Global stock markets in bubble territory

Oct 3, 2009

In this issue:
» India lagging on adult literacy
» How does one replicate Buffett's success?
» High unemployment haunts the US
» The worst monsoon since 1972
» ...and more!

------- To All Warren Buffett Fans -------
Have you ever wondered which stocks Warren Buffett would buy if he were investing in India? Well, if you want to know how to build a Buffett like portfolio based on the principles of the second richest man in the world, you do not have to look too far.

Just click here to buy the stocks Warren Buffett would probably have liked to...

While criticizing the current and the ex-chief of the US Federal Reserve-Ben Bernanke and Alan Greenspan-contrarian guru Marc Faber has said, "They have achieved something no central bankers have achieved in history. They created a bubble in everything." Faber has indeed compared them to the Zimbabwean President Robert Mugabe whose money printing policies have brought about hyperinflation and an economic collapse in that country!

Faber now blames the Fed's policy of printing more than required money for the bubble that is currently building up in the global stock markets. His pessimism can be gauged from what he adds about his sentiment, "You can't find anyone more negative about the world than I am." Investors in India though can take some respite from Faber's advice to global investors to put money in Asian equities and commodities.

 Chart of the day
India may have a lot going in for it in terms of strong growth that the country is expected to log in the future when compared to its developed peers, which are still mired in recession. But just imagine how much stronger this growth would have been if some basic development measures were in place. Take the case of adult literacy for example. Today's chart of the day highlights how India needs to catch up with the US and the other BRIC nations as far as adult literacy is concerned. Just as infrastructure needs to be built, healthcare expenditure needs to be ramped up and corruption needs to be eradicated, so does the country's adult literacy rate needs to be improved. Is the Indian government upto the task?

Data Source: United Nations Human Development Index

In the world of investing, Warren Buffett has become a force to reckon with not only for the wealth that his company Berkshire Hathaway has amassed but also in the way he has generated this wealth. Infact, Buffett has been generous in dispensing his sound investing principles to shareholders and investors around the world through his company's annual reports. Little wonder then that after him, his successor may not be able to replicate Buffett's success. Yes, Buffett's knowledge and expertise can be emulated but the same cannot be said of the aura that surrounds him.

Data Source: Warren Buffett's letter to shareholders 2008

Now just like Buffett's successor, we at Equitymaster also aim to provide attractive returns to investors using Buffett's tenets of investing in our latest offering 'The Value Investor'. We agree that in this modern age, it simply isn't possible to beat the market as Buffett has done so successfully over his life. So we do not want to promise you the moon. However, what we will promise you is that by being part of 'The Value Investor', you will generate tremendous wealth for yourself over the next few years. This is because you will become an integral part of the process that aims to emulate Buffett's investing principles and take advantage of the wealth-generating opportunities that are available here in India.

Economists who could see 'green shoots' emerging from the US and were predicting an accelerated recovery for the bereaved economy may have to eat their words. As reported by Bloomberg, the unemployment rate in the US hit another 26-year high in September, as the long-battered US labour market took an unexpected turn for the worse. The US Labour Department's latest report said that there was a net loss of 2.6 lac jobs in September, up from a revised loss of 2 lac jobs in August. It is also important to note that this is only the second time in 2009 that job losses rose month on month, after the US labour market started showing a steady recovery since the loss of 741,000 jobs in January this year. Having said that, despite all the stimuli that the US government has been pumping into the economy, an unemployment rate of 9.8% in September (9.7% in August) is unlikely to facilitate consumption. Hence the scope of US' economic recovery and recovery of all the economies that are linked to US' consumption stands limited.

As if the high unemployment rate in the US was not enough, economist Bob Shiller noted for famously predicting the housing bust, does not hold a very positive view on the home prices in the US either. He is of the opinion that while the home price index has been moving up sharply based on data for three months, it is not clear whether the same will be sustainable. Shiller believes that the index will not continue at this high rate of increase and will infact move sideways for a period of 5 years! While the various stimulus packages have done their part in bolstering home prices, it remains to be seen how the scenario will unfold when these are withdrawn. All in all, the global economy which is hoping for a quicker US recovery will have to settle for playing the waiting game for the time being.

Is India losing its weight amongst BRICs? Well, if nomination to host the Olympics Games is the criterion you go by, probably it is. The announcement by IOC President Jacques Rogge in Copenhagen that Brazil will host the 2016 Olympics, despite intense lobbying from the premiers of US, Spain and Japan, has been hard-hitting enough. It is all the more important for India to take notice from the infrastructure expenditure point of view. Brazil plans to spend US$ 14 bn renovating old stadiums and building transport and accommodation infrastructure. Prior to this the Athens Olympics were originally budgeted at US$ 1.5 bn while the actual cost came to US$ 16 bn. The Beijing Olympics overshot the budget of US$ 2 bn by a huge margin going up to more than US$ 30 bn. Given this history, India's 5-Year infrastructure spending plans are soon expected to be dwarfed by those of Brazil as well.

The monsoon season in India has passed and according to official data released by the Met department India's monsoon this year was the worst since 1972 with 24% less rainfall than average. Dividing the country into four broad zones, the northwest region suffered the most with a 36% deficit in rainfall this year. Close on its heels is the northeast region and central India which faced a 27% and 20% deficit respectively. The southern peninsula was better off with a shortage of just 4%. Now the government has a much tougher task on its hands as it will have to find a way of keeping a lid on inflation (since food prices are rising) and at the same time not thwart India's GDP growth too much.

While the week saw only three trading sessions, it was an eventful one for the Indian markets as the country's benchmark index, the BSE-Sensex crossed the 17,000 mark after a span of nearly sixteen months. The Indian markets were in fact, the top gainers amongst the key world indices during the week. The BSE-Sensex ended higher by about 2.6% over the previous week. Brazil was the other market which recorded a gain on a weekly basis. The pack of losers this week was led by Japan and Hong Kong, which ended lower by about 5% and 3% respectively. They were followed by France, Singapore and China, which were down by about 2% each. The US and UK markets ended the week lower by about 2% as well. Losses in Asia were mainly due to concerns of economic recovery.

Performance during week ended Oct. 1
Yahoo Finance, Kitco

 Weekend investing mantra
"In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond" - Warren Buffett

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2 Responses to "Global stock markets in bubble territory"


Oct 5, 2009

I thought your existing services like StockSelect etc. would encompass some of the learnings you had from Buffet's style of investing as these services also target investors with long term horizon. I can't believe that you want investors to pay close to Rs. 10,000/year for another stock advice which we should be already getting through Stock Select.


Ankur Kapoor

Oct 3, 2009

A small correction in the above article. The Brazil Olympics are actually scheduled to be hosted in 2016 year as against 2014 written in the above article.


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