In this issue:
» US bailout plan rejected
» Europe goes the US way
» What links Nano with Ford Model T
» The men who made a killing in the crisis
» ...and more!
For a tribe that calls itself 'Value Investors', this is nothing but an investing world equivalent of 'Harry Potter'. Infact, on second thoughts, this could be even bigger because while the wand wielding child wizard had more than a few tomes dedicated to his histrionics, this is probably the first and the last authorized biography of arguably the biggest financial wizard of our times.
|| Buffett's first and last biography
We are referring to one Mr. Warren Buffett and his first authorised biography (The Snowball: Warren Buffett and the Business of Life) that hit the stands yesterday. And like with most of his other endeavors, especially of the investing types, the timing could not have been more impeccable here as well. With the US financial industry roiled in one of the worst crises in decades and with reputation of quite a few firms in complete tatters, the book about a man whose investment techniques are widely believed to be the gold standard has indeed come as a breath of fresh air.
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Another man that could be lauded for his sheer timing is the chairman of the Tata group of companies, Mr. Ratan Tata. And just as in Buffett's case, this is likely to be more coincidental than pre-planned. The event under discussion is the impending launch of the world's cheapest car 'Nano' and how it will coincide with the centenary year of the launch of another product that revolutionized the US auto industry - the iconic Ford Model-T.
|| Complement someone to the 'T'
The car, launched exactly a hundred years ago, put car ownership within the grasp of millions of middle class Americans, eerily similar to what the 'Nano' strives to achieve in its home country. It also helped the US citizens to move out of congested urban areas and move into the hinterland, something that if the 'Nano' manages to achieve, could do a world of good to India's already crumbling urban infrastructure. Now that's what we call complementing something to the 'T'.
The US House of Representatives (Lower House of Parliament) has rejected TARP or 'Troubled Assets Relief Program' of the US government to bail out financial institutions. The US$ 700 bn plan that would have allowed the US Treasury Department to rescue the financial system got a thumbs down yesterday by a vote of 228 to 205. This sent the US stock markets in a tizzy, as the benchmark Dow Jones Industrial index declined by a massive 777 points (7%), its biggest single day decline ever.
|| TARP falls into a trap
Warren Buffett had recently proclaimed that the financial crisis in the US was 'everybody's problem' and not just that of Wall Street. He had in fact warned policymakers that the US might face its 'biggest financial meltdown' if they did not do something to secure the financial system. Now with the bailout plan turning turtle, experts are predicting the financial system and the economy to be in dire straits. Although another version of the bailout plan will likely go before the US Congress for a vote, concerns remain that the passage of the bill could be a more drawn-out process.
Just last week, when the US announced its bailout plan of US$ 700 bn to the troubled financial sector, Europe had reiterated that it was not likely to follow suit. If yesterday's events are anything to go by, Britain, Belgium and Germany at least are going the US way. According to the IHT, the Belgian, Dutch and Luxembourg governments combined chose to bail out the troubled Belgian-Dutch financial conglomerate Fortis by infusing US$ 17.5 bn into it.
|| Europe goes the US way
Similarly, with the British mortgage lender Bradford & Bingley being in dire straits due to its bad mortgage assets, the British regulators had to step in to rescue the same after no private buyers emerged. Meanwhile, as per reports on Bloomberg, the stock of Hypo Real Estate Holding AG was given a dressing down as the German government and a group of private banks provided a US$ 50 bn guarantee for the commercial-property lender.
Given that Europe has also to deal with the tremors of the subprime crisis and going by reports which proclaim that the recession in the European continent is likely to be deeper than in the US, the bailout news seems hardly surprising. Having said that, the silver lining in the cloud for Europe is the fact that some of the banking behemoths such as HSBC, Barclays, ING and BNP Paribas seem to have weathered the storm for now at least. This is in sharp contrast to the US, which saw many of its top financial companies including banks and insurance companies topple like nine pins.
In fact the credit crisis has led to the bankruptcy of Lehman, the demise of Merrill Lynch, the bailout of Freddie Mac, Fannie Mae and AIG by the government and the transformation of the investment banks Goldman Sachs and Morgan Stanley into banking entities.
Not a month that anyone is likely to forget for a long time to come!
