India's inflation is at 10%

Mar 13, 2009

In this issue:
» Downgrade of Berkshire Hathaway
» India leads the outlook for fresh hiring
» Jim Rogers' hottest tip
» Pharma is on a consolidation drive
» ...and more!

The global economic downturn and its impact on the Indian economy have been amply reflected in the inflation and manufacturing numbers. While the IIP contracted for the second straight month in January, the wholesale price index (WPI) dipped to 2.43% for the week ended 28 February making it the lowest figure in at least 6 years. This is a considerable fall from the 12% figure that was reported in August last year. But while this fact seems to be grabbing the headlines across newspapers, are we as consumers feeling the impact of the same? Have prices of goods that we purchase become any cheaper? Infact, the consumer price index (CPI) figures have a completely different story to tell. CPI remained in double digits at 10.45% for January, indicating that fall in prices has not reached consumers at the retail level. Not only that, India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for. Thus, for all practical purposes, inflation in India currently is as high as 10%.

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In a shocking move yesterday, Fitch, one of the world's leading credit rating firms downgraded Berkshire Hathaway's debt ratings. We are in a dilemma whether it's a case of once bitten twice shy for the ratings firm or a decision that was purely based on Berkshire's fundamentals. After digging a little deeper, it was revealed that the downgrade was made on account of two principal reasons, the derivatives exposure of the company and Warren Buffett's midas touch, in the absence of which, Berkshire's performance might take a hit.

It is rather hard for us to digest both the facts. On the first, the master's latest shareholder letter does enough to allay our fears, on the second, we believe that the company's financial standing is so strong that even a slightly lesser gifted inheritor of the Berkshire legacy will do a good job of preserving the company's credit standing. Fortunately though, the other big ratings agencies like S&P and Moody's still rate the company triple A. Berkshire Hathaway was not the only company to face the axe, GE, another bluest of blue chips also had its ratings pulled down a notch, this time by S&P. And in doing so, S&P incurred upon GE the ignominy of having to face a downgrade for the first time since 1956. How the mighty have indeed fallen. Little wonder they call it the worst slowdown since the Great Depression.

General Motors, the beleaguered US auto major, yesterday gave the US government a tiny but pleasant surprise. It announced that it has enough cash to make it till the end of March. It had earlier requested from the US government a US$ 2 bn infusion during the month of March after already having received US$ 13.4 bn in emergency government loans till then. As per the company, it is its cost cutting moves, drastic scaling down of vehicle production and capital expenditure deferrals in January and February that have helped it avoid needing more funds in March.

It should be noted though that this is just a delay of additional fund infusions from the government as it is almost certain that the company will require more aid to survive in the months to come. This is in sharp contrast to Ford Motor Company, which said that it did not need Federal aid as it had tapped a US$ 10.1 bn revolving credit line to preserve the company's access to cash. The company said that it has sufficient liquidity to fund its transformation plan sending positive signals that its business is in a relatively much better shape.

The global pharma industry in the past few months has been on a consolidation overdrive. The biggest of the biggest deals took place when Pfizer announced that it was acquiring Wyeth for a staggering US$ 68 bn. Just a couple of days back, the US based company Merck acquired Schering Plough and yesterday, Roche was successful in buying out it the remaining stake in the biotech company Genentech. So what has compelled Big Pharma to go in for big ticket acquisitions especially when the global economy is in a downturn and credit is scarce? There are myriad reasons for these moves.

One is obviously the pipeline of drugs that the acquiring company will have access to. Thus, the acquisitions will not only enable Pfizer, Merck and Roche to augment their product portfolio and thereby minimize the risk of patent expiration of some of their existing drugs but will also enable them to have a presence in a new field. The latter especially holds true for Pfizer and Roche. By acquiring Wyeth, Pfizer can now boast of a presence in vaccines while Roche will have access to biotech drugs. The second reason is that global pharma companies have strong cash balances as a result of which they have been able to purchase companies even when the global economy is contracting and money is not readily available. But, while these acquisitions have sent out some signals that the health of the pharma industry is not overly affected, these companies will still have a tough task on their hands when it comes to digesting these purchases. At the end of the day, as is the case with any acquisition, successful integration is what will generate strong returns for shareholders.

India leads the outlook for fresh hiring. As per BusinessWeek, HR consulting firm Manpower conducted a survey of the net employment outlook (NEO) in 33 countries and found India the most upbeat. NEO is calculated by asking what percentage of employers expects employment to increase. In contrast, what percentage of employers expects employment to decrease? The difference is NEO. India has a NEO of 25% for 1QFY10, followed by South Africa with 14%. On the other hand, China registered 4% and the US just 1%. It may be noted that India had a NEO of 19% last quarter. Looks like the job market is set to improve.

Amidst the gloom, US markets had something to cheer about. As reported on Bloomberg, US stocks posted the biggest three-day gain since November as General Electric was positive that losing the top credit rating at Standard & Poor's will not hurt business and Bank of America said it's profitable. While the S&P 500 rose 4.1% giving it an 11% surge since March 9, the Dow Jones climbed 3.5%. Various heavyweights seeming upbeat contributed to the rise. For instance, besides Bank of America, both JP Morgan and Citigroup announced that they made profits in the first two months of the year. Also, on the retail front, the government announced retail sales beating estimates, signaling that the biggest part of the economy is stabilizing. Whether this optimism is short lived is anybody's guess.

The Chinese are seeing red. You must be wondering what's new with that! After all, the country's national flag, symbols and slogans are all painted in that colour. But this time it is different. China, which is the US government's largest creditor, is worried about its holdings of US treasuries. The Chinese government has in fact asked for assurances that its investment in the US treasuries is safe. While the US is relying on China to sustain buying of its treasuries as the government issues record amounts of debt to fund the US$ 787 bn stimulus package, the latter is in two minds whether to continue doing the same. As per Bloomberg, China had boosted holdings of US government debt as it lost more than US$ 5 bn from investing US$ 10.5 bn of its reserves in Blackstone Group, Morgan Stanley and TPG Inc. since mid-2007.

As much as the US requires China's help to boost consumption, even China needs the help of US to continue exporting its products. China's own foreign exchange policy is manipulated to accommodate its exports. One can thus only wonder which of the two economies is in more dire need of salvage.

Here's the hottest tip from the legendary investor and commodity guru in recent times, Jim Rogers - "I am waiting to short them again. I have no idea when. US government bonds are going to be one of the great shorts of our time somewhere down the road."

Rogers believes that the US government will likely start buying back Treasury bonds soon to keep its borrowing costs down, thereby driving prices up and yields down. He says and Bloomberg quotes that this is only delaying the inevitable inflation and setting things up for a gigantic fall down the line.

Rogers said that he unwound his short positions during the last quarter of 2008, where he incurred a loss betting that the bonds will decline. He's looking to short them again!

The Indian markets closed higher by 5% today, aided by gains in the BSE-Metal, BSE Bankex and BSE IT (up 6% each) indices. While the Asian markets closed mixed, the European indices are trading in the positive currently. As reported on Bloomberg, crude oil prices traded near US$ 47 a barrel, set for a fourth week of gains as the OPEC prepares to meet this weekend to consider a cut in output.

 Today's investing mantra
"Of one thing be certain: if a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked" - Warren Buffett

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