Blue-chip stocks on a tear. Beware!

May 9, 2009

In this issue:
» 8 Sensex stocks double from their lows
» Is the US staring at a 'lost decade'?
» Krugman warns us to be very afraid
» Even Buffett isn't perfect
» ...and more!

If the 54% rise in the Sensex from its one year lows has taken you by surprise, wait until you hear this. As per a leading daily, as many as 400 companies have seen their share prices double from their lows! And the list is restricted not just to the small cap and mid cap stocks where all it takes for the prices to shoot is a little bit of buying. Even 300 pound gorillas like Reliance Industries, SAIL, ICICI Bank and Sterlite have been beneficiaries of the investors' largesse.

With central banks and governments across the world taking concerted measures to pump liquidity into the system and announce fiscal measures, investors have become hopeful that the downturn is not going to last as long as it was previously expected and this explains the mad rush for equities.

But we believe that fundamentals don't seem to be driving the stock markets these days simply because the fundamental issues have not yet gone away. The world continues to fight a financial crisis, economies are in doldrums, policymakers remain confused as to what will be their next step and industries are going slow on expansion given that they remain unsure about the demand environment. From a long-term perspective though, we believe that Indian equities, especially the blue-chips hold a lot of promise.

Here's something very interesting that comes straight from the man who saved India. Dr. Y.V. Reddy, the former governor of the Reserve Bank of India and the one whose policies are credited to have saved the Indian banking sector from the gallows of the financial crisis, has revealed the secret of his success as a central banker. In an interview with The Economic Times, he has said, "I cannot define God, but I can recognise the devil. And whenever I see the devil, I take precautionary measures to avoid being affected."

We wonder how wonderful place the financial markets would have been only if other central bankers had this ability to recognise the devils!

Critics in the US just do not seem to be getting over the obsession of comparing the current plight of the US banking system with that of the Japanese banking system of the 1990s. The latter as we all know had to endure what is now famously known as the 'lost decade'. The results of the recent stress tests have given them some more ammunition. Many believe that at little less than US$ 600 bn, the US regulators' estimation of bad loans is quite conservative and this may only help postpone the day of reckoning when the US government will have no other option but to nationalize the banks to save them from going kaput.

And this sounds eerily similar to the Japanese crisis as even then, the Japanese government, for fear of public backlash, did not commit enough money and ended up prolonging the recession to extraordinary levels. Kenneth Rogoff, a former IMF Chief Economist put it best when he said to Bloomberg, "If the banking plan still falls short, the fiscal stimulus will have been wasted to some extent. We could end up like Japan, sliding in and out of recession." We hope Messrs. Obama and Geithner are listening.

"Hooray! The banking crisis is over! Let's party! O.K., maybe not," exclaims Paul Krugman who won the Nobel Prize in Economics last year. In his latest post in The New York Times, Krugman writes whether one actually should feel reassured from the US bank stress test depends whether one is a banker, or someone trying to make a living in another profession. He writes, "Given the possibility of bigger losses in the future, the government's evident unwillingness either to own banks or let them fail creates a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout."

And his warning - "While bankers may find the results of the stress test 'reassuring', the rest of us should be very, very afraid."

From Wall Street, let us go to the Main Street and things continue to look quite bleak here. Toyota Motor Corp, world's largest automaker that had to face the ignominy of posting its first loss in six decades last fiscal has predicted that its loss for the current fiscal year may stand at US$ 5.5 bn.

What is more, the company had to also slash dividends, ending a spectacular run of a six-fold increase in dividends in 10 years, as it looks to preserve as much capital as possible. Toyota's plight is at least better than some of its US rivals. Worst recession since World War-II has sent car sales into such a downward spiral that companies like GM and Chrysler that were tottering on the edge, have a strong chance of going bankrupt unless the US government bails them out.

Warren Buffett's Berkshire Hathaway, which posted five straight declines in quarterly profit through the end of 2008 and last posted a loss in the quarter ended September 2001, has now posted its biggest loss in 20 years. This was largely on the back of write-downs on derivatives and a loss on the company's investment in oil producer ConocoPhillips, which Buffett had recently termed as a grave mistake on his part.

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This loss might give an indication that even for the legend he is, Warren Buffett isn't perfect. But then, this 78-year old world's best and most followed investor remains a force to reckon with. And at a time most people his age are looking to get money out of the market rather than put money in it, he's doing the opposite. He's investing in stocks.

The worst of the global recession could be over, predicts media tycoon Rupert Murdoch, owner of The Wall Street Journal. "I'm not an economist, but it is increasingly clear that the worst is over," he said in an earnings call with analysts and reporters recently. In what might bring some relief to media companies, Murdoch believes that advertising is coming out of its slump and that "the marketplace is likely to see advertisers come back."

If we believe that less of bad news is a prelude to good news, policymakers and investors can take some respite and hope that things improve from here on. This is given that while the American job market remains in doldrums as 539,000 people lost their jobs in April 2009, this decline is less severe than what has been seen over the past five months. The unemployment rate in the US has risen to 8.9%, the highest in 25 years.

Job losses in the USUnemployment rate (%)
Image source: The New York TimesImage source: The New York Times

The Asian markets put up a good performance during the week gone by. It is believed that a variety of factors such as regional bank earnings, stress test results of US banks, and an expansion in Chinese manufacturing activity boosted optimism amongst investors. The Indian indices, on the others hand, remained the lowest gainers as the BSE-Sensex rose by only around 4% as compared to last week. Other Asian indices such as Singapore (up 17%), Hong Kong (up 12%), China (up 6%) and Japan (up 5%) ended the week on a stronger note. As far as other global markets are concerned, they ended the week on a firm note as well, with Brazil (up 9%), UK (5%), and France (5%) leading the pack of gainers. These were followed by the US (up 4%) and Germany (up 3%).

While large Indian companies might still seek time to emerge on top of tables when it comes to size, they're already earning laurels when it comes to reputation. As reported by The Economic Times, the US-based Reputation Institute has ranked the Tata Group, State Bank of India, and Infosys among 17 Indian firms that figure among the top 50 in a list of the world's 200 most reputable companies. The Tatas are in fact placed at the 11th rank, above global giants like Google, Microsoft, General Electric, Toyota, Coca-Cola, Intel and Unilever.

 Weekend investing mantra
"The best advice is to learn from mistakes and move on. "If every shot you hit in golf was a hole-in-one, you'd lose interest," Warren Buffett has said. "You gotta hit a few in the woods." - Anonymous

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