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Investing in India - 5 Minute WrapUp by Equitymaster
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In this issue:
» US government's latest plan
» Tata Motors' insatiable thirst
» Liquidity crunch for liquid funds
» Pepsi's reduced fizz
» ...and more!

00:00 Hank bites the bullet...
Finally. After being rather reluctant to spend taxpayers' money for buying stakes in banks, deteriorating credit market conditions have forced the US Treasury secretary to do exactly just that. We are talking of a new US$ 250 bn bail out plan, which although forms a part of the bigger US$ 700 bn plan, has been given primacy over the other plan envisaged few days back. As per the new plan, US government will inject equity capital through a combination of preferred stock and warrants into banks deemed crucial for the smooth functioning of the US economy. Any fears on the part of the banks that this might hurt their shareholders' interest have been allayed by a built in clause. This clause calls for a far lesser dilution in current shareholder equity if the money is repaid by the end of 2009. Furthermore, the preferred stock carry an interest of 5%, which means that even tax payers are being adequately compensated. Thus, unless banks go into bankruptcy, the plan looks like a win-win situation for both government as well as bank shareholders. More importantly, it addresses the root cause of contraction in capital as the equity capital can now be leveraged 9-10 times over by the banks and hence, make possible that much more lending. This scenario would not have been possible under the earlier plan where buying up of toxic assets by the government would have freed up capital only to the extent of the distressed price of the asset.

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00:45 Wall Street's obituary
And while we are on the bailout, it will not be months but several years before the American economy can come to terms with and write the obituary of Wall Street. Cities like New York that have thrived on the prosperity of securities firms and Wall Street analysts could probably face dire consequences for some time to come with the near extinction of this breed or atleast their bonus packages. If the estimates of Bloomberg are anything to go by, the loss of 35,000 jobs in financial services positions will leave New York with very few residents who can afford to pay taxes. Not just individuals but also the Wall Street firms that have incurred huge losses this year will not have to pay taxes to the city for a couple of years. Wall Street, which accounted for 9% of New York city's tax revenue in 2007, offered 5% of the total jobs in the city but contributed nearly 23% of its wages.

01:13 India and an Indian do it again...
India's diversity and contrasts have had many a people spellbound. Little wonder stories woven around the same have won rave reviews worldwide. What else would explain the fact that as many as eight books with an Indian connection to them have won the prestigious Booker prize. Booker, for the uninitiated, is touted as the literary world equivalent of an Oscar. Did we say eight? Well, the list just swelled last night. Aravind Adiga, a debutant Indian novelist was declared the winner of the Man Booker Prize for fiction for the year 2008 for his book 'The White Tiger'. Quite fittingly, Aravind's novel is about a man's journey from Indian village life to entrepreneurial success. Indeed, India's shunning of the 'Licence Raj' mentality has spawned many a 'White Tigers' in recent times.

01:38 Tata Motors' acquisition spree continues
Looks like India's largest auto company's thirst for overseas acquisition is far from being quenched. In a big boost to its plan of launching an electric vehicle into the European market, Tata Motors took a controlling stake in a small Norwegian company yesterday. The company specializes in the manufacturing of polymer Lithium Ion batteries, the heart of an electric car. The deal size is a paltry US$ 2 m but is of great significance for a company that vows to deliver a practicable option for the consumer of the electric car. Spiraling crude prices and ill effects of global warming have led many a big investors to invest huge sums in alternate energy solutions. Interestingly, Warren Buffett also bought a small stake in a Chinese manufacturer of Lithium Batteries some days back so that he could benefit from this worldwide effort of switching to alternate energy.

02:05 Liquid funds at the receiving end
The ill effects of the liquidity crisis facing the Indian financial industry is showing itself up at some really strange places. As per reports, NAVs of some of the liquid mutual funds in India have turned negative in recent times, a rare occurrence indeed. This is because a mad scramble for liquidity and chances of attractive returns elsewhere are forcing companies and bank treasuries to undertake redemption, which in turn is forcing fund managers to offload some assets below cost price. As per Mint, Liquid-plus funds had a particularly tough time in the previous week with 33 of 291 of such funds declining in value between Wednesday and Friday. Unless more money is pumped into the system, there could be more pain in store.

