War Premiums are back
(Dec 29, 2008)
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In this issue:
There used to be a time, when disasters, conflicts and political upheavals bothered investors and they flocked to 'safer' places. In other words, asset classes in the 'unsafe' places had to provide a risk premium to attract investors. In case of military conflicts, the term used is 'war premium'. Be it a war in the Gulf or near in India's North West.
» War builds a premium in oil prices
» Is the Fed creating another bubble?
» Satyam's board wakes up.
» Is DTH a security threat?
» ...and more!!
Those were the days of innocence. Of late it could be seen that investors, like common citizens everywhere, have become numb to such risks. Hence, markets stopped reacting to these events.
But are investors, once again, getting sensitive to pain? There are indications that this might be the case in at least one instance- Crude oil. The geo political risk of oil supplies from the Middle East is back in focus. As per Reuters, oil prices jumped over 5% to almost US$ 40 per barrel, on the Israel- Hamas conflict. In fact, renewed conflict has deeply angered Arabs across the region raising the risk, although remote at this point, that the conflict could spread to major oil exporters and threaten real supplies.
While we are bullish on oil prices in the long term, we hope and pray that it happens for reasons other than war.
Satyam's board wakes up. Prof. Krishna Palepu and Mr. Vinod Dham, both directors on the board, have resigned. Earlier, another independent director had owned the moral responsibility for the recent debacle and stepped down. There are talks of even trying to bring about a turnaround in the company's image by taking radical steps like change of management, seeking a takeover etc. While it remains to be seen how it works out, the entire episode highlights the importance of the saying, "a stitch in time saves nine". Satyam has a lot of stitching to do now.
The recent terrorist attacks in Mumbai have left many with a lingering sense of insecurity. This shone through in an interview with Jawahar Goel, MD of Dish TV, conducted by a leading business daily. He is of the opinion that raising the limit of foreign investment in the DTH sector in India from the current 49% to 74% would be a foolhardy move due to the 'security concerns' it raises. His main contention is against a particular feature of the DTH technology. That is its "single messaging system", which enables the DTH operator to send a message to an individual viewer on his TV screen, and there is no way to intercept these messages. As far as the government's final decision on the issue is concerned, the jury is still out.
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But we wonder if the argument suits Dish TV rather well. After all, it works against competitor no. 1: Tata Sky. After all SKY is a foreign entity!
While the year when the world's credit markets stood standstill is about to come to an end, the blame games we believe, will continue to go on for quite some time. And now, courtesy an article in The New York Times, another event has popped up as a scapegoat. It is the bailout of the notorious hedge fund, LTCM, way back in 1998. Mr.Tyler Cowen, a professor of economics at a US based university, has argued that the global financial world would have been better off without the bailout of LTCM's creditors when the hedge fund ran into losses worth billions of dollars on the back of massively overleveraged bets. LTCM's creditors included names like Bear Stearns, Merrill Lynch and Lehman Brothers, the very same names that had a huge role to play in the current credit crisis. Mr Cowen argues that their bailout emboldened them to take even bigger risks, the price of which is now being paid by the entire global economy. The ad hoc policy measures of the government authorities have also come in for criticism by Mr Cowen, who argues that "regulatory uncertainty is stifling the ability of financial markets to engineer at least a partial recovery". He signs off by saying that we need to make some hard choices and focus on the long-term, failing which we may well stare at another crisis. We cannot help but agree with Mr.Cowen.
Be it stocks or placements, FMCG companies are the most preferred in times of turbulence. This is evident from the fact that HUL, which had slipped to 14th position on the recruiters list of B- schools in 2007, has bagged slot zero position on B-school campuses this year. With investment banking, IT/BPO, and other services sectors having stopped recruiting, FMCG companies have earned the top slot.
