The surest investment bet!
(Jan 7, 2009)
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In this issue:
» Satyam's Chairman resigns as big fraud is unearthed
» The perfect insurance will rise for eighth straight year
» Japanese firms in best position for M&A activity
» Fed's 2009 forecast for the US economy
» ...and more!!
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"Gold may advance for eighth year as perfect insurance sought," screams the title of one of the stories on Bloomberg. With major nations willing to print and inject trillions of dollars into their respective economies, there will barely be any paper currency left to hide.
A perfect setting for the only dependable alternative - gold. No wonder the commodity is having a dream run, a price appreciation for seven consecutive years and the one, which is likely to continue for the eighth year as well. Although the precious metal has risen only 6% in US dollar terms in 2008, against the other major currencies like Euro and British Pound, it has risen an impressive 11% and 44% respectively. If you haven't bought gold yet, you are perhaps shying away from the only possible hedge against inflation.
However, we are not alone in our view of the yellow metal. William Bonner, the founder of Agora Inc, author of financial best sellers like 'Empire of Debt' and the much feted author of The Daily Reckoning had this to say on why gold is likely to emerge an investment of choice. He opined, "The US government is determined - 'hell-bent,' some would say -- to keep consumers spending dollars. They will bring this about by massive government spending, tax cuts, bailouts, loans and other ways of increasing the number of dollars in circulation. If this plan does what they hope it will do, prices will begin to rise. In fact, almost all asset classes will rise in price - especially gold. Shrewd investors will seek protection from inflation by buying gold - causing the price of the yellow metal to rise. If the plan fails to work, on the other hand, the feds will continue emitting pieces of green paper, which will eventually call into question the value of the paper itself. Either way, probably the surest bet on the blue planet is that the price of gold will go up." Wise words indeed.
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In an event that is likely to leave a deep and a long lasting scar on corporate management practices in India, Ramalinga Raju, the controversial Chairman of Satyam, one of India's largest IT services dropped the biggest of the bombs so far when he resigned today, owning responsibility of a fraud running into billions of rupees. The company's balance sheet, it is believed, has in reality just 6% of the total Rs 54 bn that it is reported to have. In other words, funds totaling Rs 50 bn are non-existent. In a confession letter sent to the stock exchanges, Mr. Raju wrote, "Every attempt to eliminate the (balance sheet) gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten." While managements at other companies may not be riding the so-called tiger, confidence is likely to take such a beating, that the mauling will come at their doorsteps as well, resulting into market value erosion for no direct fault of theirs. Not a good position to be in, especially when the economy is already in the doldrums.
The worst slowdown since the great depression has meant that assets are available at fire sale prices. And this is indeed one of the best times to engage in M&A (merger and acquisition) activity and ensure strong shareholder value creation. But cheap valuations do not always occur at the same time as access to cheap funding. And this time around too, it has been no different.
Ramesh Damani reveals the sector which could lead the next stock market rally.
Scheduled for Monday, 12th January, 2009 at 5:30 PM (IST).
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The only companies that are able to sew up a deal are the ones that are sitting on huge cash pile and do not require the help of capital markets. And there are no firms in a better position in this regard than the Japanese firms. Fresh from a long and tenuous era of restructuring, it is believed that Japanese firms are sitting on trillions of dollars worth of cash that could enable them to scoop up assets that are available cheap.
And if the trend of 2008 is any indication, they are indeed putting their money where the opportunity is. As per reports, while M&A deals in 2008 for companies in the US and the UK witnessed a sharp slowdown, Japanese companies had their best year ever, splurging more than US$ 77 bn towards buying companies. And with credit markets showing little signs of thawing, Japanese companies might once again emerge as the frontrunners for M&A deals.
The fact that the country's currency has appreciated significantly has also put them in a strong competitive position. India too got a taste of the same when just a few weeks back, Japanese telecom major DoCoMo forked out US$ 2.7 bn for a strategic stake in Tata Teleservices.
The global sharp decline in sales of flat products used by the automobile and the consumer durable sectors has taken its toll on the quarterly sales of Tata Steel. The bellwether of the Indian steel industry, Tata Steel has registered a 14% decline in sales to 1.07 m tonnes in the 3QFY08 as compared to the corresponding quarter last year. With the onset of the results season, if this is any indication of what is to come, these results do not bode well for the other players in the industry.
