat. I didn't get time to do this research, but it's a simple search you can perform. In all teh meats, pork will have closest -ve correlation to chicken as it is also a lean meat.

4> Finally the safest bet. Please note there is nothing called safe investment in stock market. Anyone who sells safe investment is a fraud or fool (FOF). Well you might have already guessed this one. It is in big pharma firms that are in this field.
"A U.S. government-funded study showed that very high doses of an avian-influenza vaccine supplied by Sanofi-Aventis (SNY) were needed to boost people's immune responses to levels that should protect them from the virus.
But even at the highest dose of the vaccine tested, only 54% of volunteers who received it achieved the study's immune-response target, below the 75% rate for which government officials had hoped. That suggests nearly half of people receiving the highest dose might not get full protection."

So, in the event of actual flu outbreak (In my view very unlikely), these firms have great distribution experience as well as required regulatory experience and lobbying groups to push the drug through quickly or as a last resort cash to buy small players will be able to reap great benefit.


Chiron (CHIR) makes cell-based vaccines
Sanofi-Aventis (SNY)
Baxter International
Invitrogen
Roche, the biggest manufacturer of Tamiflu
GlaxoSmithKline (GSK) antiviral Relenza
Solvay

SNY and CHIR were recently given grant to research on Avian flu. Betwen the two I will bet on SNY as CHIR is in acquisition fight. We on the other hand just want to play avian flu not in some acquisition fight.

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Stock chart of all the Stocks Here
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Finally, If you are really creative and have faith, you can buy Clorox (disinfecting wipes) ,3M (face masks & gloves), hospital stocks (for flu services) and a whole lot of firms that provide similar things. Just think what would you do to save yourself from flu.

Portfolio distribution: Diversification

A very good comment about portfolio diversification from Murali, my co-author to renewable energy blog. By the way, he is the guy who first pointed me to look at alternative ethanol energy even before president's State of Union speech.

I agree with him that international and metals are missing from my portfolio. distribution. I, for one, have not been able to fully understand the commodity market. I know what moves them and when, but have not had time to look into them fully. And so have stayed away from them. I did mention in my where to invest post about looking at commodity this year. In fact, that is one of my new year resolutions to understand the commodities market.

About international, I should thank Murali to get this to the front. I do have my 401K account (about 20% of my Ameritrade portfolio) in two international fidelity funds. One is a European fund and other a World fund. As I am young, both are aggresive growth funds. I will update "my current portfolio" with this too. I like following the market, but don't have time to follow everything, so this way I get exposure to international markets, but don;t have to actively follow them.

Most stocks that I buy have a story behind them. There is a logic to why they will go down or up. And as my logic unfolds, I gain from my positions. As I am not a fortune teller, many a times my story doesn't come true. So, when I notice that I was wrong, I close my position and look somewhere else. In fact, that is what happened with GNBT recently, it went up too fast and I couldn't find the reason why so I put a couple of orders so that the position closes earlier.

Now this may a cliche, but this is one of the lessons that I learnt from Warren Buffet. Never invest in something that you don't understand. You should applaud the self control of a man with about tens of billion of cash on hand and Nasdaq market booming. He didn't invest in technology because, as per his statement, he didn't understand them. I believe everyone should develop his/her investment style, but it's always good to learn from your and other's mistakes as well as success.

Finally an unrelated comment; you can over do diversification. Most academic studies have proved that you don't gain much reduction in volatility after 30 stocks. In fact, risk reduction from 20 to 30 stocks is also not big enough.

Portfolio distribution: The issues

After selling GNBT and OXY, my current portfolio distribution is 54% Cash (after recent withdrawal to survive in UK) 6% Pharma and 40% Software.

Ideally, in the current market conditions, I would like to have 20% cash, 40% Technology & Media 10-15% each in Pharma, Oil, and Alternate energy.

The problem is I am not finding any bargains currently. And I am waiting for Keane to show the upside that I expect in next 3-6 months as they increase their margins. So, in the likely event of a stock pull back, I will most probably be loading up Peix. I am not a conservative guy to look at ADM, though I expect that to be a great buy too.

