The world needs a Maradona - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The world needs a Maradona 

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In this issue:
» After Wall Street, who next?
» The 'Developed' country
» RBI slashes the CRR
» 'Hoard' mentality
» ...and more!

00:00 The world needs a Maradona

Legend has it that Maradona, one of the world's greatest footballers, scored a goal using his hand during a 1986 World Cup quarter-final match against England, which was not seen by the referee and therefore allowed.

At the post-match conference, Maradona claimed that the goal was scored 'a little with the head of Maradona and a little with the hand of God.' So it was. The goal was later termed as 'Hand of God' goal. Maradona scored another goal in the match that was later voted as the 'Goal of the Century.' Argentina went on to win their second world championship title.

The financial world wants a Maradona now! It wants a 'Hand of God' to take it pass the crises that has been the creation of past so many years of financial mismanagement.

Maradona's goal was an example of players skirting the laws of the game in the hope that the referee does not see. In context of the current financial system, we have already seen so many players (a.k.a. bankers and investment bankers) skirting the laws...driven by greed and hubris.

But with the pain that investors are feeling currently, will 'greed' that created so much money in the first place vanish anytime soon?

Not till we remain truly 'human'. The inherent nature of the human being to speculate will never die. Greed will come back. And irrational expectations from money, stocks, bonds, gold, commodities etc. will again find their place under the sun.

The imperative for you, the long-term investor, is to arm yourselves against the hubris that too much of money creates. The idea is to stay away from greed and get over the fear factor. Invest within your means. Keep saving - and investing. When the cycle turns, and it will, you will be glad to have pulled the trigger.

But for this moment, the world financial system needs a Maradona...a hand of God.

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00:54 After Wall Street, who next?
Banking in its most fundamental avatar is one of the riskiest business models around. Hence, leverage should be as conservative as possible. Otherwise, dangerous consequences lie in store. Sadly, it took downright capitulation of Wall Street firms to drive home the point. Next in the firing line could be the US based insurance companies. Here too, higher leverage is the norm. As per IHT, stocks from the insurance sector have gotten battered over the past few days, indicating that consolidation and recapitalisation could also become the norm here, similar to what has happened with the few surviving Wall Street firms. However, unlike Wall Street firms, it is the bad environment that could get insurance firms into trouble and not exactly bad decision-making. The scenario reminds us of the famous Buffett saying, "If a management with a good reputation tackles a bad business, it is the reputation of the business that remains intact."

01:21 The 'Developed' country
In the list of 'developed nations' of the world, the US is considered to be at the top. The metrics that are used to qualify the US as a developed country are many. But the country has worked long and hard over a span of many years to attain the top slot in one such criterion. It has truly 'developed' its debt levels to an extent that the country itself had not imagined. What a fabulous success story!

With the ongoing subprime mess in the US, this particular criterion has come into the spotlight. In what can be viewed as a dramatic representation of this, the National Debt Clock in New York has run out of digits! It can no longer display the figure of the national debt of US, defeating the sole purpose it was made for. The electronic billboard hit its limit of $9,999,999,999,999 after US public debt rose above the US$ 10 trillion mark for the first time on September 30. As a temporary fix the dollar sign in $10 trillion has been switched to the '1' to accommodate the figure.

The clock, located in Times Square in New York, shows the amount of money owed by the US government (now US$ 10.2 trillion). The late Manhattan real estate developer Seymour Durst put the sign up in 1989 to draw attention to what was then a US$ 2.7 trillion of debt.

The Durst organization says it plans to update the sign next year by adding two digits.
That will make it capable of tracking debt up to a quadrillion dollars. Bravo!!

02:13 It's now up to the Government
Like its peers in UK, Iceland and Italy, the Treasury department of the US is also contemplating buying equity stakes in some of the country's banks. This is likely to be a part of the US$ 700 bn bailout package that was recently passed. Capital is the lifeline of a bank and the deep scars that have been engraved on the books of banks have led them to fiercely hold on to this capital, thereby freezing the credit outflow needed by businesses and consumers. While the exact nature of the government intervention has not been made clear, the probability of the Treasury holding stakes in banks that receive capital cannot be ruled out. Meanwhile, while the British government has announced capital infusion to the tune of US$ 87 bn to the country's eight largest banks to shore up capital, Iceland had taken over control of three of its banks. Italy too is looking to mirror the moves made by the UK. These moves are driven by the need to soothe the public, who seem to reckon that in the absence of government intervention the credit situation is likely to get worse.

