Bad times will pass
(Aug 1, 2008)
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In this issue:
» This too will pass, says Bill Miller
» Govt. to offload banks?
» Your home loan just got costlier
» Chinese fix for falling markets
» ...and more!
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In his recent letter to investors, Bill Miler, the fund manager from Legg Mason famous for outperforming the S&P 500 for 15 consecutive years quotes Warren Buffett from a recent talk. He mentions that as net savers, we should be happy if stock prices declined a lot more, so we could buy even better bargains.
||"Current conditions very tough, but will turn eventually,"- Bill Miller
Mr. Miller says that he was of the opinion that the toughest markets he had seen was 1989-90, but now thinks the current period is even tougher. He also mentions that the best time to invest is after the markets have had a dismal performance, and the worst time has always been after a long run of excess returns.
He also points out that earlier in his investing career, it was wise to do the opposite of what the newspapers were saying. If the newspapers headlines painted a rosy picture about something, it was time to sell. Similarly when the newspapers were pessimistic about something, it was the time to buy. All that seems to have changed over the last few years. Of late, it has been wise to tag along with the papers instead of taking the contrarian approach.
However, Mr. Miller still believes valuations are important. It might seem that the pessimism in the newspapers over the US financial sector means one should not touch them, but with valuations back to the levels of 1991 it could be a great buying opportunity for conservative investors. In fact, this could be a once in a lifetime chance for investors who believe things will turn out to be fine in the long term. Such investors include Warren Buffett, Late John Templeton and Bill Miller himself.
Also read - Our interview with Dr. Marc Faber
Inflation for the week ended July 19, 2008 was reported at 11.98%, up from 11.89% in the previous week. This is the highest increase since the current wholesale price index series was started in 1995. The increase is attributed to higher prices of food articles and manufactured products. It may be noted that the Reserve Bank of India (RBI) had raised the repo rate and cash reserve ratio to 9% each earlier this week in a bid to anchor inflation.
Also read - Monetary Policy: RBI doesn't give up.
||Inflation still high at 11.98%
In an expected move to protect their margins after the recent monetary policy measures announced by the RBI, ICICI Bank and HDFC have raised their lending rates by 0.75%. This move is likely to raise borrowing costs for home, personal and corporate loans. However, the banks indicate that they will provide a variety of payment options to help home loan borrowers meet their payment requirements. Moreover, homebuyers might benefit from a likely fall in real estate prices. So far real estate prices have held their ground on the back of rising cement and steel prices. But the higher interest rates are expected to finally burst the bubble.
||Your home loan just got costlier
After the exit of the left parties, it has been widely anticipated that the government will press the gas pedal on banking sector reforms. In a move that lends weight to this view, the government has asked the management of public sector banks for their view on reducing its stake in them. CEOs of some large public sector banks as well as the Indian Bankers' Association (IBA) have been approached by the ministry of finance. IBA's management committee has already had a round of discussion on the issue since then. As per IBA's chief executive, the body is in favour of reducing the stake to below 50%.
||Stake sale in government banks on the cards|
Banks want a lower government stake because it enables them to enter the market for more capital. They need more capital to support their capital growth and to take care of market risks under the Basel II norms. While banks can also bring in fresh capital through a rights issue, they are deterred by the bad experience of the premier public sector bank, SBI. SBI had government bonds in return for rights shares issued to the government. However, the bonds prices crashed since then on the back of increasing interest rates. A lower government stake is also conducive to attracting better talent and better operational freedom on commercial decisions.
The Narasimhan committee on financial reforms had recommended as far back as in 1998 that the government should lower its stake to 33%. However, nothing happened since then due to the compulsions of coalition politics. It may be noted, the government cannot bring down its stake below 51% under the present laws. Still there is plenty of scope for a scale down from the current levels (See Table). The government is still likely to face difficulties especially in getting the parliamentary approval once the proposals are tabled on the floor of the house.
