»5 Minute Wrap Up by Equitymaster

On This Day - 30 OCTOBER 2010
Biggest fraud in history of mankind

In this issue:
» US running a giant Ponzi scheme
» Rise in investments through PNs alarming
» Currency options off to a fine start
» Food security bill could strain budget
» ...and more!!

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Quantitative Easing I has been done and dusted. And is well known, it managed to have a negligible impact on the US economy. However, the US Fed is still far from giving up. Infact, there are strong chances that the second round of easing, quite predictably called the Quantitative Easing II (QEII) could be unveiled by the Fed as early as next week.

Will it work this time around? Certainly not, believe most financial gurus. They argue that this would just be another in the long list of wrong actions that the US Central Bank has taken so far to come out of the crisis. And perhaps the most trenchant critic so far has turned out to be Bill Gross, the MD of world's largest bond house PIMCO.

Writing in his most recent monthly investment outlook, Gross observes that the outcome of QEII is by no means certain. He argues that even if the size of QEII runs into trillions of dollars, it may not stimulate borrowing or lending because consumer demand is just not there. Thus, QEII as per Gross, would amount to nothing but a giant Ponzi scheme and of the size that has never seen before.

Even we tend to agree with Mr Gross. We are of the opinion that the problem of excess debt cannot be solved with more debt. Instead, what is needed is long period of deleveraging where the excess debt is paid off and the economy grows at a far lower rate than before. Any attempts at injecting more money, like the US Fed is trying to do, will only prolong the problem and set itself up for an even bigger crisis in the future. In other words, the US Fed is doing nothing but perpetrating perhaps the biggest fraud in the history of mankind.

Do you think QEII will work? Let us know or share your views on our Facebook page.

 Chart of the day
India is indeed climbing on the economic growth charts and it is a trend that is certainly desirable. But what is not desirable is India's ascendancy on the corruption chart. As today's chart of the day shows, India ranks a lowly 87 out of a total of 178 countries in the corruption perception index. Important to add that Transparency International, the organisation that carries out the study had ranked India three places higher at 84 in the same study last year. So, what has led to our slipping off the charts? As you would have guessed it, the allegations surrounding the CWG games in Delhi. It is time our babus and politicians get their act together on this one as it presents a serious threat to the India growth story.

Source: LiveMint

Obama is not the first incumbent US President to visit India. And quite certainly he may not be the last one. But this trip of his is indeed unique in more ways than one. None more so than the fact that Obama will perhaps be the first US President to spend more time in Mumbai than in Delhi. Yes, that's right. Mr Obama will be spending almost two days in India's financial capital as against spending just a day in Delhi. This gives enough hints that his main talking point is going to be economics and not politics. A point of view that perhaps even the US would endorse whole heartedly.

Indeed, creating more jobs or sustaining current ones is the top most priority for the world's most powerful nation. And it is hoping that India would make some contribution towards the same. Deals close to US$ 10 bn are lined up and if at all they come to fruition, around one lakh US jobs would be created or saved. India too would be hoping that it does not end up being a one way street. And it will certainly bargain hard. We may have to wait to see how much of a two way street this entire affair turns out to be.

Business Standard reports that currency options, which made their debut on Indian exchanges yesterday, were off to a good start on the NSE as the turnover touched Rs 14 bn. Indeed, currency volatility has jumped manifold in recent times, especially after the US financial crisis. Hence, dabbling in currency options could be another good avenue for investors wanting to diversify out of stocks and commodities. However, investors are advised to go overboard with it at their own peril. Kindly ensure that the exposure that one takes does not form a very large part of one's investable surplus.

Participatory notes (PNs) have always been treading in murky waters. FIIs, wanting to skirt SEBI rules, have more often than not used this as a route of putting money in Indian stock markets. And in the month of October, investments through PNs seem to have gone up so strongly that alarm bells have started ringing. Consider some numbers. PNs had been hovering at around 14% of the assets under management of foreign institutional investors for the last few months. In October, this number is expected to see a sharp spike. And the culprit for the same is none other than the huge Coal India IPO.

Nearly Rs 720 bn, or 40% of the total applications for the qualified institutional buyers' (QIB) quota in the issue, have come through the PN route. What makes PNs attractive to foreign investors is that their identity is protected. Many take the PN route when they are otherwise disqualified by the SEBI for not being compliant with the relevant norms. SEBI in recent times has pretty much been proactive in upping the transparency of the stockmarkets and protecting the rights of minority shareholders. Whether it can introduce some reforms when it comes to PNs remains to be seen though.

Food security is of paramount concern for the government. If a nation wants to progress, then it needs to ensure security of food for its population. This is the main agenda for the government's proposed National Food Security Bill. The Bill promises food security to two-thirds of the nation's population. However, this guarantee is going to cost the Government Rs 720 bn which is equivalent to over 1% of the country's GDP.

This will considerably strain the fiscal condition if the spending is not matched with adequate earnings. The Government has proposed a change in tax structure to increase the revenues from taxation. However, it is not likely to come online this year. We hope that the Government comes up with a plan soon else it may have to defer the food security plan, which will be a loss. On the other hand, if it does go ahead with the plan and strains the fiscal position, that would be bad too.

Meanwhile, Indian stock markets across the world were under pressure this week with Asia leading the pack of losers. Concerns in Asia were over the earnings growth slowing down as well as the US central bank's decision on its quantitative easing strategy early next month. Japan and Hong Kong were amongst the top underperformers this week, with their benchmark indices down by 2% each. The Singapore and Indian markets followed suit with their respective markets down by about 1% each. Stocks in Europe and the US ended lower this week as well, with UK, France and US down by about 1.2%, 0.9% and 0.1% respectively. Gold once again did well, edging 2% higher during the course of the week.

Source: CNN, Kitco, Yahoo finance

 Weekend investing mantra
"Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded, and sceptical." - John Templeton

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