Could this trigger second round of recession? - The 5 Minute WrapUp by Equitymaster
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Could this trigger second round of recession?

Jan 28, 2010

In this issue:
» US Fed keeps interest rate at near zero
» Sectors that have beaten S&P 500 for three decades in a row
» Telecom industry on the brink of a consolidation
» Higher interest rates no solution to food problem says minister
» ...and more!!

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00:00
 
US Federal Reserve, the most important monetary body in the world concluded its two day meeting yesterday. No one was expecting any surprises on the interest rate front. And the script unraveled as per expectations. The Fed maintained interest rates at near zero levels and vowed to do so for an extended period of time. But there was another important development. The Fed signaled its intention of unwinding the massive monetary stimulus that it had undertaken during the peak of the crisis.

In other words, it restated its intention to stop buying US$ 1.25 trillion worth of mortgage backed securities in March. Now, this is likely to be a watershed event in global financial history. It should be remembered that stimulus unwinding of this magnitude has never taken place in history before. And hence, the US Fed may not be quite aware of how to go about it. The Fed has certainly not given any indications of how or when it plans to start pulling back the enormous money it has pumped into the economy over the last two years.

But there is every chance that a mistake could be made. The money involved is huge and the economic recovery still fragile. So, is the transition going to be smooth or will the world's largest economy head into another recession on account of the US Fed not injecting any more liquidity in the system? Our bet is more on the latter than the former. And if it indeed does happen then what happens to Indian stocks? Well, there could be impact no doubt. But it will be restricted to Dalal Street and not impact Main Street a great deal. In other words, it could turn out to be a good opportunity to invest in the Indian long term growth story.

01:01
 Chart of the day
Today's chart of the day depicts the sectors that have beaten the S&P 500 index in the US for a period stretching as long as thirty years. Consumer staples and healthcare have been the sectors that have outperformed the index by a fair margin. Please remember that it is sectors and not individual stocks that we are talking about here. Thus, if any sector manages to beat the general index for not one, not two but three decades in a row, then there is indeed something in the business model of the sector itself that gives it such an edge.

It should be noted that most companies in the consumer staples and health care space come equipped with strong pricing power, a sustainable moat, rock solid balance sheets and virtually perennial demand for their products. Thus, if one is looking to beat the average indices over a long term period, these are the qualities that one should look for in a stock.

www.ritholtz.com

01:44
 
Expert after expert has warned of China's property market entering bubble territory. Real estate prices in China had boomed in recent times fueled in part by increased lending by banks. Fearing serious repercussions with this bubble bursting, the Chinese central bank chose to rein in liquidity by raising the reserve requirements of banks. What is more, Chinese banks have now become vary of lending to the real estate sector and are strictly stepping up the scrutiny of property loans. This will definitely have an impact on the Chinese property market. Having said that, Hang Lung Properties Ltd., the Hong Kong developer that is spending US$ 5.1 bn building offices and malls in China, is of the opinion that the country should be able to bring down real estate prices. It has also said that the Chinese government has some 'tools' that it can employ effectively to manage home prices lower. The country has already given a taste of one such tool. It remains to be seen what others it has in store.

02:19
 
The telecom price war seems to have started hurting both existing and new players. However, a blind chase for new subscribers at the cost of profitability cannot sustain for a long time. This is what Sunil Mittal, chief of India's largest mobile company Bharti Airtel also believes. In an interview with a leading business channel, Mr. Mittal has spelled his agony very clearly. And he has hinted at consolidation within the industry over the next two years.

As he says, "...something has to come, blood-letting has started to happen and there is enough blood to be seen on the streets. Market caps of companies have halved, companies are making losses after so long. Only a few who have the scale are doing okay." He is of the belief that the industry cannot sustain with 13-14 players competing for the market share. Something's got to give!

We share Mr. Mittal's views. We expect some of the new small mobile players to capitulate over time. This will happen as their losses will mount and eventually they will end up being acquired by a bigger operator. As such, the phase of industry consolidation is not very far away. And it is very likely, or let us say it is only possible for well established players to emerge fitter and stronger from this.

