The worst quarterly loss ever - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The worst quarterly loss ever 

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In this issue:
» Marc Faber’s dire predictions
» China’s ingenuity
» The worst showing of the modern era
» DLF bites the bullet
» ...and more!

Bad news just doesn’t stop coming in for the US corporate sector. With majority of banks making write offs worth billions of dollars in an effort to clean up their balance sheets, companies that comprise the S&P 500 have reported their first ever combined quarterly loss in the fourth quarter. As per Bloomberg, never since 1936, since quarterly data began, has such a thing happened. Perhaps another indication that this recession is indeed no ordinary recession. And we may not be done yet. The reluctance of the banks to lend money despite massive recapitalization could well mean that more toxic aka loss making assets are sitting on the balance sheets, waiting to be written off. No wonder, more and more experts have gone on record stating that the size of the bailout may have to be increased considerably or the entire cache of bad assets be transferred to a bad bank so that balance sheets are unclogged and confidence is restored back into the economy.

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Dr. Doom, Marc Faber has written an interesting piece titled ‘Synchronised Boom, Synchronised Bust’ for the Wall Street Journal. The allusion, of course is to the greatest synchronized boom in the history of capitalism between 2001 and 2007 and the vicious down cycle that followed, which just as on the upside did not spare any asset class either. Faber has put the blame of the mess that we find ourselves into, squarely on the shoulders of the US Fed. He has accused the Fed of not letting free markets take their natural course but instead indulging in interventions that although resulted in short term pain aversion, eventually set the world up for a bigger crisis down the road.

Bailout of the hedge fund LTCM (Long term Capital Management), ultra-expansionary policies following the Nasdaq bubble and failure to take interest rates high enough, were cited as some of the examples that had a stamp of a bad Fed policy. And Faber is worried that the Fed is not done yet. According to him, the same people who were the architects of the previous crises are setting the world up for another crisis by throwing billions of dollars towards troubled banks. What may follow, Faber argues, is possibly an inflationary depression with dire social consequences.

There have been efforts dime a dozen to lure the consumers to spend in the current depressed environment. But this one might surely take the cake! As per reports, a number of Chinese cities are paying some 5% to 10% of their civil servants’ salary in the form of gift vouchers. And these are no ordinary gift vouchers. They come in with a maturity date, which means that people ‘have to’ utilise them within a specified time period or risk rendering them worthless. We wonder if this strategy does not work then what will. However, there are a few skeptics that doubt the longevity of the plan as consumer confidence in the country remains weak. Furthermore, with not enough social welfare net, an uncertain economic environment is likely to force people to save for future needs.

While the government has been handing out ‘gift vouchers’ in one nation, companies in the other are pleading for more government funding. We are referring to the US auto behemoths GM and Chrysler. The two companies said yesterday that worsening demand for their cars and trucks has meant that they would need another US$ 21.6 bn to pull themselves out of the troubled waters. However, this may still not be enough to save close to 50,000 jobs as even with the funding, they will have to axe atleast that many people. Not doing so of course would mean even greater job losses, not to forget the deadly blow it might give to the already fragile economy.

The central government may not have announced another fiscal stimulus package in the recently held interim budget. But there is still a Rs 60 bn stimulus coming along for the country. How, you may ask? Well, this is the total amount that will be spent by all the concerned parties during the forthcoming Lok Sabha polls. And most of it would fall into the laps of services sector, which is often believed to give a bigger push to the economy than other sectors.

Of course, given the state of politics in the country, one can safely assume that a significant chunk of the expense will not even flow through official channels. But in the past, serious contenders are known to spend lavishly in order to lure voters and there is no reason why things should be different this time around.

Commodities may have lost steam fuelled by the global financial crisis but that is precisely why the allure of the precious metal gold has only increased. Gold touched new highs of Rs 15,200 per 10 gram today as the prospect of a slowing economy caused many investors to make a beeline for gold as a source of investment. The other reasons that contributed to the rise in price of gold in India have been the fall in the rupee and the stock markets and the ongoing marriage season.

In the international arena too, gold is gaining lustre with prices touching US$ 960 an ounce. What’s more, demand for the yellow metal is expected to remain firm as the bleakness of the economic environment in the future persists.

While it may have come as a surprise to many, ICICI Bank’s disclosure that it has lost nearly Rs 115 m by way of credit card defaults in 8,280 cases seems well in line with the bank’s reported gross NPA numbers for 9mFY09. It may be recalled that in early 2008, SBI Cards (SBI’s joint venture with GE) had similar experience in credit card delinquencies and reported NPA level of 16% along with losses for FY08. Banks like SBI and ICICI Bank that are the largest issuers of credit cards in the country have seen the negative impact of their aggressive foray into this segment in recent times. Players like American Express Bank, Citibank and HSBC that have a global experience in the credit card business have also not been spared from losses in the domestic market.

Rationality it seems is slowly returning back in the real estate industry. DLF is the latest case in point. As reported by leading business dailies, the company has decided to re-launch its first project in Bangalore at 33% lower prices. This is a second cut that the company has announced after it had lowered the price of the same project by 20% in November 2008. The company has also reduced the sizes of apartments by around 17%.

While DLF is cutting home prices to elicit buyer response, the heated debate regarding home loan pricing between private and public sector financiers might also benefit home buyers. HDFC’s chairman, Deepak Parekh, has come down heavily against SBI for the latter’s predatory pricing of its new home loans. He has called SBI’s 8% home loan a gimmick to attract HDFC’s and other private sector bank’s customers. As a matter of fact, this low rate offered by SBI has made the market more competitive, even as private sector players find it tough to bring their rates down due to higher cost of funds.

As quoted by IBN Live, Mr. Parekh says, "I think SBI's growth in mortgage loans may not have been strong this year. So it could be a kind of gimmick, kind of teaser rate to get customers locked in for one year at 8 per cent."

Government funding for making the unviable projects viable for private sector players may be a thing of the past. If the acting Finance Minister Mr. Pranab Mukherjee’s views are anything to go by, the Planning Commission’s proposal to increase the upper limit for Viability Gap Funding (VGF) for infrastructure projects under the public-private partnership (PPP) model will find no supporters. The proposal was to increase the limit on VGF from the current 40% due to lower private sector participation in many infrastructure projects that came up for bidding in recent times.

As per a leading business daily, around 15 road projects worth between Rs 200 bn and Rs 300 bn that came up for bidding did not attract a single bidder. However, Mr. Mukherjee has claimed that the additional funding provided by the government to IIFCL should suffice the funding needs for the PPP projects. The Finance Ministry seems to be in no mood to take the burden of private sector costs in its books at a time when the government’s balance sheet is itself heavily leveraged.

In the meanwhile, mood in the Asian markets remained split today as some of the indices gained while the others drifted lower. The Indian benchmark, BSE-Sensex, belonged to the latter category as a see-sawing day of trade finally saw the index closing marginally below the break even. European markets are also trading in the negative territory currently.

04:55  Today's investing mantra
"If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter." - Warren Buffett
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