Stash cash under carpets in 2009 - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Stash cash under carpets in 2009 

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In this issue:
» Gold enters dangerous territory
» China's caveat about protectionism
» After home loans, SBI sets eyes on car loans
» NTPC losing UMPP race
» ...and more!

Image source: CNN Money
"Stash cash under carpets in 2009". That is probably the best thing that the US government can tell its citizens this year. And for once you can be glad for not being a citizen of the most powerful nation in the world.

25 banks failed in the US in 2008. The number has gone to 14 in the 12 weeks of 2009. This suggests that the rate of bank failures in the economy is quickening as the economic crisis deepens. With more consumers and businesses likely to default on loans as the recession drags on, economists believe that the pace of bank failures could accelerate further.

Although the US government has repeatedly claimed that it will not allow major banking institutions to fail, Citigroup and Bank of America being cases in point, some embattled regional banking giants are expected to be difficult to save. Conceivably, it is anticipated that we may see some larger names fail as we go forward.

The US Federal Deposit Insurance Corp. (FDIC) guarantees deposits up to US$ 250,000 per account. The FDIC has maintained that it expects its deposit insurance fund to suffer US$ 40 bn in losses through 2013. It has therefore asked the US Treasury to enhance its borrowing limit. Also, so far the FDIC has often found buyers for the beleaguered banks. However, the same may not be easy in the future.

The Dow Jones index ended at a fresh six-year low yesterday, as worries about the outlook for the banking sector exacerbated fears of a prolonged recession.

As far as our outlook on Indian banking sector is concerned, most banks envisage higher slippage rates and provisioning costs in the next fiscal, which may eat into their profits. Having said that, the sector continues to remain very healthy as compared to its global counterparts in terms of systemic risks and safety of depositors' money.

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US manufacturing activity in January registered its largest one-month drop since 1982 with the disappearance of 207,000 jobs. This has raised doubts whether any goods are being manufactured in the US anymore. According to the International Herald Tribune (IHT), what US is in fact doing is moving upscale and making efforts to become more efficient. Despite the plunging activity in manufacturing, in value terms the country is still the largest hitting US$ 1.6 trillion in 2007. For every US$ 1 of value produced in Chinese factories, the US generates US$ 2.5. Given that low cost production has moved overseas, the US is increasingly concentrating on producing high end goods especially ones that other countries cannot really make. This includes heavy equipment, circuits that go inside other products, aircraft, missiles, space related equipment, farming equipment, gas turbines and the like. What is important to note here is that in times of recession, jobs are especially lost in those manufacturing industries which make low end goods. The chances of job losses are lesser in high end jobs due to the requisite skills and expertise required. In that sense, the US does seem to have an edge.

It is widely believed that gold is the best hedge against inflation. That theory seemed to hold when fear of inflation was at its peak last year. Then why is gold doing so well when the world is staring at the prospect of deflation? The answer lies elsewhere. The stimulus packages worldwide have injected huge amounts of money into the economy. When paper currencies lose their value, hard currencies like gold and silver become attractive.

So, the present demand for gold is not coming from consumption for jewelry or industrial applications. It is coming from financial investors. And that is dangerous territory. Financial investors identify asset classes based on fundamentals. But soon all judgment is dropped in the chase that follows. Without realistic upper limits to valuation, bubbles get formed in asset prices.

This happened to real estate, equities and commodities in the past few years. We wonder if now it is the turn of the yellow metal.

China, the factory to the world, is worried. And it has every reason to be. Economic turmoil across the globe is translating into idle capacities and unemployed factory workers in the world's fastest growing nation. As per estimates, the country needs to grow at around 9%-10% to keep unemployment from rising to alarming levels. But the number once considered 'all in a day's work' is now proving to be a luxury.

And if its cup of woes wasn't brimming over, it has a new threat to contend with. The threat goes around by the name of 'protectionism'. So much so that, the country's commerce minister, through an article on the Wall Street Journal, has made an appeal to nations to keep the world trade flowing and not erect unhealthy barriers. He argues and rightly so that although erection of trade barriers during recessionary environment is not a new phenomenon, it has met with disastrous results on all the occasions. Be it the tariff barrier by US in the 1930s or the most recent East Asian crisis, economic woes, instead of improving, worsened further and only when the barriers were lifted, did improvement happen. Hence, the message seems to be loud and clear. Avoid protectionism and come to the other side of the present recession relatively faster.

Of course China is going to be one of the major beneficiaries of the same but not the only one. After all, it imported US$ 1.33 trillion worth of goods from countries around the world in 2008, thus boosting the economic development of its trading partners. If a nation knows its comparative advantage and sticks to it, cross border goods flow is indeed a two way street.

Meanwhile the largest lender in India, the State Bank of India (SBI), is increasingly becoming the subject of envy for many of its peers. This is not just because the bank is amassing a large scale of low cost deposits and is going full steam on its expansion plans.

SBI recently raised many eyebrows when the bank froze the interest rates on new home loans at 8% for one year. This move has apparently helped it cannibalise on a large share of the home loan segment belonging to its private sector peers. It has now set its eyes on capturing a share of the auto loan segment. And what better way to do so than finance the car that is set to revolutionise the Indian auto sector? As per a leading business daily, SBI has been appointed as the sole booking agent for the world's cheapest car, Nano, being built by Tata Motors. The car is expected to be launched in March 2009. SBI has sweetened its offering by freezing the interest rates on new car loans at 10% for a period of one year.

While a higher market share may be a good thing, the bank needs to maintain caution on the quality of the new loans given the low provisioning headroom available at the subsidized interest rates.

The country's largest power company NTPC needs to do some serious bucking up if it wants to win any ultra-mega power projects (UMPPs) currently in the process of being awarded by the government. Out of the four UMPPs already awarded, it has failed make a bid competitive enough to win even a single one. As per a report in Mint, a senior government official has been quoted saying that NTPC has to do some innovative thinking since in future all new projects will be awarded through a bidding process. Innovation may definitely be the need of the hour for NTPC considering the fact that the company's bids so far have been way out of league compared to the winning bidders.

The Indian markets began their losing streak right from the first day of the week itself. It began with a negative reaction to the interim budget presented on Monday, and continued right through the rest of the week. The benchmark index, the BSE-Sensex lost 8.2% during the week, and incidentally turned out to be the worst performer amongst its Asian peers. Chinese markets too lost about 2.6% but relatively that was the best performance in the Asian region.

Germany was the worst performer amongst the global markets with a loss of 9% for the week. That was followed by France and UK which lost 8.2% and 7.2% respectively. The Dow Jones index lost 6.2% during the week. It may be noted that the Dow Jones slumped to its 6-year low on Friday. The low of the last bear market was in October 9, 2002. November 2008 seemed to be the lowest point in financial markets as the panic around the sector's turmoil was at its peak then. But that does not seem to be the case as the US government's bailout package has succeeded little in cheering investors.

Source: Yahoo Finance Source: Yahoo Finance

In line with the uncertain investing environment in other asset classes, gold closed at about US$ 973 per ounce, higher by 3.2%. Indian gold prices moved closer to a high of Rs 16,000 per 10 grams. Crude oil rose 3.3% during the week to close at about US$ 39 per barrel.

04:55  Weekend investing mantra
"The stock market is filled with individuals who know the price of everything, but the value of nothing" - Philip Fisher
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