I think Microsoft can wait a couple of weeks as there has been some bad news and market needs to throw that off it's back before it can start my anticipated stealthy (Yes Stealthy!!!) climb. Another Tech player that I am looking at is MARVELL TECH GROUP (MRVL) I think it is at or near bottom and may be turning around. And the stat's look great. 43% YOY quarterly revenue growth. 54% Gross margins. On track to exceed analyst expectations for this year. Institutional and insider bought 2.3% of the firm net over the last quarter. I will jump on it when it crosses the last peak of 58.

About the Oil, I haven't been able to devote enough time to find some Jewel, though I am looking at some like Houston Exploration company (THX) and a couple of others, but am still not thorough enough to recommend any of those.

Alternative Energy Play: Ethanol

Ethanol, that grade school oraganic chemistry compound ethyle alchohol (C2-H5-0H). It was one of the most common compound. Some of my friends even thought of stealing some from lab before they realized that one in lab is not drinkable. So, why I am discussing this in a stock blog. A couple of things have boosted the outlook for the Industry.

1> Last July Congress passed an energy bill that mandates doubling of biofuels ouput by 2012. This January President gave a boost to ethanol manufacturers by giving ethanol and other bio fuels a strong endorsement.
2> Most refiners are phasing out the harmful petrochemical called methyl tertiary butyl ether, or MTBE and will be replacing it with ethanol. MBTE is responsible to complete combustion of gasoline in your engine. This means that consumers get better gas milage and hence lower cost of running their vehicles. This also means less polution as the gasoline burns more cleanly (fully) as well as less gasoline to reach our destination. Ethanol is the replacement of choice.
3> Mckinsey says always have three points :) Many people in midwest are using corn and ethanol to heat their home to reduce high heating bills. I saw some report 3-4 months back that mentioned that it comes 50% cheaper than heating by natural gas. This is and additional demand pressure on the industry.

Coming back to the main demand, the shift from MBTE to Ethanol has taken the industry by surprise and it may be interesting to see how they cope with it. Ethanol can't be transported by pipeline as it is corrosive (Even wondered why you don't get wine in can's;) So, it goes the good old way through ground transport.

I like to invest in industry where there is increase in demand with supply almost at capacity and Ethanol is a good play. Depending on your risk apetite you can choose ADM (Yes our dear big old corn firm) or PEIX( Pacific Ethanol, Inc. -a small Ethanol producer first suggested to me by my friend Murali). But buy it quickly as you want to be onboard this train when the summer fireworks start.

PEIX buy 17.5-18.5 Target 30% increase in 6 months
ADM buy under 35 for a 15-20% pop in 4-6 months

GNBT roller-coaster (March 26th Update below)

A day after writing such glowing reviews about GNBT, here I am telling you that I got out GNBT.

I was tracking this the whole day. The run was great, but it couldn't last and I didn't have heart for that. When it hit about 5, I changed my trade from 18% trailing all my holding to two sells that would give me better price at around Noon. Here is a Yahoo message board posting.


Here is the extract of the posting:

Guys,

My heart couldn't take it anymore. I am leaving. Have ridden this one from 0.94. Sold half at a trailing stop at 1.32 (trigger 1.4 in Jan). Had a trailing 18% on for since then.

Now I have put two orders.

1> half my current holding at stop mkt 4.5 expiring today.
2> Rest of my current holding at 15% (current activation around 4.15) expiring April 30th.

I am happy with my run and wouldn't mind if one or both these orders are filled. This bird has flown too high too quickly for me.



Both my sells were taken out at $4.40 and $4.00 for an average price of $4.20 and an over all average of $2.76 (including 1.32), one of my top five return, almost tripling my initial price of $0.94 in 4 months.

About long-term,

I still like the stock and will be willing to buy back when it reaches below 3
I will have to do more research for the exact entry.



Other stock that I am tracking is MSFT (I like the drop today) and a friend's recomendation VSPC.OB

(UPDATE MARCH 26th)
I think GNBT is a good buy if you can still get in below 3 so I will be looking to pick up some if I find some opportunity.

GNBT on a tear!!!