02:46 'Hoard' mentality...
Central banks the world over have been showering trillions of dollars to assure banks of adequate liquidity. The latest being our own conservative RBI. However, the banks seem to be happy hoarding the same, rather then putting it to good use. This is infact against the very principles of banking.

The latest instance of such insane business practice has been of a domestic banking borrowing from its peer at interest rate in excess of 20% (nearly 7% above PLR). While the structural stability of the Indian banking system has not been in doubt despite the global meltdown that has engulfed several large banks, everyone wants to play safe. Even Indian banks that can afford to lend do not wish to be caught in illiquidity and would rather keep as much cash as possible in case of having to deal with large withdrawals by depositors. The good news is Indian banks can still find money in the domestic market, unlike those in the US and UK. Nevertheless, sacrificing the interest of shareholders to sustain business seems to certainly suggest that bankers in this part of the world too need to take some refresher courses.

03:19 Crude declines to 1-year low, gold marches on...
Crude oil declined to its lowest in a year over concerns that the global credit crisis will push countries into an economic recession. As per Bloomberg, OPEC has signaled that it may cut output at an emergency meeting on November 18 in a bid to stop the plummeting prices. However, OPEC cannot cut output substantially because it would be seen as worsening the economic slowdown, something its western customers will not appreciate. Gold on the other hand, continued its march upwards as panic-stricken investors continued to get lured by its safe-haven status. While crude declined to US$ 86.6 per barrel, gold closed at US$ 913 an ounce.

It may be recalled that the spike in crude oil, along with the credit crisis was held responsible for the decline in stock markets during the first half of 2008. Now, it has joined the equity markets at the receiving end of the financial turmoil. We believe that all asset classes - real estate, commodities and equities - must eventually obey their fundamentals and reverse to the mean. If prices get bid up to levels beyond what is justified by their demand and supply, eventually the bubble bursts.

03:52 Domestic oil companies squeezed...
As per a leading business daily, India's commercial banks have stopped lending to the public sector oil marketing companies (OMCs) - Indian Oil, BPCL and HPCL. The OMCs have accumulated high levels of debt to finance the under recoveries from the sale of petroleum products. Given the liquidity shortage worldwide, the banks have refused to infuse money into them any longer.

We find it ironical, that when the crude price spikes up, OMCs suffer because of higher under recoveries, and when the crude prices fall they still cannot find adequate finance. This confirms our view that the problems plaguing the downstream oil segment is structural which cheap valuations cannot sufficiently compensate.

04:11 RBI slashes the CRR
The RBI, in a move to cushion the liquidity crisis facing by the Indian banking system, made the steepest cut in the CRR (cash reserve ratio) since 2001 slashing the same by 1.5% to 7.5% (effective October 11 2008). It must however be noted that this reduction is done in replacement of the 0.5% cut that was announced on October 6 (Read the RBI release on CRR cut). As such the total cut of 1.5% includes the earlier reduction. The cut is expected to release Rs 600 bn into the banking system as against the earlier expectation of Rs 200 bn. The Indian banking system has been severely starved for liquidity on account of the ongoing crisis in the US and Europe. The RBI's moves were also in reaction to the rupee slumping to record lows against the US dollar and overnight lending rates doubling. The central bank, however, continues to be cautious about alleviating inflationary pressures. Bankers in the meanwhile see the recent rate cuts being insufficient to pass on any benefit to customers.

04:42 In the meanwhile...
Major Asian indices traded deep in the red today echoing yesterday's 7% fall in the US Dow Jones index. The Indian stock markets also felt the heat, opening the day with losses of almost 1,000 points on the benchmark BSE-Sensex. They rebounded briefly following a CRR cut by the RBI, only to fall down again on the back of poor IIP numbers. ICICI Bank lost a fifth of its value in today's trade alone, following the management's remarks that the bank has a 'small exposure' to overseas investments and loans. The bank however clarified that it has sufficient liquidity to meet its lending requirements.

Infosys led corporate India's charge in announcing its June-September quarter results today. The management has indicated that while the current environment is concerning, its business remains strong. It reiterated that while delays in decision making can impact performance in the short term, the momentum for offshoring remains strong.

04:55 Today's investing mantra
"We have usually made our best purchases when apprehensions about some macro event were at a peak." - Warren Buffett
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