"More than a bear market rally"

Apr 16, 2009

In this issue:
» Indian cement manufacturers operating as a cartel
» China grows slowest in 10 years
» Is the IPO market reviving?
» US doing a volte-face
» ...and more!!

The world may be going gaga over Indian stocks but Rakesh Jhunjhunwala, the man Bloomberg has dubbed as India's Warren Buffett has advised investors to stay away from the market after the elections, albeit for only a short period of time. "My advice is to stay away from the markets between May 16 and May 30 as there will be volatility in the markets post elections," is how the maverick investor chose to put it across. Jhunjhunwala believes that the elections would be a closely fought affair whose results are very difficult to predict. On being asked whether the current rally in the Indian stock markets is a bear market rally, Jhunjhunwala replied in the negative, saying "The pace, breadth and volume of the market suggest this could be more than a bear market rally." Considering the man's track record, ignoring him may not be a very prudent thing to do.

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Once considered the most preferred location for Indian firms venturing abroad, the Middle East is fast losing its charm, thanks to the crude price induced slowdown and the construction industry going into the doldrums. As per a leading daily, many Indian companies that have a presence in the region have either gone slow in acquiring new projects or have altogether shelved their plans until visible signs of upturn start emerging. Companies operating in the construction space have been the worst hit with one out of two real estate projects in big cities like Dubai coming to a grinding halt. An acquaintance who had come down from the Middle East tells us that property prices in Dubai have become cheaper than even suburban Mumbai, a far from normal situation considering the world-class infrastructure that the former offers.

Looks like even banks are in no mood to poop the Nano party. Specifically, the Union Bank of India (UBI). As per a leading daily, UBI is willing to extend Nano loans to buyers with monthly income of as low as Rs 5,000 per month. However, the bank is in no mood to offer any guarantees and has gone on to mention that it will be comfortable to offer loans for Nano only for its existing customers or the ones who have salary accounts with the bank. If that is indeed the case then why the minimum eligibility criteria of Rs 5,000 per month? A desire to cash in on the Nano phenomenon perhaps. While a person walking in may not get the keys to the Nano but something else could definitely be sold to him. So much for the public sector banks being less marketing savvy.

News that cement companies in India are operating as a cartel are doing the rounds in most business dailies today. And the allegations have been made by India's builder association. The association has claimed that cement prices over the past couple of months have gone up by Rs 15/20 per bag (of 50 kg) with cement companies absolutely having no reason to do so. This in turn has fuelled the cartelisation rumors and the fact that most of the capacity is in the hands of a handful of players, is further making their case strong.

Cement industry sources however have trashed such allegations. Maintaining that there is no cartelisation at work, they feel that the rise in prices is mainly on account of demand supply dynamics and nothing else. Indeed, with cement costs accounting for just 10% to 12% of the total costs of a building, builders have little reason to get so worked up on the issue of 2% to 3% rise in cement prices. In fact, they could do well to focus on their own price structure as affordable housing at most of the places is still out of bounds for the local populace. Talk about the pot calling the kettle black.

The heydays of 2006 and 2007 saw IPOs being announced by the dozens both in the Indian and the global markets. However, once the global financial crisis unfolded and the stock markets plunged, companies shelved their IPO plans citing too much volatility. Is the scenario set to reverse now despite IPO volumes declining in the first quarter of 2009 by 95% in the US from the corresponding period last year? With two American companies set to launch their IPOs in April, there seems to be hope that the IPO market could revive this year. What is probably driving this new found optimism is the fact that S&P 500 is up almost 25% since its low on March 9, 2009. Of course, all may not be hunky dory and investors may probably still be vary of pouring large sums into IPOs especially since they tend to be riskier than well established publicly traded companies. Hence, one will have to just wait and see. Having said that, is the Indian IPO market also witnessing signs of revival? Probably not yet, but companies here must be keeping their fingers crossed hoping that the optimism in the US starts rubbing off over here as well.

China's GDP grew by 6.1% in the first quarter of CY09, further slowing from the 6.8% growth reported in the previous quarter. That number might not look so bad compared to how most developed nations are faring currently, but is surely something the dragon nation is not used to. It is in fact the slowest pace for China in almost 10 years. As per a Bloomberg report, the OECD (Organisation for Economic Cooperation and Development) predicts 6.3% growth for China this year, compared with a 4% contraction in the U.S. and a 6.6% decline in Japan.

The Institute of Chartered Accountants of India (ICAI) has shown disappointment over Satyam's bidding, given that the deal was finalised (Tech Mahindra winning the bidding war) even before the IT major's accounts were restated.

As reported by the Indian Express, Mr. Uttam Prakash Agarwal, the President of the ICAI has said, "Today, such a large deal has taken place without finalising the accounts and assessing the current valuation (of Satyam). This is speculative activity." Now, while Mr. Agarwal is right in grieving about the non-finalisation of Satyam's accounts before such a process actually began, the ICAI has itself gone very slowly in taking any action against the company's auditors, who share an equal amount of blame for the perpetration of the fraud. The institution is now defending the auditor, Price Waterhouse Coopers, saying that they got incorrect statements from the company! Mr. Agarwal in fact believes that blaming the auditors is 'a gameplan of the management'.

Well, if it is not the role of the auditor to point out deficiencies in a company's accounts and to be alert for any misrepresentation by the management, whose is?

"If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, your bank has a problem." - John Maynard Keynes. That is precisely the state of the US which is heavily indebted to China. However what needs to be kept in mind is that the US is also banking on the China for buying US Treasuries to support the former's multi-billion dollar bailout programme. While China itself has started offloading its exposure to US Treasuries being worried about the fate of the same, the US does not wish to sour its relations with the dragon country. Probably it is due to this reason that the Obama government that was initially very vocal about China manipulating its currency, has retreated from its claims. Further, the move avoids US' confrontation with China at a moment when world leaders are trying to present a united front against the economic crisis. Given China's weighed participation in the G-20 Summit, the US can afford to make fewer mistakes.

Markets across Asia closed mixed today with the Indian benchmark ending in the camp of losers. In fact, the BSE-Sensex emerged as the biggest loser, coming off by a little less than 3%. The major European indices however, are all trading in the green currently. Crude oil, as reported on Bloomberg, rose for the first time in a week on the back of US Federal Reserve's assessment that some of the US' biggest regional economies are slowing their pace of declines.

 Today's investing mantra
"We find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding." - Warren Buffett

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1 Responses to ""More than a bear market rally""

jehangir unvala

Apr 16, 2009

An excellent article which opened my eyes to certain facts which r very true!

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