One of my holding GNBT is having a great run. I came across this firm through Avian flu research that I did. Though, it is not directly involved with Avian flu. I liked their product - spray based insulin. I had read a lot about the technology when I was working at a boutique investment bank. I liked the concept as it is much more painless drug delivery method that needles. So, I added it to my portfolio at 0.94 on Nov 18th. At that time, it's flagship product Oral-Lyn(TM), oral insulin spray product, had been approved for commercial sale in Ecuador for the treatment of patients with Type-1 and Type-2 diabetes, and was in various stages of clinical trials around the world. There is always some theory why I buy stocks. The main reasons for the thinking were

1> Management looked motivated. They have good background, but motivation was the key. They seem to be putting all the right moves.
2> They already had a product which would be generating revenue. I didn't care if they wre first in the US market or third. With the kind of competition for spray based products, I was sure they would have marketing alliances with some big pharma distributor (That's what I call the big pharma companies)
3> They had an Avian flu play in the form of wholly owned subsidiary Antigen Express with it's avian flu vaccine program. I equated avian flu to oil. Any news or supply shock or demand spike increases the price of crude.

So, the story is expected revenue from Equador will inprove it's topline as well as provide more data for clinical trials. Management will get the drug approved in other countries including US (the biggest drug market) in time. Finaly there is Avian flu play as a an icing on the cake.

I was planning to get half out at 1.4 and rest out at 2.5-3 range. A 100% annual expected return, not bad a risky bet on a $50 million firm I am not the kind of person who can watch the market every minute due to my work. So, I put a trailing stop trigger at 1.4 and waited for the first move. and surely it came much earlier than expected. I got a price of 1.322 on Jan 23rd 2006. Then came a number of other good news. They had a positive pre-IND meeting with FDA for Avian flu and other meeting with Canadian and European trials. As of today it is 4.23 and my current trailing order sell price is 3.52. I have already made more than I expected and I am ready to catch any other upside that comes my way. I will make a value judgement in about a month whether I want to keep my trailing order or convert this for the long haul. This company is really showing promise and if they can deliver or one of the two potentials - Avian flu and Oral insulin- it will be a keeper.

MSFT: Windows Mobile and buying strategy

4> Now the fourth and final reason. I will elaborate this later, but in short. Window Mobile is gaining market share if you are talking about new mobile phones. There has been a lot of new mobiles with WM 5 on them. Also, with it's push email technology, this has become a valid alternative ( IMO stronger one) to challange RIM. I agree initially you will see WM5 mostly on exec style smart phones, but soon you will see more and more media phone ( a growing category) with picture, video and music coming with WM5.

One reason for this move is tight linkage between Nokia and Symbian experienced by other cell phone manufacturers. The caveats to this argument is that Nokia still hold a huge market share in cell phone markets and will never ( IMHO;) shift to WM5.
(Detail discussion to follow)

Finally,


Buying strategy: I think MSFT is a great buy as any price below 27.5, but I will be looking to add it to my portfolio if I can get it under 26.5. I feel it is possible to get this price as the stock might fall when the US Market pulls back after the recent run. It should reach around 35 over the next 12 months.

MSFT: X-Box 360 Vs PS 3

3> X-Box 360 Vs PS 3: First let me state why this is important, gaming is the next battle ground. It has already taken over the movie industry and will be gaining in on the PC industry. In fact, gaming consoles will provide the link between PC and Home entertainment convergence.

With the PSP 3 delayed till Nov 2006, X-box 360 is in a great position to gain a market leadership position. This one year lead in console means more than the products sold in the time period. As all the top three consoles are similar in the features at a basic level, the key factor in console selection becomes the content (games) offered on the console. Now let me stake my neck out and put down how the things will play out.

With PS3 not in the market this summer, game developers along with marketers will focus on X-Box 360 system. With an expected 4.5-5 million installed base by summer, they have a great foundation to bank on.

Come November X-box 360 will stake out about 7-8 million install base. That means in the 2006 holiday season, X-Box for the first time have the gaming console leadership. And this in my opinion will shift the momentum towards the X-Box 360 System both in terms of consumers as well as content provider.

