A trillion dollar potion...or poison?
(Mar 19, 2009)
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In this issue:
Ben Bernanke, the current US Fed Chairman, is believed to have studied the Great Depression extensively. In fact, he had even authored a book on the same way back in 2000. Yesterday, more than nine years later, he showed in ample measure that he has not forgotten the most important lesson of it all - How not to invite another depression.
» Fed creates more money out of thin air
» India's inflation at 20-year low
» India Inc. says no to quarterly results
» Can Nano pull Tata Motors out of the mess?
» ...and more!
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Why buying some "about-to-go-bankrupt" companies
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In one of the Fed's biggest moves to date, he announced that the world's largest central bank would buy long term US Treasuries worth as much as US$ 300 bn (apart from purchase an additional US$ 750 bn worth of government-guaranteed mortgage-backed securities) in an effort to lower long term interest rates and pump additional liquidity in the system. Bernanke's main grudge against the Great Depression was the fact that not enough was done back then to stem the crisis and this ultimately led to a prolonged recovery. He, however, refused to have nothing of the sort this time around. And hence the latest measure of flooding the money markets with cash created out of thin air.
The latest move by the Fed is likely to ease interest rates further and make credit available to those who want it at cheaper rates. However, there is no such thing as free lunch and hence, many experts are of the opinion that injecting cash directly could drag the US economy into a hyperinflation kind of a situation later on and also lead to weakness in the dollar.
Although the Fed has enough ammunition to call back the additional liquidity when the economy recovers and inflation threat raises its head, it may not be as easy as it sounds. For the time being though, pulling the economy out of the slump is the Fed's top priority and it has shown that it can go to any length to do so.
While the US markets yesterday saw the Fed's bond buying announcement as a positive, we are reminded here of the warning given by the legendary investors - Jim Rogers and Marc Faber - that such actions will lead to high inflation in the future that will subsequently lead to a crash in the bond market. Rogers in fact thinks the US government bonds as "one of the great shorts of our time somewhere down the road."
While prognostications are about hyper-inflation in the US, prices in India are falling, at least as of now. This is given that inflation (based on the Wholesale Price Index or WPI) has touched a 20-year low of 0.44% for the week ended March 7, 2009. Economists are now predicting a deflation in the economy. However, at the consumer level, prices remain high given that inflation based on the Consumer Price Index (or CPI) remains near about 10%.
Whether we like it or not, there continues to exist a gender bias when it comes to typecasting certain occupations. Women particularly are perceived to be inferior when it comes to mechanical work. The ladies in control of the wheels are not given enough credit for their driving skills. Interestingly, at a time when the entire world is trying to figure out the best way to manage money, Reuters conducted a survey to figure out which gender is better at it. The poll which comprised opinions of 4,500 women and an equal number of men from 12 countries, concluded that females did this job better. Simply because women prefer lower leverage and strive harder to become financially independent.
While money management goes way beyond financial independence and having a control on ones' expenses, it also depends upon exposure to financial knowledge. Over the decades, increased financial independence has automatically brought in more exposure to financial knowledge amongst women. Having said that, we have yet to see more women holding the posts of CFOs, finance ministers, central bank governors, and treasury secretaries to lend more credibility to the result of the survey.
As we gear up for our general elections scheduled to start next month, the whole world seems to be tuned in. UK based Financial Times has stated - "The greatest show on earth is about to begin. One of the miracles of the modern age, Indian democracy, will next month pen its latest chapter."
What has caught outsiders' fancy is the question that if politics is failing India so badly, how has the country been progressing so fast? Further, in the past five years, the Congress led UPA government has overseen growth of about 9% a year. Pessimists are of the opinion that the economy should grow 4.5% next year, a worst case scenario, but even that would be one of the world's best performances.
But the most interesting view is that of Gurcharan Das, a bestselling-author and a business consultant, who explains the anomaly thus: "Our economy grows at night when the government is asleep."
Have you looked at the movement of the auto index lately? Tata Motors, with a near 30% gain sits pretty on the top if one arranges the list of the top gainers in the index in the past one month. And most of the gains, we believe, could be attributed to the hype surrounding the company's forthcoming launch, Tata Nano, which will be available for sale very soon.
But success of a product is one thing and its impact on the company's financials another. And if stock prices reflect the latter, we find the surge in the company's stock price a bit baffling. After all, the company currently has capacity to manufacture only 50,000 to 60,000 Nanos and even if we assume that it manages to earn a neat 10% profit margin on them, the likely impact on the overall cash flows will be in the region of US$ 10-12 m. Not a very big number considering the fact that the company has US$ 2 bn worth of debt coming up for repayment. Once again a case of letting sentiments overpower reason!
As per a survey conducted by the Associated Chambers of Commerce and Industry (Assocham), around 95% of Indian companies (out of the 400 surveyed) are against the compulsory declaration of quarterly results. Apparently, the exercise puts their human resource under great pressure. "Corporate brains do not find adequate time to explore and think differently," says the report. The industry body suggests that SEBI should allow companies to publish half yearly results instead.
It is not as if managements prepare the quarterly results. It is the responsibility of their accounting and auditing professionals. We wonder then, why it should sap management bandwidth. In fact, Indian investors would benefit from further information in the form of quarterly balance sheets (US companies include balance sheets in quarterly results).
We believe the real problem is the managements' pre occupation with 'managing the earnings' and 'providing guidance'. If they just let the accounting professionals deal with the reporting, there is no reason why they can't concentrate on their jobs. May be it requires a larger accounts department!
IBM, the world's second largest technology company after HP, has shown interest in buying out the server computer maker Sun Microsystems for a consideration of US$ 7 bn. While there are no official comments from the two companies, the deal, if it goes through, will give IBM (also known as Big Blue) a bigger control of the server market and make it a fitting rival for the likes of HP, Dell and Microsoft.
Following the strength witnessed in the US markets yesterday, stocks across most markets in Asia, with the exception of Japan, traded today amidst strength. The Indian benchmark BSE-Sensex closed marginally up, by around 30 points. Stocks in Europe have also opened in the positive.
The liquidity measures announced in the US yesterday, while targeted at helping the economy pick up pace, could potentially dilute the value of the dollar and set the stage for future inflation. Given this, gold prices rose almost US$27 an ounce yesterday, hitting the US$ 942 mark. They are however currently trading lower by US$ 12 an ounce.
2008 Nobel Prize winning economist, Paul Krugman, believes the US stimulus is way too small than is required to jumpstart the economy. "The U.S. isn't doing enough to fight the economic crisis, and Europe is doing a bit less than half as much as the U.S.," he said in a recent interview with Bloomberg.
"Abnormally good or abnormally bad conditions do not last forever. This is true not only of general business but of particular industries as well. Corrective forces are often set in motion which tend to restore profits where they have disappeared, or to reduce them where they are excessive in relation to capital." - Benjamin Graham
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