Are You As Confident As Our PM?

In this issue:
» Will the PM's confidence transpire into reality?
» Stocks across Asia crash on economic concerns
» If economy is down, can stocks go up?
» Buffett selling energy, buying healthcare stocks
» ...and more!!

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00:00

Politicians are generally a confident lot. Or they have to show themselves as being confident as any. This is especially true when it comes to talking about the country's future. Read for instance Prime Minister (PM) Dr. Manmohan Singh's statement on Independence Day - "We are rapidly moving forward. We have faith in ourselves. We have political stability. Our democracy is an example for the whole world. We are gaining in economic strength. Most importantly, we have confidence in our youth...I am sure that they will take our country to a new glory."

Total confidence, isn't it? These comments can be seen in light of Dr. Singh trying to allay fears emanating from the global economic meltdown, unending terrorism and the swine flu to assert that India had the strength and resilience to overcome all obstacles.

But what about the action? The last time we heard his ministers 'talk' about action was when they were spelling out their 100-day plan. Now even that has come a cropper! Of course, one cannot judge a government's abilities through a 100-day plan, but can any politician in power explain our blemished history in meeting targets set for a period as long as 5 years! Or at least, how do we know who's accountable for the failures of the past in meeting the 'confident' targets that were set at the start of all the 5-year plans?

Now the Prime Minister and his team-members are confident that the Indian economy will bounce back and 'witness a 9% growth' by this year end. We remain utterly skeptical. Apart from the fact that the global economy remains in tatters and that it has clear implications for India as well, we also have to contend with weak monsoon this year that is likely to cut short recovery in consumption demand from rural areas.

Has the Prime Minister's office taken this into account while preparing his Independence Day speech? Or are they still shooting in the dark assuming that Indians, who have been fooled 'confidently' in the past, can be fooled with equal confidence in the future as well?

01:33

Chart of the day

Bloomberg reports that China's car sales grew by almost 71% YoY in July, which is the largest gain since January 2006. This was led by tax cuts and government subsidies that have spurred demand in the world's third largest economy. Today's chart of the day shows how the car market in China has taken off since 2002, when the country was producing just around 1.1 m units. Compare this to 6.7 m units produced in 2008 and you'll arrive at an average annual growth rate of 35%. As against this, car production in India has grown by around 17% annually during this period.

Data Source: International Organization of Motor Vehicle Manufacturers

02:06

Stocks in India traded weak today. The BSE-Sensex, led by selling in realty and metal stocks, was trading down by around 540 points (3.5%) at the time of writing. Selling was also seen in mid and smallcap stocks as the BSE-Midcap and BSE-Smallcap indices were down 3.2% and 2.3% respectively.

Overall, stocks have gotten expensive in India after the sharp run up seen since March. While corporate profitability during the June quarter has surprised us on the positive side, we remain concerned about the sustainability of the same. While investors can still find valuable stocks for long term investment, such a universe is shrinking by the day. At these times therefore, you need to take every step with utmost caution.

02:33

After closing the last week in the positive, stocks across Asia closed in the red today, led by the benchmark indices in China (down 5.8%), Hong Kong (down 3.6%) and Japan (down 3.1%). An 'unexpected' decline in the US consumer confidence index and lower than expected GDP growth in Japan are said to be the culprits of today's fall.

Interestingly, this sharp fall in Asian markets today comes just in the wake of economists' observations that the worst is over for the global economy given the rebound in US and European regions. And guess what? These rosy observations come at a time when the economies of the US and Europe continue to shed jobs on a mass scale and consumers, wary of splurging all over again, are saving more than they are spending.

Further, as these consumers go on a saving spree thereby leading to less demand for products that companies make, a lot many of the companies are going bankrupt. The proof - US bankruptcy filings rose 38% year on year (YoY) in April-June 2009 period, according to data released last weekend.

03:21

What if someone told you that the worse the global economy was to get, the more stocks could go up? As implausible as that sounds, we're sure you will be left a little less unconvinced about that on hearing the rationale for the same. Renowned investing guru Marc Faber said recently in an interview that since the central banks the world over have become nothing but 'money printers', it won't be surprising if the stocks go up despite the economy going down as a deteriorating economy will spurn central banks to print more and more money in the guise of 'stimulus packages' and supporting the economy. And as we have seen in the case of China, such money can very easily find its way into the stockmarkets.

Thus, opines Dr. Faber, "They're (central banks) dangerous to the health of the global economy". With many of their policies directly leading to the Nasdaq bubble and the housing bubble, it does not seem very farfetched to think that their policies hold the potential of directly creating yet another bubble.

04:11

Few years back when Warren Buffett, the Oracle of Omaha was quizzed on his buying equities in a leading MNC healthcare company, his simply one line reply was that in a world where the population is ageing, buying fundamentally strong companies in this space makes immense sense. We in India wouldn't really feel the enormity of his statement because we happen to be living in a country with supposedly the youngest population in the world.
But the developed nations seem to be a different kettle of fish altogether with rapidly ageing populations and spiraling health care costs. Little wonder, Buffett has still kept the theme close to his heart as was evidenced in his piling up of shares in drug and consumer product behemoth J&J during the quarter gone by. Besides J&J, he also bought shares in another health care company. On the other hand, Buffett seems to have turned a little bearish on energy and power stocks as he lightened his position in Conoco Phillips and utility operator Constellation Energy. Thus, this stock maneuvering of his would have indeed caught the fancy of scores of money managers and investors alike.

04:57

Today's investing mantra

"According to our view, the high prices paid for 'the best common stocks' make these purchases essentially speculative, because they require future growth to justify them." - Benjamin Graham & David Dodd