Beware! Second wave of crisis lurks - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Beware! Second wave of crisis lurks 

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In this issue:
» Bailouts may have to be scaled considerably higher
» Geithner's googly
» More than 300 Indian companies fumbled here
» Aditya Birla group has designs on retail
» ...and more!

It's not over until it's over. And this is exactly what policymakers across the globe are perhaps failing to realise. Agreed that they fully comprehend the gravity of the current economic mess. But things could turn a lot worse before they get any better. This warning was sounded by none other than the world's biggest bond fund PIMCO.

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Koyo Ozeki, the man who heads PIMCO's Asia Pacific credit research believes that the economic setback is still nascent and any further erosion in housing prices might aggravate the situation, setting in motion another wave of asset price erosion and possibly, culminating into a second wave in the financial crisis in the next six to twelve months. Given that most countries have gone nowhere despite undertaking huge fiscal as well as monetary stimuli, the 'second wave' is a possibility that even the staunchest of optimists will find hard to ignore. If it does indeed materialise, governments will have no other option but to further increase their spending, which in turn will deteriorate their finances even more. Little wonder, PIMCO is advising clients to avoid longer term bonds in Asia against this backdrop of high government spending.

The US Fed's strategy of lowering interest rates may not have led to increased lending just yet. But it is definitely leading to a few institutions that are heavily invested in government securities to dramatically change their investment mix. And there couldn't have been a better harbinger of this change.

As per Bloomberg, The New York State Lottery is proposing for putting a part of its US$ 1.3 bn prize fund from US treasuries to stocks, corporate bonds, real estate and hedge funds. The reason - it wants to increase the returns it gets from its reserve funds so that the huge budget deficit that is staring the New York State in the face could be reduced to some extent. If at all it gets the permission then it would be the first state lottery among the 20 largest to shift to pension fund style investments from treasuries. While the returns from stocks are of course going to be a lot more volatile, but at current valuations, it does look like a gamble worth taking. Who better to understand the same than the institution where gambling is a way of life?

"Disappointing, inadequate, ill-conceived" - were just some of the adjectives floating around in the newspapers, especially of the pink types today morning. Also, the US markets plunged yesterday with the Dow edging lower by more than 4%, its lowest points since end November.

And what caused all of this? Well, it was a reaction to the US Treasury Secretary Tim Geithner's new rescue plan to restart the frozen credit markets and strengthen the balance sheets of the troubled banks. Needless to say, Geithner's plan was seen as a huge letdown. Experts are of the opinion that the plan falls woefully short on both the fronts. Neither does it talk of making enough capital available to recapitalise the banks nor does it give a detailed outline of how exactly some of the toxic assets clogging banks' balance sheets will be removed.

On the former, Giethner's plan leaves around US$ 120 bn for boosting the capital of banks, an amount that many people feel will not be enough to save even one large bank let alone a few banks. Although some ideas did meet with approval, sadly, they were few and far in between. Thus, if the reactions are anything to go by, looks like the US Treasury Secretary will have to come back to the drawing board pretty soon.

We are well into February and the Union Budget is just around the corner. But with elections looming in May, this budget is more of an interim budget and one which is likely to offer considerable tax breaks as the economy slows down. Some tweaking is expected in the indirect tax structure, besides higher depreciation rates to bolster investment and extension of tax breaks for the IT sector on the direct tax front.

In the case of indirect taxes, the finance ministry is contemplating various proposals such as lower excise duties for auto, auto components and cements. On the direct tax front, many IT units which were not getting the 100% tax holiday on profits as per the SEZ Act because they were set up under their parent companies and not independently, might get full tax benefits. Depreciation benefits could also be enhanced especially for plant and machinery and commercial vehicles to boost expenditure on capital items. Even though this is an interim budget there will be some pressure on the government to introduce some relief measures before elections begin so that some benefits could start trickling in. What happens after that is anybody's guess.

Looks like the things are beginning to take a turn for the better for the balance sheets of Indian real estate companies. As per reports, biggies like DLF and Unitech have been able to raise longer term cheaper loans so that these could take the place of costlier short term loans which was not only impairing their profitability but was also leading to liquidity problems. In fact, Unitech's MD even went to the extent of saying that hopefully they should be in a position to look at other opportunities and initiatives. That hope though looks unlikely to materialise anytime soon as demand for housing continues to remain poor.

If you thought the economic slowdown has been taking a toll on Indian retailers, think again. Aditya Birla Retail, which runs the supermarket chain 'More', certainly shows no signs of any slowdown. The company plans to increase sales by 18 times from Rs 12 bn this fiscal to Rs 220 bn by FY14. It plans to:
  • Expand supermarket stores from 670 now to 2,100 by FY14.
  • Expand hypermarkets of 50,000 square feet from 2 now to 14 by FY10.
  • Enter the milk and dairy products business with its own private labels. It currently sells over 300 private labels in cereals, processed foods, personal care, detergents etc.
  • Raise funds from the public when business achieves a certain level.
  • It is not alone. The Future group has recently announced plans to become Rs 100 bn retailer by introducing new private label brands. We wonder if these companies are overoptimistic or Subhiksha was just a victim of a bad strategy.

Source: Business Standard
Throughout the last month when Indian companies were announcing their December quarter results, there were many that reported losses on foreign exchange transactions (loans, receivables, or derivatives). The count did not seem to end. We now have the figure, courtesy a report in today's Business Standard. The report states that 335 companies reported forex losses (or provisions for the same) during the said quarter, amounting to Rs 96 bn, or almost US$ 2 bn.

This number of companies is much higher than the 107 that reported such losses/provisions during the April-June 2008 quarter. We wonder if such disclosures would have come when the going was easy and companies were valued on managements' words and month-ahead plans rather than their long term standing and quality. Welcome to the post-Satyam world!

Most Asian markets ended in the red today with the Indian benchmark, BSE-Sensex also ending with marginal losses. However, the index put in a much better performance in the second half of the trading session, managing to close shade below breakeven (down just 30 points, or 0.3%), a possibility that seemed remote when markets opened for trading today. Most European indices are trading weak currently. In the US markets yesterday, the Dow Jones Industrial Index edged sharply lower, losing more than 4% as Geithner's plans of fixing up the US financial sector fell way short of expectations.

04:50  Today's investing mantra
"High prices inside of a year will typically be 100% of the low price. Businesses don't change in value that much. That is simply crazy. There are extreme degrees of fluctuation, and Mr. Market will call out the prices. Wait until he is nutty in one direction or the other." - Warren Buffett
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