This could send commodity prices crashing! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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This could send commodity prices crashing! 

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In this issue:
» China freight index defies gravity
» Health insurance cost to increase greatly
» Buffett words of wisdom from his latest letter
» Pranab's dreams could run into RBI wall
» ...and more!!


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00:00
 
China has done it again! The numbers coming out of its economy look out of sync with reality on yet another occasion. Consider the shipping data for instance. There has been a marked increase in the number of ships sailing around China these days. And this has made the country's shipping indices go berserk. Freight costs in China have jumped nearly 20% in the last month and a half alone. And the trend is showing no signs of reversing. Infact, the freight index jumped another 4% last week.

However, there is an even more surprising element to this development. The jump in freight indices is almost entirely a Chinese only phenomenon. Shipping indices in the rest of the world have barely budged. In fact, the Baltic dry index, an indicator of worldwide shipping activity, fell sharply in January and was nearly flat all of February. Thus, what explains this anomaly? Sadly, the indices do not indicate what goods are being shipped from China. But there seems to be more and more evidence at hand that basic materials like metals are leaving Chinese shores for other countries.

Thus, the big trend of 2009 where the dragon nation was stockpiling commodities in hope that their prices would increase, seems to be unwinding in a big way. The consequence? Commodity prices could come crashing down as a still weak global demand would fail to cope up with increased supply coming out of China. Thus, will this be the pin that deflates the current bubble? We do not know for sure. But it does look like a high probability event.

00:53  Chart of the day
Commodities could appear more likely to crash right now than go up in price. But if history is any indication, they are expected to outperform paper assets like stocks and bonds in the current 17-year period that we are in. And this in a nutshell is the crux of today's chart of the day. If we were to divide period since 1914 into a number of periods of say around 17 years each, then we have had a situation where if paper assets have outperformed hard assets like commodities during one 17-year period, then the succeeding 17-year period has seen hard assets outperform paper assets like stocks. And this cycle has repeated itself many times. It should be noted that the previous 17-year period which ended in 1999 belonged to stocks and hence, the current 17-year period, which will end in 2016, will most likely go in the way of hard commodities. Already, for the first 10 year period, commodities have outperformed stocks, returning 136% as opposed to the S&P 500, which is down 24% during the same period.

Source: Daily wealth, Reuters, Yahoo Finance

01:39
 
Health insurance is set to become expensive in India. The Finance Minister in his recent budget speech has decided to impose service tax on payments made by insurance companies to hospitals in settlement of claims where policyholders had received cashless service. As reported in a leading business daily, each year the non-life industry pays around Rs 60 bn by way of claims to the healthcare sector. The insurance industry for its part is hoping that they will now get some offset benefit on account of the service tax that is being paid on premium collected. Whatever be the case, it appears that health insurance will turn out to be a much more costly proposition for the end consumer. Will this impact the growth of health insurance? Well, only time will tell.

02:05
 
The FMCG companies must have not liked this, but the Finance Minister had his financial compulsions. We are talking about the Union Budget 2010 taking away the tax concessions after March for factories set up in Himachal Pradesh and Uttarakhand. As for the concessions granted for Jammu & Kashmir, these would cease to exist in 2012. As reported by Mint, this "marks the end of a golden era for so-called fast-moving consumer goods (FMCG) companies." After all, a whole host of FMCG companies had utilised the tax benefits in these regions for year to lower their costs and become more competitive.

Midsize firms had been the biggest beneficiaries of the same. Given that such tax breaks were a relief for them in their fight against the big players who anyways had deep pockets to splurge on advertising and distribution. This policy provided the mid-size FMCG firms a way to cut their costs and growth their profits at a faster rate than their sales. All this will change now.

02:39
 
Warren Buffett's annual letter to shareholders for this year is out. Many experts had predicted that the freshness quotient in Buffett's annual dose of wit and wisdom would be rather low this year. Unfortunately, we would have to agree. Of late he has been far more willing to give interviews. As a result, his opinion on many current issues is now well known.

But we are seldom disappointed with the letter when it comes to his thoughts on investing. There were a few pointers in this year's letter as well. Take for instance his advice to small and large investors on how should they make their stock investments. He was of the opinion that as an investor with small capital, one should prefer businesses that have high returns on capital and that require little incremental investment to grow whereas an investor with large amounts of capital, one can invest in businesses that regularly require large capital expenditures as long as these businesses have reasonable expectations of earning decent returns on the incremental sums they invest. Buffett has also mentioned in the letter that one should avoid businesses whose futures one can't evaluate, no matter how exciting their products may be. As per him, often the future includes competitive dynamics that would decimate almost all of the companies entering those industries. Clearly, these two thoughts alone are worth years of careful study of the art of successful investing.

03:26
 
The Finance Ministry's hopes for inclusive growth of the Indian economy could be set for a major setback. By offering more bank branch licenses to banking and non banking companies, the government hoped to accelerate the nation's savings rate. Particularly by tapping the wealth in the smaller towns and villages. However, if one goes by the data put forth by the RBI in terms of branch locations, the hopes would be met with nothing but disappointment.

