These CEOs should be put behind bars - The 5 Minute WrapUp by Equitymaster
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These CEOs should be put behind bars

Aug 1, 2009

In this issue:
» Airlines hold India to ransom
» Conditions just right for a bull market in the US
» Warren Buffett sitting on billions of paper profits
» US consumers taking notice of Indian cars
» ...and more!!

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Aviation is a bewildering sector. It ranks among the finest achievements of human technical progress. It also ranks among the most difficult businesses to run profitably. Little wonder then, that in a bid to demand a bailout from the government, leading airline operators in India have called for a strike on August 18.

The pioneer of low cost airlines in India, Captain Gopinath calls the step a gimmick. He says, "The business magnates, Vijay Mallya or Naresh Goyal, know the reality: airport infrastructure is costly, oil prices are high. But they started a business and took a risk...The message to airlines is that there is lot of cost cutting they can do themselves."

He adds, "They got together as a cartel and fixed price by blaming fuel surcharge. That was the beginning of airlines' woes - occupancy fell, collections came down and losses went up." We agree. Although the government needs to do much more in making the Indian aviation sector more viable, holding the public to ransom is hardly the way for businesses to negotiate terms.

In fact, on being asked what should the Government do if the airlines insisted on the strike, Gopinath said, "The Government can arrest airlines chiefs under the Essential Services Maintenance Act - if truckers can be arrested they can do the same thing here."

We have repeatedly advised investors to be careful while picking aviation stocks. As Warren Buffett had once written, "I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright (co-inventor of the world's first successful airplane) took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did."

 Chart of the day
One of the leading business dailies shouts today - "Adani Power IPO is a blockbuster." We wonder whether it really is! See today's chart of the day, which is a comparison of the oversubscription figure of Adani's July 2009 IPO with Reliance Power's IPO of January 2008. The mania that surrounded the latter last year does not seem to be there this time around. But given the current market conditions, even much lower subscription numbers for Adani's IPO are being touted as 'blockbuster'.

While we were highly negative on Reliance Power's IPO, we have had a similar view for Adani as well. After all, investors have been offered shares in these companies, when these have no business revenues or profits to boast of. And nothing's going to come for the next 2-3 years as well. Retail investors are again been made to see 'Power' as a 'hot' sector. We hope they do not burn their hand again given that these IPOs have been sold not on real company profits, but on imaginary profits that are 'likely' to come a few years down the line.

Source: Newspaper reports, IL&FS Investsmart;
QIB-Qualified Institutional Buyers, HNI-High Networth Individuals

The US commerce department has reported that the US economy shrunk by 1% in the June quarter. This drop is lower than was expected and after a drop of 6.4% in March quarter, has given some hope that the recession is easing.

But is it really? The key factor in Obama's plan to improve the economy is to encourage spending. Consumers this quarter have reduced their spending by 1.2%. This is largely due to wages and salaries being revised down by US$ 156 bn in the first quarter. Furthermore, the unemployment rate which is at a 26 year high is expected to climb up still further as companies continue to lay off people albeit at a lower rate. Hiring is not expected until companies are sure that the recovery is for real. In such a scenario there is the very real danger that consumers will curtail their spending still further, thus delaying recovery in the real economy even further.

Renowned US based fund manager at Legg Mason mutual fund, Bill Miller, believes that conditions are just right for a bull market to begin in the US. According to him "Bull markets typically begin when the following four conditions are present: the economy is bottoming, profits are bottoming, the Fed is stimulating, and valuations are low." And that is exactly where we are now says Mr. Miller.

A survey of around 30,000 car buyers in the US, conducted by AutoPacific brings a lot of good news for the Indian and Chinese car manufacturers. According to the 'Opportunity for Chinese and Indian Brands in the USA' survey, 15% of the new buyers would like to consider Chinese cars, while 11% would like to give chance to India-made cars. These statistics suggest that there is ample of opportunity for Indian car-manufactures to expand in the US, even though Japanese and Korean peers have already made their mark in those markets. It goes without saying that competition is this space will increase exponentially and understanding consumer behavior will be equally critical for the seasoned players as well as the new entrants. We hope that the Indian car manufacturers are doing their home-work!

Warren Buffett has done it once again. Just like he has been doing it over and over again since the start of his career as a security analyst and money manager. 'Be greedy when other are fearful, and fearful when others are greedy' goes his simple homily. But simple doesn't necessarily mean easy, just like it wasn't easy to put your hard earned money in the stock market between September 2008 and March 2009. The markets were tanking almost everyday. Fear was everywhere, gripping everyone.

