RBI's next move and more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

RBI's next move and more... 

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In this issue:
» No end to Citigroup's woes - Plans to shelve jobs
» Some learning from Buffett's mistake
» Anticipating the RBI's next move
» Who's the fattest of us all?
» ...and more!

00:00 Citi is on 'fire'
There's no stopping the sell off in stocks across the world, as was seen from the performance of Asian markets today. Most of the indices closed deep in the red - stocks in China and Japan were down 2.5% and 0.7% respectively. Indian markets too closed with losses of 2%. Currently, it is red everywhere for European markets as well.

Decline in stocks across the world follows the 2% decline in the US indices (Dow and NASDAQ) last Friday on fears that more bad news could be lurking in the global financial sector. Global banking companies remain under pressure, with Citigroup, the largest bank in the US, set to cut 6,500 jobs in its investment banking division (10% of the division's total manpower).

Citigroup currently employs about 300,000 people worldwide and has announced more than 13,000 job reductions this year. As reported on the Bloomberg, the bank is gradually reducing costs and shedding assets after having reported two straight quarterly losses totaling US$ 15 bn. Also, as a matter of fact, the world's largest banks and brokerage firms have slashed more than 80,000 jobs since the subprime mortgage crisis infected credit markets and led to almost US$ 400 bn of write-downs and losses.

Out of this, 10% (US$ 42 bn) has been contributed by Citigroup alone. And subsequently, the bank's shares have lost the most over the past 12 months, declining by 63%. Compared to this, our own HDFC Bank's ADR (American Depository Receipt) has come off by just about 3%. Some lessons to be learnt here for Citi from its Indian counterpart?

00:54 The infallible Buffett failed here
As reported on Fool.com, the legendary investor, Warren Buffett, spent eight years working with 'this' investment technique before discarding it as worthless. It is a simple yet compelling strategy of identifying stocks showing unusual price and trading patterns - and so it is restricted to just 'price' and 'trading' and has nothing to do with 'business fundamentals' and 'valuations', the basic study points of long term investors. While Buffett spent eight years in his early investment career trying to master this technique, at the end of it all, he discovered one problem - it did not work!

Widely known as 'technical analysis', Buffett concluded that it was the wrong way to invest. Subsequently, he focused his efforts on the wisdom of his teacher and mentor, Benjamin Graham, who stressed on business fundamentals and identification of 'value' without giving any relevance to the stock's price.

And thus followed the three most important lessons that Buffett practiced while making his investment decisions. These were - buying stocks with adequate margin of safety, understanding that stock is part of a business, and knowing that the market is there to serve you, not instruct you.

As a matter of fact, you too can learn from Buffett's failure. This you can do by not focusing on 'charts' and related jargons like - candlesticks, DMA, retracement, arbitrage, breakout, etc. Instead, the imperative is to understand business fundamentals and seek excellent quality stocks the market offers at low valuations (remember price is not the key here, valuation is).

  • Also read - More lessons from Buffett

    01:46 Oil woes continue unabated...
    Woes for the oil market show no signs of receding. As if supply constraints were not already pressurising crude prices to move further up, there's news that global energy major Chevron has stopped output from its Nigerian fields following a militant attack on the same. As reported on the Bloomberg, around 120,000 barrels per day (bpd) of crude have been halted by the blowing up of the pipeline. This is equal to 6% of Nigeria's daily oil output.

    As a matter of fact, Nigeria is the second-largest oil producer (produced 1.9 m bpd of oil in May) in Africa after Angola. As also reported, 'rebels in the Niger Delta, which produces all of the nation's oil, are sabotaging the industry's infrastructure to press their demand for a greater share of the area's oil wealth and more political power'. Chevron's latest action follows energy major Royal Dutch Shell's recent halting of shipments by as much as 190,000 bpd from Nigeria following militant attacks on its facilities.

