Doomsday almost happened

May 7, 2010

In this issue:
» The crash that almost happened
» Supreme court verdict on the Ambani gas dispute
» Indian exports hit by the Greek crisis
» Indian consumers, the most confident in the world
» ...and more!

------------------ Are You Ready For The Coming Stock Market Crash? ------------------
The stock markets have crashed by 20%.
Trading on the exchange has been suspended.
Television anchors -- the cheerleaders for the rally thus far -- are looking as though they have seen a ghost.
But here's what matters the most - "How have YOU been impacted by the crash?"
If you want to be one among the very few who are geared up for any adversity, then, you need to see this right away... click here...

You are alarmists. Some people say that to us, when we point out how unsustainable the current markets look. From a macro perspective, the recovery - be it economic or of stock market prices - has just happened too quickly. And based on what? Government printing presses around the world, which have pumped in unprecedented amounts of liquidity into the system. From a micro perspective, we look at the valuations of companies on a case to case basis. Most investment-grade companies here in India are richly valued.

So it does not surprise us at all that the Dow crashed by almost 1,000 points yesterday, before bouncing back. Scaring the daylights out of investors around the globe. They now blame it on a glitch in computer algorithms used for trading. Sure.

Actually, Bill Bonner has been predicting such a decline in stock markets for a while now in his daily column The Daily Reckoning. He calls it the 'crash alert'. It is important to note that Indian investors will not be immune to a 1,000 point drop in the Dow. The US is much too important in the financial world for that. But a sharp decline would not be such a bad thing. It would provide Indian retail investors with an opportunity to buy into high quality companies at a reasonable price. An approach we strongly recommend.

 Chart of the day

Source: PTI

For a growing economy like India, fossil fuels are vitally important. But also problematic. India is heavily dependent on imports for them. They also damage the environment. That brings alternate sources of energy into focus. Forms like nuclear, solar and wind energy. But we lack any great sense of urgency about them. As the chart of the day shows, nuclear power generation in India has not gone by much during the last decade. True, it can be attributed to the lack of domestic supplies of nuclear fuel in India and the global isolation India faced post the Pokhran blasts. Let us hope that with progress on the nuclear treaty, India makes rapid strides in this important source of alternate energy. India needs all the power that it can get.

If you thought the 9% drop in Dow was alarming, there emerged a company in India that was down in the region of a whopping 22% even as we write this piece. The company answers to the name of RNRL and is a victim of the landmark ruling by the Supreme Court in the fiercely contested Ambani gas dispute. The Supreme Court has given its verdict and has ruled in favour of the senior Ambani.

As per the verdict, RIL does not have absolute right over gas and hence, the price is subject to government approval. As such, it is for the government to evaluate the price of fuel. This effectively means that all the routes for the junior Ambani to broker the deal at a lower price are effectively shut now. It will have to hammer out price agreements with RIL as per the diktat of the Government. Little wonder, investors took ADAG group stocks to the cleaners as the SC ruling would significantly impact the cash flows of the group.

They are the guys who keep their noses to the grindstone when it comes to searching for value. And their entry and exits often serve sufficient cues for the less informed investors. Particularly, because their interests lie in companies that do not have enough public disclosure. We are referring to the private equity and venture capital investors. PE and VCs, for short, these investors are known to be pro-value and have a tendency to exit as soon as they achieve a reasonable IRR (return on investment). Hence we were not surprised when a business daily today reported that a host of foreign PE and VC investors are lining up for mass exit from India. Interestingly, most of them had invested in India around four to five years back. And their decision to lock in gains seems in line with the opinion of most value investors who eye the current market valuations with caution. Probably this should serve as a subtle indicator to retail investors too.

What do Nestle, PepsiCo, Nokia, Unilever and Coca-Cola all have in common? Yes, they are all large MNCs. Behemoths in their respective industries. But apart from that, they all have their eyes set on India. Actually, rural India to be more precise. With little scope for growth left in the saturated developed countries, the seriousness with which these MNCs are looking at rural India is unprecedented. The growth potential is enormous in India's vast and underpenetrated hinterland. Average incomes are slowly rising higher. The rural folk are coming out of their shadows, and beginning to consider the prospect of leading a better life. These fledgling steps towards consumerism might bode well for these companies. But at the same time, a lot of strategizing is required. The typical rural consumer is finicky and extremely price conscious. And reaching such a customer in an efficient and low cost manner is perhaps the biggest challenge. More so considering the dismal state of infrastructure. For those who are successful, the potential for reward nonetheless remains immense.

It's a small world. This statement was further reinforced as the Greek debt problems begin to threaten Indian export growth. After notching positive growth for the past 5 months, it had started to look as if the 15% YoY targeted growth in exports would be met. However, the recent development in Greece has prompted the Indian government to confess that Indian exports are not out of the woods yet. The truth is, in spite of all the warning signs, no one factored the Greek problem into the exports equations. What started off as a problem in a small country in Europe is threatening to spread across the continent, affecting countries whose major exports are to Europe. We believe that until there is sustainable economic recovery in US and Europe, Indian exports will continue to suffer.

Indian consumers seem to be an optimistic lot. As per a survey conducted by Nielsen, consumer confidence is strongest in emerging Asia Pacific and Latin America. And the icing on the cake is that India tops the table as the country where consumer confidence is the highest. Not surprisingly, this is not the case in the US and Europe. In fact, considerable doubt prevails in the minds of European consumers. After all, they are grappling with recession and the euro zone debt crisis. Asian economies have recovered remarkably well from the crisis. They are now the envy of their richer counterparts due to the strong growth in GDP that they are expected to log in the coming years. Overall, perceptions of job prospects and the state of personal finances have been witnessing an improvement. However, this has not paved the way for consumer spending due to rising urban housing costs and a strong saving tradition. Overall, Asia will have the edge over Europe and the US unless the latter manages to stage a dramatic recovery. That, alas, does not seem to be the case.

Meanwhile, Euro zone debt fears coupled with the Dow's intraday plunge resulted in a shaky start of trade for the BSE Sensex today. Despite constant attempts to cut the losses, it languished deep in the red during the day. At the time of writing, amidst broad based selling, the BSE-Sensex was down 190 points. Only energy stocks managed to stay in the green. The Indian stock market seemed to be moving in tandem with other Asian markets, most of which also displayed weakness and closed in the negative. European markets too opened in the red.

 Today's investing mantra
"I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going." - Peter Lynch

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5 Responses to "Doomsday almost happened"

Dr P Mulay

May 9, 2010

The western economies are at the stage of ' THE END GAME'. The time of leverage, fiat currency and fractional reserve is all gone.

Buy gold and protect yourself.



May 8, 2010

Santhana is absolutely RIGHT. Let us not repeat the mistakes of the dirty western world with its bagful of bad food promoted with all the gusto of modern artcraft aided by our not so consentious filmstars.


Adrian Saldanha

May 8, 2010

The great Economist Nouriel Roubini had predicted the housing crisis in the US 2 yrs in advance and now he is critical of the Govts.bailing out loss making companies. Would like to read more articles on this great man.


Mayank pandya

May 7, 2010

Excellent point about Big Gaints spending in Indian Rural market,It can help these location to grow and certainly indian standard of living will improve. Thanks to these companies for their decesion of spendings in Rural market.



May 7, 2010

Do you mean to say having a coke and eating Pizza or KFC is better life? Our rural folk are better off without these hazzards to health and purse. What little more they earn, would be squandered on these junk because of their catchy advt. Western world is paying for all there indulgence with obessity and health problems. Let us not repeat their mistakes. Warn the rural folk not to fall prey.

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