Buffett's 'mirror-image' is most bearish on...

Dec 19, 2009

In this issue:
» World's foremost short seller is bearish on
» Equity funds too jump in on the gold bandwagon
» Freshly minted Indian MBAs' industry of choice
» Food prices may continue to soar
» ...and more!!

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We all know that Warren Buffett's investment style is buying rock solid companies and staying invested in them for the long term. Now, what would be mirror image of this strategy? Shorting companies that look extremely weak fundamentally and holding the position for long periods. And the foremost practitioner of this art is a man called Jim Chanos. Called a short selling guru, Chanos is perhaps the most successful pure equities short seller in the world right now. Thus, when he is bearish on something, his words cannot be dismissed lightly. Ironically, he seems most bearish on a country that other investors feel is the most attractive growth story of the next decade or two. Indeed, we are referring to China.

Chanos believes that China is forging its GDP numbers on a massive scale by not providing adequate depreciation for a very, very shaky capital base and further adds that there is no bigger credit excess than China right now. In fact, he has called the China credit excess problem "Dubai times 1,000 or worse".

There could well be a lot of merit in his argument. It is a well known fact that China's export driven growth model has crumbled in the wake of the credit crisis and if it were to keep its economy on a higher growth path, the current model will have to be altered dramatically. We are not saying that it may not be able to do it. However, the transition may not be easy and there could be a lot of turbulence ahead. Perhaps, Chanos is pointing out to one such turbulence, which he believes could happen any time soon.

 Chart of the day
Few days from now, curtains will come down on the year 2009, which has been quite an eventful year for the Indian stock markets. The fact that after touching a bear market low in March 2009, it went on to record more than 100% gains would indeed be remembered for a long time to come.

Today's chart of the day shows the sectors that have turned out to be the top performers of the phenomenal rally that we have witnessed over the last few months. While there is a close competition between metals and auto for the top spot, the IT index is a distant third, albeit at 128% its gains are nothing to scoff at.

As for auto and metals, we believe that the massive correction that took place in some of the stocks from these sectors was uncalled for in the first place. And hence, when investors realized their mistakes along with the government stimulus measures, the sector stocks came back into the reckoning.

Given the valuations at which the companies from these sectors are now trading, it looks unlikely that a similar chart for the next year will feature any of the current top three sectors.

Source: CMIE

Here's another good news for gold bugs. The Wall Street Journal has reported that the dash to get into gold has caught so much popularity that not only are commodity mutual funds digging into the precious metal but even stock funds are stocking up on it. So much so that funds specializing in large cap growth stocks have made gold a good 3% of their portfolio as compared to 0.9% not a very long ago. And given that the US government is thinking of going ahead with another spending binge via a second round of stimulus, gold is only going to gain in popularity from here on.

Agreed that the yellow metal has hit a bit of a road bump recently, but such corrections are only expected after a brilliant run that it has seen the whole of 2009. In other words, there is still a lot of steam left to be exploited in gold prices. But as we have always maintained, do not make it too large a part of your portfolio.

One class of investments where a top down works rather well is commodities. By top down, we mean-ask the broader questions first and then look at merits of the specific investment vehicle or security. For example, take crude oil. The most important questions are - is the average Chinese and Indian likely to consume more oil in the future? Where are the new crude oil supplies that have been found in the last several years? The answers will indicate that crude prices will only tend to move upwards over the long term.

Or take agricultural commodities. First, the demand side. The world is getting more populated. It is also getting more urbanized. The average Chinese and Indian is likely to consume more. On the supply side, it is difficult to bring more land under cultivation. Weather patterns are getting erratic with frequent droughts and floods. That makes it reasonable to expect increasing food prices over the long term.

Little wonder then, experts are pointing at higher food prices next year. That includes investment banks like JPMorgan Chase, Deutsche Bank and Barclays Capital as per Bloomberg. Goldman Sachs's recent outlook for commodities is also bullish. The immediate reasons are the ongoing economic recovery and low inventory levels currently.

It is official now. The recession that started in 2008 was less dangerous than many feared. But here's a warning. It's after effects are likely to be more dangerous than many expect.

This is what a recent report in The Economist suggests. It states that a recovery built entirely on government support is dangerous for the world economy. Another big danger is that central banks are using cheap money to cure problems that were a result of cheap money in the first place. This is sowing the seeds of another bubble, especially across the emerging markets. Or what would justify doubling of stocks across these markets over the past year despite no meaningful improvement in economic fundamentals?

The Economist also mentions that property prices are still falling in more places than they are rising, and the global banking industry is still under too much stress. As for the Indian economy, we are facing a problem of a different kind, fast rising inflation.

While the RBI was proactive enough to ward off the recession's impact on India, we need to wait and watch as to how it acts to save the 'aam aadmi' from the spectre of high inflation!

Marc Faber, one of the most successful investors of our times has a very interesting take on the industries that investors should avoid investing in. He believes that the sector which is very popular among freshly minted MBAs is very likely to have a very bleak future over the next few years. Indeed, just before the sub-prime crisis broke out in the US, every MBA dreamt of working on Wall Street. And now, see what has happened of it. Wall Street companies and the financial sector have come crushing down. If we were to extend a similar logic to the Indian economy, the sector that is very likely to face a bleak future is the FMCG sector. This is because if a leading business daily is to be believed, the FMCG sector has emerged as the industry of choice for this year's management graduates. The daily further adds that the security that the sector provides forms a major attraction for the students.

So, is the Indian FMCG sector as well as the sector stocks likely to come down in a heap? We do not think so. Unlike the Wall Street firms, Indian FMCG companies have little or no leverage to speak of and have excellent returns on capital and a severely underpenetrated market to cater to. Thus, while the sector stocks may certainly look expensive from a medium term perspective, over a long-term basis, they could actually turn out to be very profitable career option for young MBA graduates in India.

Barring a few, most major indices across the world saw declines this week. India too, unfortunately found itself amongst the losers. The BSE-Sensex ended the week lower by 2.3%. This came after a subdued performance last week when the index saw an almost flattish performance. The recent dull performance of the markets here in India comes at a time when concerns about high valuations are taking centre stage. As for the key commodities, crude oil and gold were at opposite ends of the spectrum. While the former saw a gain of 5%, the latter saw a decline of 1.6%.

Source: Yahoo Finance, Kitco, CNN Money

 Weekend investing mantra
"Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least." - Warren Buffett

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2 Responses to "Buffett's 'mirror-image' is most bearish on..."


Dec 20, 2009

Just enough to form a logical mind set inspite of so many hypes & rumours about the future of the Investment world.



Dec 19, 2009

"Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least." - Warren Buffett

Not very clear.
Can someone pl. explain in depth?


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