Losses keep getting bigger and bigger - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Losses keep getting bigger and bigger 

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In this issue:
» Biggest quarterly loss ever
» Feb auto sales, temporary relief or trend setter?
» The next big bubble according to Warren Buffett
» Vedanta Group's ambitious plans
» ...and more!

The losses just keep getting bigger and bigger. US insurance giant AIG's fourth quarter loss topped US$ 62 bn, the largest ever for any listed corporate in the country's economic history. Deteriorating credit market conditions forced the company to undertake huge write downs and restructuring charges, causing a serious dent to its bottomline. The loss even prompted the US government to inject another US$ 30 bn as capital infusion, taking the total aid it has offered AIG to US$ 70 bn and in the process, making it the biggest beneficiary of the US$ 700 bn TARP program. The aid, argued the government, had been made necessary as not providing it would have posed a far greater risk to the already fragile financial system. With this loss, curtains seem to have well and truly drawn on the assumptions that the global economy would well be heading towards some sort of recovery. Instead, feelings of exactly the opposite kind has gripped investors, further corroborated by the nasty decline in the US benchmark Dow yesterday, that fell to sub 7,000 levels for the first time since 1997.

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Something to cheer for India though! February auto sales numbers of some of the leading players in the domestic market raised hopes that the worst may indeed be over for the industry. Certain measures like the government stimulus package and increased salaries for government employees, courtesy the sixth pay commission, seemed to have played a key role in reversing the trend. Furthermore, interest rate reductions by certain PSU banks have also played their part in reviving the demand.

Not all segments are benefiting from the measures though. Sales of commercial vehicles have continued to go downhill. However, even here the performance has been better than the previous months where sales had been battered out of shape. All in all, while the numbers are indeed heartening, waiting for a couple of more months before passing the verdict could be the right thing to do.

A lot of economists had suggested that in order to unclog the US financial markets, most of the 'toxic assets' be transferred into a 'bad bank'. First signs that the government is working on such a plan were brought to the fore recently, albeit with some amount of tweaking. As per Wall Street Journal, the Obama team is planning to set up multiple funds, instead of one, involving public-private partnership whereby money will be put in by both the government as well as private investors to buy distressed assets. This move will not only lighten the tax payer's burden but the roping in of a private player would ensure that a market of some shape and size would be created as there exists none currently. Furthermore, it will also help in setting up an efficient market price for the assets. The multiple funds would be run by private investment managers, who will have to put up a certain amount of capital. Guarantees of some kind would also be provided to the private investors, who given the nature of the assets and its illiquid markets, would otherwise be too hesitant to put up the money, especially in a risk averse environment as the current one.
Source: The Wall Street Journal

Unclog the credit markets they might, but the investors who will participate in the US government fund raising program by buying into its bonds, might have to pay through their nose later. This is because these bonds are trading at rock bottom yields currently, courtesy risk aversion that has gripped even the most seasoned investors. But once risk appetite comes back into the market, there is no reason why one should keep holding US treasuries that offer close to zero yields. The only way out could be a massive correction in the prices of these treasuries, which in turn will result into huge losses for the holders of these securities.

This is a fact that even Warren Buffett has acknowledged in its 2008 letter to shareholders. He is believed to have said, "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

While the subprime crisis is something that the world is not likely to forget anytime soon, there is a possibility of even a bigger crisis in the making atleast in the US. For instance, the Obama administration is hoping that the recovery of the American economy happens faster and has assumed a real GDP growth of 3.2% in 2010 and 4% in 2011. But if that does not happen, which itself may not be such a big surprise, then US' deficits and debts will prove to be higher than what was projected in the budget. As reported in CNN Money, the president's budget results in a total debt-to-GDP ratio of 96% and rising by 2010. This is after factoring in the current debt owed to the Social Security and Medicare programs. Thus, what needs to be asked is if the US government's debt does reach gargantuan proportions, who will be the one to bail it out?

The global financial crisis is taking its toll on India's trade. For the first time in 7 years, both India's imports and exports have declined due to waning domestic and international demand. As reported in a leading business daily, exports dipped for the fourth consecutive month by 16% to US$ 12 bn in January 2009, while imports shrunk by 18.2% to US$ 18 bn. The trade deficit in January however stood at US$ 6 bn, significantly lower than the US$ 14 bn deficit recorded in August 2008 largely due to the slump in commodity prices. Exports have obviously been hit hard due to the ongoing recession in the US, Europe and Japan, which together make up half of the world output and nearly 40% of India's exports. Fall in imports have largely been due to declining commodity prices such as crude oil, iron ore and the like.

Commodity prices, especially metals, have seen an abysmal fall. And as demand languishes in the midst of the gloomy business environment, the outlook for metals is said to be equally grim. But that perspective is definitely not shared by Mr. Anil Agarwal, executive chairman of the Vedanta Group. He is all set, financing in place, to invest about Rs 700 bn in areas like aluminium, copper, iron ore, silver and zinc by 2012. With this, production capacities of the companies under the Vedanta group would increase manifold and would thus propel the group to the position of world's 5th largest metal and mining company from the present 10th.

"United we stand, divided we fall" is working in reverse these days. While on one hand the divided Asia plans to combine as a single force, the united Europe (European Union or EU) is seeing some cracks. Let's talk of Asia first. As reported in The New York Times (NYT), governments in the Southeast Asian region (excludes India) are talking of the formation of an economic group modeled on the EU as the global recession slows their export-driven economies. The report cites the meeting of the 10-member Association of Southeast Asian Nations (ASEAN) in Thailand last weekend where they signed trade deals and agreements to form an integrated economic community by 2015.

Now interestingly, this integration drive from ASEAN nations comes at a time when the EU is facing severe pressure to hold on to its combination due to disparities in the strength of its constituent economies. "With uncertain leadership and few powerful collective institutions, the European Union is struggling with the strains this crisis has inevitably produced among 27 countries with uneven levels of development," writes the NYT.

Even while Satyam's board is in the process of finding a strategic investor, others are making their interest known in no uncertain terms. Fidelity has hiked its stake in Satyam Computer to 10.17% through the open market. It is now the 2nd largest shareholder after L&T, which holds 12%. The search for the strategic investor through the international bidding process surely promises to throw up some interesting results.

In the meanwhile, mirroring their global counterparts, the Asian markets closed on a weak note today. While stocks in China closed with 1.1% losses, those in Japan and Hong Kong ended lower by 0.7% and 2.3% respectively. Stocks in India also closed weak, as the benchmark BSE-Sensex ended the day almost 180 points down. The rupee slid further to a low of 52.1 to the US dollar.

04:57  Today's investing mantra
"Capitalism requires a structure and a value system that people believe in and can depend on" - John Bogle
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