Over all, I think X-box 360 and PS-3 will end at parity in this generation of game consoles if Sony doesn’t screw up its holiday 2006 launch. This is an important point, Microsoft has already played its cards well (that’s debatable considering Holiday 2005 Chip shortage) and Sony has to play their cards correctly to gain parity.

Now to some minor tactical issues:

Sony may reduce the price of it’s PS2 to $99 this summer to stop the Xbox 360’s march. Sony has a much lower manufacturing cost compared to X-Box first generation. I don’t know the exact figure, but it is around $30-40. I don’t think it is very likely, as people buying 2nd generation and 3rd generation gaming consoles are totally different consumer segments. So, this will have small impact of probability of having a 7-8 million installed base before holidays though impact of X-box first generation sales will be huge.

Microsoft will release latest Halo game along with the Sony’s PS3 release. This again is a small tactical play. Though “Halo on X-box 360” advertising will give boost to X-box 360 visibility, I think people deciding to buy PS3 will already know that Halo will not be available on PS3 and have taken that into their decision making. Now this analysis assumes that people are rational and make rational choices. This is a whole another discussion on consumer psychology and irrational decision making.

MSFT a Growth Company?

Call me crazy (especially after the last post), but I am getting excited by prospects of MSFT over the next 12 months. months. MSFT is not a typical company that would come in my profile as mentioned in the last post, it surely looks a great buy. Lets me list the reasons.

1> New product pipeline. Windows Vista, Office 2007, Exchange 12 and SharePoint 2006
2> $500 million marketing initiative to coincide with product pipeline.
3> X-Box & PSP3
4> Windows Mobile gaining momentum in cell phone sector.

Though new product pipeline along with the marketing campaign will provide most earnings boost, I am optimist about the last two points also. The only leg that I feel is and will remain weak is a their MSN and internet group. lowering of the advertising revenue is not helping either.

1> New product pipeline: The reason why MSFT has moved in the range from 23-28 since ...it feels like eternity... is that they didn't have a new product in the last 3 years. Software business is like auto makers. New product means new features that people crave. This results in upgrades and hence increased sales. Unlike automakers. this sales comes at very low incremental product cost. So that's the icing on the cake. Please note, like auto makers, they still have to make the necessary marketing investment

So, where does the cost go?
As R&D expense over the last three years. WOW!!! It's like MSFT took a write off for it's cost to make sure that earnings are better for next three years. In a way GAAP forces MSFT to do what other companies try to do by bending the rules.


If you are still not convinced. Try to correlate the firm's revenue with product launches. Conversely, you can also look at APPLE product pipeline (Hardware and Software) and the sales and stock price in early to late nineties.

2> Marketing push: Now as a product firm, once a product is ready they have to invest in marketing and they could not have found a better timing for a marketing push. With all the product coming up so close to one other, there will also be lots of cross selling revenue. When you see a MSFT ad for Xbox, you also start thinking about Windows and Office.

Next posts I will be discussed 3&4 and also the buying strategy

Keane: Connecting the dots

My friend asked me why am I still holding on to Keane (I use to work in Keane) stock. I was in New York and on cell phone, still I talked for about an hour (we also discussed google). I am personally excited about Keane. I don't believe that it will ever give 30% growth rates like Indian firms - WIPRO, Infosys (I use to work for infosys) or TCS. With 25% insider ownership, I am sure it is not an acquisition target. So, am I crazy? Well here is my theory on Keane

Let's go in history. Keane had a decentralized consulting model. In effect, it was a holding company with 50 small firms (offices) all over US. Each office took care of it's own hiring, training and local clients. They did have some national cost centers, but most of the business was at a local level. This worked very well during and before Y2K. Billing rates were high so the local office overhead as a percentage of total revenue was less. Clients liked personal attention during Y2K scare and employees didn't have to travel and still enjoy almost consulting lifestyle and pay.

