Disunited we stand... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Disunited we stand... 

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In this issue:
» Satyam's last fortnight?
» HDFC fights competition
» Microsoft likely to show the pink slip
» Mark Mobius favours consumer products, commodities
» ...and more!

The one-stop shop called Citigroup that Sandy Weill had created in 1998 will be getting dismantled. As reported in the International Herald Tribune, Citigroup would divide, for management purposes, into two separate businesses - Citicorp and Citi Holdings. Citicorp will focus on international banking, while Citi Holdings will comprise the brokerage, asset management and consumer finance businesses. The banking behemoth posted a loss of US$ 8.3 bn for the fourth quarter of a rather turbulent year and has now reported a loss for five consecutive quarters. Revenue was US$ 5.6 bn during the quarter, a drop of 13%, and lower across all regions. While Citigroup's rapidly deteriorating condition led the US government to infuse cash into the company, its troubles do not seem to be over yet. The company also went in for a massive reduction of its workforce to cut down costs. Infact, its work force was reduced by about 29,000 since the third quarter and approximately 52,000 for all of 2008. While Vikram Pandit, the bank's CEO was reluctant to split the bank since he took over the reign of the company, the continuous losses have meant that he has had to eat back his words. It remains to be seen whether this latest strategy to shore up the beleaguered bank will really work.

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Although Merrill Lynch has been acquired by Bank of America, the problems for the company have not ceased to exist. Infact the company is being taught a lesson by teachers themselves. Having been accused of issuing misleading statements about collateralized debt obligations and other assets backed by subprime mortgages, which artificially inflated Merrill Lynch's shares, the company will have to pay US$ 550 m to settle claims by the Ohio State Teachers Retirement System and other shareholders. Hope atleast this time, the lessons are well learnt.

While Satyam has barely a fortnight to arrange for Rs 4.4 bn (US$ 98 m) of salaries and Rs 26 m (US$ 0.6 m) of rental expenses for the month, its customers who were its last ray of hope are also refusing to bail out the company. As per a leading business daily, even as the centre dithers on a financial package for the beleaguered company, the customers have started showing signs of deserting it. The situation has reached alarming proportions in the last 72 hours with six customers indicating they would like to terminate contracts. In the absence of a CEO, with no decisions being taken on the company's working capital requirements, the customers are worried about the transition plans even as the cash-strapped company has stopped all payments to vendors, sub-contractors on customer sites and travel services. The company is currently working on 3,500 odd projects and had roughly 650 customers (185 were Fortune 500 companies) at the end of September 2008.

In a bid to save its market share from being cannibalised by public sector banks, the largest housing finance company, HDFC, has decided to cut its lending rates further by 0.5%. Besides the priority sector loans (with ticket size below Rs 2 m), the institution has also passed on the benefit of lower cost of funds to loans below Rs 3 m. Taking cues from the RBI's directive and cut in key lending rates earlier this month, most public sector banks had slashed their home loan rates. The rate cuts have also come in the light of the slump in the property market, which have made the home loans more viable. The lenders, nevertheless, continue to remain wary about higher slippages given the possibility of job losses and a prolonged economic slump.

As financial institutions and automobile companies the world over lose sheen, Mr. Mark Mobius, who oversees about US$ 26 bn in emerging-market stocks as executive chairman of Templeton Asset Management, has indicated interest in buying stocks of consumer products and commodities producers. The same may be due to the former's resilience to economic cycles and the latter having bottomed out in the past few months. More importantly, he finds stocks from these sectors in the Asian markets offering attractive valuations. It must be noted that the MSCI Emerging Markets Index, which tracks 746 companies in 24 developing nations, dropped 54% in 2008, the worst annual performance since the measure was created in 1987. Mobius believes that stock markets around the world will recover later this year, and the US economy will rebound in 2010.

In a rare move, the world's largest software company, Microsoft Corporation is contemplating significant layoffs due to the decline in computer sales. It is believed that the announcement could come as early as next week itself. Most seem to be jittery of the fact that if one of the largest and steadiest companies in the world is having a tough time in managing its expenses, the situation is unlikely to be much better in other industries.

The European Central Bank (ECB) lowered its key interest rate by 0.5% to 2% during the week in an effort to avoid a deep recession. This is its fourth rate cut since last October. There may be more to come; the ECB president has indicated that a further cut is likely if Europe did not show signs of a recovery by March. Recent economic data has shown that a number of countries in the 16-member Euro zone are already in recession, while others are facing a severe economic downturn.

Both, world and Asian stocks took a beating during the week. Hong Kong saw the biggest loss in its indices with a decline of 7.8%, followed by Japan and Singapore witnessing declines of 6.8% and 4.2% respectively. A slacking of Japanese machinery orders and sharp dip in US retail sales renewed concerns that global recession is deepening. Incidentally, Indian stocks lost the least compared to its Asian peers in the week gone by, recouping some of their losses towards the end of the week.

The negative economic data showing that many countries in the European Union are already in the midst of a severe economic downturn weighed heavy on the markets of the region. German indices lost the most and were down 8.7% during the week. France too was down about 8.6%. US stocks managed to fall the least during the week with a decline of 3.7%.

Best of this week's 5 Min. WrapUp - We hosted the second Equitymaster WebSummit this week, with leading stock market expert Mr. Ramesh Damani as our guest. Mr. Damani offered some interesting answers for uncertain times such as these. The most sought after one indeed being with regard to the sector that could lead the next bull-run. Citing that every bull-run in the past had seen a different sector leading the chart, Mr. Damani opined that the leaders of the past will not be leaders of the future.

The 1992 bull-run was led by cement companies, the one in 1994 was led by FMCG stocks, in 2000 technology was the king, while the most recent bull run from 2004 had infrastructure and real estate companies foraying into unprecedented territories. None of these, are, however, expected to repeat history.

It will be a different sector that will lead the next bull run and Mr. Damani believes that the sector to watch out for is - hold your breath - Media! If the recent Golden Globe awards are anything to go by and such instances are repeated more often, there is no reason why Indian content cannot see higher demand, both domestically and overseas and command much higher valuations.

Source: Yahoo Finance Source: Yahoo Finance

04:55  Weekend investing mantra
"To suppose that the value of a common stock is determined purely by a corporation's earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Wells when he told them over the radio that the Martians had landed" -Jim Grant
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