A mistake that could wipe out your returns

In this issue:
» Government confident of 6% growth despite drought
» Is the US dollar at an inflection point?
» Baltic Dry Index falls 25% in nine days
» China bracing itself for a double-dip GDP growth
» ...and more!!

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00:00

Chart of the day

"The markets seem to be on a downward path. I will invest only when they start turning positive". This is a standard argument given by most investors when asked to invest in a falling market. These investors believe that they could time the market to perfection and hence, investing in a falling market makes no sense. However, expert after expert has gone on to say that trying to time the market is a fool's game and should be avoided at all costs. The chart of the day laid out below further highlights the point. During the last ten year period, if an investor would have missed out the ten best days in the stockmarket, a sum of Rs 100,000 would have returned a puny Rs 133,592 as opposed to Rs 349,256 had he stayed fully invested. Even missing the two best days would have lowered his final figure by a significant 23%. The moral of the story is that it pays to remain invested for the long haul rather than trying to move in and out of markets in an attempt to try to time them.

Source: Trend. (Data considered: Sensex closing between 5th Aug 1999 and 5th Aug 2009)

00:45

Quite a few experts have taken the July payrolls report in the US as an indication that the worst is behind. And now, there has been another landmark event that has had its genesis in the same report. As our readers would have noted, ever since the onset of the global financial crisis, every sign of US economic recovery has been greeted with a fall in the dollar and vice versa. However, this trend, which lasted for about 18 months, was broken recently when the employment report came in better than expected, leading to a rally in the dollar. This has led many to believe that the US dollar has now embarked on a new journey, which will see it surge even more in the coming months. And if the upcoming Fed meeting has some bullish undertones on the US economy, it will give the dollar's rise even more wings.

However, not all are convinced. Some believe that the dollar's rise just as in the month of May is a temporary phenomenon and the dollar is likely to remain under pressure till Fed raises interest rates, something that is not going to happen at least until 2011. Clearly, with the US not likely to turn into trade surplus anytime soon and with its assets not expected to generate substantial returns, interest in the US dollar is likely to be speculative at best.

01:29

Indeed, if the US dollar is likely to remain weak and hence, erode its value in real terms, gold is likely to reinforce its case of being the most suitable countervailing asset class. Infact, as per a leading daily, in almost all but a global soft landing scenario, gold is likely to rally and with a global recovery unlikely to be smooth, the two main threats, viz. inflation and US dollar are both a big positive for gold. Little wonder, gold prices are expected to continue with its good performance in 2009 and also likely to breach the 2008 highs of US$ 1,030 per ounce as per the same daily. What's more, even after the rally of the past eight years, the yellow metal is still just half of its inflation adjusted previous peak, leading many experts to believe that its price may touch US$ 3,000 per ounce in due course of time.

01:56

India's industrial growth surged to 7.8% YoY during the month of June 2009, as against a 2.2% growth recorded during May. Reportedly, this sharp rise in June was on account of higher demand for consumer goods and increased mining activity. Output of consumer durables such as home appliances, for instance, rose by 15.5% YoY during the month.

How long this performance sustains is difficult to say given that erratic monsoon rains could impact demand over the next few months. This is considering that rural demand, which accounts for more than half of country's domestic consumption, is expected to be severely impacted on the back of below normal monsoon. We keep our fingers crossed!

02:29

The average rainfall has been deficient in India by 25% from June 1 to August 5 this year, but the Finance Minister Pranab Mukherjee does not seem to be unduly worried. Infact, he is confident that the RBI's GDP projection of 6% and above for the current financial year will be met drought notwithstanding. The obvious fallout of the deficient monsoons is the spike in food prices but the Prime Minister Manmohan Singh has assured of the government doing 'everything possible' to prevent food inflation from growing by leaps and bounds.

So, what has made the Finance Minister so sanguine despite growing worries in the agricultural belt? One is that central agencies like Food Corporation of India have buffer stocks of over 50 m tonnes of rice and wheat; two crops which have been badly hampered by lack of adequate rainfall. Also, his confidence that the government is prepared to handle a drought and that a contingency plan is also in place which would include adopting measures such as allowing import of foodgrain, continuing with the ban on exports and asking state-run agencies to buy more stocks from the open market. We certainly hope that the government's confidence is well founded. After all, India is barely limping back to some semblance of normalcy after putting the global crisis behind it. The eruption of swine flu is also casting a pall of gloom. This means that the government will have to do all in its power to make sure that these phenomena do not deal a huge blow to India's growth. A very challenging task indeed!

03:23

The Baltic Dry Index, a leading indicator of worldwide international shipping rates for transporting various dry bulk cargo like coal and iron ore, is on a losing streak. Yesterday was the ninth consecutive day in which it fell and it's now at its lowest level since May 18th this year. The index is down 25% over this 9 day stretch, reportedly on account of the slowing down of Chinese demand for shipments of coal and iron ore. As per reports on Bloomberg, it was China's record coal and iron ore imports in the first half of 2009 that helped the index to advance almost five times this year, thus reversing a part of its devastating 92% collapse in 2008. But now, the culprit for the recent fall may have also been China, as the country saw a slowdown in new bank loans in July.

03:49

Voices that China could be heading for another 'dip' in its economic growth are getting louder by the day. A couple of days after Stephen Roach, one of the world's most respected economists raised a red flag, few other have also joined the growing list of detractors. As per a leading daily, the huge 18.3% growth that China registered on an annualized seasonally adjusted quarter on quarter basis in the second quarter of 2009 is unsustainably high and any more increase could surely lead to greater inflation and even more bigger asset bubbles, eventually causing a collapse in economic growth.

Experts are of the opinion that the enormous stimulus packages unleashed by the Chinese government have encouraged more fixed asset investment at a time when the need of the hour was perhaps to reduce capacity. Thus, as the effect of the stimulus packages wears off, the realities of excess capacities will dawn on corporates, forcing them to go slow on them and thus, leading to a slowdown in investment led GDP growth. Furthermore, the possibility of a second stimulus package by the Chinese government seems limited because the country's fiscal sustainability is less strong than it appears. A second package is only likely to make it even worse. Indeed, testing times ahead not only for China but also for the rest of the world as another of its growth engine starts to sputter.

04:38

In the meanwhile, the Indian stock markets seem to have completely ignored the news of surge in June IIP numbers as the benchmark Sensex was down nearly 2% at the time of writing. Infact, it seemed to be moving in tandem with other Asian markets, most of who also displayed weakness and closed in the negative. Europe, however, is trading mixed currently.

04:50

Today's investing mantra

"Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor." - Warren Buffett