Of desperate brokers & more... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Of desperate brokers & more... 

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In this issue:
» Fed keeps rate intact
» Commodities' persistent slide
» Indian IPPs in a dilemma
» Broking industry's problems
» ...and more!

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 00:00    Fed does not tinker with the liquidity tap
Fed rate, widely believed to be the benchmark for many consumer and business loans in the US, for the second straight time, was left unchanged at 2% by the US Federal Reserve (Fed) yesterday. Faced with the weird prospect of rising inflation on one hand and weakening economic growth on the other, the Fed has continued to support the latter as evident from seven straight cuts from last September through this April.

Many experts including the emerging markets guru, Mark Mobius, feel that it may not take two to tango this time around and rates will have to be lowered further if the economy is to be stimulated enough. The Fed is no mood to oblige though, as it also has rising inflation to contend with. Lowering rates even more would mean further stoking the inflation fire. However, with crude prices softening at a rapid pace, concerns with respect to inflation are also likely to ease and this might prompt the Fed to further lower the rates. This though is not likely to ease problems that the world's largest economy will continue to face in the long run. With savings rate touching rock bottom and the average US citizen's net worth turning negative, a massive wave of wealth transfer is currently underway. Something drastic is needed than merely rate cuts.

 00:35    Oil's cooling off and quite rapidly at that...
The US Dow Jones Index was up a record 331 points yesterday. Apart from the Fed move what also helped shore up the spirits was another bout of decline in crude oil prices. The latest round of declines has taken the black gold to below US$ 120 per barrel, a fall of around 20% from its highs of US$ 147, and that too in quick time. The fall though was not without reason. On the heels of demand destruction in US, there is news floating around that China and European countries are also witnessing lower off take of oil as economic growth slows down in their largest exports market, the US.

The US consumers on their part are also not likely to return to their old oil consuming ways in a hurry as retail prices are still on an average around 40% higher than what they were a year back. Furthermore, shrinking values of their assets such as stocks and houses is also forcing them to cut back on other spending such as oil consumption and maybe, also forcing them to buy more fuel-efficient cars. Signs of moderation are already prominent. SUV (sports utility vehicle) makers are struggling to sell their gas-guzzling beasts and Americans are driving fewer miles than ever before. Looks like the crude is not likely to resume its northbound journey anytime soon.

 01:10    ...and gold's sliding too
It's not just the 'black' gold that is feeling the heat but the real metal that the crude derives its moniker from is also witnessing a free fall. Yes, we are talking about the yellow metal, the real gold. As per Kitco, gold futures fell more than US$ 21 an ounce on Tuesday, tallying a three-session losing streak of more than US$ 36 an ounce as prices sank to their lowest levels since mid June. The metal followed a decline in oil prices and saw pressure from US dollar strength, which eased demand for the precious metal.

However, long-time trackers of the metal believe this to be a temporary blip and see gold inching up substantially in the longer run as a flawed monetary system and structural weakness in the dollar shows no signs of reversing. These prophets of doom hold a very strong view that in the long-term, the world should return to its old ways of fixing major currencies of the world in relation to gold.

 01:36    In the meanwhile...
Buoyancy was witnessed across Asian markets today as most of them managed to close in the positive on the back of strength in the US markets and easing inflationary pressures. While Japan edged higher by nearly 3%, stocks in China closed 1% higher. BSE-Sensex, the Indian benchmark also displayed strength and logged in gains of over 100 points although it came off substantially from the day's high. The US markets closed strongly in the positive yesterday as falling crude prices and the Fed's decision to maintain the current Fed rate of 2% brought some cheers to participants, enabling the indices to snap a streak of declines. European indices are also trading strong currently.

 01:55    A Catch-22 for independent power producers
Independent power producers in India are in a Catch-22 situation. Sensing serious shortage of power equipment in the country, these players had turned to ordering equipment from China. This would have enabled them to meet their generation targets on time. Now this route too seems to be nearing a close, as two of the biggest lenders to power projects in India have raised objections on the quality of equipment that the Chinese suppliers are exporting to India.

