Shorting Time - High-Time??

I have traditionally been a buy and hold investor for the last few years. However, with the experts predicting slow economic growth and/or recession for 2008 combined with the housing drop, I have been selling off my profitable positions for the last 2-3 months. I still hold some international positions that I think dont have too much downside and a good long-term outlook, and of course some laggards. I have been sitting mostly on cash and watching the markets. I added money to couple of CDs before the two rate drops we had recently - which have given me better returns than the S&P 500 in the same timeframe.

As true as it might be that timing the markets is futile, I think time has now come when I think I should try my hand at shorting/trading in the direction of general market fundamentals. I have been observing the stocks/ETFs that I'd like to short, and my general thoughts and ramblings are below.

How shorting works:
For all practical purposes, shorting is exactly the opposite of buying a stock now, and selling it in the future for a profit. Shorting is a strategy that can make you money when you think that a stock is destined to fall further. You first borrow shares from the brokerage, and sell them off. You then buy these shares back at a lower price(theoretically and hopefully) and return them to the brokerage, pocketing the difference. Keep in mind that shorting is risky, but can work great in a bear market.

I have been thinking about the following strategies:

• Shorting ETFs: If I want to start with low-risk, shorting ETFs might not be a bad idea. Two housing ETFs that come to mind are iShares Dow Jones U.S. Home Construction ETF (ITB) and S&P Homebuilders SPDR (XHB). If you think the economy is headed for a tank, you can also short ETFs like the Financial Sector Select SPDR (XLF).
  

• Buying Short ETFs: ProShares has a number of ETFs whose performance is inversely proportional to the underlying index performance. If you buy the ProShares Ultrashort Real Estate (SRS), and housing keeps going down, SRS goes up in value. Same is true in the Financial Sector for ProShares UltraShort Financials (SKF).
  

• Shorting stocks: Shorting housing stocks seems like a good strategy at this point, considering the housing has still not bottomed, and they all have room for further downside. Shorting stocks like Lennar (LEN), Centex (CTX), DR Horton (DHI) seems like a good strategy. Graph below shows the continuous drop in these three, and from all the negativity around housing, this graph should maintain its downtrend atleast for the next 5-6 months:

Few notes:

• Do not, again, do not let a trade become an investment. This is not buy and hold. Decide on a percentage and sell it off after that. I think my initial limit would be 5%.
  
• Average over 2-3 buys and buy on up-days (for shorts) and down-days (for longs).

Voluntary disclosure: I do not hold a position in any of the securities mentioned above, but might start one soon.

Sterlite Industries India - a Strong Buy

This post is dedicated to Sterlite Industries India (SLT), a leading producer of copper, aluminium and zinc with mines across India, Australia and Zambia, and more recently its forays into the highly attractive electric power generation business. I first heard about this company from a friend who runs his own blog - Rant About It, so I will give him due credit for recommending this to me, and I followed it up with my own research below.

Business:
Sterlite India is a subsidiary of the London based Vedanta group of companies. It engages in production of copper, zinc, aluminium and electric power. It ranks #3 globally for zinc production, #5 for refined copper and on the way to becoming #10 for aluminium production. Graph below shows Sterlite's metal production plan, phase 1 of which has been delivered on time and within cost.

(Source: company website)

This increase in production is facilitated by Sterlite's commitment to increase smelting capacities in planned phases. Sterlite holds excellent reserve positions with #3 in iron ore, #4 in coal and #5 in bauxite reserves. Sterlite also recently acquired Sesa, a debt-free, cash-rich company to get an entry into the highly attractive iron ore business.

The company recently announced its intentions to enter the coal-based power generation on Nov 7, through its subsidiary Sterlite Energy, with plans to aggregate a total capacity of 10000 MW. The current capacity of India's largest power generator Tata, is about 2400 MW. Plans are to complete the 1215 MW Jharsuguda commercial power project in two phases, with Phase1 to be completed by mid 2009, and Phase2 by mid 2010. This foray into the power sector positions Sterlite to capitalize on the power shortage in India, with supply outweighing demands over the last few years. Rumours have it that the company plans to offer another IPO for Sterlite Energy sometime in the future.

Financials:
Sterlite (SLT) started trading on the NYSE back in June '07, and plans to use its proceeds to fund its recent entry into the electric power market. It has appreciated 60%, since being listed. Sterlite's parent company Vedanta is listed on the London stock exchange - it started trading back in December '03, and has appreciated 460% since. Sterlite is also listed in India on the Sensex, where it has delivered returns of 4000% over the last 5 years.

