Nationalisation is back - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Nationalisation is back 

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In this issue:
» The west following Indira Gandhi?
» No Satyam bailout
» Crude on water
» Bye-bye Bush
» ...and more!

00:00
When Indira Gandhi proposed the nationalisation of 14 major Indian commercial banks in 1969, it was seen as an act of 'protectionism'. But the same showed good results when the Indian financial system displayed resilience against the macroeconomic shock of the East Asian crisis. The West which was a critic of India's protectionist financial policies, however, seems to have adopted the same in the past few months. The bailout packages for US banks and financial institutions, including double dosages for the likes of Citigroup and Bank of America (BoA), represented displays of financial gymnastics aimed at providing capital without appearing to take equity stakes. The latest infusion of capital into Bank of America is only expected to help BoA digest the losses of Merrill Lynch without serving any long term purpose. The absorption of the banks' most toxic assets by way of guaranteeing the same essentially liberated the banks from some of their most threatening risks. At the same time, the taxpayers' money is being used without guaranteeing any tangible benefits for the same.

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00:31
The U.S. Senate has decided to release the second half of the financial industry bailout fund, i.e. US$ 350 bn. This move has come amidst increasing distress in the banking industry, including further deterioration of Citigroup and need of more government aid by the Bank of America. The package includes huge increases in spending on education, aid to states for Medicaid costs, temporary increases in jobless benefits and a vast array of public works projects to create jobs. The government is also planning to create a board to oversee the spending of the stimulus money. While the recovery plan is necessary in face of recent recession, whether it is enough to stabilise the economy needs to be seen.

00:53
While the state government is in favour of bailing out Satyam, the Centre has ruled out any government-sponsored bailout package. The Congress-led government in Andhra Pradesh is proposing a bailout package similar to the one used for UTI. However, Prime Minister Manmohan Singh, along with his cabinet colleagues is of the view that tax-payer money cannot be used for cleaning up a problem created by the company's fraud management. The future course of action will be decided once the newly appointed board provides the necessary details on Satyam. Given the amount of land allotted by the Andhra government to Satyam in recent times (see table), little wonder that it is such a strong advocate of a bailout.

Company Place Land
Satyam Bahadurpally, Ranga Reddy 11 hectares
Hitec City, Madhapur 12 hectares
Thotlakonda 20 hectares
Vizag 7 acres
Kapuluppada 50 acres
Maytas Properties Gopanpally, Ranga Reddy 16 hectares
Gundla Pochampally 14 hectares
Bachupally, Ranga Reddy 30 hectares
Maytas Infra Hyderabad Metro rail stations 269 acres
Machilipatnam Port project 2,584 acres
Total 17,409 acres
Source: Economic Times

01:15
'Fake' seems to be the flavor of the season. At least if one were to go by the leader of opposition in Gujarat, Mr. Shaktisinh Gohil. He has dubbed the huge figure (Rs 12 trillion) of investment MoUs signed by companies during the much hyped 'Vibrant Gujarat Global Investors Summit' a 'Narendra Modi-scripted lie'.

According to him, just about 22% of MoUs signed in the 2005 and 2007 summits have been implemented, while Mr. Modi put the figure at about 64%. He alleges that the figures are include investments for routine projects being executed by government corporations. For instance, six civic bodies like the Ahmedabad Municipal Corporation have signed MoUs worth Rs 1,260 bn which would have to be conducted anyways.

01:31

Source: Yahoo India Finance
After Nortel's bankruptcy, it's Motorola's turn to spill the beans on its deteriorating performance. The company is close to shutting down its India sales and distribution venture. While this does not mean that the company will cease to sell its handsets in India, the distribution will be done out of Singapore. Motorola's exit from the world's fastest growing mobile market comes just three years after the company had envisioned of having India as one of their growth centres. However, over three years, the company has been beaten hands down by Nokia, both in the low and high priced handset segments. As far as Motorola Inc (the US-based parent) is concerned, it is on a cost cutting spree and will be slashing 4,000 jobs over the next few months (in addition to the 6,700 layoffs in 2008).