The matter first came to light when BHEL, India's largest power equipment manufacturer expressed concerns over the quality standards of imported Chinese equipment forcing India's power sector regulator CEA (Central Electricity Authority) to set up a committee to delve further into the matter. Now, until the lenders of the stature of PFC and REC get a go-ahead from this committee, they have put disbursements to projects that use Chinese equipment on hold.

The move is likely to have a big impact on the commissioning timelines as out of the 80,000 MW that the country intends to add over the next five years; nearly 25% was to come from plants with Chinese equipment. Important to add that few days back, the Indian government was initiating plans of restricting foreign equipment manufacturers from bidding for projects at home unless they have an Indian operation. An independent power producer has called this a retrograde step as while Indian manufacturers have failed to expand their capacities on time and now, they are also trying to resist measures that could result into a potential loss of revenues for them.

  • Also read - Opportunities in power transmission

     02:59    Management or the business
    Warren Buffett, the sage of Omaha had once quipped, "If a management with a good reputation tackles a bad business, it is the reputation of the business that remains intact." Nowhere this could be truer than in the present volatile times where even the best run companies operating industries with poor fundamentals are finding it hard to make ends meet. Cathay Pacific, Asia's third largest carrier by market value and one of the best managed airlines company has posted its first half-yearly loss in five years on the back of slowing air travel and surging fuel costs.

    Contrast this with the results of P&G, world's largest consumer products company, which managed to post an impressive 33% growth in net profits as it was able to pass on the price hikes to consumers on the back of its brand strength. Investors could easily take a lesson or two from these events. The most important one being that it pays to staying invested in a company that does not require huge capex from time to time and is also able to raise its prices as and when needed.

  • Also read - Jockey or the horse?

     03:29    Another desperate industry in desperate times
    The broking industry could be another example of how commoditised businesses can suddenly find their ships sinking during bad times. In order to bring them out of troubled waters, quite a few brokers have started resorting to steps such as complete waiver of asset management fees that these companies charge for their PMS (Portfolio Management Schemes) services.

    As per reports, a top retail broker has come out with a fee structure wherein a PMS client will be charged only if he earns returns beyond a certain threshold and will be completely exempt from the asset management fees. Since secrets in these types of industries cannot remain secrets for long, it is only a matter of time before other players follow suit. With revenues from broking shrinking at a rapid pace, the latest measure is seen as an attempt to atleast retain high net worth clients so that they could be milked later once the market conditions improve. The huge fall in the markets over the last few months have led to a huge fall in revenues for most of the brokers who not until long back were the toast of Dalal Street. In fact, most of the sector companies have seen their market values erode by as much as 50% to 60%, causing significant pain for investors who would have bought these companies at their peaks.

     04:06    FDI in Indian real estate to increase 6x in 10 years
    As far as foreign inflows go, the June 2008 quarter was not a good period for Indian real estate firms as it witnessed a 14% YoY drop in inflows. With banks becoming wary of lending to relatively riskier sectors like real estate in wake of hardening interest rates and IPO markets also drying up, firms were pinning their hopes on inflows to bail them out. But with this source of funding also playing truant, tough times seem to lie ahead for real estate firms as decade high interest rates and escalating prices are turning away middle class buyers.

    However, inflows may play spoilsport for long at their own peril because such is going to be the pace of growth in Indian real estate that it is likely to turn out to be one of the most attractive markets over the next decade or so. As per estimates, IT sector alone is expected to require around 200 m sq feet of space across major and large townships. If one further adds housing shortage to the tune of 20 m units, the magnitude of demand becomes surprisingly clear. As per industry body Assocham, if the ceiling of 50,000 sq feet of construction activity were to be removed for foreign developers and taken upto 200,000 sq feet gradually, then inflows alone could touch a significant US$ 25 bn in 10 years from the current levels of US$ 4 bn. Good news indeed for real estate firms starved of cash.

  • Also read - India property goes bust

     04:44    Today's investing mantra
    "The competitive nature of corporate acquisition activity almost guarantees the payment of a full - frequently more than full price when a company buys the entire ownership of another enterprise. But the auction nature of security markets often allows finely run companies the opportunity to purchase portions of their own businesses at a price under 50% of that needed to acquire the same earning power through the negotiated acquisition of another enterprise." - Warren Buffett
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