Glass of global economy half full or half empty?

Mar 28, 2012

In this issue:
» How you can beat Wall Street at its own game?
» US taxpayers are now bailing out Europe as well
» Is the coal scam a nonsense?
» Real estate developers can go to jail if they mislead consumers
» ...and more!

---------------------------- Raise your voice before this turns into yet another scam! ----------------------------

When millions don't even have food to eat, our government is thinking about bailing out multi-millionaire CEOs!

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Does the name Jim O' Neill ring a bell or two? Yes, he is the same guy who coined the famous acronym BRIC to describe a group of emerging nations. Looks like Mr Neill is back with another prediction. And this time, he has tried to cast his prediction net a little wider. In other words, he has chosen to comment on the entire world economy. And what do his comments look like? Well, he believes that he continues to see the world glass more half full than empty. Put differently, the global economy is in better shape than most people think and investors would do well if they remain optimistic as per him. And he is not alone. Another market veteran, Barton Biggs, is in the same boat as he boosted his bullish bet on stocks recently.

So, that's the glass half full perspective. However, it would be a mistake to jump right into the markets based on these predictions alone. For the list of those who see the glass as half empty is equally illustrious. Take Jim Rogers for example. Only last week he came out with a prediction that there is a big trouble lurking ahead and the world economy shall go through a very rough phase. Then there are people like Marc Faber who are equally gloomy.

Going through these contrasting predictions could confuse even the most level headed investor we believe. Fortunately though, there is a way out of this predicament. You see, it just can't be known in advance all the time how the economic environment would unfold. Thus, it makes immense sense for an investor to build his portfolio in such a way that it is able to withstand both the environments better than most other investors. And this can only be achieved by building a diverse portfolio of stocks with only the strongest companies bought at reasonable valuations. Thus, most of an investor's time should be spent spotting such opportunities and investing in them right away irrespective of how the future looks. Trust us; this strategy has a proven track record. You would do very well for yourself if you shut out the noise out there about the future market environment and focus only on what is under your control i.e. unearthing fundamentally strong companies.

Is worrying too much about the macro economy a right thing to do? Share comments with us or you can also comment on Facebook page / Google+ page.

 Chart of the day
So, the state of Goa has thrown the gauntlet it seems. Will the other states follow suit? We are referring to Goa's decision to slash the petrol prices in the region by bringing down the tax rates that it charges on sales of petrol. As per estimates, this is going to bring huge relief to the citizens as the cut amounts of savings of Rs 11 per litre. As today's chart of the day shows, the relief could be even higher in some states like AP and Punjab that are believed to levy an even higher sales tax/VAT rates. If only these states can take a leaf out of Goa's book.

Source: Petroleum Planning & Analysis cell

Very recently we came across an inspiring article by value investor Chris Mayer. He recalls, in a very candid manner, some of his interesting experiences with Wall Street analysts. As it turns out, even the brightest of minds tend to lose rationality when faced with peer pressure. Warren Buffett terms this kind of behaviour as following the 'institutional imperative'. Though Mr Mayer's opinion pertains to Wall Street people, it applies just as perfectly to all the financial boulevards of India. He points out some very simple yet powerful lessons for investors. One, it is best not to subscribe to any crowd. Stock markets are certainly not a place to find safety in numbers. Which way to go then? Follow your own investment approach. Of course, this is not going to be easy. There will be times you will see others cheering a trend and even making some quick bucks riding it. That may put seeds of doubt in your mind about your abilities. There will be times when you feel like a fool. But hang on to the basics of value investing. Be disciplined. And there is nothing that can stop wealth from pouring into your treasure chest.

It is bad enough that the US Fed is saddled with massive debt on the back of its never ending asset purchase program and quantitative easing. But it has now taken a step too far and bought some amount of European sovereign debt too. This effectively means that the US taxpayer is bailing out Europe as well.

