We completely disagree with Buffett on this! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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We completely disagree with Buffett on this! 

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In this issue:
» India's industrial production slowing down?
» Air India default could hit Indian banks
» Promoters forced to pledge more shares
» US downgrade an opportunity for Indian IT
» ...and more!

--------------------------- WebSummit On Global Crisis With Ajit Dayal --------------------------

Later this month we will be recording a webinar with Ajit to get his views on the global crisis and where he sees opportunities to invest money.

If you have any questions for Ajit, just write in to us.

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00:00
 
The recent downgrade of US' credit rating by S&P's has not only spooked markets but has also set various tongues wagging. Many of these have criticized the S&P's action and believe that US still deserves to be accorded an 'AAA' rating. One man who certainly believes so is none other than the legendary investor Warren Buffett.

Buffett believes that US should carry the top credit rating because the country won't have trouble paying off its long-term debt obligations. He opines that although US leaders may have a hard time agreeing on the country's financial plan and the value of the dollar may decline, the world's richest nation would still be able to pay its debts. The reason? US has a GDP of about US$ 48,000 per person and the US Fed can still print more money. He has also gone on to criticize S&P's and believes that investors should make up their own decisions without relying too much on what the credit agencies have to say.

And we must say that we do not agree with Mr. Buffett. We are not arguing with the credibility of S&P's whose reputation admittedly became tainted when it gave the highest rating to many mortgaged backed securities in the months leading up to the demise of Lehman. But that does not mean that the US is without some serious problems. Indeed, US' mounting debt is a huge cause for concern and the government's latest move to raise the debt ceiling is only likely to postpone an eventual default and not entirely extinguish it.

Moreover, the claim that US can pay its debt because it can print more money is a dangerous one to make. Printing money never really solved America's problems. The 2 big quantitative easing programs and their failure to revive the sagging US economy is testimonial to the fact. One thing that it will certainly do is bring down the value of the dollar and cause inflation to accelerate posing a fresh set of problems for the US. So, while criticisms can be piled on S&P's, downgrading of US' credit rating is something that the world's largest economy had a long time coming.

Do you agree with Warren Buffett views that the US still deserves to get an AAA rating? Share with us or post your comments on our Facebook page.

01:26  Chart of the day
 
While there are concerns of India's GDP slowing down going forward, growth in industrial production could also lose a bit of steam. Today's chart of the day shows that the pace of growth in India's industrial production has slowed down in the past three months. And not without reason. With higher interest rates, cost of funds has become dearer which has probably put on hold capex plans of many companies. Indeed, if production continues to slow down in the coming months as well, India's overall GDP growth may also come under pressure.

Data Source: The Economist


02:06
 
If you have not already got saturated with updates on the US' ratings downgrade, here is some more bad news on ratings downgrade. This time though it is from India Inc. We are particularly referring to the public sector banking entities here. Saddled with over Rs 460 bn worth of loans to the beleaguered national carrier Air India, the banks have to reconsider their portfolio quality. The dismal state of affairs that Air India's finances are in is not news. With that, the chances of the company defaulting on a large part of the bank loans are high. The government's capital infusion to the tune of Rs 12 bn was paltry and solves very little problem. Also, we believe that it will be long before the airlines' turnaround plan starts showing results. As per rating agency Moody's, the loan default could add up as much as 1% to the gross NPAs of the PSU banks. The likes of SBI, Punjab National Bank, Bank of Baroda and Oriental Bank of Commerce could therefore end up becoming the victims of the government's poor business acumen. Thanks to the high provision coverage, most of the banking entities will still remain in fairly healthy state. However, the impact on shareholder returns cannot be discounted.

02:46
 
Share prices are indeed fickle. While a lot of investors got a taste of the same during the last few trading sessions, the promoters too are realising this truth the hard way. As per a leading daily, with share prices of their companies being taken to the cleaners, promoters are now being forced to cough up more shares as collateral against loans. The daily goes on to add that around 27 of the 100 top companies on the BSE have a portion of their promoter shareholding pledged with financial institutions. There are also cases where the pledge is as much as 88% of promoter holdings. Important to add that even with a 50% margin of safety, there has emerged a need in some cases for promoters to top up either with cash or more shares. Fortunately though, the situation is not worrisome yet if a foreign NBFC is to be believed. But promoters remain complacent at their own peril. After all, as Maynard Keynes famously observed, the markets can stay irrational longer than one can remain solvent.

03:15
 
If you thought only America and Europe were in midst of a debt crisis, you may need to think again. China is a surprise entry on this list and its problems may be even worse than the US or even Portugal for that matter. China states that its debt-to-GDP ratio is a benign 17%.

