In this issue:
» RBI's inaction spooks markets
» Alan Greenspan admits his mistake
» The Guys from 'Government Sachs'
» The next crisis
» ...and more!!
The much awaited Companies Bill, 2008 was tabled in the parliament on Thursday. What is important about the bill is that it makes promoters of Indian companies accountable to minority shareholders. The same carries considerable weight in the light of the fact that in the recent past minority shareholders have felt cheated with the actions of the promoters. The sale of Ranbaxy's promoter stake to Daiichi-Sankyo being a case in point.
|| Shareholders to get their voice
The important features in the new bill are prohibition of insider trading, class action suits against promoters, independent directors, speedier incorporation, mergers, and winding up of companies. The Bill is based on recommendations made by the J.J. Irani Committee and will replace the current Companies Act 1956, which has been amended 25 times in its 52-year old existence. Besides increasing the accountability of the promoters, the Bill will also make India's regulatory framework more aligned to international best practices.
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Not wishing to let out too many of its cards after having already had a hectic month, the RBI chose to have an in-active stance in its half year review of the monetary policy. Although the central bank has been vocal about some of its key concerns on certain macro and micro issues, it has chosen to keep most of the policy rates unchanged, after having exercised a cumulative reduction of 2.5% in the CRR (cash reserve ratio) in the past month, accompanied by a 1% drop in repo rate. The monetary policy review thus seemed to be taking stock of the developments that have unfolded in the recent past and left enough headroom for the RBI to maneuver its future course of action based on the outcomes of its recent policy measures. This is particularly so because the Indian central bank is, as in the past, not exactly flowing the footsteps of its global peers.
|| RBI's inaction spooks markets
However, the markets did not take the RBI's stubbornness very kindly and went on to punish the banking stocks in particular, which led the pack of losers as the benchmark BSE Sensex lost more than 12% of its market cap during the interim trades.
"It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities," said a former President of the Bank of England. Who else can vouch for this than the man under whose aegis the seeds of the current global financial turmoil were sowed? Alan Greenspan - you guessed it right - the former Chairman of the US Federal Reserve!
|| Alan Greenspan admits his mistake
"Yes, I found a flaw," says the man on his market ideology. He oversaw the building up of the credit bubble by ignoring lax banking regulations and flawed actions of investment banks. He attributed rationality to markets. And the world is paying a price now. Nobody has ever escaped the consequences of his choices. There was a choice Mr. Greenspan had made then. And he's now left the world with no easy choices at all!
It may be a pure coincidence. But the way the markets reacted today to the RBI's policy moves almost made us wonder if it has anything to do with today's date - 24th October. This very day 79 years ago (1929), the US Dow Jones Index crashed 12% in a single day and laid the foundation of the Great Depression.
|| In the meanwhile...
Along with the BSE-Sensex, key indices in the Japanese, South Korean, Hong Kong and Singapore markets also lost more than 8% of their market capitalisation today. European markets across the board have also opened deep in the red losing more than 7% of their value in early trades. The rupee closed at 49.98 to the US dollar.
OPEC has decided to cut production by 1.5 m barrels a day, smaller than what was expected. Due to this, oil prices have dropped to their lowest point since March 2007. A barrel now costs US$ 63.
Calpers (The California Public Employees' Retirement System), which is the US's largest public pension fund, is a worried lot. Its assets have declined by more than 20%, or at least US$ 48 bn from the end of June through October 10th this year. If the returns show no signs of improving, Calpers is poised to impose an estimated increase in the California public employers' contributions to the tune of 2% to 4% of payroll starting July 2010.
|| Calpers not clapping!
California government agencies across the state are already heavily affected by grim sales-tax and income-tax revenue and a tanking real-estate market. Looking at all this, the state and local governments intended to have budget cuts for coming years. A rate increase from Calpers would be a big burden to this, simply adding to the fiscal mess already plaguing the region. All in all, just one more ramification of the all so familiar CDOs, those evil 'weapons of mass destruction'!
