Citi: Finally, cat's out of the bag - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Citi: Finally, cat's out of the bag 

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In this issue:
» Warren Buffett speaks
» The Citigroup bailout
» Tata's £ 1 bn loan
» Cheaper houses in Mumbai?
» ...and more!

Putting an end to the woes of one of the largest global banking companies and preventing it from a merger or acquisition, the US Treasury has agreed to step in to bailout Citibank this time. As per a note released by the US treasury, Citibank is set to be injected with US$ 20 bn of equity funding, making it yet another beneficiary of the TARP (Trouble Assets Relief Program). The government is mulling the purchase of a substantial amount of stressed assets from Citibank. However, the final payment would depend upon the valuation of the assets taken over. As per the proposal, the government would buy bad assets from the bank at a price higher than what is being offered in the market and in return take a stake in the bank.

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The US Treasury and the Federal Deposit Insurance Corporation (FDIC) will provide protection against the possibility of unusually large losses on subprime loans of approximately US$ 306 bn to the bank, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. The preferred shares will earn an 8% dividend for the US Treasury.

It may be noted that the top brass at Citi, just like the others before them, made several reassuring statements about group's well being in the past. We wonder if we will get to hear the truth from them now that the US$ 326 bn aid on their plate leaves no room for guesswork.

A leading US based news channel pulled off a casting coup last week when it managed to interview the Oracle of Omaha, Warren Buffett on a spectrum of issues. And like most of his ilk, he did not have good things to say about the US economy in the short run, particularly the unemployment scenario. In fact, he went so far to say that the US unemployment figures could even reach all time highs five months from now. He however seemed far less worried over the economy's prospects over a five year period, justifying his claim by going far back in history where despite facing worse times, the US has eventually emerged stronger from a crisis.

And unlike most others, the legend has not shied away from putting his money where his mouth was, forking out billions of dollars to buy stakes in companies, especially at a time when investors were looking the other way. Infact, he has been even criticized for his lack of timing as most of his recent investments are significantly under water currently. But it has to be borne in mind that he does not believe in timing his entry and exits into a stock perfectly. Instead, he buys significant stakes when a company, whose businesses he understands trades a significant discount to intrinsic value and then waits patiently for five years or more for the two to converge. Hence, to judge his investments through a short term lens of a few months would not be the right thing to do. The nearest instance that comes to mind of the market becoming skeptical of the master's 'midas touch' was the dot com boom. As seen from the chart, although Buffett's investment vehicle, Berkshire Hathaway, suffered a short period of underperformance vis-a-vis the tech laden Nasdaq, it outperformed massively over the next few years. Does similar underperformance lie in store for Buffett bashers over the next few years? Only time will tell.

Coming back to the interview, Buffett also put forth his views on the auto industry bailout and on being the next US Treasury Secretary. On the former, he gave indications of supporting the bailout but on terms that were strictly capitalistic in nature like forcing the CEOs to have a significant part of their own networth in the company. As far as being US Treasury Secretary is concerned, he refused to take up the job if offered as he loved his current job too much but also went on to add that he would be happy to help in any way he can. The charismatic leadership of Obama also came in for praise by the master.

Around 9 months earlier, the Tata group had paid US$ 2.3 bn for acquiring luxury car maker Jaguar Land Rover (JLR) and had raised a bridge loan of US$ 3 bn to finance the deal. Since then the global financial turmoil has hit the auto industry forcing JLR to cut down on production so as to sell its piled up inventory of vehicles. In fact, the Tata's are bracing themselves for a likely financial stress over the next 2 years. JLR is reportedly seeking a £ 1 bn loan from the UK government.

We wonder if the Tata group is just a victim of bad timing or has it bit more than it can chew and has over-stretched the balance sheets of its companies?

Back home in India, the government is planning to set up a special corpus of Rs 500 bn to provide low cost funds to projects being developed by private players and public-private ventures. It will be channeled through the two infrastructure funding agencies - IDFC or the India Infrastructure Finance Company (IIFCL) in order to ensure the timely completion of vital projects.