    02:23 In the meanwhile...
    Gold is trading higher in India today, duly supported by foreign markets where rising crude oil and geopolitical issues (between Iran and Israel) have drawn more investors to the safe haven of the yellow metal (gold prices are internationally benchmarked). However, as reported on Yahoo Finance, Indian buyers have continued to stay on the backseat with the lean season not necessitating any purchases. Gold generally follows crude oil as the latter fuels inflation, while the metal is used as a hedge against it. Also, as reported, India's lean season for gold will last another couple of months after which festivals are expected to put consumers in a more favourable mood for buying the precious metal.

  • Also read - Gold to touch US$ 5,000 an ounce?

    02:51 What will be the RBI's next move?
    Rising inflation has made interest rate hike decisions for the central bank easier than before. As a matter of fact, inflation (as measured by the wholesale price index or the WPI) accelerated to a 13-year high of 11% during the week ended June 7 2008, after gaining 8.75% in the previous week.

    This latest spike in inflation can directly be attributed to the government's recent decision (on June 4, 2008) to raise retail fuel prices (of petrol, diesel and LPG) for the second time in four months. As for the RBI's interest rate decision, the central bank had recently raised interest rates to a six-year high and reduced cash in the banking system. However, the latest inflation data shall push the policymakers to implement a further rate hike. And this time, as is being expected by economists, the RBI's action could be a combination of increases in interest rates and the cash reserve ratio.

    03:24 Rupee adds to RBI's headache
    An interest rate hike in India is expected to put upward pressure on the rupee, which is Asia's third-worst performing currency this year with 8.9% depreciation against the US dollar (against a 12.3% appreciation it had recorded in 2007). It is important to note that a weak currency increases the cost of imports and thus weakens the balance of payments.

    As reported on the Bloomberg, the rupee is the only to decline this year among the currencies of BRIC nations - Brazil, Russia, India and China. While Brazilian real has climbed 10.9%, the Russian ruble and Chinese yuan have gained by 4.4% and 6.3% respectively.

    A research from Lehman Brothers projects that India's current account deficit may swell to 3% of GDP next year, up from 1.4% in 2008. Now, this projected level of 3% will be the same as in 1991, when the country faced a severe balance of payments crisis. Back then, the rupee had tumbled 42% over a span of three years! Now, are we in for a repeat act?

    03:52 Political crisis looms large on India
    If inflation and slowdown in growth were not enough to shake its mantle, the ruling UPA (United Progressive Alliance) government in India faced a major setback late last week when it lost support of one of its ally, the Bahujan Samaj Party (BSP - which provides the UPA with a 19 member support). As reported, the BSP has accused the UPA government of neglecting the poor and worsening their condition due to 'flawed economic policies'.

    While the support of the BSP's 19 members in the lower house of parliament (Lok Sabha) is not so critical to the survival of the coalition as of now, the fact that this makes the Left parties' support so crucial for the Congress-led government cannot be denied. And especially with the Leftists holding tough stance against most of the progressive policies of the government, India's political landscape is for sure witnessing rough weather as of now.

    Rising inflation has already eroded the popularity of UPA government, which has lost ground in 9 of the 11 state elections since January 2007. The government now faces polls in six more states this year and general elections by the middle of next year.

  • Also read - Political hypocrisy on display

    04:25 Who's the fattest amongst us all?
    The penchant for winning has struck such a cord with the Australians that the country has claimed the title of 'fattest country among the world's major economies' from the US. This is given that around 26% of Australia's 15.1 m population has become obese, compared with 25% in the latter.

    India is still far behind in this race, given that 'just around' 5% of our population is suffering from this disease. A recent study had found that the problem of obesity was high among schoolchildren in Hyderabad. Lifestyle changes and intake of high calorie food were among the causes associated with obesity. The expansion of middle-aged waistlines will result in much more hospital admissions owing to cardiovascular-related diseases. Good news for hospital companies, bad for the country!

    04:48 Today's investing mantra
    "Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."- Benjamin Graham
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