Weapons of mass destruction strike - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Weapons of mass destruction strike 

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In this issue:
» Fed to AIG rescue
» Barclays eyes the big league
» Ranbaxy and FDA's love hate relationship
» Bittersweet time for sugar
» ...and more!

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00:00   US Fed: AIG's knight in shining armour
The US Fed is getting used to creating history these days. But definitely not of the kind it would like to create. Barely two weeks after engineering the biggest bailouts in the nation's economic history, it engineered one more yesterday - that of the troubled insurance giant AIG and the one that ranks as the biggest bailout of a private sector firm. As a part of the deal, AIG would get Fed funding to the tune of US$ 85 bn and in return, the latter would acquire an 80% equity interest in AIG and also the right to veto the payment of dividends to common and preferred shareholders.

The AIG facility has a 24-month term and at the end of the term, the loan will have to be repaid from the proceeds of the sale of the firm's assets. The package, although smaller than the one provided to housing mortgage giants, has created a much bigger controversy. This is because Fannie Mae and Freddie Mac were atleast quasi-government agencies but the insurance giant AIG is a completely privately held firm, prompting accusations of gross misuse of billions of dollars of taxpayers' money. However, such is the complexity and interconnectedness of AIG's businesses that letting it go bankrupt could have sparked off a huge chain reaction, putting the already fragile financial system in further jeopardy.

Like at other investment banks, the main culprits behind the mess were once again complex derivative instruments like credit default swaps whose values shrunk rapidly, endangering AIG's net worth. Little wonder, Warren Buffett once termed derivatives as 'weapons of mass destruction'. While the firm did book losses in the earlier quarters, it somehow managed to tide over the problems of liquidity, as its other businesses like insurance underwriting are still quite profitable. However, the latest round of write-downs seemed to be the last straw that broke the camel's back, forcing it to enlist help from the Fed.

00.52   Barclays respite for Lehman
While AIG's size and complexity saved it the ignominy of going into bankruptcy, its financial sector peer Lehman Brothers wasn't so lucky and hence, had to file for bankruptcy. For its part though, the investment banking giant did see some light at the end of the tunnel earlier today when Barclays, UK's third largest bank agreed to acquire Lehman's North American investment banking business for a very attractive price of US$ 1.75 bn. The consideration, to put things in perspective in an otherwise normal scenario would have gotten Barclays a firm just 1/50th the size of Lehman. Little wonder, Barclays' president has termed the deal as a once in a lifetime opportunity. The deal catapults Barclays into the league of elite investment banks as Lehman is currently ranked seventh on M&A (mergers and acquisitions) deals involving US companies.

As per information given on Bloomberg, the purchase includes the equities and fixed-income sales, trading and research businesses, commodities and foreign exchange, merger advisory and prime brokerage units. Important to add that Barclays had earlier refused to take over all of Lehman Brothers on the back of US government's reluctance to guarantee Lehman's 'open-ended' trading obligations.

1.28   Goldman's tenacity
How bad is a 70% fall in quarterly profits? Very bad, right? Wrong, it is indeed a commendable achievement. It's all about relative performance. In an environment where bankruptcies have become routine, a 70% drop in profits is indeed a good performance. This is the dilemma that was faced by analysts yesterday when Goldman Sachs, one of the only two (the other being Morgan Stanley) remaining major independent Wall Street brokerages, announced its third quarter numbers today, reporting a 70% fall in profits marred by write downs.

While the news was indeed comforting, what was even more comforting was the assertion by the company's CEO that Goldman remained well positioned to meet all its liquidity needs. In an environment where everyone, including Goldman's clients are facing the heat, how did the firm manage to stay float? Did it know something that its clients did not? Only time will tell.

1.58   It also cuts crude price forecast
In another development, the US based securities firm slashed its 6-month crude price forecasts from US$ 142 to US$ 125 per barrel of West Texas intermediate crude oil, citing the latest round of subprime related losses as demand dampeners. However, the firm continued to remain bullish on the commodity on the back of supply side constraints and has gone on to describe the current price as a rather compelling buying opportunity.

2.11   'Not low enough', says the oil minister
While crude is down nearly 40% from its peak, the Indian government is not in a hurry to ease the burden on its citizens. The Indian basket of crude touched US$ 91 per barrel on Monday and there are voices that want a cut in fuel prices in order to stem the inflationary pressures in the economy. Not yet, says the oil minister. It may be noted that retail prices of diesel, petrol, kerosene and LPG in India are heavily subsidised. Unless the crude weakens to US$ 67, the state run oil marketing companies (OMCs) will continue to incur under recoveries, although lower than what they faced in July this year. Indian Oil, the largest OMC is still losing Rs 2.1 bn per day due to underrecoveris of Rs 13 per litre on diesel and Rs 6 per litre on petrol. In fact, the adverse movement in rupee dollar exchange rate has undone any relief from the decline in crude prices. As India imports nearly 70% of its crude oil requirements, it requires substantial favorable movements in both crude prices and the rupee dollar exchange rates before the OMCs can consider price cuts.

