Mr Market at his manic-depressive best! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Mr Market at his manic-depressive best! 

A  A  A
In this issue:
» India's forex reserves depleting rapidly
» Will US Fed have a millionaire chief?
» Spike in crude oil prices to hit India like never before
» US' debt ceiling problem resurfaces
» ...and more!

Stock markets, gold prices, oil prices and rupee have each competed to grab headlines over the past few days. Therefore while business channels are making the most of the alarming doom predictions, the poor investor does not know where to hide! It is at times like these we find it irresistible to remind ourselves of Buffett's famous quiz in the letter he wrote to shareholders of Berkshire in 1997.

"If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But answer this. If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying.

This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

Even 16 years after Buffett wrote these lines, there is hardly anything we need to write to explain or put in context. In fact referring to the allegory of Mr Market one can decipher that he is currently at his manic-depressive best. Statistics ranging from stocks to currencies to commodities to economic data support the doom prediction. And for the wise, patient and disciplined investor there cannot be a better time to fetch a mouth watering bargain from Mr Market.

Of course, given the risks, stocks cannot be the only asset class that you should add to from a long term perspective. It is as important to first take care of short term liquidity needs via safe debt instruments. A little bit of gold is necessary to protect yourself against inflation and currency risks. But if you are looking to create wealth, over the long term, from the safest stocks that are rarely available at a discount, now is the time to do so.

So remember that Mr Market is a very accommodating guy who would not mind being ignored. But investors cannot afford to let go of the opportunity to take advantage of his manic-depressive mood! It would be worthwhile to screen some of the best stocks that you would want to add to your long term portfolio.

Are you buying stocks despite the negativity across markets and asset classes? Please share your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
At the time of writing this, the rupee is trading at 68.75 per US dollar. Frightfully close to the prediction of breaching the 70 per dollar mark. Fiscal concerns over the Food Security Bill and the Syria issue have brought the currency lower by 10% in the last 10 days. The sword of sovereign downgrade, to junk status, hangs mercilessly over India's economic fortune. Meanwhile, the government is least interested in paying any heed to the warnings of the RBI. The only solace is the fact that several other emerging market currencies have also lost significant value in 2013, albeit much lesser than the rupee.

Source: Hindustan Times

A bureaucrat is not exactly what comes to mind when one talks about monetarily lucrative positions. For the objective of a bureaucrat is more public service than money spinning we believe. And if it is someone like Janet Yellen or Larry Summers, it comes as close to having the best of both worlds as possible. It should be noted that both these people are touted to be the top contenders when the chair of Fed chief becomes vacant sometime in the near future. And wealth wise, both of them are quite well off with ownership of assets running into few million dollars.

Thus, the debate around who would become the next Fed Chief is certainly not going to revolve around their wealth. It would be more about who brings what skill sets to the table. And if you ask us, both of them look barely qualified on this front. The global economy needs a US Fed Chief who can call a spade a spade and not resort to disastrous money printing. Unfortunately, both Larry Summers and Yellen appear to be cast in the same mould as Bernanke. Therefore, it would be better if expectations with regards to a real recovery in US economy remained muted at best.

RBI's nightmares don't seem to be ending anytime soon. After trying to reign in the monster of inflation it is now facing a new problem. The problem this time is the rupee which has been plunging to new lows in recent times. As a result, the Reserve Bank of India (RBI) has been forced to intervene in the currency markets to provide some support the currency. This move has not really helped the rupee much but has certainly led the forex reserves to start depleting. As reported by the Financial Times, India's forex reserves currently stand at US$ 278.8 bn which is nearly US$ 14 bn lower than what it was at the end of March 2013. This translates to an import cover of just 7 months. India has a large import bill that includes essential commodities like crude oil. Therefore it cannot afford to let the import cover fall. At the same time a falling currency also leads to a loss of investor confidence which could further magnify the forex problems.

