US calls China's bluff - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

US calls China's bluff 

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In this issue:
» Chinese Yuan manipulated, says US
» Obama begins on a sticky wicket
» At Satyam, fewer employees to feel sorry for
» PM Singh to undergo surgery
» ...and more!

It isn't a good idea to rub your biggest lender on the wrong side especially when you want him to lend you even bigger sums of money in the near future. However, the US seems to have done just that. Timothy Geithner, the man almost certain to become the next US Treasury has given a statement in writing to the Senate finance committee that upholds President Obama's view that China is 'manipulating' its currency.

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While this merely is a repetition of what Obama has been mentioning in his campaign all along, experts have expressed deep concern over the timing of the statement. In order to tide over the economic crisis, the US is looking to print enormous amounts of money and no other country is as capable of absorbing US debt as China considering the latter's huge trade surplus and enormous forex reserves. But it is also equally true that in order to keep its exports cheap, China has not allowed its currency to float freely, thus putting US manufacturers as well as exporters at a huge disadvantage. While a solution indeed needs to be arrived at, it is in the interest of both the stakeholders (US and China) that a measured approach is taken to resolve the controversy.

Barack Obama may have assumed office as the President of the United States amidst considerable pomp and splendor but the acute economic problems confronting the country seem to be showing no signs of easing off. As per Bloomberg, home prices in the US dropped the most in at least 18 years and builders broke ground on the fewest houses since record-keeping began.

Consider some numbers. Prices in November declined 8.7% from a year earlier, the biggest drop in records going back to 1991. Housing starts fell 16% last month to an annual rate of 550,000, the lowest since the government started compiling statistics in 1959.

Besides the weakening housing market, things are bleak on the jobs front too. The US unemployment rate has risen to 7.2% and could reach 9% if the recession drags on. Measures taken by the Fed to reduce interest rates to zero levels and introduce programmes to buy mortgage secured debt have so far not yielded the desired results. President Obama certainly has a tough job on his hands!

The results of the Indian pharma companies have started pouring in and they are mixed to say the least. The common thread running through these companies is that most of them incurred considerable forex losses during the quarter ended December 2008, as the rupee depreciated sharply against the US dollar. Other reasons that impacted the companies' performance are more specific. While Ranbaxy is still grappling with manufacturing issues raised by the US FDA, Dr. Reddy's is trying to come to terms with the fact that the previously lucrative German market is not so lucrative any more.

While the pharma sector as such is said to be immune to an economic slowdown, that may not really be the case. For instance, it has been observed that in light of the current slowdown, sales of prescription drugs have fallen as people have reduced their consumption of expensive drugs besides going in for more over-the-counter medicines. Also, those focusing on contract manufacturing have witnessed some slowdown as innovator companies are placing lesser orders to clean up the inventory at their end.

After corporate behemoths like Sony, Nokia and Intel, it is now Microsoft's turn to announce layoffs. The company has begun executing its plan to layoff over 5% of its employee base, which translates into about 5,000 people losing their jobs. Microsoft has been relatively less affected in the past downturns because of it dominant market position, high margins and the scorching growth rate. But not this time around. For the December quarter, while revenues saw a meagre rise of 2% YoY, the company witnessed a 11% YoY drop in profits. As Microsoft CEO Steven Ballmer puts it, "We are certainly in the midst of an once-in-a-lifetime set of economic conditions."

World's largest maker of computer chips, Intel, too recently announced similar job cuts and plans to close testing/manufacturing facilities after witnessing abysmal sales numbers. Other victims of the credit crisis include employees of Seagate, AMD and Nvidia.

As per a leading business daily, Prime Minister Dr. Manmohan Singh will undergo a heart surgery tomorrow. He will need to take rest for at least three weeks after the surgery during which Affairs Minister Pranab Mukherjee will take charge. Here's wishing Dr. Singh a speedy recovery.

The wholesale price index (WPI) based inflation rate rose to 5.6% for the week January 10, compared to 5.2% in the previous one. After a continuous fall for 12 straight weeks, the rate shot up due to the truckers' strike that lasted for eight days till January 13. Prices for food articles were the worst hit, and rose by 11.6%. It may be noted that fall in inflation rate from 12.9% in August last year has been due to declining metal and fuel prices. According to a leading business daily, experts believe the rise in inflation this week is temporary and expect the RBI to cut interest rates soon to kindle growth.

Greed, destructive creativity and arrogance were the prime causes of the turmoil in the global financial markets. These were the words of one of the recipients of the India Business Leader Award yesterday. And we couldn't agree more! The developed financial markets were themselves plagued by poor regulation, dangerous incentives and the reckless use of mathematical models. The desire to ape their temporary and superficial success led to institutions from developing economies as well to tread their path.

Case in point being some of our own Indian banks who tried to rake in thick spreads on complex derivative instruments. Experts believe that fixing these problems will take a lot of work over the next 18 months or so. While the timeframe is uncertain, what is certain is that by then we should have legislations in place for a smaller but better regulated and a more conservative financial world.

Some noticeable changes have been witnessed in the exchange rates over the last few months. The Yen and Pound are now close to fair value. Although less expensive as compared a year ago, the Euro is still overvalued. This is indicated by the Big Mac index, Economist's lighthearted guide to exchange rates. The index is based on the idea of purchasing-power parity, which says currencies should trade at the rate that makes the price of goods the same in each country. For example, if the price of a Big Mac translated into Dollars is above US$ 3.54, its cost in America, the currency is dear; if it is below that benchmark, it is cheap.
Source: The Economist

There's no need for you to worry about Satyam's 53,000 employees. Because there aren't 53,000 employee working for the company after all! Satyam's ex-CFO has revealed that the company has only 40,000 actual employees and the remaining 13,000 are just fictitious! Ghost employees! These numbers were faked to siphon off money in the name of employees (who weren't really there!). The funds amounting to around Rs 200 m per month were then used by the Chairman to buy land in 'benami' names in Andhra Pradesh.

Employees are the most important and critical assets of a software company. But Satyam's case has made this asset no more than a commodity. Just about every company says that they expect and want their employees to work smarter and harder. Few of them understand that people cannot and will not work this way when they have wrong role models to follow, especially in cases like Satyam.

By doing whatever they have done, the disgraced ex-management of the company has ensured that they have not only risked the careers of the 40,000 'actual' employees that are on its rolls, but have also driven away talent that would have otherwise found its way to Satyam. After all, why would one want to work with a colleague who is not really there?

Indian music maestro A. R. Rahman is in the race for 3 Academy awards. He has received a nomination for the best original score and two nominations for the best original song for the movie 'Slumdog Millionaire'. Way to go, Mr. Rahman!

The benchmark BSE-Sensex closed the day nearly 1.4% lower, in line with the negative sentiment pervasive in all the Asian indices. The Nikkei (4%) and the Seoul Composite (2%) led the pack of losers in the region. European markets have also opened on a weak note. The anxiety of the earnings season amidst the strong recession in most parts of the world is keeping up the pressure on world stock indices. US index futures have also declined. The demand for gold as an alternative investment slackened in Asia today as the dollar strengthened.

04:50  Today's investing mantra
"It requires strength of character in order to think and to act in opposite fashion from the crowd and also patience to wait for opportunities that may be spaced years apart."- Benjamin Graham
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