The poor state of India's infrastructure is a well known fact. To make matters worse, a recent study on Civil Aviation in India has stated that the country is not suitable for low cost airline operations precisely due to the lack of adequate infrastructure namely secondary airports. The matter does not end here. There are a myriad of other problems as well. These include higher staff costs in tandem with those paid to the staff of full service carriers to curb the menace of poaching, not to mention the high aviation turbine fuel (ATF) prices, dearth of capable senior management and competition from roads and railways. In fact, 70% of the costs of low fare carriers are almost as same as those of full service carriers meaning that the scope for expansion in margins is that much more difficult. The scenario for these airlines seems bleak indeed, but perhaps the first step in developing quality secondary airports needs to be taken if the fortunes of these low cost carriers are to change for the better.
The RBI which has been temperamentally tight fisted in allowing access to foreign players to the Indian banking sector, is now doing a reverse exercise as well. With the troubled assets of some global financial majors creating craters on the surface of global economy, the central bank is leaving no stone unturned. Although the RBI figures reveal that that Indian banks have an exposure of around only US$1 bn to five troubled global financial institutions (out of total sector's advances of US$ 550 bn in FY08), it does not wish to take chances. This primarily concerns the assets of Wachovia Corporation, Washington Mutual, AIG, Lehman Brothers and Fortis. The central bank is monitoring the exposure of Indian banks towards overseas credit derivatives and related mark-to-market losses on a monthly basis. The RBI, in its annual report, has also expressed concern over Indian bank's growing off balance sheet exposure. Out of the total exposure to troubled foreign assets, about US$ 446 m are fund-based while the rest (US$ 634 m) are non-fund based exposure. The concerned Indian banks have made a provisioning of US$ 47 m on these exposures, leaving room for more provisioning going ahead.
The next bubble lies in zero. Wondering what we are up to when we say this? To clear the air, 'zero' here refers to the interest rates that the Federal Reserve is charging for the amount of money it is lending. Simply put, it is giving away money for free (almost!). So where does it lead the US economy, or the entire world, to? Another boom-bust cycle probably.
This latest step of providing money for free talks tale of the US central bank's failed attempts in the past to save the economy from falling into a deep recession.
Its first step was to lower interest rates to spur borrowing. Failed, because the balance sheets of companies and consumers were already rotten!
Then, the Fed tried to swap high quality government bonds against junk collaterals. There were still no lenders, no borrowers.
|Source: The Economist
Now, the Fed has brought the cost of funds to zero. Simply put, instead of getting people to lend and borrow, it is creating money at its printing presses and using them to buy bad assets from banks. The economy financial system remains in a tailspin.
The original idea of the Fed in doing all this is to avert deflation (falling prices) by spurring people to spend (and revive the economy) rather than save. However, going by history, all government interventions come with unintended consequences. This heavy supply of cheap money, we believe, will go into fueling 'hyper-inflation' in the US in the years to come.
Stocks in India closed firm today as the benchmark BSE-30 Index ended with almost a 215 points gain. However, other Asian markets such as Japan (marginally higher) and China (marginally lower) ended on a mixed note. Stocks in Europe are currently trading in the positive. As per Bloomberg, European stocks and Asian shares rallied as higher oil and metals prices buoyed commodity producers and merger speculation lifted insurers. US index futures remained flat.
Is Buffett often misquoted? We think so, given how often 'Buffettisms' are not used in their original context.
Take 'concentrated portfolios' for example. Buffett is extremely meticulous in digging out data. Then, he uses his analytical ability acquired over the years to end up with qualitatively better information than most other people. This thoroughness makes him supremely confident of his decisions, making him inclined towards concentrated bets rather than diversification.
When the lay investor picks stocks much more casually than how Buffett would, the advice on having a concentrated portfolio needs to be taken in context. Ignorance of that could hurt, more than help the investor.
"For investment, the future is essentially something to be guarded against rather than to be profited from. If the future brings improvement, so much the better; but investment as such cannot be founded in any important degree upon the expectation of improvement." - Benjamin Graham
|| Today's investing mantra
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