Thursday, December 07, 2006
The EDS- Mphasis Story
The recent acquisition of Mphasis by EDS is very exciting for Mphasis. An article in the Wall street journal tells us how EDS has been turning around. For Mphasis this is very good news; markets sense that. The stock has moved from a low of 130 to a high of 290 and is currently at 250. With a Marketcap of around 4500 CR and FY06 revenues of 380 CR mphasis seems very expensive. However if one factors in the fact that EDS has $ 25 Billion in sales and it might move a lot of its business to Mphasis to cut costs further, Mphasis doesn’t look that expensive
The article that appeared in the WSJ
EDS Writes a Recovery Tale (Wall Street Journal)
Three Years From Sea of Red Ink, Street Hails Leadership Moves
By JIM CARLTONDecember 6, 2006; Page C3
Three Years From Sea of Red Ink, Street Hails Leadership Moves
By JIM CARLTONDecember 6, 2006; Page C3
Just three years ago, Wall Street investors were racing to distance themselves from Electronic Data Systems. As the information-technology titan bled red ink amid a string of problem contracts, analysts urged investors to dump the stock. Wall Street now is writing a new contract with EDS.
The Plano, Texas, company is completing the first stage of a turnaround under Chief Executive Michael Jordan, who took over the ailing company in 2003. EDS officials say sales are on track to total $21.1 billion to $21.3 billion this year -- up roughly 7% from 2005 -- while adjusted profits are likely to double. Debt that stood at $5 billion in 2003 has been cut to $3.1 billion.
To help revive the firm, Mr. Jordan, 70 years old, restructured contracts EDS was having trouble handling such as by seeking more-favorable terms. He also cut costs by centralizing some business functions, diversified into additional support services and targeted new accounts.
To help revive the firm, Mr. Jordan, 70 years old, restructured contracts EDS was having trouble handling such as by seeking more-favorable terms. He also cut costs by centralizing some business functions, diversified into additional support services and targeted new accounts.
Six Wall Street analysts recently upgraded recommendations to the equivalent of "buy" from "hold." Another began coverage of EDS with a "buy" rating. The shares have more than doubled from a five-year low of $12 in 2002, to $27.06, down a penny yesterday in 4 p.m. New York Stock Exchange composite trading.
In a recent conference call to discuss third-quarter results, EDS officials explained how they had reduced staff, consolidated facilities and streamlined telecom and computer networks. The quarter "presented convincing proof that senior management is indeed able to pare back costs," Alan Hellawell, an analyst at Lehman Brothers, wrote in a Nov. 28 research note, raising his rating to "buy" from "hold." He doesn't own the stock, though Lehman does hold shares and has done business with the company.
Mr. Hellawell is among analysts who say there is room for the stock to rise further. He thinks it could trade at 20 times analysts' expected per-share earnings of $1.61 next year, which means a stock price of $32.
Some large institutional investors have built up their stakes in the company in the past few quarters. According to Securities and Exchange Commission filings, AllianceBernstein held more than 58 million EDS shares as of the end of September, up from nearly 35 million at the beginning of the year.
EDS helped invent information-technology outsourcing -- under which companies basically hand over management of their complex computer networks -- in 1962 under founder H. Ross Perot. By 2000, large corporations were flocking to a Big Three of IT providers: EDS, International Business Machines and Computer Sciences Associates. But in recent years, with competition from offshore rivals and companies parceling out their business to several vendors instead of just one, the Big Three's share of the IT business has shrunk to about a third from two-thirds, according to Sanford C. Bernstein & Co. That has squeezed profit margins across the industry.
In a recent conference call to discuss third-quarter results, EDS officials explained how they had reduced staff, consolidated facilities and streamlined telecom and computer networks. The quarter "presented convincing proof that senior management is indeed able to pare back costs," Alan Hellawell, an analyst at Lehman Brothers, wrote in a Nov. 28 research note, raising his rating to "buy" from "hold." He doesn't own the stock, though Lehman does hold shares and has done business with the company.
