"All the world's a stage"
(Oct 7, 2008)
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In this issue:
» SEBI lifts curbs on P-notes
» European banks in the doldrums
» How is the shipping industry impacted?
» Rupee's freefall continues
» ...and more!
Enumerated below are the famous starting lines from the play 'As You Like It' penned by William Shakespeare, widely regarded as the greatest dramatist in the English language:
|| Shakespearean take on the Wachovia drama
"All the world's a stage,
And all the men and women merely players:
They have their exits and their entrances"
If the events of the past one year in the global financial markets are anything to go by, 'dramatic' is definitely one of the words that come to mind. And drama after drama has kept unfolding with the 'players' being the central banks around the world, banks, financial institutions and stockmarkets. And while not much comes to mind as far as 'entrances' are concerned, 'exits' (read American and European banks) are happening at the blink of an eye.
In fact, if you thought that the global financial markets battling the crippling effects of the subprime crisis was the biggest ever yet and nothing could really come close, think again. Two big elephants of the American banking industry Citigroup and Wells Fargo have in a space of one week identified the battered Wachovia as a prize catch and are fighting over each other in the legal courts.
And the cast of characters has expanded, which now includes a battery of lawyers, bankers, two courts and the Fed Reserve chairman Ben Bernanke. While Citigroup had announced its intention to buy Wachovia's banking operations for US$ 2.2 bn, Wells Fargo came out with a counter offer, which totaled seven times as much money for all of Wachovia. Thoroughly rattled and not amused by Wells Fargo's move, which Citigroup labeled as foul, the latter sought recourse from the legal courts and is demanding US$ 60 bn in damages from the two companies. This is just one drama amongst many that the world is being made to watch. But are investors and the common man positively entertained? We think not.
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The going is not easy for European banks. The subprime crisis, which emanated from the US and spread its poison to the European financial industry, is now beginning to claim victims. And in the past week, European regulatory authorities have been on an overdrive trying to keep banks from going down under. For instance, BNP Paribas will take control of Fortis' units in Belgium and Luxembourg after government efforts to ensure the company's stability failed, while Germany's government and financial institutions agreed on a US$ 68 bn bailout package for Hypo Real Estate Holding AG. The authorities of France, Belgium and Luxembourg pumped in US$ 9.3 bn to bolster the capital base of Dexia, a public-sector lender having a presence in bond insurance. Meanwhile, the UK Chancellor of the Exchequer, Alistair Darling said Britain is "ready to do whatever it takes" to help its banks. While a massive bailout plan akin to the US bailout package of US$ 700 bn has not been announced as such, European countries are working together "to limit the economic fallout, ease accounting rules, and seek tougher financial regulations".
|| European banks in the doldrums...
The Economist states, "There are two sources of pressure on the banks. To date government intervention has tended to focus on one or the other, but not both. The first source of pressure is concern about solvency, and the ability of banks to withstand further losses. The second source of pressure is liquidity". In the case of the former, even if the rescue package of US$ 700 bn by the US does eventually get passed, losses are still expected to accumulate as the bleakness of the economic environment deepens. As far as liquidity is concerned, many banks including the solid ones are finding it difficult raising long-term debt.
Akin to the airline industry, the global credit crunch is set to have an adverse impact on the shipping industry as well. And the Indian shipping companies have also been entangled in this web. As per reports in a leading business daily, Indian ship owners have outlined an investment to the tune of US$ 20 bn to replace part of their ageing fleet and expand cargo capacity. Given that many of them depend upon European banks for financing, the latter being embroiled in the credit crisis means that financing is most likely to get hard to come by. The Indian ship owners have so far considerably relied on European banks for their financing needs, as the funding from these banks is cheaper than local funds.
|| ...and impacting the shipping industry too
While owners finance 20% of the cost of a ship, the balance 80% will have to be financed by debt and therein lies the problem. Debt is expected to become more expensive as banks charge more to wriggle themselves out of risks. In the long term, things might get smoothened out given that investment in shipping is a long-term commitment. However, the scenario in the medium term seems tough. Infact, the situation is not likely to improve until banks clean up their books and when this is likely to happen is anybody's guess. What does seem imminent is that the situation is not likely to change for the better next year atleast.
The RBI has cut the cash reserve ratio (CRR) by 0.5% for the first time since June 2003. The drop in CRR was a move to infuse additional liquidity. Having raised the CRR by 4% since December 2006, this cut will bring the reserve rate to 8.5% (effective from October 11). This is expected to release nearly Rs 200 bn into the financial system after banks having already borrowed in excess of Rs 900 bn from the RBI over the past few days. While the central bank will continue to keep an eye on the level of inflation, this measure is expected to only temporarily solve the liquidity issue.