The US obviously does not seem to have learnt its lesson. Two rounds of quantitative easing hardly spurred growth in the flagging US economy. Instead job growth is muted and unemployment continues to remain high. All of which has led to reduced consumption despite the Fed keeping interest rates low. Why in such a situation then would it choose to monetize European government bonds, is a mystery. Europe is also in the same soup as the US and is struggling to keep its head above water as countries brink on the edge of bankruptcy. Quantitative easing did not do much for the US and is hardly likely to bolster Europe's fortunes either in the longer term.

Imagine you are heading a large company. Amongst many responsibilities, you would be in charge for growing the company's business. For formulating future strategies. For making sure that the company's clients are well-serviced. And most importantly for profit maximisation! But, also imagine that with all this, you do not have the powers to make decision and execute plans.

The senior managements of some of the largest public financial companies - mainly LIC, SAT, UTI, GIC, IRDA and NIA - in India are going through similar pangs at the moment. For a period ranging from 3 to 14 months, their ships have been sailing without a captain. In fact, certain companies are experiencing their most difficult phases presently. Since the top positions in these companies have not been filled formally, the 'acting' senior managements have their hands tied to a certain extent. But what are surprising are the reasons for the same to occur! They vary from CBI probing the top official due to alleged irregularities while heading previous organisation; vacancy not being filled due to very high qualification requirements; salary expectations not being met; plain delays in decision making considering the government has had its hands full with others issues. This is yet another example of how policy paralysis and government inaction is having an effect on these institutions, which at the end of the day have been formed to serve public interest.

Time and again we have spoken about the need of having a real estate regulator in India. Due to rampant corruption prevailing in the sector, there was a strong need to protect the interest of home buyers. And this could have been done only through an autonomous body.

It seems that something is finally being done. The Union Ministry of Housing has proposed to come out with a real estate bill. The draft legislation contains stringent laws against the builders who bully customers. For example, the draft proposes to jail the promoters if they will fully do not comply with some key provisions related to the project. There is also a penalty clause for giving false information to buyers with respect to the project. There are several other provisions in the act which will tighten the noose around corrupt builders. Once the act is approved, real estate regulatory authority will also be formed in each state. We believe this a welcome step by the government. Not only will it reduce corruption in the sector but it will also improve transparency over the long run.

The value of nothing is easiest to calculate. The answer is obviously nothing. This is not rocket science. And as per First Post this is exactly what the new coal scam is all about. A lot of hue and cry over nothing. The Comptroller Auditor General (CAG) has come up with a figure of US$ 210 bn as the loss to the exchequer due to the coal scam. It says that if the coal industry assets were auctioned then the government would have received more money. The argument has one major underlying assumption that companies particularly the foreign players, wish to participate in the Indian coal sector. But the truth is that the sector does not really exist in the country. It is a monopoly of the government owned Coal India. Lack of secure rights to land and assets is the biggest hindrance that prevents foreign players from entering India's coal sector. Therefore, when no foreign player wishes to participate in the auction then how can the price of the mining licenses allotted be decided by a notional auction price that a foreign company is willing to pay? Makes sense, isn't it?

Meanwhile, indices in the Indian stock markets started the day on a weak note and went down further as the day progressed. Sensex was trading lower by 115 points at the time of writing. Heavyweights like ICICI Bank and Infosys were seen adding maximum selling pressure. Asia too closed mostly in the red whereas Europe has opened on a mixed note.

 Today's investment mantra
"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." - Warren Buffett

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    1 Responses to "Glass of global economy half full or half empty?"

    Anupam Garg

    Mar 28, 2012

    m getting highly unsure about Warren Buffett's quotes when markets have been in the same limbo for years altogether...the level of indian market indices 2 years ago is the same today...volatility being sky high, i wonder if short term trading is the only way to make money now....if not mistaken, mr. jhunjhunwala also acceded to this fact...time to change the game?

    Like (1)
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