After Y2K, Keane was not able to convert most of it's clients from Y2K projects to other high billing projects. This was due to two reasons. Due to depression, firms had liquidity crises and cut IT spending. On the other hand, Indian firms had shown the success of their model and were able to attract the clients by undercutting US firms like Keane. In this situation, accenture opened an Indian division, KPMG opened an office in China and years later India, while Keane stayed put with it's model. So, Accenture made most out of it and Keane fell back further.

They did acquire an Indian firm to start an indian operation, but it was never same. The indian operation became a cost center and they worked with US offices to get projects. US offices with revenue targets wanted to most of the work within their office. I still remember how in each quarterly meeting we should focus on our branch position based on revenue.

To be fair, inflexibility has also something to do with kind of people Keane hired, but that's another big discussion. So, with lowered revenue, these headoffices became a larger % of revenue resulting in Keane's profit margin falling to -3% to 3% range and revenue dropping from more than a billion to 6-700 million range.

Recently I read a news that Brian Keane mentioned during this trip to India that Keane plans to hire 5000 people in India. I also heard that in 2005, Keane hired WIPRO Senior executive Richard Garnick. Also, I saw some news about Keane merging their branches and cutting support staff. Also, there is indication that US and Indian staff are bidding on the project jointly, thus throwing the revenue based performance out of the window. Now when I connect these pieces of information, I think Keane is moving to the accenture model. Their operating margins will increase. It has been increasing recently. Please note any additional saving in cost is directly passed over to the net income after tax. When you compare with accenture Keane has higher revenue growth, slightly higher gross margin (2-3%) , but almost half operating margin (5% against 10%). This is the effect of all those local branch overheads and mostly US workforce. Now if the save any cost by using their India unit effectively and merging local branch offices, it will fall directly to bottomline.

As an example, if they improve their operating margins from 5 to 7.5. This 50% improvement will have a 50% improvement in net income so assuming same P/E(growth rate) 50% increase in revenue. If they cam come to 10% as accenture, their stock price should double.

So, why havn't analyst caught this. First, I am not sure how many analysts actively follow Keane. It's a boring firm. Also, Brian Keane's announcement was in India. Finally, after 5 years of bad management analyst don't believe that Brian gets up one day and decides that he will stop acting as a leech and work to improve performance. So, they are discounting this news. I believe otherwise. Next two quarter are expected to be key for Keane. I will closely monitor the performance and if there is no action, I will get out of the stock. sometime before June/July.

Recommendation: Buy under 12 for a pop to 18-20 in under a year.

Where to invest in 2006?

Before I start giving my picks, let me start by giving you an idea about the kind of investments that I look for. I would classify myself as a combination of growth and value based on the sector.

I am bullish about energy. I think I will be bullish about energy right till my retirement age (2040). I think firms providing oil exploration & drilling services (oil infrastructure) will have a banner year. With the demand of oil closing in on supply, there is a need to develop new oil fields. As the oils firms start increasing the capacity and developing new fields, these oil infrastructure firms will get the economic rent out of the whole chain of companies working to develop new fields. Next couple of years will be great for the current leaders. With time, new players will enter the market to make the industry profit more in line with normal economic profit. A couple of important points to look for in this sector are firms with low P/E, good management and high exploration investment.

I always like buying firm whose products and services are in demand and I think Oil services may be the ones for 2006. Where do I get the above logic. Well sometime back I was looking to buy a oil field with 14 wells in Midwest. The price was $5 million and oil was 45-50 then. Though there was a lot of oil underground, the field was not developed and half teh wells were not working. The current annual output was around 4000-5000 BPY. After including all the production cost and royalty payment, I was getting around $34/barrel Not with that kind of oil coming out, I couldn't sustain a 4 million debt to finance the field. So, I tried to find out if I can get other wells repaired or drill more wells. The owner said that all the repair/drilling guys are busy and unless you pay 50% premium there is a long wait. BTW, within 6 months, oil was 70 :) and has never been below 57 after that. That's another matter, but this experience got me thinking about the importance of oil infrastruture firms in current environment.

On the other end, as the oil price will increase, a whole lot of other sources of energy will become relatively cheaper - solar power, wind energy, oil from canadian sands and ethanol. I look to invest in leaders in their space.

