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US Fed: The recession is over

Sep 10, 2009

In this issue:
» Recession is over, says US Fed
» Gold prices expected to correct in the short term
» India not a easy place for doing business
» Cheaper to trade on the NSE
» ...and more!!

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In a recent issue, we had discussed how the club of rich industrialised nations, Organisation for Economic Co-operation and Development (OECD) says that the global recession is coming to an end faster than thought a few months ago and may in fact already be over.

The US central bank now has joined in the chorus. The US Federal Reserve has come out with a survey that confirms that the US economy has turned around a corner based on reports from regional banks. This survey precedes the monetary policy meeting, to be held in two weeks. If indeed the US Fed accepts at the meeting that the recession is over; then it is likely to increase interest rates, currently pegged at zero.

We continue to be of the opinion that investors should not get too optimistic. Several noted investors including Wilbur Ross and David Dreman have also sounded a note of caution. In fact, Warren Buffett has recently warned that we will have to deal with the side effect of the enormous dosages of monetary medicine that continue to be administered.

 Chart of the day
Although it is close to two decades since India began on its path to liberalization, doing business in India continues to be a difficult task. Today's chart of the day shows India's rank among 184 nations in the ease of doing business. The 'Doing business 2010' study conducted by the International Finance Corporation ranks countries on 10 parameters. India performs relatively well on 'getting credit' and dismally on 'enforcing a contract', where it gets the lowest ranking among all the nations studied! Not surprisingly, India comes in at the 133rd place, on an overall basis.

India does have company from the other BRIC nations, but that's hardly any consolation. The countries where doing business is the easiest happen to be among the most prosperous. That's certainly food for thought for our policy makers and the administrative machinery.

Source: Doing business 2010, International Finance Corporation

For those of you who've missed buying into Gold before it began its recent rally, a widely anticipated upcoming correction could present a very good opportunity. Yes, that's right. Gold prices are expected to take a breather for some time as one of the major supporters of its surge from US$ 900 per ounce to US$ 1,000 shows signs of weakening. As per the Wall Street Journal, firms like Barrick and AngloGold Ashanti, which are amongst the largest producers of the yellow metal have decided to go slow on their plans of gold hedging elimination.

Gold hedging is a process whereby producers sell their future production in advance because of the belief that gold prices may decline in the future. However, currently the dynamics are such that gold prices are expected to witness a sustained long term rally. Hence, these companies have decided to eliminate their hedges and profit from the price rise. Hedging elimination on the other hand, required these companies to purchase gold from the market and this along with a move away from the dollar was causing the gold price rise in recent months. But with these companies now going slow on eliminating their hedging, the gold rally is expected to slow down for a while, presenting long term investors with a good opportunity to buy into the metal.

Looks like Indian telecom major Bharti Airtel has sweetened its bid for the South African based MTN as the two companies appear to have reached a US$ 24 bn prelimanry accord to buy each other's shares, which is the first step in a planned merger. Interestingly, Bharti's founder Sunil Mittal has denied that such a pact has been reached and has reiterated that talks between the two are still going on. Already the deadline has been extended twice since July 31 and what seems to have stalled the process are some administration issues and trying to work towards an arrangement which is acceptable to all parties concerned. Should this cross-border deal finally go through, it will create a mobile-phone carrier with annual sales of US$ 20 bn and 200 m wireless subscribers. In our view, while there will be short term pressures, the long term advantages of entering a wider market and gaining synergy benefits are expected to be meaningful for Bharti, especially when growth in the Indian market slows down.

Optimism has returned with the late surge in rains. The rainfall deficit which was 25% at the end of August has shrunk to 20% this week and if the Meteorology department is to be believed this will shrink further to 15% to 18% by the end of September. However, we should hold back the celebrations for now. As on September 3, the total water storage in country's major reservoirs was 29 % below normal and 25 % below the 10 year average. Unless, the water stock improves perceptibly in the next couple of weeks, availability of water for hydro power production as well as for irrigating crops in the ensuing rabi season will be a concern.

NSE has now reduced its transaction charges by about 10% in the cash and futures segment for market intermediaries. In effect, this move will especially help retail brokers and investors by reducing the overall cost of trading. Although it may now become cheaper to trade, long term investors must by no means get encouraged to do so. We believe, trading is a loser's game. Just ask the ones who have learnt it the hard way. By the time they realise that they are back to where they started from, their brokers are already busy laughing all the way to the bank!

Bankers are a humble lot these days. In a statement strongly condemning the outsized discretionary compensation received by bankers before the financial crisis, the Chairman of Goldman Sachs Mr. Lloyd Blankfein has said "No one should get compensated with reference to only his or her own P&L". A very important statement indeed coming from a banker of repute. It may be recalled that the multi-year guaranteed employment contracts signed by bankers received much criticism last year after several large banks paid bonuses despite anchoring to bailout funds. The payment of bonuses to individual bankers are typically based on how much money they earn for the bank, which critics claim encourages them to try to maximize returns by taking bigger risks. This also leads them to lose sight of the risk taking ability of the institution.

The unemployment numbers worldwide have been dismal during the economic downturn with the western economies worst impacted. However, if the latest survey conducted by a leading business channel is to be believed, India Inc. kept hiring despite the global slowdown. According to the findings from a sample of 375 listed companies, three out of every five companies added employees. The major recruiters were the IT majors like TCS, Infosys and Wipro each of which recruited over 10,000 people during the last fiscal. India's biggest bank, SBI, outnumbered the IT giants by recruiting 26,691 employees during the same period. This hiring feat of India Inc. can be attributed to robust domestic demand and early signs of revival of global business during the latter half of FY09.

Meanwhile, the BSE-Sensex was up 100 points at the time of writing. Despite opening the day substantially higher, the index was dragged down by heavyweights from the auto and power sectors. On the global front, while key Asian indices closed in the positive, European indices are also trading firm currently.

 Today's investing mantra
"We try to stick to businesses we believe we understand. If a business is complex or subject to constant change, we're not smart enough to predict future cash flows." - Warren Buffett

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2 Responses to "US Fed: The recession is over"


Sep 11, 2009

Great. This is why I always like your site
Always, to the point and starting from the basics.

Thanks again




Sep 10, 2009

Hey you guys

Gold industry is already in a deficit. The elimination of the hedges is a positive for the gold rally not negative. However that does not mean that gold would continue to rally but only that one by one various factors are coming together like perfect storm in gold fundamentals...

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