Look who's been buying big! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Look who's been buying big! 

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In this issue:
» Buffett at it again...
» Smoking ban up in smoke?
» Oil to witness a sharp fall
» Sweeteners for a bitter medicine
» and more...

00:00  Buffett at it again!
The man, for the most part of his investing life has been preaching the mantra, 'Be fearful when others are greedy and greedy when others are fearful'. Not surprisingly then, with the mercury of fear in the US markets hitting its all time highs, all eyes were fixated on whether this man practices what he has so vigorously preached. If the recent events are anything to go by, he has indeed walked the talk and how! The man under scrutiny is none other than Warren Buffett, one of the most successful investors the world has ever seen.

Using the current turmoil in the financial markets to his immense advantage, Buffett has lapped up stakes in blue chips after blue chips under terms so favorable that he has very little chance of not outperforming the markets over the next few years. The latest to join the high profile club is the quintessential American conglomerate, GE. The Oracle of Omaha has agreed to buy preferred stock of the company worth US$ 3 bn with an attractive 10% yield. What more, GE has also thrown in warrants worth the same amount that allows Buffett to pick up around 1% stake in the company at about 8%-9% discount to the prevailing price. The fact that GE's market cap has come down by nearly 50% in the last year gives ample indication of the attractiveness of the deal to Buffett. Thus, with another US$ 3 bn spent, it looks unlikely that Buffett would pursue anymore deals of similar size at least in the near term. Even by the liquidity standards of his holding company, Berkshire Hathaway, Buffett seems to have used up enough cash this year. It should be noted that before the crisis started assuming dangerous proportions, Buffett had already invested huge sums of money in facilitating M&As like Mars' acquisition of Wrigley and Dow's acquisition of Rohm and Haas. And then came the current crisis where acute shortage of liquidity especially at Wall Street firms enabled Buffett to infuse money into companies like Constellation Energy and Goldman Sachs and now of course, GE.

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00.59  Sweeteners for a bitter medicine
The US House of Representative re-votes on the US$ 700 bn (and counting) bailout package today. The US Senate has already passed the bill and has added sweeteners for the House of Representatives for good measure. The modified package hikes the limit on federal bank deposit insurance and authorises regulators to shelve asset valuation rules.

The deal enables the government to purchase distressed assets from financial institutions struggling under unprecedented home foreclosures. Interestingly, the House of Representatives might be more willing to pass the package after the market's reaction to their earlier refusal. The Dow had fallen a record 778-points in the wake of the rejection.

It may be noted that given the severity of the credit crisis, most observers believe that it is inevitable that the bailout package will be passed. In fact, Warren Buffett has gone on record saying that his recent investments are to an extent based on the expectation that the government will eventually pass the bill. While short to medium term measures are indeed necessary, we believe the long-term solution to the crisis lies in avoiding the excesses witnessed in the financial system over the past few years.

01.33  Smoking ban up in smoke?
On Oct 2, 2008 the world's biggest public smoking ban came into effect in India. With 1 m people losing their life every year due to smoking, the ban was implemented to prevent smoking in public places like stations, government offices, airports, amusement hubs (theatres, malls etc), and hotels among others.

India is the third largest market for cigarettes, with up to 250 m smokers and around 102 bn cigarettes sold every year. Though it is too soon to know whether the ban would be a success or not, it did fail on the first day as the authorities were ignorant about the new law. Further, ITC along with Indian Hotel Association is planning to go to the Supreme Court in November to challenge the ban. Higher taxes, pictorial warnings and now a ban are likely to come as a big blow for India's largest cigarette manufacturer, ITC. The company earns around 60% of its revenues from the cigarette division. Of late, it is facing pressure on its volumes, which declined 1% YoY in FY08.

2:03  Oil to witness a sharp fall
The gyrations in the crude oil prices this year have left everybody flummoxed. And now Merrill Lynch has stated that oil prices are likely to reach the US$ 50 a barrel mark next year in the event of a global recession. The rationale being that the deep credit crisis in the US, which has eaten into the incomes of the Americans, would result in a slackening of demand. As reported in Bloomberg, Merrill Lynch states, "US oil use is declining faster than expected, while European consumption is falling rapidly, and OPEC production capacity is just about to soar". In fact, oil demand in China and India is also expected to slowdown next year. These two nations have been touted as major guzzlers of oil in view of their expanding economies and large subsidies. Given the slowdown now, China's oil demand for 2009 is likely to rise by about 3.4% a day, while that of India is likely to rise by 1.4%. This is in contrast to earlier projection of usage rising by 6.7% a day and 4.1% in India and China respectively. Further, a slew of fields in countries within the OPEC are set to increase capacity in the next 18 months.

