Big Bull bets on gold

Feb 9, 2009

In this issue:
» Experts speak out their minds at ET event
» SBI's effective marketing strategy
» IMF's dire warning
» We're in a mess the govt. has created
» ...and more!

The discussions on 'Equity Market Outlook 2009', an event hosted by The Economic Times recently, brought forth wide ranging views on the Indian economy and stock markets. "India will come out much faster than other countries, but till the disentanglement process continues, India will also feel the pain arising out of deglobalisation," said Uday Kotak, the chief of Kotak Mahindra Bank.

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Master trader and investor, Rakesh Jhunjhunwala, also referred to as the 'Big Bull' outlined his positive view, this time not on stocks but gold. He opined that the strength in gold will continue because currencies across the world would weaken as a result of the bailout packages offered by the central banks.

When asked about his view on stocks, Ridham Desai, the chief of Morgan Stanley India said, "There are a lot of long-term buying opportunities," though he sees Sensex at 8,500 by December 2009, in line with the expectations put forward by most of the other panelists at the event.

ICICI Prudential Asset Management's chief investment officer and deputy managing director Nilesh Shah said, "It's the Delhi winter right now and you are unable to look ahead of the bonnet. Just stay in the car and keep the foot on the accelerator. Winter will not last forever." The broader view couldn't have been summed up any better!

Effective marketing you may call it, but something that is rather not expected of a public sector, but a private sector bank. But SBI's steep downward re-pricing of its new home loan scheme suggests more than just that. The bank's home loan scheme that offers an interest rate of 8% for the first year promises to make the borrower 'happy'. Well, although that may not be the case initially, the borrower will benefit over the longer term.

As per an article in DNA Money, the borrower may be disappointed initially as mathematically the loan bears the same equated monthly installment (EMI) that a borrower who opts for floating interest rate (10.25%) would have to pay. But eventually the benefit of lower interest payment would fructify over the tenure of the loan.

To explain further, SBI has managed to price the loan at a discount by altering the portion of the EMI diverted toward repayment of principal. Accordingly, principal repayment would be higher during the first year when the interest is fixed at 8%. Thus a higher amortisation of the principal in the first 12 months would effectively reduce the tenure of the loan and consequently the overall obligation. Lower outstanding principal would also bode well going forward when the interest rates move higher.

"God loves fun," claimed an unidentified email we received today. It went like this (verbatim):

If we analyze carefully, we come to realize that God (or Nature or Universe) loves fun. In Sanskrit this is referred to as "Leela" (or fun game) of God (or Nature or Universe). Analyze this:
He created Life - and also death.
Day - and also night.
Pain - and also pleasure.
Happiness - and also sorrow.
Virtue - and also ego.

For stocks, he gave EPS growth - and also PE. EPS growth is nothing but virtue, while PE is nothing but ego!

"Shed your ego, and you will become God", the sages have said. How to shed the ego? Either reduce it gradually through conscious efforts or increase your virtues to such high levels that the ego looks pale in comparison.

Similarly, stocks that have high PE are duty bound to maintain robust earnings growth failing which they will have to shed their PE! Market corrections are nothing but stocks shedding their ego for failure to deliver the required virtues.

"Advanced economies are already in a depression and the financial crisis may deepen unless the banking system is fixed," says Dominique Strauss-Kahn, the managing director of IMF (International Monetary Fund). While this is a stark warning, we aren't hearing it for the first time.

The IMF has already cut its world GDP growth estimate for 2009 to 0.5%. This is the weakest pace since the World War-II. Kahn says, "Stimulus packages alone won't succeed in dragging the global economy out of recession unless confidence is restored in the banking system."

Jack Welch would vouch for the last statement made by Kahn. The former chief of General Electric, Welch believes that policymakers need to first focus on the banking system, and only then the stimulus package. He writes in an article for The New York Times, "Healthy banks are to the economy as healthy hearts are to people: They keep them alive with the "lifeblood" of credit. Right now, however, while the patient is having a heart attack, policymakers are busy talking about how much to spend on a suit he's going to wear next year."

Welch has his own experience to back his words. He writes, "During each of those downturns, on any given day in February, even with the economy in decline, you could still predict your April sales figures within a couple of percentage points. Today it's as though a blanket of fog has dropped over commerce: Visibility is near zero."

Well, this is something that will soothe a lot anxious nerves out there. Ken Lewis, the CEO of Bank of America (BofA), one the largest lenders in the US has made a very bold statement. In an interview to a leading US based business channel, he said that his bank will not need any further bailout money from the government, even going to the extent of saying that BofA will repay the US$ 45 bn that it had in TARP funding within three years. It has to be noted that before it acquired Merrill Lynch, BofA was among the least affected banks on account of its limited exposure to toxic assets and low leverage.

Do the man's words and his action mark a fundamental shift in people's perception of how far the bailout has reached or we would rather wait for some more positive news to emerge. Considering what is at stake, waiting a bit more is perhaps the more rational decision.

Almost 90% in debt, with little to spare and a wide scale pre-elections spending to see, India's balance sheet is in a real mess. And the most horrifying part of this is that the perpetrator, the government, is not recognising it at all! Apart from the official mention that the deficit (excess of expenditure over income, funded by borrowings) is on a rise, we are yet to hear any meaningful caution from the government of the mess that it has brought us into. Rising fiscal deficit is a silent killer, and has already been eating away at India's economic growth for the last several decades.

The politicians have already found scapegoat in the external slowdown for the mess they themselves have created. But the fact remains that wherever we are today is all thanks to populist expenditure and flagship programmes that, while benefiting the politicians, are yet to benefit the lives of the governed - we the people!

Indian markets staged a strong rally today as the BSE-Sensex closed with gains of over 280 points (3%). Among other key Asian markets, while China (2%) and Hong Kong (1%) also ended in the positive, selling pressure was seen in Japan (1%) and Korea (0.6%). Markets in Europe have also opened the day on a mixed note.

As reported by the Press Trust of India, the Indian economy is expected to grow by 7.1% in the current fiscal (FY09), which seems good enough in these turbulent times. This is however the slowest growth recorded by the economy in five years. In the meanwhile, Bloomberg has released a consolidated list of companies whose promoters have pledged their shares. Click here to view the list.

 Today's investing mantra
"Institutional concentration, conformity pressures on professionals and overreactions to the current economic problems seem to me to present the investor with some of the greatest stock market opportunities in decades." - David Dreman

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