Longing India

Now, that's quite a title eh. I meant "going long India", i.e. buying some Indian equities. Let me explain it using something >>1000 words

CSCO is a value stock

The beating that CSCO stock has taken in the past many months has been nothing short of amazing! Granted that other stocks like RIMM, NOK, TLAB are in the same boat but from my eyes, those declines are more understandable than Cisco. Below is some commentary from Hedge Fund quick pitch as featured in a recent issue of Hedge Fund wisdom.

Cisco is a global large-cap leader in the development and sale of internet networking products. It has +$40bn in sales, a $110bn market cap, 63% gross profit margin and 26% EBITDA margin. It is projected to grow top and bottom-line by 11% and 18% annually for the next three years, trades at 11.3x forward earnings (excluding net cash) and has a 10% free cashflow yield. It competes with companies like Juniper (JNPR), Aruba (ARUN), F5 (FFIV), NetGear (NTGR), Motorola (MOT), Avaya and Huawei.

David Tepper’s Appaloosa Management established an almost 4% new position in Cisco in 3Q, which is now even more interesting considering the company just reported very disappointing guidance and dropped close to 20% to its 52-week lows. So, investors currently have the opportunity to buy the stock at a lower cost-basis than Appaloosa’s (assuming they still own the position). The reasons investors were disappointed were weak projected growth and gross margins, driven primarily by softness in Europe, state government spending, and market share loss in the US set-top box business.

Cisco checks off all value-investor requirements:
- Cheap valuation (not paying for growth)
- Strong barriers to entry in a highly concentrated industry (where Cisco is the market leader)
- Solid long-term fundamentals (internet bandwidth usage increases exponentially with mobility and video)
- Fortress balance sheet ($25bn of net cash)
- High returns on invested capital (30% ROIC).

The criticism is that Cisco’s stock hasn’t really done much over a 10-year period, so it has somehow failed miserably to realize any value from very strong fundamentals. Also, there are increasing concerns that Cisco will lose market share and/or its gross margin will deteriorate. Finally, Cisco’s products and strategy are geared more towards integrated IT infrastructure, which is under attack by cloud computing.

Financials hitting strong support

I use XLF, the financial sector etf, as a proxy for the entire financial sector. While it is difficult to predict the fortunes of any one stock, investing in a sector etf significantly reduces stock specific risk while still allowing for selective investing.

Look at the chart above. Is shows that the financials are hitting strong support at around the 14.9 level. While is is always possible that they crater through this, such a shelf of support usually allows for atleast a cursory bounce to prior support.

So that was the technical aspect of investing. Coming to fundamentals and sentiment, both of these are very depressed wrt to the financial sector right now. Just over the weekend, both the NYT and WSJ carried very negative stories regarding these stocks. Bottom picking is always hard but I believe it affords a good risk reward..place a stop below the support and get out if it looks to be breaking. On the upside, the chance for a strong and quick snapback rally on any slimmer of hope is high.

Disclaimer: I have bought into C calls, MS calls and FAS to play this thesis

Futures 10 Year Note Chart Daily

Will a dramatic jump in yields crash this party? Check out the chart below (also, link to updated version). The price of the bond is dropping implying the yield is rising. Yields can rise due to growth expectations or inflation expectations. What do rising yields imply for other markets? Growth better be awesome or else the stock market that Helicopter Ben has pumped up so much is going to snap.

Futures 10 Year Note Chart Daily

Does Apple want to sell TV's?

Intriguing idea. And why not? They pretty much own the rest of the media space - the next revolutionary step should be home entertainment. They apparently have been securing lots of supply of some product...lcd displays?

Stock up on that coffee

Coz the prices have gone ballistic, and it's about time the costs will be passed on to the consumer.

Of note, target has a great deal on Starbucks coffee right now...discounted + a small gift card for buying in bulk.

Overbought readings

At this juncture, the stock market looks very overbought. While timing declines based on such indicators in not of much value, it certainly does imply that any further gains from here will be tenuous and prone to sudden downdrafts. The indicators I follow for this are:

• CBOE index and equity put/call ratio
• ISE sentiment index
• VIX/VXO volatility indices