»5 Minute Wrap Up by Equitymaster

On This Day - 4 NOVEMBER 2011
Is this the new Saudi Arabia of energy sector?

In this issue:
» The shocking fact about Mumbai real estate
» Roubini's secret meeting with his clients
» Indra Nooyi outlines the main reason behind global crisis
» Real estate mogul's recipe for US economy
» ...and more!
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Warren Buffett does don many a hat. Being a very good cheerleader for the US economy is certainly one of them. In interview after interview, he has mentioned how the US system has been designed to unleash human potential like no other. And truth be told, until 2008, most of us seemed to be in sync with Buffett's observations. Then, the financial crisis took the US economy in its strong grip. And its debt also started going up sharply. Due to these developments, questions started being asked of the validity of Buffett's statement. His obsession with the US way of doing things started being labelled more of a wealth creating tactic than an objective truth.

Will Buffett once again prove himself right in the long term? Well, we don't know for sure. But his case has definitely become stronger if a recent report in Bloomberg is to be taken seriously. It should be noted that for the US to regain its lost stature, a manufacturing revival has to happen and happen fast. And the recent discovery of its enormous shale gas reserves promises to do just that. And how big is this potential? Well, some people are already calling US the Saudi Arabia of gas. Reports are awash with how energy giants like Exxon Mobil and Conoco Philips are diverting billions towards developing shale gas reserves. And this could be just a tip of the iceberg. As more of this cheap source of gas is exploited, energy intensive manufacturers of chemicals, plastics, and steel could well bring their operations back home from emerging nations and in the process, re-create tens of thousands of jobs. And if this were not enough, shale gas is environmentally far friendlier than other sources like coal. Little wonder, it is touted to be the next big game changer for the US economy.

Do not get us wrong here. We don't think the US economy will jump straight from below par growth to above par. It has had its share of excesses in the past and will certainly have to pay the price for it by growing at a slow pace over the next few years. But courtesy its system of unleashing enormous human potential like Buffett mentioned, it could well be a force to reckon with in the long term as well. After all, its universities are still the hot bed of innovation and its Government still interferes far less in the free market system than other countries. Thus, while Uncle Sam could be down, it would be dangerous to count it out just yet.

Do you think the US is the new Saudi Arabia of energy and will thus regain its lost competitiveness or it has entered a permanent long term decline? Share your views with us or you can also comment on our Facebook page.

 Chart of the day
Companies in the Indian aviation sector may not exactly be going laughing their way to the banks but domestic air travel in India surely is booming. As today's chart of the day highlights, India witnessed the highest growth rates amongst major economies when it came to growth in number of domestic passengers taking to sky in the month of August and September. Surprisingly, amidst a subdued economic environment, even the global industry witnessed a positive growth rate.

Source: IATA (International Air Transport Association)

Without mincing any words, India born and CEO of Pepsico, Indra Nooyi summed up the turmoil in the global economy in a single sentence- "The world is living in a crisis of leadership and expectations." She further pointed that the 'crisis of leadership' was compounded by a simultaneous crisis of governance and accountability. We couldn't agree more. The proof of a crisis of leadership, governance and accountability is all over the globe. When you allow bad practices to flourish, this is what usually follows.

Indra Nooyi made it clear that doing business in such an environment of negative uncertainty was going to be extremely challenging. Consumer demands are changing. Trust in established brands and instituting is declining. Competition is getting more and more intense. While growth expectation are declining, high commodity prices are disturbing cost structures. So what do investors have to take home from this? Plain old value investing principles still remains the best strategy. One, invest in companies that are run by honest and dynamic leaders. Two, invest in brands that have a strong moat. Three, don't overpay. As the world gets more complex and messier, a simple yet sound investing strategy will help you survive and thrive.

Property prices in major parts of Mumbai are at an all time high. As a result, most of the property buyers are playing a wait and watch game. Apart from high prices, rising interest rates have also been a deterrent for home buyers. Resultantly, there has been a substantial rise in unsold inventory in the metropolitan city. Approximately, 32,000 units are unoccupied in Mumbai alone. Include the entire MMR region and the figure rises to 95,000 units. However, what is interesting to note is that despite a massive decline in sales (lower demand) builders are not willing to liquidate the inventory at lower prices. This indicates they are confident that demand would return once the credit environment improves. But considering that the average selling price in Mumbai is approximately Rs 10,000 a square feet, we believe it is already out of reach for an average Mumbaikar. Thus, unless the prices correct to a meaningful levels we do not foresee demand returning anytime in the near future.

What Dr Doom aka Nouriel Roubini has to say on markets and the global economy always makes for interesting reading. But when one learns that he held a secret meeting for his clients to discuss big issues, then the interest factor only multiplies. And what Roubini had to say about the state of world affairs behind closed doors does not paint a very pretty picture.

With respect to the biggest issue dominating headlines today, notably the Europe crisis, Roubini has a very bearish view indeed. He believes that there is a significant risk of Eurozone breaking up which does not only include Greece and Portugal exiting but Spain and Italy ultimately leaving as well. Addressing problems of growth and trade deficits is a very serious and difficult one and Roubini opines that reforms and more stimulus and monetary easing might still work. But this goes against German culture which is not in favour of more stimulus. Meanwhile, in the US, Roubini is reluctant to join the bandwagon of those who believe that US is out of a recession.

Although big firms may have reported better numbers, small and medium enterprises are still struggling, which means that the Q3 GDP estimates may get revised downwards. And China is not out of the woods either. Although the dragon nation may escape pain this year and next, FY14 may see it in trouble. This is because of a build-up of non-performing loans at banks, rising government debt and asset bubbles bursting eventually. All of which makes for a very gloomy scenario, indeed!

Iceland and Greece indeed are the classic cases of regulatory discretion or lack of it on financial entities. The former despite being one of the earliest cases of sovereign default lived to enjoy the fruits of ruthless governance. In fact today Iceland stands tall in terms of economic discipline as against all of the countries that have bailed out their banks. Greece on the other hand has enjoyed its early days of financial recklessness and may live to repent it for a very long time. Most economic experts agree that Iceland's decision to let its banks fail was one of the best that any debt laden economy can adhere to. However few recommend the same to the likes of Greece, Spain or Italy. The only reason being that size matters! Greece being a larger economy to Iceland may have more ramifications on global economy if the former's banks are to fail. But by the same logic if the 'Too Big To Fail' economies continue to burden the healthy ones, the chances of a global economic tailspin cannot be ruled out. One in which even the emerging economic will get sucked into. We completely support the idea of Greece doing an Iceland while major economies in the G20 adopt a more brutal approach to fiscal excesses.

Meanwhile, indices in the Indian stock markets have been trading firm right from the beginning with Sensex higher by around 90 points at the time of writing. Heavyweights like Axis Bank and Tata Steel were seen driving most of the gains. Optimism also covered almost all major Asian indices whereas Europe too has opened on a firm note.

 Today's investing mantra
"The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage." - Charlie Munger

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