- 2007 revenue and EBITDA are up 84% and 152% respectively, over 2006.
- Strong balance sheet with net cash position
- Trailing and forward P/E at 12 and 16 respectively
- Debt of $2.2 bn as of March 2007, with 65% being long-term debt
- Revenue/EBITDA graph shown below:

(Source: company website)

Positives:
- Sterlite India is positioned excellently to take advantage of Indian as well as global growth in infrastructure, with rising demand for copper, its primary production.
- With the Indian ecomony growing at 9% in 2007, and predicted to be 10% in 2008, Sterlite revenues and income should grow accordingly.
- Management only invests in debt instruments, where asset protection is guaranteed.

Negatives:
- Vedanta's revenue base is largely in US dollars. With the Indian rupee rising against the dollar, export margins could be hurt.
- Short trading history on NYSE, and no analyst estimates.
- If the global economy goes into a recession, Sterlite's returns might turn out to be lackluster.

Overall:
- 3 analysts follow SLT on yahoo finance, with a rating of "Strong buy"
- Overall factors look good for Sterlite India, and I highly recommend it - buy on dips and average over 2-3 buys


Voluntary Disclosure: I currently do not own a position in SLT, but plan to start long one soon.
Sources: Sterlite corporate website

Mutual Funds in India - Part 1

NRIs who live in US and are considering returning to India at some point, should give a serious thought to investing in India through Indian mutual funds:

-Why mutual funds in India vs. Indian mutual funds in US?
# Long term capital gains taxes in India on equity schemes are 0, thats right, nil. So, considering India's GDP growth, and the fact that this growth shows a promising future, it makes sense to invest in India and take advantage of this 0% long-term capital gains taxes. Long term capital gains tax in US is 15%. Long term refers to any investment over 12 months in both countries.

# Taking a bearish view on the dollar long-term vs. a bullish view on the rupee, you are probably better off investing in funds in India where your rupee will only grow, vs. investing in dollars which probably will fall. This will leave you with a bigger portfolio when you return to India vs. trying to convert all your assets into rupees when returning to India. Five year chart of US dollar converted to Indian rupees is shown below:



-How to buy mutual funds in India?
#The very first thing you will need is a savings account - you can easily open one through either ICICI or HDFC or any other bank offering this service. If you are considering buying mutual funds through your income here, then you need an NRE savings account. If you already have income in India through any source, you can open an NRO account.

#PAN cards are becoming increasingly mandatory for any kind of investment/tax payment in India. To apply for a PAN card, you can fill out an online application here.

# Once you have this savings account, you can buy mutual funds by issuing a check or demand draft from this account, some mutual funds also allow online payments

# You can buy mutual funds through a lot of places like ICICI Prudential, Tata, Birla, Reliance etc.

-NRI Resources
# Reliance has a good guide to NRI investing here

ETF Investing - Part 3 (Addendum to your existing portfolio)

This is Part3 in a multipart series exploring ETF investing. Click to read Part1 and Part2.

If you have already established a core portfolio and are looking for something that would let you get a quick exposure to say, another country, or another asset class, without taking on a significant risk, you can use ETFs. Certain scenarios include:

• International Exposure:

If you own only domestic US stocks, and are looking to diversify into international markets, an ETF like Vanguard All World Except US (VEU) can be a good bet. For that matter, using only 2 ETFs like Vanguard Total Stock Market ETF (VTI) and Vanguard All World Except US ETF(VEU), you can gain a diversified exposure to the entire world's capital markets.

If you are looking for a specific region exposure like Europe or Asia, you can take a look at the Vanguard European ETF (VGK) and SPDR S&P Emerging Asia Pacific(GMF) respectively. If you are bullish on Pacific countries like Australia, New Zealand etc, you can invest in Pacific-ex Japan ETF like iShares MSCI Pacific ex-Japan (EPP).

If you are looking for country-specific exposure like India or China, you have the iPath India ETN (INP) (currently there is no ETF for India, but for all practical purposes, you can consider this ETN as a viable alternative) and iShares FTSE/Xinhua China 25 Index (FXI) respectively. However, if you think that India and China are bubbles, and would like to invest in Malaysia, South Korea or Middle East, you have the iShares MSCI Malaysia Index (EWM), iShares MSCI South Korea Index (EWY) and SPDR S&P Emerging Middle East & Africa (GAF)respectively.

