They're Back...You Better Be Fearful! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

They're Back...You Better Be Fearful! 

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In this issue:
» America is bordering on communism, says Jim Rogers
» 500 more banks could fail in the US
» L&T's outlook for the future
» Deficits have saved the world, says Krugman
» ...and more!!

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They're back, and we are worried. If you are wondering who 'they' are, let us clarify that we are talking about investment banks in the US and asset gathering mutual funds in India. Let's talk about the Wall Street first, as it is this place that 'Greed' calls its own. We heard a couple of days back how Goldman Sachs made a return to massive profits that it was accustomed to before the financial crisis had begun in the US. The markets celebrated as the company posted record earnings as trading and stock underwriting reached all-time highs. Remember, this is less than a year after the firm (called a 'Government Sachs by some critics for its close contact with the US government officials) took US$ 10 bn directly from US taxpayers and US$ 13 billion indirectly through AIG.

Now, some are even arguing that the return of Goldman signals that the worst for Wall Street is over. This makes us, sitting in India, feel very fearful, as it must be making all Americans who have lost a large chunk of their retirement savings to the crisis that firms like Goldman helped create. The fact that Goldman's chief financial officer claims, "Our model really never changed, we've said very consistently that our business model remained the same," adds to our fear. This is because these Wall Street icons' high-risk business remains a high-risk business even now, after their greed has caused so much of wealth destruction for investors in the past two years. So, as they are back, we are fearful that investors in the US, and therefore around the world will see more of such crises erupt in the future.

Now, coming to investors in India, there is another scam brewing in the mutual fund industry as fund houses are pushing all kind of equity schemes to investors before the ban on entry load kicks in from August 1. In fact, distributors are saying that they are being offered higher upfront commission and higher trail fees for meeting sales targets! So, what you might be hearing these days from your investment advisor/agent could be -
  • This new NFO is available at just Rs 10. Buy it now!
  • Infrastructure is the next theme. Buy now into an infrastructure fund and make great returns over the next few months.
  • Markets will run up very soon. If you buy now, you can possibly double your money over the next 5-6 months!
  • This fund is about to declare a 200% dividend. Grab it before you miss out!
See, these are all gimmicks employed by the 'asset gathering' mutual funds through their distributors/agents. They're trying hard to miss-sell you something that might not be in your interest. But then, it's your hard earned money and you have to make a choice! The last year's crash that followed years of greed can lend you a lesson or two. Our suggestion - just be aware of what you are buying as an investment.

01:55  Chart of the day
Today's chart of the day brings about the stark deficit that India faces when it comes to production and consumption of crude oil. Indirectly, it also reinforces the extent to which India is dependent on oil imports to meet its requirements. With crude oil prices being as volatile as they can be, and with little in terms of fresh discoveries, India's growth might get impacted if alternate energy sources (like gas) are not identified fast!

Source: BP Statistical Review 2009

Have you ever wondered what has become of the US Government lately? By virtue of its bailout efforts, it now owns the car industry, the mortgage industry and also a lot of the insurance industry. If you are still finding it difficult to describe the policy that it has adopted, do not fret, Jim Rogers, the investor extraordinaire, has perhaps the most apt word for it. He has called it Communist! Yes that's right. The nation that has prided itself on being as capitalist as they come is slowly but steadily hurtling towards socialism and may be even communism. Speaking to Moneynews, Rogers also came down heavily on the US Government stimulus programs saying, "They've been doing the wrong thing for over two years. Nothing has worked. I don't know why they think this is going to work. This is going to make things worse, too." Indeed, after the erstwhile President approved two packages, current President Obama approved another but none of them have really helped the country get back on track with unemployment continuing to soar. And now, there is a talk of a fourth one, which as Rogers pointed out may not work as well. Rogers also seemed pretty critical of the US Fed and observed that printing money is going to lead to serious problems down the road since the money involved is staggering given the fact that the Fed has more than tripled its balance sheet in the past year or so. Little wonder Rogers is betting big on commodities.

Bad news continues to tumble out of the mess that the US has become. And the latest one has the country's banking system as its focal point. According to FDIC Chairman Sheila Bair, the rate at which the US banks are failing may increase - hold your breath - tenfold in the coming months. In other words, there is a strong chance that 500 more banks could fail in the US, taking the current crisis close to the late - 1980s banking crisis in the US, when 745 banks had to be shut. Clearly, you cannot help but gape at the scale of damage

Engineering and construction major L&T announced its 1QFY10 results yesterday. Its dull sales growth figure of about 7% was nothing but a reflection of the capital investment scenario in the country at present. A 'revival' to that extent, has been quite flimsy so far. It would not be wrong to say that the scenario on the ground has not yet become as hunky dory as the newfound high level of optimism that has been pushing up share prices makes it out to be. In its earnings call yesterday, the company's management expressed how it expects things to pick in the second half of this fiscal. However, the present environment continues to remain a little grim as far as expansion capital expenditure is concerned, especially from the private sector.

