Where's our cost cutting chief? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Where's our cost cutting chief? 

A  A  A

In this issue:
» Indo American Kundra, Obama's CIO
» Invest in necessities not luxuries
» Narayana Murthy gets his own comic book
» We can still clock 8%, says China
» ...and more!

Barack Obama has named Vivek Kundra, a 34-year old Indian American, as the federal chief information officer. His mandate will include increasing efficiency and lowering the cost of government operations through the use of technology. It may be noted that Kundra will now be in charge of disbursing US$ 80 bn that US federal government agencies spend annually on technology. Hence, there will be ample scope for cost cutting. Mr. Kundra certainly is suited for the job. As per the Washington Post, one of his earliest memories after moving to the US from Tanzania as a child is seeing a TV commercial for dog food. "I was shocked," he said. "I was used to seeing people starve in Africa. It was mind-boggling to me that people could afford to feed their dogs!" We wonder if the Indian civil service will ever have a post whose main mandate would be efficiency and cost cutting.

----------- Equitymaster Research -----------
Why buying some "about-to-go-bankrupt" companies
can be the best decision you ever make.
Read On.


Amar Chitra Katha, the publisher of illustrated Indian epics and legends has decided to pick up a contemporary story. That of Infosys founder, N. R. Narayana Murthy. The publication will also publish the stories of APJ Abdul Kalam, Sachin Tendulkar, Homi Bhabha and Vikram Sarabhai. At a time when business leaders are attracting attention for all the wrong reasons, this comes as a welcome reminder that there are exemplary people in the other India that exists.

The job market in the US, which is already in shambles, is set to get worse. As reported on CNN Money, economists have estimated that the unemployment rate rose to 7.9% in February with a loss of 650,000 jobs. Compare this with the scenario in the early 1980s when the unemployment rate had peaked at 10.8% and one would be misled in believing that the 7.9% figure in February pales in comparison. That is, however, not the case given that the current crisis has shown no signs of abating as yet. This means that there is likely to be more pain ahead. If the job loss forecasts for February turn out to be accurate, it would be the worst monthly drop since 1949 and would bring total job losses over the last six months to 3.1 m, which is the largest six-month job loss since the end of World War II. There are many factors why this trend is worrisome. Because of the depth of the job downturn, recovery is not likely to happen anytime soon. Then the job loss phenomenon has encompassed all companies across sectors. Not only that, even when the job losses end, the unemployment rate may continue to rise because the recovery in the job market will not be enough to absorb all the people who had been rendered unemployed. Due to all these factors, unemployment rate in the US is likely to hit a peak of 10% in 2010. Difficult times indeed for the US.

As per a leading business daily, several oil explorers with projects in India are looking to sell their stakes. GAIL, Australia based Santos and Canada based Canoro are among the companies seeking to farm out their interests.

It is a well known fact that commodity industries behave in a cyclical manner. High prices for a commodity pull the profits in the sector upwards. As a result fresh investment gets attracted, thereby increasing supply. Prices moderate.These low prices for a commodity push the profits in the sector downwards. As a result fresh investments into the sector dry up. Hence, it should come as no surprise that the crash in crude prices will lead to lower investment in oil exploration. Of course, the global liquidity crunch has only worsened the situation by making it difficult to raise money for investments.

It also doesn't help that there is uncertainty over the taxation of new production. The Indian government must recognise these developments as a fresh auction of oil blocks, NELP VIII, is around the corner.

More trouble for US companies seems to be brewing in Venezuela. The Venezuelan President Hugo Chavez has ordered the nationalization of some of the operations of the US based food behemoth Cargill. He has alleged that Cargill has been growing specialized forms of rice in a bid to evade price controls. Infact, as reported on CNN Money, Mr. Chavez called the company's practices "a flagrant violation of everything that we have been doing."