• Market Cap Exposure:

Market caps can be divided into three categories - Large-cap, Mid-cap and Small-cap. Lets say that you have been a cautious and conservative investor so far and have a lot of large-caps like GE, Exxon Mobil (XOM), Verizon (VZ) etc., and now you decide to move into a slightly more aggressive field like mid-caps. However, you might want to be aggressive with minimum risk exposure by diversifying into a broad range of mid-cap companies - and guess what, Vanguard mid-cap growth ETF(VOT) comes to your help. Or you might want to have 50-50 exposure to mid caps and small caps, in which case you can invest in Vanguard mid-cap ETF (VOT) as well as Vanguard small-cap ETF (VBK).

• Sector Exposure:

If you are bullish on a specific sector, but dont want to risk your investment in just couple of stocks within that sector, you can choose to diversify using ETFs. If you are like me, you are probably bullish on oil and energy, and you can gain a good exposure to this sector using Energy Select Sector SPDR (XLE). If you are bullish on world technology, you can take a look at Technology Select Sector SPDR (XLK). If you are bullish on steel considering the rising demand from emerging economies, especially China, you can invest in the Market Vectors Steel ETF (SLX). If you like the prospects of healthcare companies in general, you can research more about Vanguard Health Care ETF (VHT).

• Shorting Exposure:

If you are bearish on the US Economy, just like Asif Suria is, you can still make money by shorting the entire S&P using UltraShort S&P500 ProShares (SDS). This ETF works inversely proportional to the S&P 500 index on a daily basis. If you think that small-caps have had their run and its once again time for the large-caps to run, you can invest in the UltraShort Russell2000 Growth ProShares (SKK). Instead of investing in short ETFs, you can instead also short any regular ETF - however, there are restrictions on doing this within retirement accounts, and thats where the short ETFs come in handy.

Part1
Part2
Part3

Interview with SINLetter's Asif Suria - Part 2

For Part 1 of this interview, click here.

Q. What is your general outlook on economy at this point in time - for the world in general and US in particular?

A. My general outlook for the US is negative. The GDP number that came out recently probably benefited more from inflation than it did from actual growth. Some market participants are speculating that the growth component was probably less than 1%. We have a huge budget deficit, a couple of wars with almost no allies, high personal debt through credit cards and HELOCs, low wage growth and still have to work off the excesses of the housing bubble (I am still seeing "cost per click" bids in the range of $13.83 to $19.53 for the keywords "no equity home loans" on Google). The only bright spot was the unusually high job growth number that came out last week. In case you are interested, the sponsored links for the search term "no equity home loans" on Google are from LendingTree.com (a division of IAC/InteractiveCorp that is hurting right now) and Countrywide Financial (CFC). I sometimes regret not rolling my Countrywide puts into new puts as I mentioned in this blog entry.

As far as the world is concerned, I believe that India and China are currently overvalued but I like Malaysia (EWM), Turkey, U.A.E, Israel and South Korea (EWY).

Q.If you were to recommend one stock for the next 5 years, which one would it be?

A. This late in a bull market I think it may be prudent to actually scale back on positions. Instead of individual stocks, I would prefer buying the water ETF PowerShares Water Resources (PHO) that consists of a group of 25 stocks that cover various water related investments ranging from desalination to bottled water. I picked this ETF for my November investment newsletter and as I usually tend to do, will add it to my personal portfolio as well. If I had to pick a stock, I would pick children's clothing retailer Gymboree (GYMB). I realized that retail stocks are extremely out of favor at this time but I think Gymboree is attractive at these levels.

Q. Do you think individual investors can beat the market over a long period of time like 20-30 years? Or should they just stick to index funds?

A. I believe if investors are ready to work hard and do their due diligence, they can indeed beat the market over a long period of time. I do not subscribe to the efficient market hypothesis and believe that you end up getting the good with the bad in a broad index fund. Index funds are useful tools for investors who have a moderate to low appetite for risk and cannot spend considerable amounts of time researching new opportunities or keeping track of their existing portfolio. They can also be useful tools for downside protection by using one of the UltraShort index funds like the UltraShort Russell 2000 (TWM) as mentioned in the September 2007 investment newsletter. As the Oracle of Omaha Warren Buffett once said "I'd be a bum on the street with a tin cup if the markets were always efficient".