03:03
 
As per Bill Miller, the iconic fund manager who beat the market for 15 years in row, the large US stocks are still undervalued. True, the credit crisis left a severe dent in his track record, as his call on financial stocks turned out to be wrong. But today he believes the economic recovery has truly begun and corporate profits will soar by 25%. Hence the top 10 stocks on the S&P index should be trading a price earnings multiple of 14 to 18. Currently they are at 12. At a time when most investing gurus are turning towards emerging markets, Miller backs companies like IBM, General Electric and JPMorgan Chase. Closer home, we do not find many front line companies at reasonable valuations. Hence our outlook is a lot more subdued.

03:30
 
Raising interest rates may not be the solution to all problems. Atleast agriculture minister Mr Sharad Pawar believes so. The concerns over RBI's next move may have already spooked markets. But the person who is presiding over the basic worry of rising food prices seems to be quite sanguine. He says that the problem is with food supply and not interest costs. As the availability of basic food products improve, food inflation will be automatically tamed. Coupled with the drought like situation this fiscal, poor public distribution has played havoc with food prices. The minister seeks to resolve this soon. Meanwhile the RBI is all set to ensure the growth and inflation are reasonably balanced in the near term. We are all ears!

03:55
 
An interesting headline in a leading business daily caught our attention recently. It went something like 'Half a million chasing 3,400 homes'. It referred to the Maharashtra Housing and Area Development Authority (Mhada) selling some residential low cost flats in central and suburban Mumbai. I fact, it went on to quote a person from the Mhada who said that there are about 80 to 100 families applying for each home on sale.

Now what's interesting about this is the fact that the big real estate players' profits continue to suffer from the after effects of the slowdown supposedly due to demand having taken a hit. But it is plainly evident that demand for affordable housing continues to remain exceedingly high in India. It is just that these builders continue to remain hell bent on keeping prices at the stratosphere. And in the process, completely ignore such a large market that can be theirs for the taking.

04:27
 
Meanwhile, Indian markets broke their losing streak today and were trading significantly in the positive at the time of writing. Banking, auto and metals counters were seen leading the effort today. Most Asian indices also ended in the positive today and a similar trend is being seen amongst European indices currently.

Gold was seen trading at US$ 1,090 per ounce. While the yellow metal has come off more than 9% off its highs, we are positive on the long term gold story. We continue to believe in its perfect hedge against inflation qualities and urge our readers to make it a small portion of one's portfolio.

04:52
 Today's investing mantra
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises

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8 Responses to "Could this trigger second round of recession?"

T.Ramamoorthy

Feb 12, 2010

The articles are unbiased and give opinion based on international and indian economic data. Please continue this kind of articles.

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V.VIJAYAMOHAN

Feb 3, 2010

When I first wrote a few months ago in money control dot com about the Telecom price war and its likely effects on the profitability of telecom stocks, many existing investors were angry and were not willing to digest the info. Now, it is coming True. Investing in Equities is all about spotting the right stocks for investing and also about - getting out of a stock which is risky.

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Madhav Pande

Jan 31, 2010

This is the best studied article on present global economic situation and its likely impact on Indian Economy. This article serves as a direction for equity and debt market players in India

Like 

VINEET KULKARNI

Jan 28, 2010

WELL JUDGED AND CALCULATIVE ANALYSIS OF NEWS PERTAINING
TO THE WORLD ECONOMY.
KEEP GOING.

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N.L.Prajapati

Jan 28, 2010

Excellent report, Keep it up.

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Panduranga Mukunda Padiyar

Jan 28, 2010

I am getting the article of Wrapup.

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SHYAM

Jan 28, 2010

HI,

I AM A REGULAY READER OF THIS EDITION. I ALWAYS APPRICIATE UR ARTICLE.
PL GIVE SOME HINTS ABT THE INDIAN MARKET, WHETHER ITS GOING TO BEARISH OR BULLISH. CAN I STAY WITH MY HOLDINGS OR EXIT.

RGDS
sHYAM

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K.D.Viswanaathan

Jan 28, 2010

Cut-throat competition - virtually a price war of recent origin - in the telecom sector, aimed solely at broadening the service provider's subscriber base at the cost of profitability, is out-and-out an unhealthy development. The observation made in this regard by Sunil Mittal, Chief of Bharti Airtel, is most pertinent and assumes great significance. The small players in the field will certainly vanish soon.

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