Crystal gazing

Dec 6, 2008

In this issue:
» The week that was
» Tata Steel reports three-fold growth in profits
» An eye for an eye?
» ...and more!

If only we knew it! If only the traders at Lehman knew that the toxic trades would cost them their jobs. If only the mortgage borrowers in US knew that the loans would leave them homeless. If only the diners at Hotel Taj Palace and Trident knew that it would be their last morsel. And if only our government and security forces knew the intensity of the terrorist assault when it was planned.

If we all had our crystal balls to gaze into, probably all problems could have been solved before they occurred. However, since that is not the case, atleast this time we should take some lessons for the future.

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The week began with some of our policy makers taking accountability in good measure and showing an act of resonance by stepping down from their pedestals to make way for better governance. Hopefully! However, mixed cues of global economic distress failed to bring any relief to investors. Instances like that of Blackstone Group withdrawing from the US$ 5 bn Indian infrastructure fund also raised doubts over the country's resilience to recessionary trends.

As the Big Three automakers in the US continued to beg for lines of credit, their Indian counterparts did not have things going too well for them as well. In India, biggies like Maruti and Tata Motors reported decline in sales in the region of 25% to 30% for the month of November 2008 as high interest rates and non-availability of credit continued to act spoilsport.

It has been a sorry state of affairs, forcing companies to shut down plants and lay off workers. Tata Motors for instance has decided to shut its commercial vehicle (CV) plant in Pune for another six days, taking the total number of 'shutdown days' to 12 this year, highest in the last 10 year history of the plant.

After years of being blamed for job losses in the US and elsewhere, India's technology companies and outsourcing firms are also going through a downturn of their own. The global slowdown is forcing them to reduce hiring, freeze salaries, postpone new investments and lay off thousands of software programmers and call center operators.

The New York Times puts it very interestingly - "The downturn is exposing a deeper concern: India has become the world's front office, handling customer service calls, and its back office, helping to process payments and run accounting and other computer systems. But it has not yet become the head office - making major new products, pioneering marketing techniques or helping to shape corporate strategy." This, in fact, sums it all up.

Caught on the wrong foot with the recent happenings, the policy makers in India are urgently in need of an image makeover to save their positions. They have therefore started seriously dwelling upon a recommendation that was put in the backburner for the past two years. That was utilising a portion of India's swelling (almost quite a bit lost in recent months) forex reserves for infrastructure investments. The government is now contemplating to infuse Rs 750 bn (US$ 17 bn) as a stimulus package comprising of US$ 10 bn of forex reserves and lines of credit to banks, financial institutions and the beleaguered textile and real estate sectors. Thus 5% of the country's forex reserves would be utilised to form a package that would roughly be equal to 1.3% of the country's GDP.

Speculations about future movements in gold and crude prices remained rife with Citigroup actually predicting that gold will touch US$ 2,000 per ounce. That is 2.5 times the current price of the yellow metal at US$ 800. The firm believes the measures taken to tackle the financial crisis will not stabilise the global economy. Instead they will either cause spiraling inflation or lead to a painful depression.

Completely dismissing a wide range of scenarios to arrive at a bullish conclusion on gold reminds us of what transpired with another commodity - crude oil. It was being predicted that crude would march on from US$ 147 per barrel to US$ 200 per barrel. Instead, it has collapsed by more than 60% since then.

Taking cues from falling global crude prices the Indian government, in an announcement late yesterday, cut petrol and diesel prices by Rs 5 and Rs 2 a litre respectively. Price of cooking fuels like LPG and kerosene were however left untouched. While the government has termed it a 'common man friendly' move, the decision smells of a pre-election giveaway considering that the UPA government has already drawn a lot of flak over its economic policies, reforms and handling of geopolitical issues. As reported by Business Line, these cuts, while resulting in a saving of around Rs 60 bn for consumers, will leave the oil marketing companies with an additional burden of Rs 53 bn.

Central bankers in the euro zone accelerated their rate cut moves in order to stimulate the credit markets and stall de-growth of their economies. Both the magnitude of the rate cuts and the bankers' willingness to shave it down further signaled the urgency to revive the economies. The lower inflation number (WPI, 8.4%) reported in India this week also gave rise to expectations that the RBI may fall in line with its global counterparts in the coming weeks.

Source: Yahoo

Amongst global markets, key Asian indices closed with losses during the week. The Indian benchmark BSE-Sensex lost 1.4%. The European markets also languished in the red. The US markets lost as much as 2.2% of the market capitalisation with reports of further job losses and earnings downgrades from corporate heavyweights.

Economic slowdown, movement in commodity prices, changes in monetary stances and shift in business dynamics are things that may not be predicted accurately. But these can be anticipated. That is because these are cyclical in nature. However, economic depressions and terrorist attacks are not cyclical nor can be anticipated. They are some of things that can teach us lessons. It is important that we do not erase these from our memories with the passage of time. Or leave it for others to crystal gaze.

If the world is going through a very difficult period of economic slowdown, it is definitely not showing in the results of Tata Steel. One of the world's largest producers of steel announced its consolidated results for the September quarter this week. It has reported a more than threefold growth in net profits on the back of a relatively much lower topline growth of 36% YoY during the quarter. The biggest boost to the profits has come from a sizeable expansion in operating margins, indicating little or no pressure on realisation.

In fact, the company has admitted to an increase in the same. The management has also admitted to not curtailing production for the rest of the year at its India operations as it believes demand to remain strong. Comforting words indeed! Performance at its UK subsidiary, Corus will however take a hit on account of a severe recession that has engulfed most of the developed world. Overall profitability though is not likely to come under significant threat on account of lower profit contribution from Corus.

Best of this week's 5 Min. WrapUp - An eye for an eye?
"Let's not pay taxes." "Let's not vote." These were a couple of banners seen in Wednesday's gathering at the Gateway of India that protested political apathy at the terror attacks in Mumbai an paid tribute to those who died.

There has been a lot of flak that our politicians have received over the past few days, both for their apathy and insensibility of speech. The political system has seemingly never felt the heat of an irate populace such as it has in the Mumbai aftermath. The torrent of condemnation has been swift and has been handed out to all political parties. "We do not want the politicians," some have said.

But can we do without our politicians? Not really! Politicians will continue to survive till democracy survives. Asking for their extinction is like asking for the end of democracy, asking for the end of our rights - to equality, freedom, constitutional remedies and against exploitation.

Someone rightly said that politicians are like diapers. They both need changing regularly and for the same reason. In that case, we definitely need change from the dirty politics of today. But how does one guarantee that the next diaper a.k.a. politician will not become as dirty?

As Mr. Ajit Dayal writes in his latest Honest Truth - "You cannot eradicate terrorism, but we can defeat it by continuing to live life normally. And we can help remove the reasons for home-grown or foreign terrorism by eliminating corruption and weeding out the politicians who have debased the political process."

As such, rather than only asking the politician to change, let us be the change we want to see in the country. Let us obey all rules (traffic included). Let us never pay bribes (some term it action money). Let us never accept mediocrity at governance. Let us go out and cast our votes for the candidate we believe in...and hope that this country is better governed for the next five years.

 Weekend investing mantra
"If you can find a company that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you've got a terrific investment." - Peter Lynch

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