Heads I win, tails I don't lose much
(Mar 24, 2009)
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In this issue:
The latest plan announced by the US Treasury to throw more dollars at the troubled financial markets looks like a 'Heads I win handsomely and tails I don't lose much' proposition for the private investor. After US Fed's announcement that it will buy long dated US Government bonds worth US$ 300 bn in an attempt to make credit supply easier, the country's treasury secretary yesterday outlined a plan that may involve as much as US$ 1 trillion of taxpayers' money. And what is the plan? Well, it involves forming a bank like institution that will buy toxic assets from other banks so that the latter's balance sheets could be unclogged. The US government intends to partner with private investors whereby both of them could contribute equity in equal proportion, which could then be leveraged 7-8 times over by loans provided by FDIC (Federal Deposit and Insurance Corp).
» China asks for change in reserve currency
» Nano, the world's cheapest car, gets launched
» Some relief for Ranbaxy
» Hedge funds to earn returns in 2009
» ...and more!
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The funds thus amassed could be used to buy up troubled assets from various banks and financial institutions and which could then be sold in the markets, thus effectively creating a market for such kind of assets where none existed previously. In case of profit, both the US tax payer as well as the private investors gain, but in case of a loss, private investor has the option to back away and while he may lose his equity, he assumes no responsibility of the FDIC loan. Thus, while the deal has been sweetened for the private investor, same cannot be said of the US taxpayer though.
Ranbaxy must be breathing a sigh of relief. The UK and Australian regulatory authorities have given a clean chit to the company's Paonta Sahib facilities after the same was subject to investigation last year. This very facility had come under the scanner of the US FDA, which found manufacturing deficiencies in the plant. As a result, production at this site had been halted and an import ban on 30 drugs was imposed. This raised concerns among other countries to which Ranbaxy exports as well (UK and Australia being among them), thereby prompting them to conduct investigations on their own.
Hence, the green signal from these countries is like a beacon in the sky for the beleaguered pharma company. That does not mean that it can export drugs from this plant in the US as yet. The issue with the US FDA is still to be resolved. And while the actions of one country does not necessarily influence that of the other, it certainly raises some hope that the standoff between Ranbaxy and the US FDA translates into some kind of a favourable resolution for the former.
If China has its way, the currency in which two-thirds of the international reserves are held by developed and developing countries, the US dollar - could cease to be the global currency. The central bank governor's proposal of replacing the dollar as a global standard may bring in a sweeping overhaul of global finance. This also reflects developing nations' dissatisfaction with the US' role in the world economy in the wake of the messy state of financial affairs in the latter. While China's own economic and currency policies have been under the scanner for sometime now, its worries over its significant holdings of US government bonds that are in grave danger of losing value, seems to have prompted this act. The Chinese central bank governor has argued that moving to a reserve currency that belongs to no individual nation would make it easier for all nations to manage their economies better, because it would give the reserve-currency nations more freedom to use their monetary policy and exchange rate tools. Despite being one of the largest holder of international reserves, the proposal highlights China's vulnerability to the deteriorating health of the US economy.
Wow! A small word to sum up majority of the reactions that were on offer yesterday, at the launch of the world's cheapest car, Nano. The car, bookings for which will start April onwards, will come in three versions with the cheapest version costing the buyer in the region of Rs 1.3 lakh, a full 30%-35% cheaper than the next cheapest car available in the industry of any other manufacturer. So, a huge advantage there for Tata Motors. But as far as the car's impact on the company's financials is concerned, the gain, in the medium term atleast is likely to be muted. Owing to supply constraints, Tata Motors' would be able to sell around one lakh Nanos by 2010, the contribution from which would amount a measly 3%-4% of the company's current revenues. So, unless the company sells Nanos numbering around half a million, its topline will not be influenced a great deal. And that scenario we believe is still some years away. What cannot be denied though is the rub off effect the Nano might have on the company's other offerings.