President elect Barack Obama in his victory speech had declared "change has come to America". And he is already working towards it. Barack Obama has vowed on last Friday to create 2.5 m jobs by 2011 through public works programmes that would include rebuilding of roads and bridges, modernisation of schools and creation of alternative energy sources. Nearly 1.2 m jobs were lost in US this year and the situation is expected to worsen in coming future. While the job creation plan is yet to be worked out, it would require a 2 year nationwide effort to lay the foundation for a strong and growing economy. The measures indicate long term investments in US' economic future which were ignored for quite some time.

The men in blue clinch the 7 match series against England by winning their rain interrupted tie at Bangalore yesterday. Way to go, India!

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Finally property prices in Mumbai seem to be on their way down. The realty sector has been in the doldrums ever since the stock markets plunged and the global economy slowed worldwide. Property prices had reached stratospheric levels before the unraveling of the credit crisis worldwide. Thus, there finally came a time when buyers simply refused to make property purchases at such over inflated prices as a result of which property sales transactions in the realty market were next to nil. While developers and builders were in a denial mode and chose to stay put, many of them are now being forced to come to grips with the reality. As a result, several developers have finally started slashing their rates up to 20%. However, while this is a welcome move for some buyers who were waiting on the sidelines ready to jump in the moment prices came down, for builders and developers it will still be a while before volumes significantly pick up.

While Jet was pressurised to shelve its plans of downsizing its workforce fuelled by a public outcry, the fact still remains that the airline is finding it hard to shoulder the burden of a rapidly shrinking bottomline. Thus, to keep the beleaguered airline company afloat, Jet has decided to cut the salaries of its workforce in a graded manner. Thus, those earning below Rs 75,000 a month will be excluded from the paycut, while those earning Rs 0.5 m and above will see their salaries slashed by 25%. With 15,000 employees on its payroll, Jet was already footing a salary bill of Rs 20 bn annually and thus cutting back on costs seemed imminent. Not surprisingly, such a move is bound to have its share of detractors and in this case these are the airline's 750 odd pilots. But, in times such as these, a satisfactory response to their demands could very well prove to be futile.

Worldwide sales of gold reached a quarterly record of US$ 32 bn in the 3rd quarter of calendar year 2008. This is on account of gold's safe haven status amidst the financial turmoil. Sales also picked up as buyers of jewelry returned in the festive season of Ramzan, Dhanteras and Diwali in places like India and the Middle East.

Equity funds never had it so bad. Sample this. Morningstar, a research firm of repute in the US, tracks around 11,585 US and international stock mutual funds. Of these, only one fund (there is no typo here) managed to not lose money in 2008! In fact, even the fund that managed to not lose money, did not gain anything either, closing flat through last Thursdays' close. This is another indication of the kind of wealth destruction that has taken place globally in 2008. Risk aversion has reached unprecedented levels with investors liquidating what is perhaps the ultimate collateral underlying the system, equities. The entire episode was summed up best by the analyst at Morningstar who crunched the data and has been doing so since 1994. "I've never seen it this bad before", she is believed to have said. We cannot help but agree with her.

Not willing to let the opposition hijack political support to the Congress through the anti-terrorism agenda, the Prime Minister is taking a tough stand on the intelligence agencies. So much so, that he has proposed a 100 day roadmap to bring the security threat under control.

Prime Minister Mr Manmohan Singh has called for tough action to stem a surge of terrorist and communal violence that has claimed hundreds of lives in recent months across the country. He has voiced his concern with regard to the country grappling with a wave of terrorist, sectarian and religious violence that has killed hundreds of people across the country in recent months.

A series of recent bomb attacks across several major cities has killed approximately 140 people. The eastern state of Orissa has been wracked with clashes between Hindus and Christians since August. In the northeastern state of Assam, ethnic clashes between indigenous tribes and Muslim settlers have killed more than 50 people in recent weeks.

In the meanwhile, the Indian markets witnessed a highly volatile day's trading today with the benchmark indices swinging on both sides of last week's close to end marginally lower. Asian markets ended a mixed bag. Benchmark indices in China (down 4%) and Korea (down 3%) closed lower, while Japan closed higher by 3%. Europe and US index futures advanced on the news of the Citigroup bailout package.

04:56 Today's investing mantra
"With every new wave of optimism or pessimism, we are ready to abandon history and time-tested principles, but we cling tenaciously and unquestioningly to our prejudices." - Benjamin Graham
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