|»5 Minute Wrap Up by Equitymaster|
On This Day - 19 MAY 2010
'These evils will outlast us all'
In this issue:
--------------------- Urgent - Double Your Money, Safely ---------------------
As per Economist, Gross has sarcastically compared rating agencies to 'vampires in the dead of the night'! He says that the agencies that fuelled the debt crisis by overrating trillions of dollars of poor debt have had a relatively easy time. This is when money managers and central bankers in the developed world have had to answer embarrassing questions. But by virtue of their oligopolistic business, the rating agencies have escaped unhurt. Calpers, a globally renowned pension fund, has recently initiated court proceedings against the big three agencies with a fraud suit. But Gross believes that despite their wildly inaccurate ratings, the credit rating agencies will outlast us all. This he assumes is due to the lack of evidence available to nail them down. Gross also alleges that a dozen other suits have already been dismissed against S&P alone.
Known for his erudite comments on the financial crisis in the West, Gross seems to pointing fingers at the right people. But unless the regulatory bodies take the case of rating agencies more seriously, yet another crisis may not be too far.
Do you think that the rating agencies will get punished for their role in the financial crisis? Please share your views with us.
Indian companies rounded off FY10 with reasonably good set of numbers. These were particularly from the stable of metal, automobile and pharmaceutical companies. With lower input costs and higher pricing power these sectors emerged as the top gainers in terms of profit margins. Crisis situation in the developed economies did little to temper their prosperity. As today's chart shows, the profits in the fourth quarter of FY10, showed steady sign of up move despite the crises in developed economies. Most of this was supported by the fact that India's consumption demand remains largely isolated from the fate of the global economy. Going forward, however, investors would do well to keep their eye on long term trends rather than bet on quarterly estimates.
Ironically, it endangers any move by the Chinese to revalue the Yuan upwards vis-a-vis the US Dollar. It may be noted that the US has been putting pressure to relook the currency peg. A demand US makes to increase the competitiveness of its own goods. Another impact of the European crisis is that Chinese exporters are finding it hard to obtain trade finance from European banks. This puts enormous pressure on Chinese companies to finance their working capital needs. Clearly, the European malaise could easily reach China or the US. Through routes not yet fully factored in by observers. The world economy is deeply linked indeed!
Even the listed entities that were planning for QIPs to repay debt have to cut their issue sizes due to lack of investor interest. We believe that this time around the developers won't be able to fox the retail investor who has already burnt his finger once. The best possible solution to get out of this vicious debt circle is to clear the inventory at a discount. However, will the developers resort to undercutting when the prices across cities have remained buoyant? Only time can tell that. However, we believe undercutting is the best possible solution to deleverage at this juncture.
Having barely seen some signs of improving demand, the textile companies seem to be at it again. Due to the slowdown, many plants have shut shop across the world. As such, assets are available at throw away prices. Trying to take advantage of this situation, Indian textile companies are again believed to be scouting for acquisition targets in and outside the country. We believe that this may be a worrisome sign as it could add more pressure to the balance sheet of textile companies, most of which already have a high debt ratio. Instead of cleaning up their balance sheets, they will need to borrow more to fund these acquisitions. Plus, with the interest rates expected to rise, there could be additional pressure on their cash flows.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement
Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407