While most are worried over the burgeoning fiscal deficits across economies, Nobel laurite Paul Krugman is of the belief that these deficits have infact 'saved the world'. In an interesting write up in the New York Times, the economist has opined that the world would have been in a deeper mess had it not been for the government's deficit to match the rate of growing private savings. To put things in perspective, Mr. Krugman took help of a note from a Goldman Sachs report. The report states that there has been a drastic shift in private sector financial balance, which is basically private spending subtracted from private income. It is believed that the same has risen from -3.6% of GDP in the 3QFY06 to almost 5.7% in 1QFY09. As per the report "This 8.2 percent of GDP adjustment is already by far the biggest in post-war history." As such, Mr. Krugman believes that the government spending has been more of a stabiliser rather than a discretionary policy. While we believe that government spending is essential at a time when private spending is curbed, the fact that the US is printing money left, right and center to finance it is likely to create more problems in the future.

The Indian markets continued their positive run as buying activity was witnessed in stocks across the board. The BSE Small cap ended the day higher by about 500 points (up 3.5%). As for global markets, while all major Asian indices closed in the green, the European indices are also trading in the positive currently.

04:55  Today's investing mantra
"You have to segregate businesses you can understand and reasonably predict from those you don't understand and can't reasonably predict. An example is chewing gum versus software" - Warren Buffett

P.S.: With an aim to serve our audience better, we have initiated a new series directed to women investors. The series is titled - Women's Weekly - and will be a conduit through which we will provide our views and recommendations on how should women go about managing their finances and invest for a better financial future. Click here to read the fifth article of this series.
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16 Responses to "They're Back...You Better Be Fearful!"


Jul 21, 2009

Hi, i have been reading 5 min wrap since a year now,n it has helped me undestand the market , but sometimes the articles are not too specific, also few r a bit repetative....

it would help the reader if u would just get into the details ......




Jul 18, 2009

Hello Management,
The 5 min wrap is good but you can make it excellent by providing Indian sector specific updates in this report and how it going to move for short and long term period.
If this type of information is included then definetly it is going to help Indian investors.




Jul 17, 2009

I am reading this new letter daily and in fact I wait/look for this. This news letter is too good. I suggest you to include a 3 to 4 line data also on the top of this mail. Like Nifty...Sensex, CNX500 +- data Sensex, NIFTY PEs.


dara dnb

Jul 17, 2009

If the mutual fund investments are not safe, what do u recommend??? Direct equity?? Even here, lot of us have burnt the fingers.
what do u suggest/recommend for the next 6 to 12 months period.


Dhruv Das Munshi

Jul 17, 2009

As a research analyst and market watcher, I also feel the same. Shylocks are on the street luring gullible investor /trader to its net. The crash is not far away.
Please let us know what will happen once the bail out money(or dole out money) dries up?


K Venkatraman

Jul 17, 2009

Your comments will drive the retail investors out of all kinds of markets around the world."BEWARE" is the tone of your comments which is welcome and might go down well with the retail investor not to be gullible. But a retail investor also looks for some solid indicative guidance for profitable investing.Do you expect them to read between the lines? May be you are expecting "TOO MUCH".


B Chatterjee

Jul 17, 2009

I am relatively a new reader of this newsletter. I would appreciate articles analysing the short, medium and long term trend of the SENSEX.


shankar jog

Jul 17, 2009

I have read to-days 5-minutes wrap-up. I am quite impressed by the research your writers have to come up with this very good short commentary. Keep it up.


Subramanian G

Jul 17, 2009

1. I am getting prepared to get out into cash by 1st of Aug. or so. The 'They are back' is also applicable to the way of greedy mutual fund approach at this juncture. Just like the previous crash starting after the epic IPOs (Reliance Power), this time around, is it the mutual funds which are driving the roller coaster ? But what is making me sick to know is that how long will it take to use the fund collected to get invested in the market. Will these mutual fund industry, (a) collect the funds then (b) crash the market - anyway they are ruthless, so dont care for existing fund holders.. then (c) deploy new funds so that the new funds inherent hidden losses are partially offset OR will they take the route.. do Deewali in the new funds investment and then all come down crashing the roof. So in all, following this pattern will be an experience.

Is it possible to list the size of fund collected to estimate the crash in store ?

2. Regarding L&T sales growth figure.. are you comparing apple to oranges. (a) I am afraid, the previous period figures include RedayMaix Sales and current year dose not include that. This makes a huge gap. Correct me, if I am wrong. (b) There is a one time profit booked on UltraTek Cement - why is that not shown as extraordinary item, (c) There was a provision created for the Satyam investments in previous qtr. How and when that will be rolled back and what will be its effect in this year/period. Average Indian investor forgets soon after the results fever is over.


u m krishnan

Jul 17, 2009

Quite informative and upto date.
I enjoyed reading.

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