The world questions Uncle Sam
(Jan 30, 2009)
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In this issue:
What a difference a year can make. Just a year ago at the World Economic Forum (WEF), air was rife that an American recession, if one came, would be mild and would not spread overseas. Policymakers had views that the strength of world economic growth would enable Europe and Asia to decouple from the American economy.
» Global leaders on the crisis America's building
» "Shame on you," says Obama
» Citi says HDFC is core
» ...and more!
One year hence, the world is questioning America. Global leaders at the ongoing WEF meeting at Davos are worried the way US is trying to stimulate its economy by printing dollars. While few question the need to kick-start the US economy, all seem to be worried about the long-term implications of increased borrowing by the US government, and its potential to drive up inflation and interest rates around the world.
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Ratan Tata is at it again! In his second letter to employees in a span of three months, he has warned them of being ready for tough times and prepare for hard decisions. This latest letter is dated December 31, 2008, and follows the one Tata wrote to his senior managers on November 12, 2008. He has reiterated his concern that the group companies are facing severe times, those not seen in the group's entire history.
He writes in his letter, "The most challenging task will be to sustain a meaningful level of operation through the next nine to 12 months. It will call for hard decisions on the part of the management teams in many of our companies."
While warning employees, Tata has also come down strongly on critics. He writes, "Our critics would say that Tatas can never succeed, and that our recent growth and our major acquisitions will devastate us. I firmly believe that our growth strategies and our strategic acquisitions will contribute to our group's leadership position in the years to come."
Austerity is a virtue, and Mr. Tata must vouch for this. His group companies have made a couple of expensive acquisitions in recent times only to find out later that these were probably mistimed. Interestingly, while his call for austerity might indicate the right voice in these troubled times, the legendary investor Warren Buffett has something interesting to say on such initiatives.
Buffett says, "Whenever I read about some company undertaking a cost-cutting program, I know it's not a company that really knows what costs are about. The really good manager does not wake up in the morning and say, 'This is the day I'm going to cut costs', any more than he wakes up and decides to practice breathing."
Pranab Mukherjee, India's stand-in Finance Minister believes that the country's economic growth in the current year will be around 7%, backed by the stimulus packages announced by the government. He has said, "Though the economy will not grow at 8.9% or 8.8%, it will grow around 7%. There is no doubt about that. Indian economy is sound and will bounce back." While we believe in the soundness of the Indian economy, we doubt whether the bounce-back will happen anytime soon given that the country is largely dependent on improvement in the global economic scenario to drive two of its major growth engines - infrastructure and offshoring.
"Shame on you!" That's what US President Barack Obama had to say after yesterday's report that Wall Street bankers paid themselves bonuses to the tune of US$ 20 bn in 2008. He said, "That is the height of irresponsibility, it is shameful, and part of what we're going to need is for folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility."
He also referred to Citigroup's attempt to buy a plane at a time when it was receiving US tax payers' assistance to stay afloat. It may be noted that the government had to ask the company to cancel the purchase. "We shouldn't have to do that, because they should know better," Obama lamented. It is not hard to understand his reaction given the fact that billions are being spent to bail financial firms out of a disaster of their own making. But like common sense, responsible behavior seems to have become highly uncommon.
And here is the height of shamelessness - John Thain, the former Merrill Lynch executive who was forced out of Bank of America, has indicated that he would reimburse Bank of America for an expensive renovation of his office that included a rug for US$ 87,000 (approx. Rs 43 lac) and a commode for US$ 35,000 (approx. Rs 17 lac)!
Here is an image doing the rounds on the Internet that depicts a 'smooth transfer' of US presidency from Bush to Obama. We hope the actual transfer is as smooth!
While Citigroup may be facing flak from the US government for its proposed 'investment' in an airplane, the former is decidedly keen on retaining its stake in one of the best financial institutions in India, HDFC. Understandably so since India has been one of the largest contributors to the group's profits from Asia in 2008. The significance that Citi places on India is evident from the fact that it is still looking at hiring in India, even as it retrenches employees in other parts of the world. At the same time, Citigroup is downsizing its personal finance business in the country - Citi Financial - which has been one of the pioneers of personal finance in India.
It may be recalled that Citigroup recently split its global business into two divisions, Citicorp and Citi Holdings. While Citicorp is designated to hold all good assets, Citi Holdings will hold the non-core assets, which will ultimately be put on the block. In India, except for consumer finance company Citi Financial, which has had high NPA problems, most businesses come under Citicorp. That explains why Citi considers its investment in HDFC as a 'core holding'.
With most of Indian companies having made their 3QFY09 results public, a trend line can be drawn across profit numbers. And it may not make for a very rosy looking chart. More companies than ever in recent years have reported a drop in bottomline on a YoY basis. If higher operating costs and adverse currency movements were not enough in themselves, the companies also had lower revenues to contend with during the quarter. Economic slowdown made volume growth rather difficult. More so in case of industries like auto, which depend on availability of credit for their topline growth.
Passenger car maker Maruti is a case in point. The company that sells 5 out of every 10 cars produced in the country reported its smallest quarterly profit in four years as besides operating margins and depreciation, subdued topline growth hampered its performance. Consequently, profits were cut into half. However, the company has expressed hopes that correction in raw material prices and better availability of credit would lead to an improved performance in the forthcoming quarters. Given the linkages the sector has to other areas of the economy, even we hope that next quarters do turn out a lot better.
As for results of global corporations, while companies selling necessities like Colgate and Nestle continue to do well, those like Honda and Toyota that are dependent on diverse factors like discretionary spending and interest rates, are kissing dust.
Interestingly, Amazon, the world's largest online seller of books is benefiting from people turning to reading to get over bad times. As Mark Twain rightly said - "Books are for people who wish they were somewhere else."
Japan's cup of woes seems to be overflowing with the country headed for its worst postwar recession. Factory output has plunged a record 9.6% in December, unemployment rate has soared from 3.9% to 4.4% (the biggest jump in 41 years) and household spending has declined by 4.6%. Demand is waning for Japanese cars and electronics and to make matters worse, the yen has gained 18% in the past one year thereby stifling exports. Dark times indeed for the land of the rising Sun!
Indian markets closed strong today. The benchmark BSE-Sensex closed up by almost 200 points. Metal and realty stocks led today's rally in the broader markets. Among other key Asian markets, while Hong Kong closed in the positive, selling was seen in Chinese and Japanese stocks. Markets across Europe are trading mixed currently.
Gold is back to the US$ 900 an ounce levels. The surge is the yellow metal's price has been brought about by the unprecedented steps that central bankers are taking to rescue the banking system. As a matter of fact, investors buy gold when they lose confidence in financial assets. This time it is no different.
"We both (He and Warren Buffett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life." - Charlie Munger
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