"Harshest operating environment in decades"

Jan 27, 2009

In this issue:
» Pfizer's US$ 68 bn deal
» Buffett's words of wisdom
» RBI leaves rates unchanged
» 65,000 jobs cut
» ...and more!

The latest victim of the financial crisis, the worst since the Great Depression, has been American Express (Amex), whose December quarter results have been impacted by the ongoing recession. The company's cardmember spending fell 10% YoY, while delinquencies of 90 days or more rose to 3.1% of Amex's managed US lending portfolio, from 1.8% in the previous year. The portfolio's write-off rate climbed to 6.7% from 5.9% in the third quarter. The outlook for 2009 remains bleak as well with Amex's CEO Kenneth Chenault expecting cardmember spending to remain soft due to past loans which are still due and write-offs rising from current levels. In fact, he has called the current economic scenario as the "harshest operating environment in decades".

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'Acquisitions' seem to be on the agenda of the global pharma industry; especially big ticket ones. The world's largest drugmaker Pfizer will acquire Wyeth for a gargantuan US$ 68 bn making it the fourth largest company by market value after Exxon, Wal-Mart and P&G. The reasons why Pfizer is going for it are manifold. Given that global pharma majors are finding it increasingly difficult to replenish their pipelines with new path breaking drugs, many of them had already started looking to acquire either a portfolio of products or acquire smaller companies which had a few promising drugs in their pipelines but did not have the requisite funding.

Secondly, Pfizer's major drug Lipitor, which is the largest drug in the world with global revenues of US$ 12 bn is set to lose its patent in 2011. And the company does not have another blockbuster to fill Lipitor's shoes. Thirdly, Wyeth has some strong drugs in its pipeline such as blockbusters Enbrel and the vaccine Prevnar and more importantly a portfolio of biotech products and vaccines where the chances of generic competition are lower. This mammoth deal will most likely trigger a wave of consolidation in the industry as rival companies also look to grow in size to compete.

But all is not bright and rosy. Pfizer CEO plans to cut US$ 4 bn in combined spending by 2012 which will involve slashing 15% of the companies' combined workforce. Further, Pfizer will slash its stock dividend in half as the company borrows US$ 22.5 bn to help finance the deal from five banks; four of which recently received US government bailout money. At the end of the day, integration will be the key for Pfizer especially in an environment which is fraught with uncertainty as recession deepens and the credit crisis shows no signs of easing anytime soon.

Forex losses have continued to afflict major Indian companies during the December ended quarter. With the volatile moves of the rupee baffling everybody, forex losses this quarter have only mounted. As reported in a leading business daily, around 30 companies so far have reported a combined forex loss of Rs 37 bn for this quarter. These losses are generally due to cancellation of forward contracts at unrenumerative rates and the revaluation of their foreign currency loans. While more than two thirds of the same are due to hedging practices, the remaining are due to revaluation of dollar liabilities. Not surprisingly, IT and pharma majors have borne the maximum brunt of forex losses given that these sectors are highly export oriented.

China's economy may be slowing but the country has achieved another milestone. According to the Economist, the number of people using the internet has crossed the 1 bn mark out of which 180 m internet users are from China. This accounts for around one sixth of the world's online population catapulting China to the top of the heap by displacing the US. The image below gives a clear idea of the same.

Source: The Economist

The RBI came out with its third quarter review of the monetary policy this afternoon. It has stated that while the crisis that originated in the financial sector in the US spread almost immediately to Europe, it did not disturb the fundamental strength of banking entities in developing markets. The latter were infact materially impacted by three factors - capital flow reversals, drying up of overseas lines of credit and significant deceleration in global trade reducing the demand for exports.

Projecting a real GDP growth of 7% YoY for FY09, the review outlined the risks to the growth in the service sector barring communications and freight movement. On the positive side, it expressed hope that the sustained performance of the agricultural sector, fiscal stimulus, falling global crude oil prices and softening of domestic input prices such as energy, cement and steel would have a positive impact on industrial production in the coming months. The central bank expressed satisfaction over the curtailment of inflationary pressures and projected a decline in inflation level (measured in terms of WPI) to 3% by the end of the fiscal. The review has also stated that the Economic Advisory Council had projected the consolidated fiscal deficit at 8% of GDP for FY09 (budget estimate of 2.5%) including all the additional expenses.

While not making any changes in the key policy and reserve rates, the RBI has extended the liquidity window available to banks and NBFCs under the special refinance facility upto September 2009 as against June 2009. While the third quarter review of the monetary policy was a non event of sorts, the RBI's random policy actions in the past suggest the central bank's strategy to take calibrated measures keeping in view India's specific economic context.