Other than the energy stocks, I have a close eye on the comodities. I have not found something exciting, but if the prices drop, you can count me to pick up some bargains. I am gold pessimist and have been predicting a reduced return since gold reached 450. Current gold prices are 570, I like Buffet's waiting strategy. And in this huge worldwide financial market system, there are ample opportunities where you will feel comfortable if you wait.

I will also be looking for small health care firms that have or are close to acquiring new drug or drug delivery mechanism. I look for firms that already have revenues and use this new product as a stock price booster. So, I am not looking at one drug wonder.

Finally, I will look at investing in some technology stocks and international ADRs. I think emerging markets will outperform developed countries' stock market in 2006

My Current positions

March 12-16 2007:

This week I got rid of March Dow calls +DJWCR and bought and sold LEND for a 120% return (converted 415 to 927). I also lost around $30 day trading, but my last transaction FMT was a break out and I am up 185 on that as of now. I plan to sell FMT as soon as possible on Monday using trailing stop and/or stop loss

My final pick SAY was a replacement to KEA which is acquired in a reverse merger with a SFO firm.

My current holding:

Stocks: GOOG, GS, ASPV, DGX, SIRI, KEA, SAY, FMT
Options: +DJWDU
Funds: ADRE, FIEUX, FOSFX


March 03 2007:

This week I bought GOOG and GS

My current holding:

Stocks: GOOG, GS, ASPV, DGX, SIRI, KEA
Options: +DJWCR, +DJWDU
Funds: ADRE, FIEUX, FOSFX



Feb 2007:

I bought ASPV & DGX this month.

On the day when DOW dropped 400 points I bought 5 March calls +DJWCR and 15 April calls +DJWDU


Oct Dec 2006:

I had gone for vacation and work trip to India and Europe and put trailing trigger in Keane and PFE. My PFE holding was sold for 27+. So now I just own KEA ( about 30% of non retirement account). More than 70% of my non-retirement account is cash.

Recently, I also readjusted my retirement account. Now I have
14% in a Europe Index fund
14% in a International Index fund
10% in Emerging market Fund ( Region: 50% Asia, 36% Latin America Industry: 38% Information, 38% Manufacturing, 22% Service)
A small amount in Sirius radio (SIRI)

So, more than 60-70% of my investing money is in cash as of Dec 31st 2007

March 22nd:

GNBT jumped to $5 and split my 18% trailing to two order of half at 4.5 and other half at 15% trailing (activation around 4.15). Finally the share tanked and both my orders were filled at 4.20 and 4.00

Current Position:
1> KEA ($8.86): I plan to hold on to this one till June earning. That will be when I think the final part of my theory about Keane will unravel.
2> PFE ($36.5): I plan to hold on to this for now. There can be two reasons why I may sell it. I have to plan on getting rid of this sometime this year to compensate on GNBT and Keane profits.


March 13th:

My Keane Trailing stop was triggered at 13.98. I am still looking to an entry in MSFT.

Current Position:
1> GNBT ($0.94): Trailing stop 18% (Planning to change to 12-15% soon)
2> KEA ($8.86): I plan to hold on to this one till June earning. That will be when I think the final part of my theory about Keane will unravel.
3> PFE ($36.5): I plan to hold on to this for now. There can be two reasons why I may sell it. First to adjust the taxable profit from GNBT. Second, the stock market takes off and I feel health care will suffer at the expense of tech stocks


March 1st 2006:

As I have moved to London and may not be able to track the market, I have put a trailing stop on both all Shares of GNBT at 18%. and almost half the of remaining shares of KEA at 5%. I am also cutting my positions as recently I moved to London and would need some liquid cash in case of emergency.


Feb 2006

As of today I hold the following positions
1> GNBT : Avian flu & Spray insulin play. I bought at 0.94 and cut my position to half when the stock jumped to 1.45. I actually sold at 1.31 because of trailing stop that got triggered when the stock reached 1.4
2> KEA: Got the shares from ESPP. Avg price 8.86 cut the position to 3/4th recently using trailing stop (sold at 11.33)
3> PFE: Bought at 33-35 2-3 years back. Long term holding. I also hold a March put at 20.