02:37  N-clear path now opens
US senators have also passed the much-awaited Indo US nuclear cooperation accord. The deal will allow American companies to sell nuclear fuel and technology to India in return for safeguards and UN inspections at its civilian nuclear facilities. The senate also rejected an amendment that provided for the end of civilian nuclear trade if India detonated a nuclear device.

As per the Nuclear Power Corporation, India's state run monopoly, India plans to buy nuclear equipment to the tune of US$ 14 bn next year. As per the US-India Business Council, Indian will spend at least US$ 175 bn in the next 30 years. It is widely believed that the deal creates economic links between the two countries far beyond the nuclear power sector and helps the US promote India's role as a source of stability in Asia. It may be noted that India has recently signed an agreement with France for cooperation on civilian nuclear technology.

We believe the real test for the nuclear energy programme in India is not in getting agreements signed. At a time when even much hyped thermal power projects are way behind schedule, the challenge for the country clearly lies in implementing the plans.

03:11  Me too, me too!
With the Indo-US nuclear agreement in place, neighboring Pakistan is now demanding an agreement on similar terms with the US. The Pakistani prime minister has shown his interest in signing a deal with the US stating that the latter will have to accommodate them and that they (Pakistan) do not wish to face any discrimination. It is believed that Pakistan wants access to similar facilities and has devised an energy security plan, which envisages increasing its nuclear power generation from the current 425 MW to 8,800 MW by 2030. While Pakistan may be a US ally in the war on terror, it is believed that it cannot be treated like India as it lacks as long track record of democracy and nuclear non-proliferation.

03:33  Left sees 'black'...not 'red'
In their protest against the signing of the Indo-US nuclear deal, Left parties will observe a 'Black Day' tomorrow (October 4th). This, as they say, is against India's 'surrender to US imperialism'.

The note on Communist Party of India (Marxist) reads - "There is no uninterrupted fuel supply assurance, no provision for strategic fuel reserve, no transfer of nuclear technology and steps to be taken against Iran. Any self-respecting government would have refused to sign the deal and operationalise it after this."

The note further states - "It has been announced that Condoleezza Rice, US Secretary of State, will be arriving in New Delhi to sign the nuclear agreement on 4th October, 2008. In order to protest against the signing of the nuclear deal during Condoleezza Rice's visit on 4th October, the Left parties call for the observance of a 'Black Day'."

As a matter of fact, the Communists have been claiming that alternate sources like coal are sufficient to provide for the country's power requirements. Ground realities however do not sustain this claim, considering the country already faces short supply of coal and there have been several projects facing delays on account of the same.

Furthermore, we wonder if the Leftists are not aware that their companions in China are framing policies that will rapidly expand their atomic power capability with mostly Western technology.

The Chinese government has in fact budgeted US$ 65 bn to build additional nuclear-power reactors in China by 2020. The total planned capacity addition is almost 60,000 MW, which is huge by any standards.

04:16  Rupee drops to new five-year low
The capital outflows continue to weigh heavy on the Indian currency that slumped to its lowest since 2003. The rupee has depreciated by 19.4% since the beginning of the year and is currently trading at 47.1 per dollar. Overseas investors, who were net buyers until last year, have become net sellers this year as they sold Indian equities worth a record US$ 9.2 bn (source: Bloomberg) more that they bought this year.

The other reason that has caused the depreciation of the rupee is the higher oil bill. Oil firms are the largest buyers of dollars in the domestic market and they usually make payments for their imports at the end of each month. The higher global crude oil prices towards the end of the September 2008 resulted in increased dollar buying by oil companies.

04:40  In the meanwhile...
Major Asian indices traded weak today. China and India led the losers' pack with both sliding 3%. The markets in India opened marginally in the red only to steadily slide lower. Overall, European and Asian stocks fell on the back of rising borrowing costs and concerns that a not even a US$ 700 bn bailout plan would be enough to prevent the global recession. However, the European index futures rose on speculation that the slump this week that drove benchmark indices lower was overdone. The US futures too saw an increase.

04:55  Today's investing mantra
I have never seen dependable calculations made about common-stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. - Benjamin Graham

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