Barely 6.4% of private bank's branches are present in rural areas. As against this, their PSU counterparts have done a pretty decent job by having 34% of their branches in the hinterlands. Thus while the private sector banks will be happy to cash in on their additional licenses; the RBI needs to strictly ensure that the purpose of financial inclusion does not get misplaced.

03:54
 
Money managers in the UK have become quite a skeptical lot, to put it lightly. Their investment decisions in the recent past reflect one very clear opinion: after what has happened in Greece, the UK is next. A Bloomberg report pegs a renowned money manager in the UK expecting the British Pound to lose between 20% to 30% against the US Dollar once investors turn their sights on Britain. The general consensus is that the UK is in a similar predicament as Greece. And if it is hit, it could be hit very hard indeed. The government there is busy selling a record amount of debt. The fact that the British Prime Minister in December 2009 increased its planned gilt sales for FY10 to a record 225 bn pounds from the 220 bn pounds announced last April has only served to fuel apprehension further. No surprise then, that many investment funds in the UK now have their biggest holdings in Asia and Latin America, and are more comfortable buying companies that do the bulk of their business abroad.

04:28
 
Meanwhile, the post budget party had an extended run on the bourses today as both the benchmark indices galloped ahead.At the time of writing, BSE-Sensex was trading higher by around 350 points whereas NSE-Nifty was sitting pretty with gains of around 100 points. Buoyancy was also witnessed among Asian indices as most of them closed strong today. Europe however has opened the day on a weak note.

04:45  Today's investing mantra
"When you buy shares in a company, if it manages to produce profits, you are a partner in those profits. On the other hand, if you buy an IBM bond, after 20 years, the company will repay you the money and say 'thank you very much.' It will pay you the interest, but it will not be loyal to you, and you certainly will not enjoy the fruits of its success. That's the big difference between bonds and stocks." - Peter Lynch
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8 Responses to "This could send commodity prices crashing!"

Santhana

Mar 6, 2010

For the low presence of private and foreign bank branches RBI only should take the blame. They hand out the licences for location of all the branches and even the shifting of existing branches. If you leave the no branches added to the private banks' network by the take over of banks like Bank of Madurai by ICICI Bank etc, their rural branch numbers can be counted by fingers. RBI should atleast allow opening of rural and non rural branches on 1:1 basis and to generate business of 1:10 strictly. Then only, we can hope to have an inclusive growth of India.

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Gopalan N

Mar 3, 2010

The FM had only around his last budget in July '09 extolled bank nationalisation and within almost 9 months talking about releasing licences for new banks. Also when PC was FM there was big ticket talk of consolidation of banks and to be completed in 2009 - blame the global crisis anyway. Also talking of rural penetraion if that is the real concern PSU banks seem to have done great service in agri penetration etc and which are generally not very viable as we had seen recently in the 'great write-off'. Therefore there seems something more to all this in this almost surprise move.Makes one wonder whether there is a bigger move to appease the younger 'yuvraj' Anilbhai with some commercial proposition as a conciliation in the 'tangled',highly complex gas pricing imbroglio towards finding a solution. After all almost all the (naturaland commercial) resources are being divided among the 'only' brothers in/of the country. It may be still be green in memory the asoociation and synonimity of the current FM with the nurturing, growth and prosperity(?) of Dhiru and 'Reliance'. Any similarity ? So will it be ONLY RELIANCE CAPITAL like it was ONLY VIMAL for a long long time?!!

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George

Mar 3, 2010

I have started reading the market review in your column just recently. I find there are brilliant brains working behind in your institution. As regards commodity pricing, our finance ministers hope would not be true in real sense, because adverse factors specially natural calamities would grip our economy as well in coming years. But your economic survey point of view it should give some good result for our nation. Let's hope good! Thank you for your good work.

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K.D.Viswanaathan

Mar 3, 2010

The write-up "This could send commodity prices crashing" was highly informative and interesting. I relished reading it.

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H.K.Sahu

Mar 2, 2010

It made wonderful reading, for the insight it gave to the commodity market and health insurance. Keep it up.Each of your letters have been very useful to enable me to make correct judgment in investing. Thanks a lot.

Like 

f.m.lakhani

Mar 2, 2010

Thanks for tweeting world market in short and sweet way.
Indian market do not listen alarms as most of years it has been remained in speculators and this time too result would not be different.

Like 

R Sathyamurthy

Mar 2, 2010

Your Chart of the day analysis makes me ask the following questions, though you seldom take the time off to answer feedback comments:

a) Why a 17 year cycle, why not a 13 year or 14 year or 18 year cycle?

b) Why 1914 is the starting point? Why not some time earlier or before?

Why is that the mailer heading always screams something negative? THIS POINT I KEEP RAISING AND YOU ARE EITHER TURNING A BLIND EYE OR A DEAF EAR OR BOTH.

Like 

Bh V V S Bhaskar

Mar 2, 2010

The exemptions mainly, Excise duties, in respect of factories established in Himachal Pradesh and Uttaranchal is doen by extending them for further period. Govt is not likely to withdraw the benefits keeping in view the political conditions. Probably, new Notifications will be issued in the last week of Mar or April, 2010.

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