Mr. Hellawell is among analysts who say there is room for the stock to rise further. He thinks it could trade at 20 times analysts' expected per-share earnings of $1.61 next year, which means a stock price of $32.
Some large institutional investors have built up their stakes in the company in the past few quarters. According to Securities and Exchange Commission filings, AllianceBernstein held more than 58 million EDS shares as of the end of September, up from nearly 35 million at the beginning of the year.
EDS helped invent information-technology outsourcing -- under which companies basically hand over management of their complex computer networks -- in 1962 under founder H. Ross Perot. By 2000, large corporations were flocking to a Big Three of IT providers: EDS, International Business Machines and Computer Sciences Associates. But in recent years, with competition from offshore rivals and companies parceling out their business to several vendors instead of just one, the Big Three's share of the IT business has shrunk to about a third from two-thirds, according to Sanford C. Bernstein & Co. That has squeezed profit margins across the industry.
Mr. Perot sold the company to General Motors in 1984, and it was spun off by GM in 1996. In 1999, after IBM and other competitors began outmaneuvering EDS for contracts, the company brought in a new CEO, Richard Brown. Mr. Brown restored EDS's momentum as it went on to win a number of high-profile contracts, the most notable a $6.7 billion deal with the Navy in 2000 to manage its intranet. But EDS posted losses of $1 billion in both 2002 and 2003, amid problems with the Navy contract and others.EDS's board replaced Mr. Brown with Mr. Jordan, who had led a revival at Westinghouse Electric, which became CBS. Mr. Jordan devised a three-year strategy to stanch the red ink, putting in procedures so EDS wouldn't get caught in problem contracts and could invest in areas that would let it go after new business. "What had to be undone here was 20 years of management lethargy," Mr. Jordan says.
Mr. Jordan terminated some accounts, restructured others and assigned some of EDS's best engineers to bring the Navy contract into line. In 2005, the Navy contract turned cash-positive for the first time. Mr. Jordan also centralized sales functions so new contracts could be better screened to avoid potential problems.
Last year, he brought in Ron Rittenmeyer as operating chief, who is reorganizing data centers to make them more efficient and reducing head count in high-cost areas like the U.S. while ramping up in cheaper locales like India. Mr. Rittenmeyer yesterday was promoted to the additional position of president. Earlier this year, EDS acquired a majority stake in an Indian outsourcing company called Mphasis BFL, which has about 11,000 employees.
This year, EDS expects to sign $23 billion to $25 billion in contracts, up from $14 billion two years ago, says Chief Financial Officer Ronald Vargo. In April, EDS landed a $1.7 billion deal over seven years to handle IT services for consumer-goods provider Kraft Foods.
Some on Wall Street remain wary. One concern: EDS might repeat the mistake of landing more contracts than it can handle, as happened with the Navy imbroglio. "This is not a business where you want to grow fast," says Rod Bourgeois, senior research analyst at Sanford C. Bernstein. He said that he doesn't own EDS stock and that his firm doesn't do business with EDS.
Mr. Jordan professes confidence in EDS's future. "It may slow down, pick up, slow down," he says, "but I think it's basically a growth business."
Tuesday, December 05, 2006
Game thoery
What makes a good trader? Is it luck, innate talent, or is plain hard work? The question is an illusive one and perhaps one of the most difficult to answer. There are those who believe that traders are not born and can be made (the turtles for example) and those who believe that a good trader can only be shaped. There is one quality however that all great traders’ posses and that is the ability to clearly articulate their thought process. Almost all traders have a great intuitive sense but only a few can actually translate those thoughts into words. Over the last few years we have learnt and grown as traders. However the time has come now to communicate our thoughts. I will “try” to document experiences and learning’s that I have been through. I hope this process of communicating our thoughts makes us all better traders.
I read somewhere - In the markets there are no mistakes only lessons learnt.
