»5 Minute Wrap Up by Equitymaster

On This Day - 21 AUGUST 2010
Doing what other investors aren't doing today...

In this issue:
» DTC may reduce your tax liabilities
» Finally, a more financially responsible generation in the US
» Inflation in India a long term problem
» US jobless claims shake up developed markets
» ...and more!!

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For the next year and a half, with stocks crashing like there was no tomorrow, people looked back at January 2008 with a sigh. 'If only', many thought to themselves, 'I had sold off all my stocks in those euphoric times when stocks were selling at their highest point, and gone off for a vacation!'.

Yes, euphoric was the word. But how could one have known that it was the time to be selling stocks? Afterall, everyone around was recommending to buy stocks. No one could get enough of them. The 'India growth story', and 'India decoupled' were being dished out by the second. You wouldn't want to miss out on India's growth now, would you?

And that's how it always is. Be greedy when others are fearful, and fearful when others are greedy, said arguably the world's greatest investor. A simple principle alright. But definitely not easy.

If you were one of those who thought that stocks were too expensive in January 2008, you might want to give a long hard look at them again today. That's because many of them have left far behind their highs touched during that period. Take the BSE Auto index for example. While the Sensex is still not close to its lifetime high of about 21,000, the former hit a record high of 8,924 this Thursday. And that's not the only group of stocks that seem to be in fashion these days. There are many others. The buoyancy in prices fueled by the 'domestic consumption theme' as many like to call it.

So while others may be getting greedy on many a glimmering stock, you might just want to make way for fear instead.

 Chart of the day
Today's Chart of the Day illustrates global steel capacity utilisation. Considering that steel is an important industrial commodity, the capacity utilisation of steel producers can very well be used as a proxy for industrial activity. In this respect, it shows that the recovery has been on shaky ground so far, with utilisation successively dipping in both June and July 2010.

Source: Steel Orbis

There are plenty of doubts over the implications of a new tax regime, the Direct Tax Code (DTC) next year. However, taxpayers already have some good news coming their way. According to the CBDT, taxpayers can expect their tax liabilities to reduce under the DTC. In fact there is a proposal to bring down the tax rates in India in line with international standards. But the question that remains unanswered is whether all that Indians want is lower taxes? Or are they more willing to accept higher taxes, provided the government utilises the income so generated in a proper manner?

Elections in India are anyways decided by agriculturists, whose farm incomes are tax exempt. Then, high levels of poverty and tax evasion keeps the other majority outside the direct tax net. So, it is unlikely that the small taxpayer will be a government priority when it comes to tax reforms. Small taxpayers like us would prefer proper service deliveries from the government. Whether it is on the healthcare front, or electricity or education.

But unfortunately corruption is inherent in the government machinery. And even the simplified tax rules maybe twisted. Therefore low taxes may not help unless compliance issues are addressed.

With the 2nd anniversary of the crash just around the corner, American kids have been forced to learn about money the hard way. Fewer available summer jobs, market crashes and teacher cutbacks have affected teens there on a personal level. Lavish spending by their parents on them has also stopped. The unemployment rate in the US is around 25% for teens and 15% for 20-24 year olds. Young people are now only too aware of the difficulty of landing a job. They are now actively trying to build their CVs with new skills (Mandarin Chinese, technology), relevant internships and extracurricular activities. They are even trying to build networks in the corporate world. And all of this while they are still in school.

They have also realised the value of saving for a rainy day. More than half of 18-29 year olds have curtailed spending since the crisis began. The youth have also become more conservative investors due to market volatility. They are now cautious about unrealistic returns in real estate or tech stocks. Seems like we will be seeing a much more conservative and financially responsible new American generation in the years to come!

There was probably a sigh of relief for the Indian government when the wholesale price index (WPI) in July missed hitting the double digit mark by a whisker. But the fact remains that inflation in India is a long term problem. And for it to be solved some structural issues need to be addressed. For instance, food production has to be bolstered. True, the fate of that lies with monsoons. But the government needs to make more efforts to reduce this dependence by focusing on irrigation and water harvesting techniques. At present, depleting levels of groundwater as well as shrinking rivers are serious challenges to food production.

Another move than could improve the fortunes of food production is drawing foreign investment to the food supply chain. More importantly, food wastage has to be significantly reduced. As reported in the Wall Street Journal, India loses US$ 21 bn worth of farm produce after harvest every year because of wastage. Moreover, it has a storage-capacity shortfall of 35 m tonnes. Thus as far as inflation is concerned, the moot question is whether the government is up to the task of implementing some long term measures to bring inflation down or not.

A lot has been said about India's growth story. There are investors buying into India for its attractiveness. Then there are more who are avoiding India due to its expensiveness. Either ways, there is no denying that India has caught investor attention from across the globe. Recently, Marc Faber has stated that he prefers India over China and US Treasury bonds. The reason being that the US and China will weaken over time. China is slowing down, and inflation would catch up with the US thus weakening its performance over time. On the other hand, India's long term potential is way more attractive. India is not just rich demographically but is also rich in natural resources. A large part of this is yet to be discovered and hence the potential to unlock value.

The past week was a mixed one for global stock markets as emerging markets ended the week with gains, while those in the US and Europe ended the week on a sour note. One of the key factors was of the US Labor Department reporting that the initial jobless claims rose by 12,000 to 500,000 in the week ended August 14. This was above the forecast of 478,000. In addition, concerns over the drop in commodities added to the woes.

Source: Yahoo Finance, Kitco, CNN Money

Leading the pack of losers was France which ended lower by 2%. Germany, UK and US followed suit with losses of 1.7%, 1.5% and 0.9% respectively. China, India and Brazil ended the week on a positive note. While China and India ended higher by over 1%, Brazil ended the week with a gain of 0.6%.

 Weekend investing mantra
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett

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