Satyam customer defections and damage control

When it rains, it pours. Just over a month ago, I had turned my eyes toward the Indian IT outsourcing companies, focusing in on any long term opportunities given the Mumbai terrorist incident. It didn't take long for a major storm to hit with Satyam's CEO admitting to cooking up financial numbers. This was right after his company had made an attempt to acquire two other companies owned by his family members. It didn't take long for Satyam's customers to grow weary and possibly defect.

A business week article posted a few weeks ago mentions that Satyam is pretty much in damage control mode trying to assure their customers that they have their act together.

Not suprisingly, Wipro, Infosys, and TCS (Tata Consulting Services) will be doing what they can to seize the moment. Those other companies had better take lead from Mr. Obama not send any gifts to prospective clients :)

The company also has to worry about defections amongst its engineers/coders/systems workforce. Here is a quote from one of Satyam's officials trying to assure customers that everything is ok, "We have told them that there is no need to worry about contracts and that we are here to stay". For a good dose of reality, they had better pay attention to their workforce. Defections of knowledge workers is not easily solved by hiring more off the street. I work in this industry and it is not plug-n-play. Customers concerns may not likely be around the company's governance, but around business continuity with all of the systems they have outsourced to Satyam. No business process or enterprise business system is immune to the risk of a new flock of employees trying to pick up what was left off by previous employees.

So what now? Time to take a look at Wipro and Infosys. And if you're into solid governance and think Obama is going to push for US jobs, you may want to look at IBM which posted a surprising strong quarter and has a deep and established global services division.

Dissecting the ISM Manufacturing Index

This past week the Institute of Supply Chain Management (ISM) released their Manufacturing report on business. It wasn't pretty, with a reading of 32.4% (See my previous article on how to interpret these index numbers). Levels that haven't been seen since the mid 70's and early 80's.

So why dig into the report? Well, it only takes you 10 minutes to read it, and it reveals other bits of information that can help frame your perspective on the environment. Most folks will just read the number 32.4% and say, "OMG, that's bad" and move on to water cooler talk stirring up mounds of fear. Don't get me wrong, things are not pretty. However, the last time I dug into an ISM report it was for the Non-Manufacturing sector way back in February 2008. The Dow dropped 370 points the day the report came out. Digging into the report revealed one sector that was exhibiting growth (educational services). That led me to the doorsteps of DeVry and Strayer, of which the former is part of the Ten Grand Portfolio, and doing well I might add. Unfortunately there aren't any pretty stock gems in December's Manufacturing report, but there are 3 things take note of.

1. Cycles and Long Term Growth

Could we see something similar to the 1980's? A double dip in the PMI index? No one can predict this, but so far it looks like we are going to touch similar levels based on our financial mess which hasn't stabilized yet. I thew up the Dow Jones Industrials to to compare against these growth/contraction periods. Over the long haul, the Dow continues to grow, which is why you hear countless remarks about investing for the long term from your financial advisor.

2. The economy has more to suffer
I'm not an economist by trade, but I do know the source of any healthy economy are jobs. When purchasing managers tell you things on the employment front aren't looking good, it means layoffs are coming. The precipitous drop from November to December was steep. Companies can't walk into work and within a few weeks cut jobs. Layoffs require planning time. December's reading was dismal. I expect follow up actions for Q1 for the manufacturing sector.

3. Prices are dropping
This was the only bright spot in the entire report. Prices for materials to make stuff are dropping. Survey respondents have been reporting paying lower prices this past month. Everybody was getting squeezed earlier in the year when oil was in the $140/barrel range. You can see from the Manufacturing Prices Index chart prices falling sharply, a result of slowing materials demand.

So what does this mean for the Ten Grand portfolio? Don't move, with the exception of picking up EWC (read yesterday's comments), and doing quarterly and equal installments into the S&P 500 (SPY)

O' Canada, a Roth IRA vehicle for Canada (TFSA)

The other day I was watching the NHL Winter Classic on TV in Chicago. As much as I would have liked to attend the game in person, it was pretty cool to see O'Canada sung inside Wrigley. I said to myself, "How cool is that?". As I shed a tear from my eye, I reminisced about my days growing up in Canada, the street hockey games, the great Canadian accent... and yes, the poor retirement vehicles and crazy taxes (Thank you Mulroney for the lovely GST). My only hope was the RRSP (similar to your 401k in the States). Upon my graduation from college, I had no incentive to lay my neck out on the line to have a majority of my income taxed away. So I moved down south to Corporate America. Call me a traitor, it was simple economics in my eye. Their was much debate back then about Brain Drain, but that's a topic for another day.

Fast forward to 2009, and US is is getting kicked really hard in the groin. More like a few kicks, a knife stab, and other punishing attacks to this region of the body. The recent ISM manufacturing report shows that our US troubles will not go away any time soon. I suspect people will be moving back into oil and gold as a hedge against further US weakness in the year ahead after the recent sell off. Although EWC has a high composition of financial institutions, they are more fiscally responsible than their US counterparts and have faired better than the likes of Citi.

Now here is the kicker... I can't take credit for this, but my relative who works in the investment industry informed me Canada just opened up a new Tax Free Savings Account (TFSA) for all Canadians. Think of it as your typical Roth IRA in the US. You put money in, invest it, it grows tax free, and you withdraw in retirement years without the tax penalty. This new influx of money has to go somewhere, and some of it will go into EWC's composition of companies. Much thanks to my friend up North for the insight. All the best in the new year.

Time to pick up some EWC for the long haul on Monday. Now if only Mr.Harper can find a way to eject himself, and have a new Prime Minister herald in better income tax brackets for hard working Canadians. It'd be nice to sing O'Canada inside Air Canada Centre one day, rather than at home in Chicago.