When he conceptualized Nash’s equilibrium, John Forbes Nash didn’t know his principals would be applied across all walks of life. Somewhat similar to decision theory, game theory (based on Nash’s equilibrium) studies decisions that are made in an environment where various players interact. As a trader I have always been fascinated with game theory and have tried very often to apply it to the markets. To explain game theory a little more I will talk about one of the most commonly used examples, prisoner’s dilemma. Prisoners dilemma is a non zero sum game wherein the only concern of each prisoner is to maximize his own payoff.
Let’s take an example. Two prisoners A and B are arrested; the police however do not have sufficient to convict them. The prisoners each are placed in different rooms. The police tell convict A that if he confesses prisoner B will get a 5 year sentence and he (prisoner A) will be let free. Prisoner B is conveyed the same only in his case prisoner A will be convicted. If neither of the two convicts confesses then they both walk away free however if both of them confess then both get 2 years. The only way a prisoner can maximize his payoff is to betray his fellow prisoner, in an ideal world each prisoner would betray his fellow prisoner. However unknowingly each prisoner would get 2 years jail time. If however prisoner A keeps quite he is not sure his fellow prisoner will do the same. Herein lays the prisoners dilemma.
So why and how does “the game theory” apply to the markets?
I read somewhere - In the markets there are no mistakes only lessons learnt.
When he conceptualized Nash’s equilibrium, John Forbes Nash didn’t know his principals would be applied across all walks of life. Somewhat similar to decision theory, game theory (based on Nash’s equilibrium) studies decisions that are made in an environment where various players interact. As a trader I have always been fascinated with game theory and have tried very often to apply it to the markets. To explain game theory a little more I will talk about one of the most commonly used examples, prisoner’s dilemma. Prisoners dilemma is a non zero sum game wherein the only concern of each prisoner is to maximize his own payoff.
Let’s take an example. Two prisoners A and B are arrested; the police however do not have sufficient to convict them. The prisoners each are placed in different rooms. The police tell convict A that if he confesses prisoner B will get a 5 year sentence and he (prisoner A) will be let free. Prisoner B is conveyed the same only in his case prisoner A will be convicted. If neither of the two convicts confesses then they both walk away free however if both of them confess then both get 2 years. The only way a prisoner can maximize his payoff is to betray his fellow prisoner, in an ideal world each prisoner would betray his fellow prisoner. However unknowingly each prisoner would get 2 years jail time. If however prisoner A keeps quite he is not sure his fellow prisoner will do the same. Herein lays the prisoners dilemma.
So why and how does “the game theory” apply to the markets?
Friday, June 16, 2006
Can u smell the honey ?
The markets have started moving up again, but the question we need to ask ourselves is has a new bull run begun or is it just a pull back ?
I am not bearish by choice, but that is what I am seeing. Markets are going through a technical bounce, which very often happens in a bear market and I am quite certain that we will see new lows again. How soon can be anyone’s guess?
The BSE Sensex (Picture at the bottom) moved from 9000 to 12671 a move of 3671 points and from 12671 to 8820 another move of 3851 points a total of 7522 points without any consolidation.The recent move of the markets has baffled everyone; however the moves are all too familiar to anyone who has been in a bear market. Markets need to correct in time, price correction is just one of the variables.
It’s quite clear to me that the current ongoing rally in the market is just a bear trap and the markets will see new lows, the ongoing pull back is absolutely manic and it seems like a new bull run has begun.(Or has it)
However after such a sever breakdown the market needs to breath a bit before its starts moving up again, volumes need to thin out and the volatility needs to subside.The techinical bounce can go all the way upto 10500 or even 11000 i doubt it can sustain that for too long.
Monday, June 12, 2006
For the love of “The bounce”
It’s difficult to turn bearish in a bull market. What’s makes it even more difficult is the fact that you’re surrounded by 80 bulls. I work on a trading floor and obviously most traders were/are bullish. Most of our traders haven’t seen a bear market let alone read about one. I recently read an article about the bear markets that took place in the U.S post the depression era, it was difficult for me to digest.