Electricity continues to be one of India's biggest infrastructure problems. As reported in a leading business daily, the Central Electricity Authority has reported that India has experienced an 11% deficit in the supply of electricity over demand in the past 11 months. The demand number does not include the need for power from unelectrified areas nor the latent requirement from electrified areas. Interestingly, India's power plants are operating below capacity due to the shortage of coal. We believe infrastructure issues like power should take the centre stage in any political or economic discussion. After all, they determine the 'fundamentals' of our country.
Hedge funds, which badly burnt their fingers in the current financial crisis, might face some respite in 2009. These funds reaped considerable rewards during the boom time all of which evaporated once the crisis began. For instance, in 2007 near its peak, the industry was looking after more than US$ 2 trillion, whereas the assets are now expected to shrink over the next one year to US$ 1.3 trillion. But the overall scenario does not appear to be too bleak. As reported in the New York Times, as per a poll conducted by Deutsche Bank, investors believed that hedge funds would post returns of 5% to 10% for 2009, which is likely to be better than the broader financial markets.
|Image Source: The Wall Street Journal
Further, the US government is also hoping that some of these funds will buy troubled assets from the nation's banks, helping stabilize the financial system and the economy. However, all is not hunky dory and hedge funds at present are severely having their mettle tested especially on the redemption front, which is likely to be the most challenging over the next 12 months. Further, given that there has aroused a heightened need of transparency in the way these funds operate, smaller firms are going to find it difficult to survive, as a result of which the possibility of them either shutting shop or being gobbled up by bigger firms cannot be entirely ruled out.
Some of the senior executives at American insurance behemoth AIG have finally buckled under the pressure of the public outcry over receiving some obscene amounts as bonuses. Latest reports are just out saying that of the top 20 executives who received the biggest bonuses, 15 have given them back in full. The amount returned so far is about US$ 50 m and more may be returned as and when the rest too decide to capitulate. The company has come under acrimonious criticism from the American public and authorities recently as it came to light that the company has paid out about US$ 165 m in the form of bonuses even as it continues to receive tax payer money to help it keep its head above the water.
One is probably aware of the fact that India's savings, which account for 33% of GDP, are among the world's highest. What one probably might not know is that if one looks at state wise savings Nagaland, Kerala and Bihar figure among the top three. As reported in the Mint, the reason why Nagaland tops the list is that it has high urban incomes. It's, however, different for Bihar. Because of poor governance and lack of supplementary laws, creditors shy away from giving credit, which compels households in Bihar to save more to buy assets such as houses and land. The law and order problems in these states have also affected consumption. For instance, since there is higher level of uncertainty about income flows, households tend to save as a precautionary measure rather than satisfy their present consumption needs.
Global warming continues to pose an ominous threat and unless countries across the world take necessary steps, the scenario is likely to worsen by 2050. In this regard, the United Nations (UN) has asked China, which currently is the world's largest producer of green house gases and many other developing nations including India to consider accepting their first binding targets for reducing global-warming pollution. These cuts are to be made by 2050 but that is likely to be easier said than done.
India and China have categorically stated they will not be adopting any targets until industrialized nations first make reductions. As reported on Bloomberg, they contend that countries in North America and Europe were responsible for most of the buildup of heat-trapping emissions in the atmosphere which is to be blamed for warming the planet, dating to the beginning of the industrial age. Thus, if the global warming threat has to be nipped in the bud, developed nations will have to take the lead in reducing emissions first, before they can hope for developing nations following suit.
The Indian markets closed higher by 0.5% today, led by gains in the BSE Bankex (up 2%). While the Asian markets closed firm, European indices are witnessing a mixed trend currently. As reported on Bloomberg, crude oil prices fell by 1% to US$ 53 a barrel, as US stockpiles gained because of lower demand and the dollar rose reducing the appeal of commodities to investors.
"The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values." - Warren Buffett
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