However, the rating agency Moody's doesn't believe so. Dragonomics, a Chinese research firm estimates that its debt-to-GDP ratio is 89%. In comparison Portugal has a debt-to-GDP of 83%, and the US ratio is expected to reach 79% by 2015. China could rival a magician in making debt disappear. The country underreports its debt by billions of dollars. Its local government debt may be US$ 540 bn more than its state auditor estimated. Its debt is hidden in various off-balance-sheet state companies. China's central bank alone has about US$ 1.6 trillion in debt, and credit in the economy now reaches 200% of its GDP. Pointing fingers at the US is not going to be a solution for China. The country has enough problems of its own and mountain of US treasuries to deal with

03:47
 
Is the downgrading of US sovereign rating all bad for the Indian software sector? Not really. No doubt, the US contributes two-third to the sector's revenues. Hence, any slowdown in the US economy is a cause of worry. But at the same time, it opens up a new door for the sector. During an economic crisis, clients mostly look for greater business efficiencies to compete in the market using more technologies. This helps Indian software companies build a deeper relationship with their clients. Mr T. K. Kurien, Chief Executive Officer (IT Business) of Wipro Ltd, shares the same view. According to him, this structural weakness in the economy presents new opportunities for software companies in the form of making their clients more competent using Information Technology. In his view, this time the Indian IT industry is in a better position to handle any slowdown than it was in 2008.

04:16
 
If you look at the character of the current economic turmoil that has engulfed the developed economies it becomes clear that it differs in some very basic aspects from the earlier recessions and market downturns. The debt crisis in the US and the Eurozone has left policymakers baffled as the massive fiscal and monetary stimuli have failed to revive the economies. What happens when the debt burden keeps mounting while the economic growth falters? The debt to GDP (Gross Domestic Product) ratio shoots up, making it difficult for the governments to service the debt. Policymakers are now finding it extremely difficult to end this vicious circle. The chief global economist of HSBC puts the situation very aptly, "The problem is not so much another recession, but the absence of a recovery. We could be stuck in the perma frost for years to come."

04:47
 
Indian stock markets have been trading in the red today. At the time of writing, the benchmark BSE Sensex was down by 245 points (1.5%). All sectoral indices were trading in the red except Auto and FMCG. All Asian stock markets too were trading in the negative led by Hong Kong and South Korea.

04:56  Today's investing mantra
"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher
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35 Responses to "We completely disagree with Buffett on this!"

KHALID QAISAR

Aug 11, 2011

Mr. Buffet, with all respect to the legendary investor; we admire, seems to be in the situation called - "motherland bias"; which lead him to criticise S&P who are doing their duty only.

He may be a great investor, he may be a great patriot, as seems by his statement, but economic truth must not be ignored.

Like 

venkiteswaran

Aug 10, 2011

This time around Mr.Bufet seems to be wrong. If anything the matters are going to be more serious in the coming days. Though we too will be affected, I feel we are somewhat in a better position to tackle to situation.

Like 

Adi Daruwalla

Aug 10, 2011

Yes I will agree with Warren Buffet if he puts his money where his mouth is. If Mr. Buffet and the TOP 1000 corporates of the US pump back 40% of what they have earned in the last 10 years back into the US Fed (economy) then what Mr. Buffet has said is possible.!!! Are they ready to do it, then the US economy has a chance of repaying its debt and bouncing back. Also they need to reduce by a heavy margin their own internal plastic money debts.

Like 

Pradeep

Aug 10, 2011

I donot agree with Buffet. Buffet has a biassed opinion as all his investments are in USA

Like 

shoukath

Aug 9, 2011

i am not agree with Buffet.India fundamentals is strong that's it.

Like 

Sureet

Aug 9, 2011

No i don't share Mr. Buffet's view.

Like 

N.M.R.Shreedhar

Aug 9, 2011

I totally concur with you--Buffet has always had a biased approach when it comes to US issues--he was one of the last guys to acknolwedge that US was in a financial crisis in the first place. I think what Ajit Dayal said is very true-- had it been some other country(especially the developing countries) the rating agencies would,ve scrambled to downgrade-- regds

Like 

SJ

Aug 9, 2011

This shows that Mr. Buffet is no more than a greedy market operator. What else can you expect from an investor who holds a stake in another rating agency Moody. This is a reason enough why Moodys will never downgrade USA. The fact of matter is USA has been splurging the wealth of the world (read other hard working nations like China, Japan, India etc) at the expense of asian citizens. THE DOWNGRADE WAS LONG OVERDUE, PERHAPS SINCE 2008. I admire S&P for correcting their mistake of 2008 and standing up to US administration. Also, it is time the asians assert themselves and not get bullied by USA.

Like 

Ganesh

Aug 9, 2011

Debt souvereign problem of US from AAA to AA+ - given by - ( S&P - ratings ) -- should be analysed from Macro - economic ( long term ) point of view ...
In the medium term , The US Govt , can print more US $ & resolve the crisis , by retiring the debt ...Fine ...Then , the same crisis will come again , after 5 yrs ...What to do ? Again , they can print the money - if they do so , Definitely , US $ will depreciate against the emerging market currencies ....How to tackle the long term crisis ? 1 .. First , they should increase their Exports ..( EXPORTS will be greater than IMPORTS ) -for a better economic growth ...2 ..Reduce the GROSS DEBT to GDP Ratio - by less than 50 % ... 3 ..Reduce the Unemployment rates In US - by reducing the Outsourcing jobs - provided to foreign countries ...4..And , most importantly , try to reduce the expenditure in defense sector .............

Like 

Shriram Shastri

Aug 9, 2011

Yes you are right Mr. Buffett is wrong. He seems to have lost it. i believe the credit rating is lowered because of their mismanagement and no specific ideas on job creation. They have a plan for 10 years for just 2.5 trillion, They have no savings to bank on. They do not have a concept of Cash reserve and lending management. They need to emulate some measures to get out of the crisis. Our Financial system also works on some checks and balances.

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