02:29 Appetite still big for Asian Real Estate
While the world maybe going through a credit crunch of one of the worst kinds, this has not reduced investors' appetite for Asian real estate. The fact was confirmed by the successful closing of Merrill Lynch's Asian real estate fund wherein the financial institution extracted firm commitments to the tune of US$ 2.6 bn from investors. The fund money would be used to invest in Asian real estate markets like China, India, Korea and Japan. India too, like its other Asian counterparts is currently going through a process of reduced real estate demand. But from a long-term perspective, the country is one of the most attractive globally as its real estate market is expected to witness a huge 14-fold jump over the next decade. Looks like Asian real estate, mostly from the emerging markets will continue to be one of the most popular assets around.

02:52 Hedge fund titan sees more pain ahead for the US economy
Julian Robertson, one of the most astute hedge fund managers of all times, has predicted a long recession for the US. And like most others of his ilk, has gone on to mention that the current state of the US housing market has left most of the Americans broke with hardly any other savings to fall back upon. This, he believes, will eventually result in significant pullback in consumption and a long road to revival. With a track record as big as his, we dare not doubt him.

03:08 In the meanwhile
Most Asian markets, including India closed deep in the red today as worries over global economic growth assumed greater intensity. BSE-Sensex, the Indian benchmark closed lower by nearly 6%, undoing most of the good work of the past couple of days. European markets are also trading way below the dotted line currently. In the US markets yesterday, sharp pullback was witnessed as concerns over economic growth weighed heavy on the minds of the investors. Interestingly, the decline came just a day after Dow and the S&P 500 eked out record gains for themselves. Anxiety over demand also pressured crude prices as they once again fell below US$ 80 per barrel levels.

03:29 King of the Idiot box
The Indian TV viewer has never had it so good. With multiple distribution channels and hundreds of channels to choose from, it is hard to imagine that India once had only option- the national broadcaster.

But as you would expect in free markets, the players in the fray are not having such a great time. It is well known how direct to home (DTH) players incur losses for every new subscriber that they acquire. But one can understand their situation given that it is still a nascent industry and requires upfront investment.

The broadcasters have been around for quite a while now. Yet the space is in a state of flux. According to Audience Measurement and Analytics (aMap), a new entrant like 'Colors' has dislodged Star Plus form the perch of number one. Admitted, it is just one week's results and the more widely used Television Audience Measurement (TAM) data is still awaited. But the rapidity of change reminds us of what Warren Buffett had to say about emerging industries in 1996, "As investors our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride."

04:04 Pepsi is losing its fizz
The economic slowdown, which is boiling over, is taking its toll on the Americans who do not seem to want a Pepsi to cool themselves down. Given the firm crude prices and the fall in value of their homes, many Americans are looking to cut back on beverage purchases in grocery and convenience stores. Even people entering gas stations are going just that: getting fuel. As a result, this has increased the costs for Pepsi on the delivery side. Take a look at some numbers. While Frito-Lay North America, which is the company's snack business, reported a double-digit growth in the topline, cooking costs and fuel weighed heavy on margins. Man made disasters aside, the company was not spared from nature either as the revenues of Quaker Foods North America were impacted by the flooding of its main plant in Iowa. The bottled water division also failed to perform.

To add fuel to the fire, Pepsi's increasing international presence was a blight on overall performance due to the rise in the value of the dollar. The Chairman of the company Indra Nooyi aims to 'enhance Pepsi's operating agility to respond to the changing environment' and cost cutting has assumed top priority. To start with, the company plans to cut 3,300 jobs and close 6 factories, which is expected to translate into savings of more than US$ 1.2 bn over the next three years. Indeed, a tough road lies ahead for the company, which will have to chew on the problem of how to convince Americans to purchase Pepsi in times like these.

04:55 Today's investing mantra
"To carry one's eggs in a great number of baskets without having the time or opportunity to discover how many have holes in the bottom is the surest way of increasing risk and loss." - Warren Buffett
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