On the trading floor however, traders are always bullish. Being the only bear I fear my life is in danger and worry about the bulls hatching a scheme to castrate me, these things happen to bears often. (Unless the bulls go broke first)
Since the last time I wrote, the markets have continued their declines. The BSE Sensex was at 10786 we’re currently trading at 9175, down another 14% in a very short time (only 15 days). From the peak the BSE Sensex has now lost 28% and everyone though May was gut-wrenching.
Traders in India have been in love with a market bounce, and rightly so. In the last 3 years every dip has been a buying opportunity for them. However the recent fall was no bounce and a lot of people were caught off guard, everyone kept jumping back in the markets … lesson learnt.
Calling a bottom to this market is going to be very difficult and we should refrain from doing that. Our markets are taking their cues from global markets and are now very closely correlated with them. (Except for the fact that when others fall we tend to fall more than them).It is quite clear now that the rise in interest rates is causing a liquidity crunch. Japan and the US which were the providers of cheap capital(to the world) are no longer providing the same. I recently saw an interview of Geroge Soros who says that around 200$ Bn was called back by Bank of Japan (commonly termed as the carry trade). With the Yen rallying 7%, those borrowing money from Japan have not only taken a hit on the Yen appreciation but also on the fall in commodities and emerging market prices, I worry if a lot of money were to leave India how much lower can we go.
Coming back to the Indian equity markets, we have taken a big hit over the last 2 months down 28%, the pessimism is increasing and more people have begun crossing the bridge to Bears Ville. The obsession to buy however has not subsided; it’s difficult to undo what has been done over the last 3 years. Everyone is hopeful of a bounce in commodities and stocks, if anything I have learnt hope is one emotion that should not be in any trader/investor’s vocabulary. We’re forgetting how difficult it should be to make money in the equity markets; the era of cheap money is over. What starts now will be a painful journey that I think can last for the next few months. Where we go from here is anyone’s guess. I once again urge investors not to jump in too quickly and let the market tell them when it has bottomed out.
On the trading floor however, traders are always bullish. Being the only bear I fear my life is in danger and worry about the bulls hatching a scheme to castrate me, these things happen to bears often. (Unless the bulls go broke first)
Since the last time I wrote, the markets have continued their declines. The BSE Sensex was at 10786 we’re currently trading at 9175, down another 14% in a very short time (only 15 days). From the peak the BSE Sensex has now lost 28% and everyone though May was gut-wrenching.
Traders in India have been in love with a market bounce, and rightly so. In the last 3 years every dip has been a buying opportunity for them. However the recent fall was no bounce and a lot of people were caught off guard, everyone kept jumping back in the markets … lesson learnt.
Calling a bottom to this market is going to be very difficult and we should refrain from doing that. Our markets are taking their cues from global markets and are now very closely correlated with them. (Except for the fact that when others fall we tend to fall more than them).It is quite clear now that the rise in interest rates is causing a liquidity crunch. Japan and the US which were the providers of cheap capital(to the world) are no longer providing the same. I recently saw an interview of Geroge Soros who says that around 200$ Bn was called back by Bank of Japan (commonly termed as the carry trade). With the Yen rallying 7%, those borrowing money from Japan have not only taken a hit on the Yen appreciation but also on the fall in commodities and emerging market prices, I worry if a lot of money were to leave India how much lower can we go.
Coming back to the Indian equity markets, we have taken a big hit over the last 2 months down 28%, the pessimism is increasing and more people have begun crossing the bridge to Bears Ville. The obsession to buy however has not subsided; it’s difficult to undo what has been done over the last 3 years. Everyone is hopeful of a bounce in commodities and stocks, if anything I have learnt hope is one emotion that should not be in any trader/investor’s vocabulary. We’re forgetting how difficult it should be to make money in the equity markets; the era of cheap money is over. What starts now will be a painful journey that I think can last for the next few months. Where we go from here is anyone’s guess. I once again urge investors not to jump in too quickly and let the market tell them when it has bottomed out.
