»5 Minute Wrap Up by Equitymaster

On This Day - 7 APRIL 2010
Sensex at 18,000! So what?

In this issue:
» India, Brazil to lead the way, believes Rakesh Jhunjhunwala
» Indian gold sales pick up on lower prices
» Jim Rogers wants Greece to go bankrupt
» Corporate fraud on a rise in India
» ...and more!!

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"Wow, the Sensex has touched 18,000 for the first time in 2 years!" exclaimed the anchor on a leading business news channel. He then turned to a panel of market experts for their day's stock tips. One of those guys had just revised upwards his Sensex target for the next 12 months. And he had his reasons ready why he would be right in his prediction.

Doesn't this sound familiar? For those of you who are regular watchers of these channels, you must have seen such scenes repeated numerous times in the past. And this time it's no different.

The thing is that most investors give so much attention to the Sensex's movement that they end up basing their stock investment decisions on how and where the index is heading towards. So, while they cheer the Sensex's rise, they fear a correction in the index. Subsequently, they go all out into buying stocks when the Sensex is rising. And selling stocks when the Sensex is on its way down!

We believe the Sensex needs to lose its relevance for you to base your long term equity investment decisions. There have been innumerable instances in the past when gullible investors have lost loads of money just because they jumped on the TV experts' advice that the "Sensex will touch XYZ,000 in 1 or 2 months time!"

It's time you block the noise. Stop listening to the paranoid experts who claim to know exactly where the Sensex is headed! Just look at individual stocks and their intrinsic strengths and weaknesses before making the decision to invest or not to invest! Nothing else will do.

 Chart of the day
Today's chart draws a comparison in price changes for some key industrial commodities over the last year. And as it shows, copper and rubber have by far outperformed most other commodities during the comparison period. Steel prices are in fact down by around 23% YoY.

Data Source: World Bank

Rakesh Jhunjhunwala is one man who commands a lot of respect amongst Indian investors. He has no doubt made huge amounts of money for himself. But he is also a very sharp observer of market trends. Thus, we were all ears when a leading business daily decided to pick up the ace investor's brains on a variety of topics.

Rakesh opines that there is no doubt in his mind that the developed world is going to go through a long period of slowdown. He believes that there are far too many excesses in the developed world. And sooner or later, they would blow up. However, he has refused to give the timing of the same. In fact, he himself does not know when the blow up will occur. But he believes that it will happen for sure and there will be below normal growth in developed economies like the US. He further adds that when the slowdown happens, there will be a shift of power. Not just power but a shift of wealth and prosperity as well, from the West to the East. But this shift will be far from smooth. It will have its own problems and there could also be a lot of friction.

And who will benefit from this shift? Is it China that Rakesh is bullish on? Certainly not! Like a lot of other investor in recent times, even he is negative on China. He argues that the business model of the country is unsustainable and hence, not suitable for the long-term. Thus, it is India and Brazil that he believes will be the main beneficiaries of shift in power. Both the countries, he adds, have sustainable long-term models that would ensure years of strong growth. To sum up, he sees good future ahead with some sort of uncertainty. Not to forget the rise of India and Brazil.

A Wall Street Journal report suggests that gold sales in India have started picking up again as lower prices and a looming wedding season combine to revive demand. Gold prices in Mumbai, the country's largest bullion market, are currently quoted at Rs 16,515 per 10 grams, down from record high of Rs 18,340 in early December. Gold dealers expect sales to rise even further as the appreciation of the rupee against the US dollar is making gold imports cheaper.

Jim Rogers would like to see Greece go bankrupt! Such a bankruptcy, he believes would be good for the Euro. As he's told a leading business channel, "...the best thing that could happen will be for Greece to go bankrupt. It will be good for Greece, it will be good for euro and it will be good for Europe because people would understand that Europe is going to have sound currency. They are not going to lead people spend money. They don't have and if they did that, and we all realise this is going to be a sound currency, I and probably many others could buy lots of euros."

He explains that bailing out countries or companies will lead to weaker currencies and their eventual collapse.

The Satyam scam took the nation by surprise. Its chairman Ramalinga Raju cited intense competition and a pressure to perform well as reasons for cooking the company's books. Competition intensifies across industries during times of slowdown. The economic condition in India is however nowhere as bad as what is being seen across the globe. Competition on the other hand has definitely intensified over the past two years.

There's a good old saying that desperate times call for desperate measures. While the times may not seem to be all that bad, the measures certainly seem to be desperate. A survey done by accounting firm KPMG has reported that nearly two-thirds of the respondents believe that incidents of fraud in India have risen significantly over the last two years. Nearly 30% of the surveyed Indian companies believe that fraud in financial reporting remains the biggest concern. This is on the back of weak rules and the inability of authorities to enforce regulation. What does this imply for a retail investor? Quite simple actually! Stay away from scam-likely companies!

Indian markets had another volatile day today. The BSE-Sensex was trading with marginal gains of around 15 points (0.1%) at the time of writing this. While oil & gas stocks were seeing some buying interest, selling pressure marked trading in stocks from the IT and FMCG sectors. Among other key Asian markets, while China was down 0.3%, Hong Kong was up 1.8%.

It is a well known fact that infrastructure in India leaves a lot to be desired. Time and again, this weakness has been brought to the fore. The certainty that a ramp up in infrastructure will bolster India's economic growth is also unquestionable. And so, India has asked US investors to participate in its US$ 600 bn infrastructure programme in the next five years.

These investments would be made in ports, communication, roads and the like. All this is a part of the India-US Financial and Economic Partnership. This has been formed for two reasons. One is to strengthen bilateral engagement. The other is to understand the macro-economic financial sector and infrastructure related issues. The importance of infrastructure has been mentioned several times in the past by the government. Sadly, not much has been done to execute the same. We just hope that this time around things will be different!

 Today's investing mantra
"As I look back on it now, it's obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics. Investing in stocks is an art, not a science, and people who've been trained to rigidly quantify everything have a big disadvantage. If stockpicking could be quantified, you could rent time on the nearest Cray computer and make a fortune. But it doesn't work that way. All the math you need in the stock market you get in the fourth grade." - Peter Lynch

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