The US undoubtedly is facing one of the worst financial crises in recent times. Hence, it would want no one but the best to get itself out of it. But what has been hard to ignore is the ubiquity of the executives of the famed firm Goldman Sachs at the US treasury.
|| The Guys from 'Government Sachs'
One of the most admired Wall Street firm has a long history of its executives donning the public service garb and this has remained almost unrivalled. Thus it comes as no surprise that Treasury Secretary, Henry Paulson, a former Goldman executive himself has thrust a lot of his erstwhile employer's executives into the job of bailing out the troubled US economy.
Sample this - the person who was chosen to lead the bailed out AIG as well as the person selected to oversee the government's US $700 bn bailout fund were people with Goldman pedigree. In fact, some people have joking rechristened the company to 'Government Sachs'. And quite naturally, it has got tongue wagging on both sides.
While people who swear by the company's pedigree assert that these are indeed the most eligible people to do so, there are others who say that a mess created mostly by few Wall Street firms cannot be cleaned up by another Wall Street firm. Sadly, it would take a few months before we know who comes out on top in this debate.
At the end of it all, we start wondering, "What would be the Goldman Sachs equivalent of the Indian financial industry?" To get the answer, may be we will have to go through a financial crisis in the first place. We would rather have our conservative bankers with one eye firmly on the risk management than a high-flying Goldman Executive. As someone has rightly said, "An ounce of prevention is worth a pound of cure."
While the remnants of the US housing bubble are yet fresh in our memories, some of the most populated cities in China are showing similar signs of excesses. This city has complexes where only 50 of 780 apartments are occupied and only one of the two dozen cranes at new projects are operational.
|| Real estate woes in China
As in the US, UK and Spain, the real estate bubble in China has turned into a bust that could be quite nightmarish. Banking experts and economists expect the bust to produce, by next spring or summer, a sharp increase in loan defaults that could erode the high profits earned by Chinese banks over the past three years. Prices have already fallen by up to one-third in some neighborhoods of Shenzhen, the city most affected by the real estate bust. And despite the government taking measures such as interest rate cuts and slump in tax rates, there seems to be no bottom.
India's diamond jewelers, the world's biggest, are being burned by the credit crisis. And to tide this over they are encouraging their workers to go for a longer leave besides urging mining companies to restrict supplies to prevent a further fall in prices. Obviously during times of economic downturn, buying luxury goods will be the last thing on a consumer's mind and thus ripples are being felt in the gem industry.
|| The diamond's sparkle is wearing off
Major miners such as De Beers for instance, which is the largest supplier of rough diamonds are being asked to curtail production. The problem that confronts the Indian gem industry is the fact that nearly half of its exports are to the US and Europe; two regions, which are facing the maximum adverse impact of the financial crisis.
The other problem that the Indian gem industry is facing is the lack of funds. As reported on Bloomberg, India, which processes 11 of every 12 diamonds sold in the world, bought rough gems worth US$ 5.9 bn in the six months ended September 30, up from US$ 5 bn a year ago. This, going forward, is not likely to be sustainable. Diamonds have the penchant to make those who do not have them burn with envy thereby bolstering the demand for this precious stone. But given the ongoing turmoil, Indian jewelers are definitely not in an enviable position right now.
Plastic money. With real liquidity having gone for a toss, it's the plastic money (credit cards in particular) where the crisis now seems to rest. The percentage of loans deemed uncollectible by one of the largest credit card companies in the world - American Express - reached 6.7% in September 2008, up from 3.6% a year earlier.
|| The next crisis could be in...
AmEx had been making big push in the past couple of years allowing many of its customers keep a balance and pay only the interest that accumulated on that credit. While this company is in a state of serious default, even other card issuers like JP Morgan Chase and Capital One Financial Corp (that are not stand-alone card companies) are grappling with the same problems as more consumers shut their wallets and fall behind on their bills.
On the Indian shores, we had seen the SBI - GE Money credit card JV witnessing similar turmoils a couple of months back, finally separated into two separate SBUs.
"If the job has been correctly done when a common stock is purchased, the time to sell it is - almost never." - Philip A. Fisher
|| Today's investing mantra