Wednesday, May 31, 2006
Indian investors cry foul.
If there is one thing that I have learnt about the markets is that, they are not linear. For the past three years Indian equities have rallied over 300%, the Sensex has risen from 4000 to a little under 13,000. Now that’s breathtaking, of late however conviction in the market has been shaken. Any market participant would tell you signs of a top were there; from funds that invest only to capture IPO pops, to guys in the gym locker room discussing stocks, the signs were clearly there.
I was chatting with an analyst who had recently decided to venture into equity markets our discussion revolved around India’s growth and the equity markets being a reflection of the same. I urged him to take a look at China and try and find an answer as to why the Chinese market is at an 8 year low? China is different he said, “their not a democracy”.
Ah I remembered good ol Jim. Jim Rogers once said Indians are very jealous of China, and rightly so. Indian’s love their democracy, but what good is a democracy that has not really got them anywhere for the past 50 years.
The recent issues with Indian reservations and a famous movie star making a statement which appeared to be quite logical, raises the question about how democratic India truly is.
Back to the analyst, I mentioned to him perhaps this could be the year of consolidation we all talked about, its time to take a breather and reflect back on what has happened in the last 3 years. It didn’t make sense to him, the growth was good! India is a domestic led story! However no market can fend off global shocks. With crude at 70$ a barrel, political instability amongst the oil producing countries and inflation fears, it’s a miracle that volatility didn’t shoot up earlier. It might sound a bit strange but knowing the world is a more volatile place will get me good sleep at night.
Indian investors have to get use to the fact that markets do not go up in forever, every time the markets start to look a little shaky rumors of Political instability and scams surface, on a sad note it’s not their fault almost all of the bull runs in India have ended with a scam. Investors need to understand markets will correct it’s a part of life, markets always come down faster than what they go up, that’s the characteristic of any market.
Investors having been buying on dips for the past 3 years, however I urge them to wait and watch, markets could give away as much as 25%-35% of their gains (they’re already off 15%); the very foundation of the Bull Run will perhaps be questioned, that again would be a great time to buy India, but for now the elephant will take a pause.
I was chatting with an analyst who had recently decided to venture into equity markets our discussion revolved around India’s growth and the equity markets being a reflection of the same. I urged him to take a look at China and try and find an answer as to why the Chinese market is at an 8 year low? China is different he said, “their not a democracy”.
Ah I remembered good ol Jim. Jim Rogers once said Indians are very jealous of China, and rightly so. Indian’s love their democracy, but what good is a democracy that has not really got them anywhere for the past 50 years.
The recent issues with Indian reservations and a famous movie star making a statement which appeared to be quite logical, raises the question about how democratic India truly is.
Back to the analyst, I mentioned to him perhaps this could be the year of consolidation we all talked about, its time to take a breather and reflect back on what has happened in the last 3 years. It didn’t make sense to him, the growth was good! India is a domestic led story! However no market can fend off global shocks. With crude at 70$ a barrel, political instability amongst the oil producing countries and inflation fears, it’s a miracle that volatility didn’t shoot up earlier. It might sound a bit strange but knowing the world is a more volatile place will get me good sleep at night.
Indian investors have to get use to the fact that markets do not go up in forever, every time the markets start to look a little shaky rumors of Political instability and scams surface, on a sad note it’s not their fault almost all of the bull runs in India have ended with a scam. Investors need to understand markets will correct it’s a part of life, markets always come down faster than what they go up, that’s the characteristic of any market.
Investors having been buying on dips for the past 3 years, however I urge them to wait and watch, markets could give away as much as 25%-35% of their gains (they’re already off 15%); the very foundation of the Bull Run will perhaps be questioned, that again would be a great time to buy India, but for now the elephant will take a pause.