But not Warren Buffett. Buffett was busy. Busy being greedy that is. Some of his bigger buys during that period were US$ 230 m in BYD Co, a Chinese car and battery maker, and US$ 5 bn of preferred stock in Goldman Sachs along with another US$ 5 bn worth of warrants in the company. The Goldman investment has since generated a US$ 2 bn paper profit for Berkshire Hathaway.

The BYD investment too has been nothing short of a bonanza. In September 26 2008, Berkshire bought 225 m BYD shares at HK$ 8 each, then worth about US$ 230 mn in total. BYD shares closed at HK$ 42.9 this Friday, thus valuing Berkshire's stake at an eye popping US$ 1.25 bn now. Yes, value investing remains as alive and kicking as it was when Buffett started his career. And as you can see above, it can be immensely rewarding for the disciplined practitioner.

With the inflow of the June quarter corporate results coming to end yesterday, the Indian markets ended the week on a strong note. The BSE-Sensex rose by about 2% over the previous week. In fact, the index ended the week at 15,670 points, which is its highest closing level in over a year. As for global markets, Asian markets once again led the pack of gainers with Singapore, Japan and Hong Kong closing higher by 5%, 4% and 3% respectively.
Note: Country names are representative of their benchmark stock indices;
Source: Yahoo Finance, Kitco, CNNfn

 Weekend investing mantra
You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." - Benjamin Graham

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13 Responses to "These CEOs should be put behind bars"

Suresh Bhandoola

Oct 11, 2009

I believe CEOs are only as good (honest) or bad (dishonest) as they are allowed to be.


Yezdi Surty

Aug 5, 2009

It is a my pleasure to read these great thought and news. I always remove time to go through.b thank you very much.



Aug 4, 2009

Well "Goldman investment has since generated a US$ 2 bn"
I did better then him this year :)
But i know it's billions, which count.



Aug 3, 2009

please ask the Flamboyant CEO &their YES man ,first to take a a bare minimum 20% cut in their packages and incentives & sell of one their Villa's all will fall in place.Practice before preaching. Who needs PEN and Earphone in 1/2 hour flights.??.Airlines going on stike..It can happen only in India surely with a patronage of some powerfull backing??



Aug 3, 2009

This one was really good.Normally stock markets are considered to be domain of financial wizards and analyst.This is not true,there is lot of marketing understanding you need ie investor(consumer) behaviour(known as technical analysis!!),demand supply etc.I would like to mention,the basics of life and investment are still the same and will remain the same.After reading analyst report do some soul searching your self at ground level.For eg if you have read an analyst report on two wheelers,speak to your rural friend on his choice of two wheeler,speak to garage owner,speak to your local the dealer etc the bare hidden truths will be known.If you find similarity on what compnies management is projecting what your next door neighbour ,friends,garage etc tell you,you can be sure that a complete business model is in place
(2)Allocate your funds propotinately in real estate,gold,silver ,equity market based on your present financial goals.Equity can still be bought/created in pieces/single nos but the same is not true with gold /land because they are not making are any more(3)Percentages should be questioned,they can be deceptive sometimes.!!


Ravindra Rao

Aug 3, 2009

There's a way of drawing govt's attn. Declaring a no fly day is only warranted if the govt refused to listen to any legitimate requests from airlines. Besides, as an industry, have the airlines examined all possible aspects of cost savings w/o compromising air safety? Recent news articles highlighting pilots' attitude when on duty don't exactly win public confidence. My sympathies are with the airlines, but most industries face problems sometime or other & these can be solved, collectively rather than by making a 'tamasha'! Ravindra Rao


Russ Balaporia

Aug 3, 2009

You always tell us what Mr Buffet bought and when and at what price, What I am keen to know is when he sold the stocks that he bought when the Mkt was bad.
Does Mr Buffet sell when the price is high?



Aug 2, 2009




Aug 2, 2009

this edition of 5 minute wrap up was really good..Maybe a little more details were required. overall very good. How can I read more if I want to know more of a particular development. PLease reply via email, ie.,

Thank you



Aug 2, 2009

I do believe that the US interest in the Indian Cars is only a reaction to the loss of faith in the American way of life by the americans. They have over the years been laughing at the Indian way of value for money in every thing. They now realise that this may be a more realistic approach. But to base this as a reason for looking into the Indian Car market is a bit of wishful thinking. But what the hell Indian Car makers indeed tighten your belts.

As for Warren Buffet well he had the cash when most big investors were tanked . I am not surprised at his acumen. But I do have a question for him , his spartan life style is a total rejection of the capitalist and consumerist way of life that he has most of his wealth from. Is that a lesson that the Americans never learnt. I do believe he is more Indian in life style and philosophy than American.

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