01:56
After US aluminium major, Alcoa's first quarterly loss in six years, it is the turn of another 'first' for the global aluminium industry. And this time around, the 'first' is even bigger, 15 years to be precise. As per reports, inventories for the shiny metal are ruling at 15-year highs at the LME (London Metal Exchange). The current pile up is as high as 2.44 m tonnes, a number that has jumped by a huge 108% in a span of just four months. To put things in perspective, the inventory corresponds to more than 2 times India's total annual capacity for the metal. Auto and infrastructure, two of the major sectors that consume aluminium are experiencing one of their worst slowdowns in years and quite expectedly, the reverberations are also being felt loudly in the aluminium space. The world has already started working towards the painful adjustment process with a production cut of 4 m tonnes announced so far in the past few months. Indian companies like Nalco are also feeling the pinch with inventories touching the 30,000 tonne mark as against a normal inventory level of 5,000 tonnes for the PSU.

02:30
When crude prices were racing towards their peak earlier this year, there were reports of how the actual commodity was not being cleared at those prices. Now that prices have crashed to US$ 35 per barrel, oil is floating on water again. As per Bloomberg, about 80 million barrels of crude oil is currently being stored in ocean tankers, the highest in 20 years. This is almost equal to annual global consumption of the commodity currently. And guess who are chartering the tankers this time around: Morgan Stanley, Citigroup and Royal Dutch Shell.

02:47
The most powerful man on Earth - the President of the United States of America - George W. Bush made his last public appearance yesterday.He spoke for one final time explaining his decisions that shaped the US and the world over the past eight years of his presidency.

On the most contentious issue of Iraq, he said, "Iraq has gone from a brutal dictatorship and a sworn enemy of America to an Arab democracy at the heart of the Middle East and a friend of the United States." While he did not mention that violence in Iraq still persists despite improved security, he also failed to soothe nerves that believed that the war was a mistake, and that weapons of mass destruction, on the basis of which Bush fought the war, were never found.

On the US economy, Bush said, "When challenges to our prosperity emerged, we rose to meet them. Facing the prospect of a financial collapse, we took decisive measures to safeguard our economy. These are very tough times for hardworking families, but the toll would be far worse if we had not acted." Oh really? The fact is that Bush oversaw the inflation of the asset bubble led by an easy money policy of his central bank policymakers.

He also failed to mention that the largest of those 'decisive measures' has already come under severe criticism because of lack of transparency and accountability about how the first block of US$350 bn was spent.

In his parting remark, he spoke graciously about the 'hope and pride' felt towards a successor 'whose story reflects the enduring promise of our land'. Rounding up his stay at the helm of affairs at the world's most powerful democracy, he said, "You may not agree with some tough decisions I have made. But I hope you can agree that I was willing to make the tough decisions. There is legitimate debate about many of these decisions. But there can be little debate about the results. America has gone more than seven years without another terrorist attack on our soil." Well, we agree to this!

It must be acknowledged that Bush did quite a lot in improving Indo-US ties right from the start of his presidency. He defended outsourcing during the 2004 US election and recently played a key role in the civilian nuclear deal.

03:59
Indian software majors Infosys and TCS are out with their third quarter results. They have reported decent numbers despite the economic slowdown and uncertainty in the banking, financial services and insurance (BFSI) space. While Infosys registered a 7% QoQ growth in net sales, TCS grew 5% QoQ during 3QFY09. The bottomlines grew by 15% QoQ and 7% QoQ respectively. Both the companies managed to improve their margins. While Infosys improved its margin by 2% QoQ, TCS improved its margin by 0.5% QoQ. We attended the conference calls of both the companies, where the managements indicated that they are cautious about the current environment and are prepared to face challenges going forward. They have also admitted the pricing pressure they are facing currently, which might worsen in the future. In order to improve margins, the companies are focusing on cost containment and higher utilisation of resources.

04:25
The wholesale price index based inflation for the week ended January 2 has fallen to 5.24%, down from 5.91% in the previous week. As per a leading business daily, the government expects inflation to decline to 3% to 4% by the end of March this year. The RBI's comfort level is 5%. Hence the case for another round of rate cuts by the RBI is rapidly building up.

04:37
The Indian markets closed higher by 3% today mirroring the positive sentiment in the Asian and European markets. Realty space was the only sector as a whole to witness selling pressure on the BSE. While the Asian markets closed higher by about 3%, the European indices are trading higher by 2% currently. As per a Bloomberg report, crude oil prices too rose as the US government committed more money to stop the economic crisis from deepening.

04:51 Today's investing mantra
"The disadvantages of ignorance, of human greed, of mob psychology, of trading costs, of weighting of the dice by insiders and manipulators, will in the aggregate far overbalance the purely theoretical superiority of speculation in that it offers profit possibilities in return for the assumption of risk." - Benjamin Graham
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