With elections around the corner, the UPA government is doing whatever it can to push ahead with some reforms atleast in the insurance sector. Two insurance sector bills are likely to be passed in the last session of the 14th Lok Sabha. The proposals include raising the FDI limit in insurance companies from 26% to 49%, permitting foreign re-insurers to open branches in India, enhancing the government-owned LIC's paid up equity capital to Rs 1 bn from Rs 50 m, permitting insurance companies to raise capital from the market through instruments like preference shares, bonds and perpetual debt among others. Given the pressure that the government has been under lately due to the global economic slowdown, liquidity issues and the widening deficit, it is heartening to know that it is intent on the implementation of some critical reforms before the general elections in the country.
The developed economies have entered into recession, Indian economy is slowing down and Indian exporters consequently are down in the dumps. As per reports, sectors like textiles and jewellery are especially hard hit having registered a sharp fall in exports in December 2008. As a result of which, there are concerns of large-scale layoffs taking place. Since these sectors account for a third of India's exports pie, the 18% to 54% fall in revenues has become a serious issue. Orders are in hand only for the next one month and if things do not significantly improve, around 10 m jobs are at stake, quite a large number by any yardstick. While a fiscal package was announced in January, the same has not met with the approval of exporters and their demands include income tax exemption on export profits and providing export related loans at 7% among others. Meanwhile, competition from low cost countries like China and Bangladesh are only making matters worse. Given that the government is saddled with a slew of problems and with elections on its mind, it remains to be seen how this problem will be resolved.
There are a lot of predictions flying around on the movement of oil prices. Joining the fray, Texas Billionaire T Boone Pickens has predicted crude prices US$ 100 per barrel by 2010. He believes that economic activity will eventually pick up and so will the demand for oil. Interestingly, he thinks that if the US continues to depend on imports for 70% of its oil requirements, then crude will reach even US$ 200 to US$ 300 levels. Hence, the US must work on adding capacity from renewable sources of energy. It may be noted that he is currently working on building the world's largest wind farm.
The US Federal Open Market Committee (FOMC) has in a cynical tone dismissed all possibilities of the economy performing better in 2009 despite the announcement of the stimulus package. According to the committee, the country's GDP is expected to fall at a sharper rate in the first half of 2009 than previously anticipated, before recovering over the remainder of the year as the impact of the stimulus package gains traction. The US economy is expected to substantially deteriorate in the fourth quarter of this fiscal as conditions in the labour market, industrial production and consumer and business spending worsen. The FOMC also stated that despite the stimulus package's attempts at encouraging spending, the rising unemployment levels, declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets and restrictive credit conditions were likely to continue to hinder household spending over the near term.
As per the study by a leading real estate agency, developers have fallen short of targets in creating retail space. They have missed targets by nearly 54% in 2008. Out of the 74 malls planned in 8 cities at the start of 2008, only 34 were actually finished. The National Capital Region was worst affected where only 4.7 m square feet out of the promised 7.1 m was actually supplied.
The main reason for the poor supply is the sluggish demand. For example, retailers' vacancy has increased to 16%. The benchmark as per the agency is 5%. To add to their woes, developers also face a problem of lack of funds. It may be noted that the Indian organised retail sector grew at 25 % in 2007. As a result, the growth in 2008 was projected to more than 35 % in the coming years. When 2008 witnessed a growth of only 15%, it led to an oversupply situation. This just goes to show the importance of being conservative in making forecasts.
In the meanwhile, the Satyam saga had a huge negative impact on the broader markets, forcing the benchmark index, BSE-Sensex to close nearly 8% lower for the day. This was in contrast to the early morning trend where signs of another positive closing were emerging. Not surprisingly, the Indian markets fared the worst among its Asian peers, who nonetheless had a mixed session today. Most of the European markets are trading weak currently. The US markets however, edged higher yesterday despite the subdued outlook from Fed, a pattern that most experts attributed to bargain hunting rather than any sustained rally. Crude oil was steady in Asian markets today ahead of the report that is likely to show increased inventory in the US in view of the protracted demand.
"We are suspicious of those CEOs who regularly claim they do know the future - and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to "make the numbers" will at some point be tempted to make up the numbers." - Warren Buffett
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