While the US and European banks are barely managing to stay afloat, Japanese banks are beginning to flaunt their might. This has been amply demonstrated in the past few weeks when Mitsubishi bought a 20% stake in Morgan Stanley and Nomura acquired Lehman's assets in Asia.
|| Japanese banks in the limelight|
Ironically, while the excesses of the 1980s made the Japanese banks flounder, consequently taking them considerable time to recover from the same, it is this very fact that has more or less insulated them from the subprime malaise which has badly afflicted US and European banks. During the boom, Japan received a lot of flak for making acquisitions in the US at inflated prices, which over a period of time the Japanese banks found difficult to digest.
But the US financial system at that time was robust. The scenario has reversed now. While the credit crisis has helped Japanese banks acquire stakes in US banks at attractive prices, the health of the US financial sector is now in question. Therefore, how the Japanese banks will integrate these acquisitions assumes considerable importance given that cultures in both the countries are like chalk and cheese and the fact that the financial sector in Japan is just beginning to witness signs of revival.
A basic rule in accounting says that 'every debit must have an equal and opposite credit'. This must hold true irrespective of the size and nature of transaction. So, when you read about the billions of dollars going out of the largest financial institutions in the US, did you ever wonder - Who made the money? Here is the answer.
|| The men who made a killing in the crisis
According to Bloomberg, Wall Street's five biggest firms paid more than US$ 3 bn in the last five years to their top executives while they presided over the packaging and sale of poor loans that helped bring down the investment-banking system. The 185,687 employees of the big 5 (Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns) laughed their way to the bank with a whopping US$ 66 billion in 2007 (including about US$ 39 billion in bonuses).
That amounts to an average pay of US$ 353,089 per employee. The total compensation was nearly 2/3rd the combined net income of US$ 93 bn earned by the 5 firms in five years until 2007. The Wall Street investment banking genre that drew their history as closely held partnerships of investors who put their own capital at risk took their compensation levels too far and sidelined a greater share of revenue than any other industry (nearly 50%).
The men who presided over the creation of the crisis (the CEOs of the five firms) saw their compensation double between 2003 and 2007. Little wonder that President Bush in his televised address to the nation about the US$ 700 bn bailout assured that the plan would provide 'urgently needed money so banks and other financial institutions can avoid collapse' and 'should make certain that failed executives do not receive a windfall from the citizens' tax dollars.'
The battle between the Indian generic players and global innovator companies has just intensified. However, this time battle is being fought on the Indian soil as opposed to in the US. The companies we are talking about are Cipla and the innovator company Roche. The pharmaceutical landscape especially as far as far as the domestic market is concerned changed in Jan 2005 when the product patent law was introduced.
|| Cipla Vs Roche: Round 2
While over a period of time this was expected to reduce new product launches by domestic players and increase launches by MNC players, the same has not happened at the pace at which it was expected. This is because a host of anomalies in the law, which have been vehemently contested by the MNC players, have come to the forefront.
One such law is the pre-grant and post-grant opposition. While the former allows domestic players to challenge the patent before it is actually granted, the latter gives players the option to oppose the patent after it has been granted. Cipla's fight with Roche extends to two of the latter's drugs namely 'Tarceva' and 'Valcyte', catering to the therapeutic areas of oncology and AIDS respectively.
Since both oncology and AIDS are life threatening diseases, even NGO (non-government organisation) groups have been active in opposing the grant of patent to Roche as this would make the medicines that much more expensive and therefore less accessible to the common man. Given that Cipla has boldly gone ahead and launched the generic versions of both the drugs, Roche has sued the former for infringement and the matter is now pending before the courts. In whose favour the court rules is anybody's guess but the same will have an important impact as far as the implementation of the product patent law is concerned.
While the rejection of the bailout package left the US markets writhing in pain, Asian and European indices witnessed a mixed trend today after the carnage witnessed yesterday. Barring the Indian BSE-Sensex and Hong Kong's Hang Seng, which notched gains of around 3% and 0.8% respectively most of the key Asian indices closed in the red today.
|| In the meanwhile...
Crude oil rose by 1% to US$ 96 a barrel, after it had tanked by more than US$ 10 a barrel yesterday after the bailout plan was rejected. However, speculation that the bailout deal will eventually pass through led to a rise in the crude prices. Gold fell by 2% to US$ 892.6 an ounce following the strengthening of the dollar.
"Wide diversification is only required when investors do not understand what they are doing" - Warren Buffett
|| Today's investing mantra