The Worst Ever January - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The Worst Ever January 

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In this issue:
» US economy, stocks go downhil
» Tata Motors' growing angst
» Bank of America defers bonus payments
» India's favourable demographic dividend
» ...and more!

Things are indeed not looking good for the US. The economy shrank at a pace of 3.8% during the fourth quarter of 2008, which is the worst showing in a quarter century. Obviously, the deepening recession and the consequent cut back in spending by consumers and businesses alike were the reasons behind such poor showing. And the scenario is only expected to get bleaker with the current January to March quarter touted to be the worst.

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As reported in a leading daily, the fourth quarter was by far the weakest three-month period in 2008, and the 3.8% figure is likely to be revised even lower as the US government makes new estimates based on more complete data. Piling up of inventories was stark during the quarter as demand slipped and businesses were not able to cut production at the same rate. Just goes to show that 2009 is not likely to be an easy year by any yardstick.

Such abysmal reports of economic growth over and above the terrible quarterly earnings data has taken its toll on the US markets in the month of January, and has caused an unprecedented investor rout. The Dow Jones Industrial and S&P 500 finished January with losses of 8.8% and 8.6%, which is their worst-ever January performance.

Priorities have been defined. The first bill that president Obama has signed into a law is a legislation aimed at extending the deadlines allowing lawsuits for unequal pay to women. The law is named after Lily Ledbetter, who worked for Goodyear Tire & Rubber for almost two decades. After realizing that she had been receiving less pay than her male counterparts within the same company, she sued it. But all she got was the Supreme Court telling her that her claim of discrimination came too late and thus would not be legally viable. The 'Lily Ledbetter law' is designed to make it easier for people to sue for perceived discrimination dating back decades.

Taking cues from the disapproval expressed by the American masses and US government alike, large banks are finally showing some signs of sobering down as far as bonuses are concerned. As per a Bloomberg report, Bank of America is deferring payment of 2008 bonuses at its capital markets and investment banking units over three years. Employees who expected a bonus in January based on their 2008 work will instead get most of it in three annual installments, starting in February 2010. Only less than 10% of the amount due is expected to be paid in quarterly installments this year.

The financial crisis has already claimed many victims. Perhaps one of the worst hit of large and reputed companies here in India is Tata Motors. Caught in the midst of trying to gulp down its JLR acquisition, its quarterly numbers released during the week tell a grim story. Its standalone topline registered a decline of 34% YoY during 3QFY09 on the back of a 32% YoY drop in volumes. Operating margins declined by a huge 9.4% and operating profits fell 89% YoY on the back of lower than proportionate fall in expenses. Its bottomline sank into the red showing a Rs 2.6 bn loss for the quarter.

But if you were thinking that that the economic slump in the last couple of months has deprived you of higher disposable income, think again. Statistics show that in the past decade Indians have been much better off. As per the Central Statistical Organisation (CSO), the average Indian's income in FY08 nearly doubled since 2001, even adjusting for inflation. In terms of constant (1999-2000) prices, the per capita income was Rs 16,173 in FY01 and rose to Rs 24,295 by FY08. That made it a rise of just a little more than 50% over a seven-year period. Although the World Bank and the IMF have projected lower GDP growth this fiscal, if eventually the 7% growth does materialise, we could have a sixth successive year of 10% plus growth in nominal per capita income and 5% plus increase in the inflation adjusted per capita income. No wonder the world is looking greedily at India's demographic dividend to cash in on its growing prosperity.

The list of suitors for the beleaguered Satyam has just increased. Business Line reports that as many as six to seven global and Indian companies are vying for a pie of the firm, which is India's fourth largest software services exporter (at least if the sales numbers are to be believed!). For instance, Spice Corporation, which delves in business like entertainment, BPO, IT, retail and mobile handsets, wants to acquire a majority stake in the fraud-hit company. As a matter of fact, Spice has cash of Rs 21 bn in its books, a large part of which was received as consideration by selling its stake in Spice Telecommunication (mobile services) to the Aditya Birla Group.

It's official now. The Provident Fund Organisation has confirmed that Satyam had 43,622 employees on its rolls as against the 53,000 number that we have known all this while. Incidentally, the scamsters had used fictitious employee names to siphon-off money to buy benami properties in and around Hyderabad.

Notwithstanding the gloom all around, the Indian markets performed well during this week. They ruled the roost in the Asian region with the benchmark index, the BSE-Sensex, rising 8.6%, which was the highest among its Asian peers. This was followed by Hong Kong and Singapore, which saw gains of 5.6% and 3.6% respectively. Chinese markets remained closed for most part of the holiday-shortened week.

As far as markets in the developed countries are concerned, France led with 4.4% gains during the week. Next was Germany which saw a rise of 3.8%. The US Dow Jones Industrial Index was the only loser with a decline of 0.9% for the week.

Source: Yahoo Finance Source: Yahoo Finance

Gold ended the week with a jump to US$ 927 an ounce. The surge in the yellow metal's price has been brought about by the unprecedented steps that central bankers are taking to rescue the banking system. Investors buying gold is no surprise considering their low confidence levels in financial assets currently. The US House passed President Obama's proposed US$ 819 bn stimulus package, aimed at lifting the economy out of recession through tax cuts and more than a US$ 500 bn in new spending.

As much as we liked to believe the decoupling theory, it has been proved over and over again in the last one year that the Indian economy's fate is much intertwined with what is happening in the US and the rest of the world. As such, let's hope that the new US president's preliminary coup paves the way for many more such successes in the days to come.

With its television rating points (TRPs) soaring, the newly launched 'Colors' channel has managed to become number one during prime time band (7 pm-11:30 pm) on weekdays, nudging past Star Plus, which was the leader in that genre for several years before this.

04:55  Weekend investing mantra
"There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities; that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant. Those now awaiting a 'better time' for equity investing are highly likely to maintain that posture until well into the next bull market" - Warren Buffet
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