Anatomy of a Trade

Warren Buffet recently stated that, you only know who was swimming naked when the tide goes out. But some people just enjoy the nudity. I guess it must be fun for some to remain uncovered (pun intended). I for one, prefer to keep my trunks on..

The movement on the ticker entices a trade. The risk capacity dictates the size. The ego maneuvers the time duration. The stop loss is forgotten in the book.
The beta attracts, it titillates and it destroys. The joy in the volatility subsides when the margin calls you. The ride is over, the wallet is empty. Its time to move towards sanity.

Always on the edge

It is very common to see Indian's gesticulating angrily. Whether its in the queue to purchase a ticket, or in public transport or on the road. If you speak with any foreigner about their experience with Indian people they will surely use adjectives like, 'calm, hospitable, accepting, pleasant, adjusting' etc. Almost no one will say Indian's are angry people. Genetically we are not angry people, but we still display a lot of anger even in mundane activities.

Let's take a step back and evaluate the anger. Let us suppose that you are standing in line to purchase a rail ticket; there are a lot of other people as well. One smart Alec tries jumping the queue. If he is spotted, people vent their fury in dramatic fashion. The anger displayed is irrationally greater than the nature of the offense. The reason for this is traveling by train is stressful due to the crowds. If a man has to think about something as basic as his commute, he definitely is a stressed being. Over population is taking its toll.

Let's take another step back. We better not be living in the illusion that Indian sperms are more potent, and that is the reason for our population growth. But if society treats procreation as a form of recreation, then we are in trouble. Social studies have indicated lack of education as a significant reason. Illiteracy has been identified as the root to many issues. Thus it needs to be tackled in a huge way.

This is probably too simplistic an explanation of why we are always on the edge.

'Shut'yam

The investor community and markets been caught napping. The facts on Satyam have been documented and are available. Enough has been spoken on the lack of corporate governance and level of fraud. I am going to focus on what I perceive as the way forward and possible outcomes.

Scenario 1: Company Liquidates
The current situation for Satyam is extremely delicate. If we examine the last quarter numbers (as stated in Raju's letter), the revenues stand at Rs 2112cr and operating margins at just Rs 61cr. This effectively means Satyam is losing money at the net level. For a company with no cash (cash balances stated are not present) it may not be able to meet its financial commitments and fixed expenses. If these unfortunate events materialize, and no other means of financing are available to salvage the business, the company may be forced to down its shutters.
Probability: Low

Scenario 2: Satyam gets Acquired
You may wonder why anyone would want to board a sinking ship. The pragmatic answer is, only if he can repair the holes. Satyam has large holes in its accounts. Rs 5000cr of non existing cash, shrinking margins (3%) and potential client churn.
In an industry which has operating margins around 30%, Satyam's 3% looks abysmal. It reflects poor pricing and ineffective cost structures.
If a potential acquirer were to value Satyam. He would be looking at skilled employees and large number of clients. It would be fair to assume most clients would already be looking for alternatives. If Satyam manages to salvage 50-60% of its clients it would be an achievement. For a mid size I.T companies with significant cash balance, Satyam may prove to be an attractive proposition. This will be viable if the acquirer can manage to reduce operating costs and retain clients.
Probability: High

Scenario 3: Replacement of Management
Though an interim CEO has been appointed, there is a chance that other stakeholders (government, shareholders or regulators) may force a change in the management. The new management will have to inspire confidence amongst its employees and clients. Getting the business back to shape will be a long drawn process with lots of tough decisions.
Probability: Moderate

Theme for 2009 - Survive

Keep your head above the water.. Breathe.. Gasp.. Oxygen.. Hang on to anything that floats.. Oxygen.. Breath.. Breathe..

The theme for this year, cannot be any clearer. And it would be fair to say, that it is applicable for all spheres of human existence. We don't know when the haze will clear, not sure how deep it is either. What we do know is that its real and its going to be around for a while.

As the fog makes its presence felt, businesses feel the pinch. Probably defaults may rise. Litigation may raise its ugly head. Skeletons will fall out. (Watch out as Satyam unfolds)

At the individual level, expect your biscuit packet and your pay packet to be smaller. Drink less, eat less, spend less is the new mantra. (Helps you loose weight in the process)

Since life moves along a circular path, things will be bright again. The sun will rise brighter, the coffee will smell stronger and the food will taste better. Till then, stay afloat!!