The Oracle of Omaha, Warren Buffett made a TV appearance last week when he was invited to speak at one of the late night business shows at a US based channel. The host of the show managed to pick Buffett's brains on wide ranging topics, right from the most important thing that President Obama needs to fix in the economy to the US trillion dollar deficits and whether he is seeing opportunities in the US market right now.

On being asked what is the most important thing that President Obama needs to tackle in order to kickstart growth in the US economy, Buffett answered, "Well we've had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there's no magic bullet on this. They're going to throw everything from the government they can in". On being questioned about the length of the current recession, he answered in the all too familiar 'I don't know' tone as he is seldom known to have made macroeconomic forecasts. However, he did seem optimistic that things would turn around and had the following to say when he asked whether this is the time to be greedy.

"Yeah. My greed quotient has risen as stocks have gone down. There's no question about that. The cheaper something gets that you're going to buy, the happier you feel, right? You're going to buy groceries the rest of your life; you want grocery prices to go up or down? You want them to go down. And if they go down you don't think gee I got all those groceries sitting in my cabinet at home and I've lost money on those. You think I am buying my groceries cheaper, I am going to keep buying groceries. Now if you're a seller, obviously prices are higher. But most people listening to this program, certainly I, myself, and Berkshire Hathaway, we're going to be buying businesses over time. We like the idea of businesses getting cheaper".

Thus, if the frame of mind of one of the shrewdest investors around is any indication, it does look like a good time to go shopping for stocks.

Its official. Timothy Geithner has become the new US Treasury Secretary, a position that has thrust him into one of the most challenging financial jobs in the world currently. He has also had a rocky road to election, his victory margin being the narrowest it has been since the Second World War as charges of underpaying Federal Taxes forced some Republicans as well as Democrats to vote against him. But now, Geithner will have to swing quickly to action. Managing the second half of the US$ 700 bn bank rescue program and the US$ 825 bn fiscal stimulus proposal will be his topmost priorities right now. He is also seen to be a supporter of a "strong dollar" policy, as was evident from his comments on the issue last week, which had raised quite a few eyebrows. It will be interesting to see how he manages to cope up with all of these issues. He will indeed remain one of the most closely watched men as upcoming chapters of the global economic turmoil begin to unfurl.

A report by the International Herald Tribune shows the number of victims that the credit crisis claimed in just one day (yesterday). This Monday saw an announcement by companies across the world to cut about 65,000 jobs in total, a staggering number when you think of how many more people, in terms of the families of each of those people this will affect. The world's largest maker of construction and mining machinery, Caterpillar, itself announced 20,000 layoffs on Monday. Corus, recently acquired by Tata Steel, too announced 3,500 job cuts.

US companies have shed a total of 2.59 m jobs since the recession began in December 2007. Unemployment surged to 7.2% in the country last month. As Obama puts it, "These are not just numbers on a page. As with the millions of jobs lost in 2008, these are working men and women whose families have been disrupted and whose dreams have been put on hold."

An international MBA is considered a passport to working in the developed world. But at a time when the financial turmoil is taking a heavy toll on the Western world, many Indian students with brand new MBA degrees from international universities are coming back to work in India.

This is a negative development for MBAs from Indian campuses. After all, there will be more competition for the plum jobs. As for the homeward bound candidates, they might end up discovering that the job scenario in India is also not very bright given that there is a slowdown in India as well.

We believe that the job market had turned irrational along with the financial markets. The current return to reality will impart many hard lessons to current job seekers. After all many before them seemed to get their dream jobs without a hitch.

One of the best indicators of positive market sentiments is when there is a flood of initial public offerings (IPOs). Going by that indicator, the end of 2009 might bring some cheer. After all, towards the end of 2009, corporate India is gearing up to raise nearly 4 times the amount it collected in entire 2008.

As per a leading business daily, IPO proceeds to the tune of Rs 775 bn are lined up during this period as opposed to Rs 220 bn in 2008. The IPOs of Reliance Telecom, UTI Asset Management, NHPC and Oil India are among the most anticipated. However, other Asian giants like China, South Korea might witness even larger offerings.

The RBI's announcement of keeping the key policy rates unchanged wobbled the Indian markets to some extent during today's trading session. But overall the BSE-Sensex closed higher by around 330 points (3.8%). Metal, power and IT stocks led the gainers on the BSE today. The Asian markets ended on a mixed note. Japan's Nikkei gained the most in the region, up by almost 5%. The European indices have opened in the red currently.

Today's investing mantra
"Ben's Mr. Market allegory may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising 'Take two aspirins'?" - Warren Buffett

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