2.41   India's so called 'Serial Dresser'
It is not only the issue of fuel price cuts that is haunting the UPA government, it has also started receiving a lot of flak for the shoddy manner in which the administration, especially the home minister is handling the investigation of the recent spate of bomb blasts that have rocked India's key cities. Dubbed as the 'Serial Dresser' by the media for his swiftness in changing clothes on the evening of the recent Delhi blasts, we urge the honorable minister to show similar swiftness with respect to conducting the affairs of his ministry.

2.57   Saina is doing it with panache
One lady that is showing considerable swiftness and also winning a lot of accolades for the same is India's ace female badminton player Saina Nehwal. After making India proud with her quarterfinal exit from the Beijing Olympics, Saina recently won the Chinese Taipei Grand Prix, her second major title. In the process, she became the first Indian woman to win two grand prix tournaments. Besides other things, she credited her performance to greater mental endurance, a trait that was identified by the Mittal Sports trust - a trust headed by steel tycoon L N Mittal - as one of the major reasons behind what it felt was India's below par performance at the Olympics.

Many Indian sportsmen, the trust felt suffer from low self-esteem. Low self esteem! Try telling that to our army of IT managers who have taken the world by storm. With India asserting itself on the world stage economically, we believe thanks to people like Mittal, it is only a matter of time before we make our presence felt in the field of sports as well.

3.26   In the meanwhile
Troubled by the uncertainties in the global financial markets, the Indian stock markets remained choppy today, ending the day significantly in the red. The benchmark BSE-30 index shed 2% today on the back of persistent selling in heavyweights. For other Asian markets, it however turned out to be a mixed day with certain markets like Japan and South Korea showing considerable strength. Most of the European markets are also displaying strength currently. In the US markets yesterday, breather was provided in the form of AIG bailout as investors cheered the Fed gesture and pushed the indices higher.

3.43   Ranbaxy courts trouble yet again
There is trouble brewing in Ranbaxy's plants once again. The US FDA has banned the import of 30 manufactured drugs from the company's two plants namely Paonta Sahib and Dewas citing poor quality standards maintained by these plants. Infact, the FDA will not approve new products for sale by Ranbaxy until remedial measures are undertaken by the company to meet the quality requirements of the US FDA. The only silver lining in the dark cloud for Ranbaxy and an important one at that is that the FDA has not branded any of the products launched in the US as 'defective'.

The company's tryst with the US FDA is nothing new. Trouble for Ranbaxy began in early CY06, when its Paonta Sahib facility in Himachal Pradesh was shut down after it failed to comply with certain US FDA standards. One of the main products to be launched from that plant was 'Pravastatin 80 mg' for which the company had 180-day exclusivity. The company again came under fire in CY07, when the USFDA conducted a surprise raid on Ranbaxy's Ohm Laboratories in the US. However, the company continued to get approvals for products filed from this plant and did not suffer the same fate as the plant at Paonta Sahib had.

Recently, the US FDA alleged that Ranbaxy had forged crucial data inorder to secure approval for its products and that it was selling substandard drugs in the US. While the company seems to have taken pains to resolve these issues, the USFDA remains adamant in its stand. Unless Ranbaxy can quickly come up with a solution, its credibility in the US market remains at stake.

4.25   Bittersweet times for sugar
India, the second largest sugar producer, is expecting a 16% decline in sugar production next year on account of farmers switching to more profitable crops. This move comes on the back of low realisations earned by the farmers in the last two years on account of higher sugar production in the country. As per London-based International Sugar Organization (ISO) forecasts, though the stockpiles are higher by 18% than in 2006, for year ending 30th September 2009, the stockpiles are estimated to be 65.2 million tonnes (mt) (down 5.8% since 2006). With supply estimates being lower than the demand, the prices of sugar have increased, reaching a 24-year peak. Sugar being a cyclical industry, the price moves in tandem with the demand supply gap. As seen from the price chart, the sugar prices had reduced considerably between July to November 2007, on account of record high production and have been rising in recent times on news of lower production.

4.57   Today's investing mantra
"When you combine ignorance with leverage, you get some pretty interesting results." - Warren Buffett
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