Surely, that's the question the folks at Exxon, the world's largest oil and gas company, must be asking after the company reported nearly a 8% decline in production, the largest in over a decade. The decline can be attributed to nationalisation of its assets in Venezuela, a strike by Nigerian workers and share of output taken by host countries. However, this didn't stop the company from posting record profits. It clocked the largest-ever quarterly profit without one-time gains on the back of spiraling crude prices.
||How hard is it to maintain oil production?
With exploration activities in areas such as Russia, Alaska and South China getting increasingly difficult due to political pressures, access to new reserves is getting all the more tougher. To add to their woes, oil companies find it hard to raise production from their rapidly ageing existing fields. In fact, in 2007 Exxon's reserves fell the most in over a decade. Something the company is spending US$ 52 m per day to reverse.
Over the last several years, most global oil companies have had a tough time meeting their production forecasts. It is a similar story with India's premier upstream oil company, ONGC as well. The company produced 6.41 m tonnes (MMT) of crude oil in the first quarter this fiscal, marginally higher than 6.38 MMT produced during the same period last year.
Also read - Some breather on the crude prices front?
Reuters reports that top US automaker Chrysler Corporation is in talks with India's Tata Motors about selling its Jeep Wrangler SUV (sports utility vehicle) in India and possibly other Asian markets. A Chrysler tie-up with the Tatas could potentially open a new market for the Wrangler, the best-selling model from the brand widely seen as Chrysler's strongest. The company is also in talks to lease its US production capacity and share retail distribution with Fiat, allowing the Italian automaker to return the to US market for the first time in 25 years.
||Big Auto pleads for support system
As a matter of fact, Fiat is already working in partnership with Tata Motors. While the former agreed this month to handle the financing in Europe for the latter's Jaguar and Land Rover brands (which Tata had recently acquired from Ford), the latter is said to be open to the former selling Nano in international markets. Chrysler is also already cooperating with the Tatas on developing a battery-powered version of the latter's Ace mini-truck. Good to see cooperation in the auto industry on a global scale as all these companies are facing tough times in their local markets, impacted by slowdown in demand and rising financing costs.
Also read - Car trouble around the world
Assocham says the addition to power capacity in India will fall short of the XIth Five Year Plan target of 69,000 MW. A weighted increase of 25% in input costs such as cement, steel, aluminium, copper and zinc has rendered the Rs 4.1 trillion allocated for the purpose woefully inadequate. This fund allocation now requires an upward revision if India has to avoid a repeat performance of the Xth Five Year Plan, which achieved only 10% of the target capacity addition.
||Power sector will trip on its targets
Interestingly, the government has tried to contain the price hikes by engaging in talks with the cement and steel industries and imposing price freezes, export constraints etc. This news will provide the concerned ministries with a stronger argument in extending the restrictions.
Also read - Opportunities in power infrastructure
With the Chinese indices declining around 47% this year and heading the dubious list of the world's worst performing major markets, the authorities are coming to their aid. As reported on Bloomberg, the China Securities Regulatory Commission (CSRC) is delaying the final regulatory approval required for initial public offerings (IPOs). It has rejected about 33% of the IPOs filed in the past month as compared to about 8% in October last year when the Chinese market hit record highs. It may be noted that IPOs tend to do poorly in bear markets thereby further destabilising an already wobbly market. With the much-hyped US$ 70 bn Olympics around the corner, China wants a feel good atmosphere all around, including the capital markets.
Also read - Hot money hurts China
Taking cues from its global peers, the Indian benchmark indices opened the day's proceedings well below breakeven. However, in the subsequent hours, buying activity intensified at the lower levels in the energy, engineering, banking and software sectors causing the indices to move into the positive. The overall market breadth was positive with gainers outnumbering losers by a ratio of 1.6 to 1 on the NSE. As regards global markets, the Asian indices closed mixed, while the European indices are trading lower currently.
||Chinese solution for falling markets
"The price of a stock can be influenced by a 'herd' on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person." - Warren Buffett.
||Today's investing mantra
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