Imagine an elephant squeaking! Yes, that is the fate of the once global banking giant Citigroup's stock which has been relegated to the cadre of a penny stock. Citigroup, once the world's biggest bank by market value, has witnessed its share price drop below US$ 1 as investors have lost confidence about the bank being able to recover after more than US$ 37.5 bn in losses and a government rescue. Citigroup has reported more than US$ 37.5 bn in net losses during the last five quarters and the US government has provided the company with bailout funds of US$ 45 bn. It may be noted that last week, the US government agreed to convert some of the preferred stock it owned in Citigroup to equity shares, gaining a 36% stake in the company. However, nothing seems to be coming to the ailing elephant's aid anymore.

It is difficult to fathom whether the mighty dragon is desperate or in denial. Despite the unprecedented challenges from the global financial crisis, China on the back of its US$ 585 bn stimulus package, has expressed confidence of achieving GDP growth of about 8% in 2009. It must be noted that this is the minimum growth that the economy needs to clock to avoid social unrest as nearly 20 m Chinese workers have lost jobs in the past few months. China's economic growth dipped to 6.8% YoY in 4QCY08. These are worrying figures for an economy used to double-digit growth and marks a dramatic slowdown from 13% YoY growth in 2007. The slowdown in China's economy, which is reliant on exports to developed economies that are now in recession, has also resulted in countless factory closures. The Chinese government's growth assessment, is however, far more optimistic than that of the International Monetary Fund (IMF), which has forecast economic growth of 6.7% YoY for China in 2009.

As per Reuters, Bank of America has said it would cause 'grave harm' to the bank if it is forced to reveal details about the bonus to the tune of US$ 3.6 bn paid to Merrill Lynch bigwigs days before the latter was acquired. The bank said disclosure would help rivals poach talent, give them a better idea of which businesses it considers most valuable, violate the privacy of employees, cause 'internal dissension and consternation' and increase security risks for the recipients. It may be noted that news of the bonus caused widespread outrage and caught even President Obama's attention.

"Whenever you are confronted with an opponent, conquer him with love," said Mahatma Gandhi. The Indian government had an opponent in James Otis, a Californian art collector who planned to auction the Mahatma's memorabilia - eyeglasses, leather sandals, pocket watch, plate, and a brass bowl - and did so yesterday. But the Indian government did not try love to stop Otis from doing so. It was rather self-represented by Dr. Vijay Mallaya, CEO of the United Breweries group, who bought these items for a price of US$ 1.8 m.

The Indian government had earlier protested the auction, saying that the items should be returned to the nation and not sold to the highest bidder. However, the seller (Otis) and the government could not work out a deal, and the auction went forward as planned. Interestingly, as part of his plans of working out a deal with the Indian government, Otis had demanded that India raise its spending on the poor from 1% of its GDP to 5%, or an estimated US$ 50 bn.

Lowell, Blake & Associates is a small investment firm based out of New York. As reported by Fortune, its 'ethical investment' policy has helped it beat the Dow by 35% over the last 7 years. Its stock picking criteria include - products which are 'necessities' rather than 'luxuries', good corporate governance, low debt levels, and fair treatment to their employees. The firm avoids banks (they encourage people to go into debt), tobacco companies, defense contractors and polluting industries. The firm prefers dividend paying companies. It also believes that the currencies of countries backed by natural resources and a strong current account balance- Brazil, Canada and Australia- will do well.

Usually, auto companies which cater to niche audiences have an advantage during downturns. Banking on this fact, major luxury car makers such as Rolls-Royce, Ferrari, amongst others, believed that they could buck the ongoing recessionary trend by focusing on high growth markets such as the Middle East and Asia. However, the reports from the Geneva Motor Show this week indicate that they have come to terms with reality and have accepted the fact that millionaires across the world are cutting back on their spending.

The Indian markets closed 1.6% higher today, while the Asian markets closed weak. Japan lost 3.5%, while Hong Kong shed 2.4%. The European indices are trading in the positive currently. Worries over GM and Citigroup pushed the US Dow Jones Industrial Index and S&P 500 to new 12-year lows yesterday. The Dow fell 281 points, or 4.1%, to close at 6,594, the lowest since April 15, 1997. The Dow has now declined in 14 of the last 18 sessions.

04:52  Today's investing mantra
"Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols" - Warren Buffett
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

Equitymaster requests your view! Post a comment on "Where's our cost cutting chief?". Click here!



Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407