»5 Minute Wrap Up by Equitymaster

On This Day - 16 MARCH 2010
Are you holding cash or investing in stocks currently?

In this issue:
» Holding cash in these times is good, but then...
» Realty cos.' 'affordable housing’ ploy goes for a toss
» Blackstone to pump in big money into Indian cos.
» Krugman asks US to get tough with China
» ...and more!!

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"Investors should be holding healthy levels of cash in order to take advantage of known unknowns that become clearer as the economy evolves," says Mohamed El-Erian of Pimco, the world’s largest bond fund manager. El-Erian is talking here about the US markets. But then, his advice might seem true for most investors " even you " who have their eyes on high-quality stocks but are not investing just because the prices aren’t right.

As for the Indian markets, after a strong bull market of last year, it is fine to expect investors here to hold cash and wait for a sharp correction in stock prices. You might be doing that as well! And especially now, when concerns over global economic recovery continue to cloud investor sentiments.

Everyone fears corrections. But we at Equitymaster believe that after the sharp rise in stock prices we saw in 2009, a correction this year should be expected. As such, investors must hold on to a part of their cash holdings if they have set their eyes on some valuable companies that are not available cheap as of now.

But then, if you can find some wonderful long term opportunities trading at attractive valuations even in a volatile market like this, nothing should stop you to go ahead and act i.e., use a part of your cash to buy those stocks rather than wait for a correction.

So, are you investing in stocks currently? Tell us

 Chart of the day
Today’s chart of the day suggests that it is not the US but India that has a deeper unemployment problem. At 10.7%, India unemployment levels are far higher than its BRIC peers like China and Brazil (though we are not sure about the sanctity of Chinese data!). Anyways, coming to India’s unemployment, we believe the government and private sector has a big task ahead for itself. That of providing employment to the huge mass of people that come out of India’s educational institutions every year. Past governments have failed to do so and have paid the price!

Source: Central Intelligence Agency, US

The years 2008 and 2009 were pretty much like a scare for India's overleveraged real estate companies. Huge projects started during the boom years were under execution. Further, demand took a sudden hit on account of the global credit crisis and a distressed stock market. Combine that with the fact that the companies themselves were high on debt, and the combination was fatal. Many big players were brought to their knees, and in the process, many began singing songs of 'affordable housing' to sell their projects on the pretext of lower prices.

But memories in the realty space are short lived indeed. As per a DNA Money report, the market is back near the peak prices of 2007, especially in some regions like Mumbai. Also, realty companies have within a span of just a year gone from 'affordable housing' back to 'high-end' and 'premium' projects. The report states that developers such as Unitech, DLF, Orbit Corp, Lodha Group, DB Realty, Kumar Builders, and IndiaBulls Real Estate have either launched or are launching projects in the Worli and Parel areas of Mumbai with prices in the range of Rs 13,000 to Rs 30,000 per square feet. Seems like buyers will find themselves left in the lurch once again!

"China’s impressive. But India may have more long-term potential." This is what Bill Bonner, the founder and president of Agora Publishing (US), thinks. As he suggests in his daily letter to readers, while India has been upstaged by China in terms of GDP growth numbers in the past few years, the latter’s story has a lot of dramatic punch. "But India’s story may have a longer run. Because India grows without relying too heavily on exports. And it seems to have a large class of people who may be capable of keeping that growth on track," he writes.

Anyways, while Mr. Bonner speaks positively about India, one of the world’s biggest private equity firms is putting big money on India’s future. We are talking about Blackstone that is looking to pour in US$ 3 bn into Indian small Indian companies over the next 5 years.

Stephen Schwarzman, the co-founder of Blackstone is reported as saying, "...the prospects here are extremely good. I really like India." His rationale is quite simple. With India growing at a pace of 7-8% every year, all businesses are bound to grow. As per Schwarzman, what Blackstone is really assessing is the management quality, uniqueness of the company and its overall competitive advantage.

These, we believe are factors that even you must consider while looking at companies for investing. There are many Indian companies that are growing at exponential rates. But at the same time, the management integrity of most of them is questionable.

Nobel laureate Paul Krugman is one furious economist. He doesn’t seem to stand the sight of China continuing to keep its currency undervalued. "Impose a surcharge of 25% on Chinese imports," he has urged the US administration through a NY Times article. He further adds that the US has very little to fear from a Chinese retaliation. If China sells its US assets, the biggest loser is going to be China itself. For the step will weaken the dollar thus reducing the value of the remaining dollar holdings of China.

Furthermore, a weaker dollar will also make the US exports more competitive and will aid the economy in coming out of the recession faster. Thus, the prospect of a weaker dollar will actually turn out to be a boon in disguise for the US economy, feels Krugman.

So far, so good we should say. But what if the transition is not that smooth? What if investors start asking for significantly higher rates in view of a weakening dollar? It could certainly send the long term rates higher and threaten the recovery process. The US, we believe will have to tread very carefully here and may not want to impose very strict measures overnight on Chinese imports.

Indian markets saw another volatile day of trade today. However, at the time of writing this, the Sensex was comfortably in the positive, up by around 150 points (0.9%). A large part of these gains was due to buying in stocks from the energy, engineering, and auto sectors. Among other key Asian markets, while China (up 0.5%) closed in the positive, Japan (down 0.3%) and Hong Kong (down 0.3%) closed weak.

Former Fed chairman Paul Volcker has a reputation of being conservative. This is in sharp contrast to his successor Alan Greenspan. It was Paul Volcker who broke the back of inflation in the US of the 1970s. Now, as an adviser to President Obama, he has recommended the ban on investment banks from proprietary trading.

So it comes as a surprise when Volcker opines that it is not the right time to withdraw stimulus measures. It may be noted that several observers have pointed out that the unprecedented injection of liquidity in the US economy will lead to massive side effects. Hence, the stimulus measures should be withdrawn sooner rather than later. But Volcker says, "This is not the time to take aggressive tightening action, either fiscally or monetary-wise."

We believe it is the high unemployment number that is prompting him to say that. But the measures will have to be rolled back sooner or later.

 Today's investing mantra
"I let our marketable equities tell us by their operating results - not by their daily, or even yearly, price quotations - whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it." - Warren Buffett

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