'It's a correction in a bull market'

May 29, 2010

In this issue:
» Government finances - worst in 100 years!
» Impact of forex inflows on the currency
» Buffett's turn to be grilled on financial crisis
» Goldman Sachs negotiating for lesser charge
» ...and more!

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Templeton Asset Management's Mark Mobius has been bullish on emerging markets for quite a while. He believes that emerging economies are much safer than the developed ones. He says, "The numbers show that these countries are safer to put your money in. Many of these countries have been denigrated undeservedly because they've been actually doing a good job." He goes on to add, "When the time comes, emerging markets will recover faster and in a big way".

But this time around Mr Mobius is not just using his words. He is actually putting them into action. The veteran global investor has seen more inflows into his emerging market funds in recent times. And more than half of it is being invested in BRIC economies. Mobius is already heavily invested in Brazil and China. And he is scouting for more opportunities in India and Russia. Also, like any other long term investor, Mobius is ecstatic about the recent slump in BRIC markets. He believes that that this is just a correction in a bull market.

We could not agree more. The correction in Indian equities in recent times has largely been on the back of economic concerns in developed markets. It has hardly anything to do with Indian economy or Indian businesses. On the contrary such a correction presents an excellent opportunity to long term investors in India to take advantage of cheap valuations.

 Chart of the day

Data source: RBI

The RBI has been reasonably candid in expressing its worries in recent times. As if the rise in food and commodity prices was not enough, the incessant flow of foreign funds is also giving the central bank a tough time. Particularly because it is playing havoc with India's exchange rates against its main trading currency - the US dollar. As seen in the chart, the rupee has witnessed considerable volatility against the US dollar in recent times. This has been due to the volatile nature of fund flows into the economy as against the current account deficit (CAD). The foreign funds are necessary to aid economic growth. However, the short term nature of some of them cause this economic quandary. Going forward, the RBI may contemplate on taking a calibrated approach to address this problem.

It doesn't take too much to figure out that most governments in the developed world are in trouble. The newspapers are strewn with news about them. But things, complex as they are, may be worse than they seem at first glance. A Citigroup Chief Economist is recently reported to have said that government finances of developed countries have deteriorated to the worst condition in more than 100 years! Even if the current status quo does not lead to more trouble, restoring balance will take years if not decades. And in the meanwhile, growth in these countries will be severely hampered. Much like what is happening in Greece right now. Even as the government there works on cutting spending and raising taxes, all at the same time. And a stagnant economy means severely restricted prospects for the corporate sector.

Meanwhile, controversies continue to dog Warren Buffett. Money news reports that Buffett will now have to speak in front of a commission looking to ascertain the cause of the financial crisis. Important to add that Buffett had earlier refused to cooperate in the process. However, it has now been made legally binding for him to do so. Buffett would not be the only person to be grilled. He is going to face the commission with six other officials of Moody's ratings agencies, both former and current. Apparently, the entire role of credit ratings agencies is likely to come under the scanner.

It should be noted that Buffett himself owns a stake in Moody's Corp although the same has come down in the aftermath of the crisis. However, Buffett made himself quite clear in this year's shareholder meeting that he still loves the business model of ratings agencies. Ratings agencies require very little capital to grow and have strong pricing power, attributes that are vintage Buffett.

And he has also made it quite clear that hauling just the ratings agencies over the coals for their role in financial crisis is not the right thing to do. He firmly believes that ratings agencies made the same mistake that he, politicians, mortgage brokers and others did in overestimating the health of the housing market. Hmm, interesting thoughts indeed. Given this background, it appears rather difficult that the commission would be able to extract something different from Mr. Buffett. Nevertheless, we await the results of the hearing with bated breath.

Do you think Buffett is right in defending rating agencies? Share with us your views on this.

Why just Buffett? Even Goldman Sachs seems to have made it a point to be in the news for all the wrong reasons. As per reports, Goldman, the world's top investment bank seems to be working feverishly to reach a settlement with the SEC and thus, negotiate a lesser charge than fraud. Certainly, being accused of fraud will invite a greater punishment for the beleaguered firm and could end up hurting a part of its business. However, paying up a few hundred million dollars in exchange for maintaining the status quo on its functioning is too small a price to pay for someone as prolific in its business as Goldman. It is not as easy as it seems though. The judge who is overseeing the case can still take a very hard stand on the issue and pose potential problems for the firm. So, it is not over until it is over for Goldman Sachs. We wonder whether these men claiming to do 'God's work' will get away with a small charge!

The week ended largely positive for most of the world's indices. The US was the worst performing market of the week (down 0.6%) as news of Spanish debt downgrade came in late Friday. Other than the US, the only market to close in the red was Japan (down 0.2%). Amongst the other world markets, Brazil (up 2.8%) was the top performer followed closely by China (up 2.8%)

Up by 2.5%, India's benchmark Index BSE-Sensex was also amongst the top performers of this week on the back of increase in FII inflows.

Data source: CNN Money, Yahoo Finance, Kitco

Other than BSE-Consumer Durable (down 2.2%), all indices closed the week in the positive. BSE-Realty index was the top gainer for the week with an increase of 4.1% after being beaten down last week. Amongst the laggards of the week, BSE-Metal index was up by 1.7% while BSE-Midcap and BSE-Smallcap indices gained 1% and 0.9% this week.

 Weekend investing mantra
"Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." - Warren Buffett

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14 Responses to "'It's a correction in a bull market'"

Amit Shah

Jun 7, 2010

Well Buffet has stakes in credit rating agency and Goldman...so he may protect it. Buffet is only protecting his own interest and defending himself...Agree that his rationale of "Ratings agencies require very little capital to grow and have strong pricing power" makes sense....but from long term point of view, he should understand that this is not sustainable.

More than rating agencies, its the Basel committee which linked the capital of banks to credit ratings is to be blamed...



May 31, 2010




May 31, 2010

I do not agree with Buffett in this respect. It is my view the rating agencies definitely defaulted in correct assessment for reasons best known to them, I thought Buffett will expose the agencies in larger interest of the investors.


Anuj Gupta

May 31, 2010

As Nicholas Teleb puts it, it is no surprise that there is an investor who has done as well as Warren Buffett. Infact it should be surprising if there was no such extraordinarily successful investor. We are all fooled by randomness and ascribe talent and wisdom where they may be none. And ofcourse in this case Buffet is wrong people like politicians might be wrong about the health of subprime lending but rating agencies can't be expected to play at the level of politicians. You see it is their job!



May 31, 2010




May 30, 2010

Buffet is wrong in supportig the rating agencies. It tantamounts to his tacit backing of the ill-advice doled out by these agencies



May 30, 2010

Warren Buffett is one of the most respected financial experts well known all over the world for his phenomenal success in stock market. His defense of Goldman Sachs and rating agencies seems out of place. That these financial institutions have been less than honest and perhaps participated in misleading the investors is obvious. Buffett has benefitted from them and therefore he is trying to defend them it seems.



May 30, 2010

"'It's a correction in a bull market'


Chandar Shekhar Gupta

May 30, 2010

No, view's of Mr Buffett are totally wrong. Credit Ratins are supposed to have much dipper insight both on the macro & micro level.They are equipped in terms of knowledhge & the analytical tools also.

If they also make the mistake, what is a difference between them & a lay man. And for what theya are paid in terms of fees they charge.

BY defending them, Mr Buffett is demaging his reputation also. He is taking side of those people, who are inefficient & uncapable of the work which they are doing.


Sanjeev Garg

May 30, 2010


Indian banks conservative approach towards loan sanctioning save our economy .

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