How many times have you set your eyes on ads claiming to search for 'a fair bride for a handsome man'? Probably you yourself must have offered such an ad for matrimonial alliance. Most Indian mothers still hope for a fair child. Even after 60 years of independence Indians do not seem to have gotten over their obsession with the 'Goras' (meaning fair in Hindi). Certainly not with their money. What else would explain the fact that when stocks are available cheap, it is the Goras who are invited to buy into them rather than being made easy and more lucrative for Indian nationals?
|| Obsession with the 'Goras'
The Sebi chief thought that the best recourse to halt the swift decline in the benchmark indices would be to invite unregistered FIIs once again. A requirement forcing investors to register in India before buying shares and limits on offshore derivatives that were imposed last October was lifted with immediate effect. This is when we are not even sure whether the Goras have any money left with them in the first place or have they all gone bankrupt. On the other hand, Indians (atleast 1% of the population) who are yet far from investing even 10% of their investibles into stocks do not seem to be potential investors. Offering these potential investors tax sops for putting in fresh money or allowing a larger part of their retirement savings to go into equities would automatically solve a lot of Sebi's worries. But unfortunately, the Sebi seems to think like the handsome young man for whom 'Gora' is important!
The Indian currency touched the 48/US$ mark as the markets tumbled and the FIIs resorted to withdrawing vast sums of money from equities. The Indian currency's journey in the past two years has been in the extreme, appreciating sharply against the greenback in 2007 and then depreciating steeply from the start of this year. The subprime crisis has been the prime culprit and the statement that emerging markets are not facing the effects of a global slowdown obviously does not hold true. While the upward path of the rupee last year was supported by FII inflows pouring into Indian equities and contributing to the meteoric rise in the indices, the fact remained that India still continues to labour under a burgeoning fiscal and trade deficit. This year it has been all the more evident and the credit crisis worldwide leading to the meltdown in the stockmarkets has only accelerated the free fall of the rupee.
|| Rupee's extreme moves
Just a couple of days before the start of the India-Australia test cricket series, the Aussies are taking some lessons from their Indian counterparts...not on the field but in the meeting room of their central bank (Reserve Bank of Australia - RBA).
|| Money gets cheaper. But who's buying?|
As a way to calm the financial system, the RBA has made credit cheaper. It has cut its benchmark interest rate by 1%, the most since the country went into a recession in the early 1990s. This follows a similar action from the Indian central bank late yesterday, which cut its CRR (cash reserve ratio) by 0.5%. Bloomberg reports that this reduction by the RBA is twice as much as economists had forecast and has taken the rate to its lowest since November 2006.
As per the timeline reported by Bloomberg, central bankers in the UK, the US and Europe are scheduled to meet on Oct. 9, Oct. 29 and Nov. 6 respectively to take a call on interest rates in their respective countries. Within Asia, bankers in China, Thailand and South Korea are also likely to follow with rate cut decisions very soon.
Money's getting cheap everywhere. But who's buying? Or to put it more clearly, who remains creditworthy to be lent some?
A few months back, analysts were talking of crude price reaching US$ 200 a barrel. With weakening global demand, now the consensus seems to be US$ 70 a barrel. Crude price fell below US$ 90 on Monday. Of course, gasoline prices have also declined, but consumers are hardly relieved. The relief has been overshadowed by worries over economic slowdown.
|| So much for the US$ 200/barrel of oil!|
Even the serious disruption in production in the Gulf of Mexico from the hurricane Ike has not halted the decline in crude prices. The Gulf accounts for 25% of US oil and 15% of US gas production. Over 40% of this capacity is still shut. It doesn't matter because the decline in demand for gasoline in US is now spreading to Europe and China could be next. If that happens, crude oil speculators too might need a bail out package!
After the Singur fiasco and the endless dilly-dallying with respect to where the production of Nano will be shifted, the Tatas can now breathe a sigh of relief as Gujarat has decided to house the 1-lakh car. The project will be located at Sanand, near Ahmedabad and the state government will give 1,000 acres of land for the same. For the Modi government, this could not have come at a better time as it aims to make Gujarat the most investor friendly state in the country.
|| 'Nano' finds a home
Gold rose by 1% to US$ 866 an ounce as investors flocked to the yellow metal as a safe haven amidst deteriorating credit conditions in Europe and fall in commodities worldwide. As per reports on Bloomberg, a measure of six metals traded on the London Metal Exchange slumped 5.8%. While zinc fell 2.9%, copper and nickel declined 7.5% and 5.6% respectively. While the Asian indices closed mixed, some of the key European indices are trading in the red. The BSE-Sensex closed 1% lower.
|| In the meanwhile...
"Although it's easy to forget sometimes, a share is not a lottery ticket... it's part-ownership of a business". - Peter Lynch
|| Today's investing mantra
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