What's an Obama Gap? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What's an Obama Gap? 

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In this issue:
» Paul Krugman on the 'Obama Gap'
» Companies, countries, currencies...all facing gloom
» Roubini's another dire prediction
» ...and more!

"Mr. Obama's prescription doesn't live up to his diagnosis. The economic plan he's offering isn't as strong as his language about the economic threat. In fact, it falls well short of what's needed." These are the words of Paul Krugman, the noted economist who won the 2008 Nobel Prize in Economics. Mr. Krugman's despondency seems pertinent given that the policies Obama has outlined are just a mirror image of what George Bush had done to bail the US financial system out of the crisis. Just like his predecessor, Obama is also planning to throw trillions of dollars at the problem that was created due to trillions of dollars.

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Krugman writes in his article for The New York Times, "Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it's able to sell. And the Obama plan is nowhere near big enough to fill this 'output gap'."

Obama has done well to promise imposition of restrictions on future bailout money, especially for its use for such things as Wall Street bonuses. However, we are yet to hear of any tough action on the ground. The Americans are hoping, and expecting a better future under Obama's presidency, from what we have seen and heard so far. However, he has used the power of his eloquence to convince US citizens that the only sensible path to recovery is to refuse to spend more dollars to save shaky borrowers. In our opinion, he also needs to explain to his fellow citizens the virtues of saving rather then spending more than their incomes.

Only after the mess is clear should he go ahead offering companies and consumers tax breaks, loans, and grants they need to help build the foundation for a strong recovery. This will enable him to cut short the duration of this crisis. He will be able to restore faith in the system and end the recession faster.

Krugman concludes, "Right now we seem to be facing two major economic gaps: the gap between the economy's potential and its likely performance, and the gap between Mr. Obama's stern economic rhetoric and his somewhat disappointing economic plan."

Source: Reuters
Reading financial newspapers - domestic and international - is really depressing these days. Ask any top manager and he/she will describe the agony of companies across sectors. The recession has not spared anyone. Headlines on the leading global news portal Reuters, speak the entire story in few words. See the adjacent image. Seven out of ten headlines point to the terrible situation faced by corporations worldwide ranging from those that taught the world management strategies (GE) to those that preached manufacturing prowess (Toyota). Also facing trouble is a company that sells the world's best electronic items (Samsung), one that makes the world's best defense equipments (EADS), one that designs the world's best bikes (Harley Davidson), one that drills a large part of earth's oil (Schlumberger), and one that makes copying simpler (Xerox). Not one has been spared! Where have we got ourselves to?

The copier is now copying the world. We are talking about Xerox, the name synonymous with the photocopying business and often used to describe the process. The company has reported a profit of just US$ 1 m during the quarter ended December 2008, from US$ 382 m in the corresponding quarter of previous year. Sales declined by 10%. Pressure on sale of printers and other hardware equipment on the back of a cut in technology budgets, has led to this constrained perfomance. Xerox's main clients are also facing difficulty in getting financing needed to purchase large equipments.

Not just companies, even countries and their currencies are facing doom. UK, for instance, has statistically entered recession given that its GDP has fallen for two consecutive quarters (the official definition of recession). Given these dire times, the pound continues its slide against other key currencies like the US dollar and euro. The pound has slid to the lowest level since 1985 against the dollar and is headed for its biggest weekly drop in three months. The Bank of England has already cut interest rates to lowest in three centuries but the dope has not really benefited the UK economy. Unemployment is on the rise and housing prices continue to fall. The sun seems to be setting on the British Empire, finally in their backyard!

Call it the mother of all healthcare acquisitions. Pfizer, the world's largest drug-maker by revenue is in talks to acquire its rival Wyeth in a deal that could be valued at more than US$ 60 bn. Experts see this deal as a must for Pfizer given that it is facing uncertain times as the patent on its flagship cholesterol drug 'Lipitor' will expire in 2011, and the company has not yet found any replacement for the projected loss in revenues.

Want to call the shots? Invest! This is what India's largest engineering company L&T seems to be doing. As reported on Bloomberg, the company has increased its stake in Satyam to 12%, from 4% earlier. This hike is supposedly done with a view of L&T having a greater say in the rescue of the fraud-hit software firm and is precursor to the former's acquisition of the latter.

L&T's Chairman had recently commented, "My biggest worry is that nothing is going to happen over the next three months, and Satyam will be dead by then. The need of the hour is to save Satyam from disintegration. For shareholders, it is important that its value is not eroded any further. We are more than ready to help if we are approached by the government agencies."

While Mr. Naik's predicament is understandable given that L&T is sitting on a mark-to-market loss of over Rs 4 bn due to a slide in Satyam's share prices, the fact is that L&T is trying to aggressively diversify again into a field where it does not have much experience. The company is known for its engineering skills. But do we see it as a software superpower in the future? Definitely not!

The man who called the financial bubble's bluff is at it again. Nouriel Roubini, the professor of economics at the New York University's Stern School of Business has predicted that stocks around the world will continue on their way down on the back of slowdown in China, the world's third-biggest economy. He's projecting a further 20% decline in global stock prices.

After slumping in early trade after GE's lower quarterly earnings, the US markets managed to close just marginally in the red. CNN's financial website attributes this to Google's strong performance and a rally in banking stocks. This week has seen grim earnings reports coming from some large American companies like GE and Citibank. Positive surprises from the likes of IBM, Apple, and Google have however curbed the damage.

Source: Yahoo Finance Source: Yahoo Finance

In other global markets, Asian indices closed the week with large losses. As for the Indian markets, the BSE-Sensex was the biggest loser among its Asian peers. The index closed with losses of almost 7%, driven by weak December quarter performance reported by large Indian companies as also by a weakening economic outlook.

04:55 Weekend investing mantra
"I spend about 15 minutes a year on economic analysis. The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going" - Peter Lynch
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