As such the RBI has been trying every trick in the book to help the rupee stabilize. It has increased short term interest rates. It has come up with measures to curb the import of gold. It has intervened in the forex markets. But none have been very successful. This is because the underlying reasons for the rupee's fall are different. With US announcing a possible taper off of its QE program, most global investors have been pulling their money out of emerging economies and moving it instead to the US dollar. This has led to a fall in nearly all of the emerging market currencies including that of India. However for India the fall has been magnified due to the structural weakness in the economy because of which the deficit situation has been on the edge.

Therefore there is very little that the RBI can do to support the rupee at the moment. This is the time where the government needs to step in with their structural reforms. That would provide some strength to the economy which in turn would help boost investor confidence. And this would help bring back at least some of the dollars that have fled our shores in recent times and help the rupee.

Already the Indian energy sector is bleeding on account of high oil and gas imports and falls in the rupee. And now, we should brace ourselves for high crude oil prices as well. The threat of a US led military action against Syria and fears of a further spread of crisis to other Middle East nations has been fuelling crude oil price for some time now. As such, the prices have gone up by over 15% in the last quarter on chances of disruption in supply.

This is nothing new for oil. It has witnessed similar moves in prices in the past on account of unrest in Egypt and Libya. However, the development is likely to hurt India like never before. This is because the spike in crude oil price this time comes along with rupee hitting fresh lows. All this means a bloated subsidy bill for India. That too at a time when it cannot afford to get its fiscal health any messier. While the hike in crude prices at this stage may seem like an overreaction since Syria is not a major oil supplier, it exposes India's vulnerability to the developments in the global oil markets and a stark reminder of the need to become self reliant for its energy needs.

The persistent fall of the rupee against the dollar is causing the government sleepless nights. Whatever measures it has undertaken so far to stem the slide have not really done the trick. And now the latest move that it is contemplating is currency swaps. This is with key trading partners. In this regard, the commerce minister has indicated setting up a task force to examine this option. Currency swap agreements typically involve exchange of one currency for another currency. Swap agreements in US dollar is expected to prevent excess volatility in financial and foreign exchange markets. Whether this really works for India remains to be seen though. This once again sounds like more of a short term solution to a much bigger structural problem. India's current account deficit is bloating, the economy has slowed down and inflation remains at high levels. The rupee falling against the dollar is only a byproduct of the ills afflicting the economy. So unless the disease itself is treated first, all other measures will only provide a temporary breather. None of them will really solve the issue at hand.

The debt ceiling problem has come back to hog the US policymakers. First of all, let's understand what a government debt ceiling is. As the name suggests, the debt ceiling is an upper limit set by Congress on the amount that the government can borrow for public spending. The debt ceiling was set at US$ 16.4 trillion in 2011. In May 2013, this was raised to about US$ 16.7 trillion. By mid-October the US is likely to be left with just about US$ 50 bn in cash. It would have no borrowing authority unless the debt limit is raised. This will put the government at high risk. It will not be able to pay for Social Security checks, military salaries and other operations. Ultimately, it would lead to sovereign default. It is worth noting that the US government formally hit the debt ceiling in May 2013. Since then, the US Treasury has used a range of accounting techniques to be able to continue to borrow.

While we are not experts on sovereign debt, common sense suggests that the US government seems to be making only short term fixes. It is only pushing the crisis to a future date. But doing this is dangerous. Because the eventual crisis will be so massive that it will be practically impossible to deal with its consequences.

After the weakness in early hours, buying interest in power and IT heavyweights helped the key indices in Indian equity markets to recover from the day's lows. The BSE Sensex was trading higher by around 81 points at the time of writing. Key indices in Asia and Europe closed lower today.

04:50  Today's investing mantra
"In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen." - Warren Buffett
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1 Responses to "Mr Market at his manic-depressive best!"

R N Gandhi

Aug 29, 2013

Bring back the dollars stored in Swiss and other foreign banks by politicians and business houses to save nation by hook or by crook. Even intensive given by way of Amnesty scheme will not matter.

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