We don't want bonuses - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

We don't want bonuses 

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In this issue:
» Goldman's top brass shuns bonuses
» Infosys' paid philanthropy
» Japan re-enters recession
» Maruti more valuable than GM
» ...and more!

"We don't want bonuses," say the top executives of Goldman Sachs. During the heydays of investment banking, the end of the financial year was looked upon with much anticipation as mouth watering and lip smacking bonuses were lined up for the top executives. The bigger the profit, the larger was the slice of the bonus cake. Therefore given that the tide has now turned, it is hardly surprising that the top executives of the investment bank have decided to forego their year-end bonuses. And very rightly so!

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After racking up huge losses due to massive exposure to the soured subprime assets, there was obviously no valid reason for pocketing bonuses when the financial markets are literally on life support.

Consider some numbers. In line with the 32% fall in revenues in the year so far, Goldman's compensation expense has also plunged 32%. The initiative of foregoing bonuses was led by the CEO Lloyd Blankfein followed by his six deputies. As reported on Bloomberg, each of the executives receives a salary of US$ 600,000, while the CEO's bonus last year was almost US$ 70 m.

In fact, after the announcement 0f the US$ 700 bn bailout package, Wall Street bonuses that account for about two-thirds of the firms' total annual compensation, have come under intense scrutiny.

Last weekend meeting of the Group of 20 nations (G-20) ended without any tough questions answered. While the group countries have reportedly promised to continue to revive their economies, no clear direction was identified, no top level decisions taken. The G-20 now plans its next 'outing' in April after the US President-elect Barack Obama is sworn into office. As such, we would now have to wait to hear the policymakers as to what new they are doing to bring respite to financial markets and economies.

The Sun seems to have set on this land, at least for the time being. After the US and the UK, it is now Japan's turn to go into a recession, with the country's GDP shrinking during the July to September 2008 quarter. As reported on Bloomberg and other international media, Japan's economy declined by 0.4% during the quarter, the first time since 2001. Economists had expected the economy to grow by 0.1% and as such the reality comes as a disappointment. But given the decline in business confidence, and corporate and consumption spending, the results are not far to fathom.

Economists now project that Japan may be entering its deepest recession in a decade as the global financial crisis cools demand for its products within the country and overseas. Tough times indeed for the world, as three of its largest economies are now in recession with no clear signs of recovery.

As far as India is concerned, voices asking for further interest rate cuts are getting louder. This is as part of the proposed plan to pump the economy by using measures like cuts in interest rate and taxes, and investment in infrastructure. The country's leading corporate leaders are also asking the RBI to cut interest rates further to enable demand to pick up pace again.

As a matter of fact, the RBI has already cut its benchmark lending rate (repo rate) to 7.5% from 9% over the last month. It has also reduced the cash reserve ratio (CRR) by 3.5% (to 5.5%), thereby freeing up Rs 1,400 bn for banks to lend. Now the fact that inflation (as measured by the Wholesale Price Index or WPI) has declined to its lowest level of 8.9% in over five months, the RBI will have a greater leeway in cutting interest rates further. On the contrary, the fact that credit continues to grow by leaps and bounds (28.5% YoY growth reported in the RBI's latest release) will force the RBI to take a harder look at its next decision, whatever it may be.

Stocks in India closed weak today, but only after making a sharp recovery post languishing deep in the red for a major part of the session. Realty and banking stocks led the rout in today's trade as the benchmark BSE-30 index closed with almost 100 points decline. Other key Asian markets also bore the brunt of news of recession in Japan and Hong Kong. However interestingly, the benchmark index of Japan (Nikkei) closed with modest gains. Other key indices - Hong Kong, Singapore and Korea - closed weak. Stocks in Europe are also trading weak currently.

