Putting off a stock market 'Hiroshima' - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Putting off a stock market 'Hiroshima' 

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In this issue:
» Japanese govt. mulls buying stocks
» Corporate India goes on a crash diet
» Economists warn against any quick recovery in the US
» Cement, steel point to recovery in India
» ...and more!

Although Warren Buffett may have called the current crisis in the US 'an economic Pearl Harbor', the Japanese government is in no mood to allow their stock market to become a another Hiroshima-like catastrophe. So much so that it has passed a legislation allowing the government to buy shares from the market until March 2012 if share prices plunge to an extent that is seen as an economic emergency. While the exact contours of the 'economic emergency' have not been defined, the fact that the government is willing to bailout shareholders will itself offer enough stability to the Japanese market.

The plan strictly limits buying shares to cases where the price-to-book-value ratio of a majority of listed companies falls far below 1.0 time and the price earnings ratio falls below 'normal' levels. The Japanese government will set up a public body which on instructions from the country's prime minister would buy a basket of shares such as exchange-traded funds (ETFs). The funds needed for the purchase would be borrowed from the Bank of Japan as well as private financial institutions, backed by a government guarantee. Further, the government would cover any losses when the body is dissolved in 2012.

While the step seems radical enough to cap any further fall in Japanese stock market, considering that the stock prices hit a 26-year low last month and that the government has already unveiled an economic stimulus package of 50 trillion yen, it may well be the final resort.

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Back here in India, in response to the global economic slowdown, restructuring has become the new mantra for Indian corporates. As a result, deal making is set to gather pace as many companies look to hive off non-core assets to strengthen their balance sheets and more importantly raise cash. At the same time, M&A activity is also likely to gather speed as a lot of opportunities will come up to acquire assets at attractive valuations.

Readers would do well to recall that the heady days of 2006 and 2007 when the economy was growing at a scorching pace of 9% plus, many corporates had brazenly gone in for large scale expansion and entered new businesses. Cheap liquidity had fuelled their appetite further. But all that changed in a spate of one year. Realising that raising money is not as easy as it once was, India Inc. has been contemplating selling off some assets as one of the many options to bolster cash flows. That's the good thing about downturns; it seems like becoming leaner will be the top priority for Indian corporates going forward.

India Meteorological Department's initial forecast for the 2009 south-west monsoon season (June to September) is out. Their forecast is that the rainfall for the country as a whole is likely to be "near normal". If these predictions are to come true, it will surely be good news for our economy where 60% of the country depends, either directly or indirectly, on agriculture.

Is the Indian economy showing signs of recovery? Probably yes if one looks at the performance of the cement and steel sectors during the last quarter of FY09. For instance, while the cement sector witnessed a healthy 9% YoY growth, the steel sector saw consumption rise by almost 4% YoY. What drove this performance was individual housing outside big metro cities and government sponsored programmes.

Off late, both the Federal Reserve chairman, Ben Bernanke and President Obama have been quick to point out to the most infinitesimal of positives in the US. The former seeing 'green shoots' and the latter 'glimmers of hope'.

But Paul Krugman, Nobel prize winner in economics in 2008, continues to remain circumspect. In a New York Times column, he has given four explicit reasons as to why one should continue to be cautious about the economic outlook. For one, things are still getting worse. Industrial production just hit a 10-year low, housing starts remain incredibly weak and foreclosures are surging again. At most, there are scattered signs that things are getting worse, but only more slowly. Second, some of the good news like that of surprisingly good earnings from a few banks isn't that convincing because of those earnings being vulnerable to technical accounting snags and subjective assumptions.

Three, things can still take a sharp turn for the worse due to unforeseen circumstances. Somewhat like what happened during the Great Depression where things did not head straight down. There was a pause in the plunge about a year and a half in roughly where we are now, after which came further unexpected disasters causing the world economy to fall off another cliff. Finally, there is no pent up demand this time like in some previous recessions, so there is no expecting a sudden burst of spending anytime soon. So what's his advice? "Don't count your recoveries before they're hatched."

But Krugman is not alone in his skepticism. Joseph Stiglitz, the economist who won the Nobel Prize for economics in 2001 for showing that the markets are inefficient most of the time, has now called the Obama administration's bank rescue efforts as inefficient. And the reason? Stiglitz believes that there are inherent conflicts of interest at the White House as some of Obama's advisors have a soft corner for Wall Street.

Speaking to Bloomberg, Stiglitz opined, "We don't have enough money, they don't want to go back to Congress, and they don't want to do it in an open way and they don't want to get control of the banks, a set of constraints that will guarantee failure." Mr. Stiglitz was also critical of the government's Public Private Investment Program and termed it as a 'really bad program'. "We're going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks. It's a real redistribution and a tax on all American savers", thundered Stiglitz.

The US government's fiscal stimulus plan and the mortgage relief plan also came under fire from the fiery economist. Clearly, he is one unhappy man. And it is not as if he is a perennial whiner. Just a few days back, he had heaped a lot of praise on the RBI, the Indian central bank and had termed it even better than the US Fed. So, his criticism of the US government may well be justified after all. Sadly, we would only know it once the events unfold.

Indeed, the best and smartest the world over have been left grappling for direction due to the current crisis. Now, India's premier business school IIM-Ahmedabad has set up a 'committee on future directions' (CFD) which will review the entire functioning of the institute. It has also approached it alumni for feedback on how to rectify its deficiencies and build upon its international standing.

After recording strong weekly gains in the previous week, the Indian markets maintained their upward momentum this week, although at a slower pace. The BSE-Sensex ended higher by 2% over the closing levels of last week. Barring Japan (down 0.6%), other Asian markets such as Hong Kong (up 4.7%), Singapore (up 3.8%) and China (up 2.4%) ended the week on a positive note.

Source: Yahoo Finance Source: Yahoo Finance

It may be noted that Asian stocks climbed for the sixth consecutive week, the longest streak of gains in more than two years, on increasing confidence that the worst of the global recession is over. As for other global markets, Germany (up 4.1%) and France (up 4%) led the pack of gainers. They were followed by UK (up 2.7%), US (up 0.6%) and Brazil (up 0.5%).

Kenneth Fisher, billionaire investor and son of the legendary Philip Fisher is the latest guru to term the current stock market pullback a bull rally. According to Mr. Fisher, the 28% surge of the S&P 500 from its March 9 lows is simply too big to be called a bear market rally. In fact, he believes the index will climb by as much as 70% from the bottom. Only time will tell how accurate the prediction is. Nonetheless, it is interesting to note that such predictions are now coming thick and fast.

04:57  Weekend investing mantra
"We will reject interesting opportunities rather than over-leverage our balance sheet." - Berkshire Hathaway Owners Manual
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