Gold is trading with marginal gains. The yellow metal is currently at US$ 746.6 an ounce, up almost US$ 4 over last Friday's closing. Forbes reports that the yellow metal "is struggling to sustain an uptrend since hitting a two-month high of US$ 931 in October. It is well below it lifetime high of US$ 1,030 struck in March." Cash seems to be the king these days as all other asset classes, including gold, have been very volatile in recent times.

The SEBI it seems is working towards lowering barriers for foreign institutional investors (FIIs) to invest in the Indian stock markets. As reported in Business Standard, the most important move being discussed relates to doing away with registrations for these investors. High net worth individuals or institutions from foreign countries who wish to enter the Indian market without registration have to approach a registered FII to invest through the participatory note route till now.

They will be able to invest directly through brokers if this move is passed into action. It is like bringing the backdoor entrants to Indian stock markets to the front door. But we will still not know who these entrants actually are! It will tantamount to removing the brakes of a car just because you are in an emergency!

"The deep troubles of the U.S. economy are pushing a growing number of already struggling Americans into bankruptcy, often with far more debt than those who filed in previous downturns," reports the International Herald Tribune. The number of personal bankruptcy filings have in fact totaled 108,595 in the month of October 2008 (from 81,000 in October 2007), surpassing 100,000 for the first time since a law that made it more difficult and expensive to file for bankruptcy took effect in 2005. That is an average of 4,936 bankruptcies filed each business day!

Call it destiny or sheer good performance, but the fact that Indians banks appeared to do far better than what was expected of them in 2QFY09, was primarily due to the fact that globally banks were doing much worse. Although most large public and private sector banks managed to sail though the result season for the second quarter of FY09, they may not continue to remain lucky.

Some banks, particularly the ones that have remained aggressive in the loan growth in the recent quarters have exposed themselves to two serious risks. First, their capital adequacy ratios are dangerously low at a time when raising capital is an expensive proposition. Second, having lent at steep interest rates, the banks must be prepared to face higher delinquencies as well. Thus, while not all is lost for the Indian banking sector, there are grey areas that investors need to remain watchful about.

Indian IT major Infosys has given its employees the option to take a 1-year break and pursue philanthropic activities. They will continue to receive 50% of their salaries. Only employees who have spent 2 years in the organisation would be eligible after a senior panel decides on the merits of their case. The company says that many IT professionals quit their jobs to pursue such activities, hence it wants to pre-empt the process within the organisation.

Interestingly the company also says that it is a coincidence that the move comes at a time when the global economic outlook is bleak, especially in the all important banking and financial services sector. We would take that with a pinch of salt given that the benefits of cutting 50% of the salary costs for a section of its employees must be substantial for Infosys. After all, this is a company with employee strength of over 100,000!

Top US automaker, General Motors (GM) is fast running out of cash. In fact, at this rate, the company is not expected to see the year 2011 unfold. Quite expectedly, it has asked government for help, hoping that it will not discriminate between a financial sector firm and a manufacturing firm.

If the capital markets are any indication, developments in GM are definitely not being viewed upon favorably. This was evident in the slide of GM's market cap recently, where it had fallen to even below that of India's largest passenger vehicle manufacturer, Maruti Suzuki. Even Hero Honda, India's largest two-wheeler company is trading at a significantly higher market cap than GM. Now that is some wealth destruction!

China has unveiled a US$ 73 bn (approx Rs 3,500 bn) plan to develop the city of Shanghai. When did you hear our policymakers speak the last time outlining a similar plan for the 'future Shanghai of India' - Mumbai?

The extent of bubble in the global real estate market that peaked at the end of last year is well depicted by the following graph (Source: tradersnarrative.com) which shows the ratio of property price to rent across several markets. The bubble in Spain for example took the ratio from 140 in 1991 to almost 200 by the end of 2007. Japan however paints a contrary scenario with the ratio on a constant decline over the 16 year period.

04:53 Today's investing mantra
"The correct attitude of the investor toward the stock market might well be that of a man toward his wife. He shouldn't pay too much attention to what the lady says, but he can't afford to ignore her entirely." - Benjamin Graham
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