|»5 Minute Wrap Up by Equitymaster|
On This Day - 29 NOVEMBER 2008
"This too shall pass"
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The week began with the US Treasury agreeing to bailout the troubled financial behemoth Citigroup. Four straight quarters of losses totaling to US$ 20 bn weighed heavy on its stock price, which fell by 26% in a single day. With reports flying thick and fast that the bank may have to split up or merge itself with another bank, the government stepped in to prevent this conglomerate from toppling over. 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). Further, 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.
The other big development was the US Fed announcing an additional gargantuan bailout package of US$ 800 bn closely following on the heels of the first bailout package of US$ 750 bn. The second plan is seen as another attempt to drive down mortgage rates further so that lending activity gathers pace. If the initial signs are any indication, it seems to be having the desired impact as interest rates on 30-year-fixed mortgage rates in the US fell almost a full percentage point post the announcement. Terrorists once again declared war on India's financial capital, Mumbai on Wednesday night in what could be termed as probably the biggest and horrendous attacks ever. The ordeal continued for two harrowing days and finally concluded today morning, when the operation at Mumbai's iconic hotel Taj Mahal was declared over.
Indian benchmark indices witnessed a volatile trading session during the week. The first two days of the week saw the indices close in the red despite its Asian peers ending in the positive as news of Citigroup being bailed out did nothing to soothe investor fears. However, the Sensex reacted positively to China's central bank slashing interest rates by the most in 11 years. With hopes that the RBI will also mirror China's moves, the BSE-Sensex closed 4% higher on Wednesday. Terror attacks in Mumbai resulted in the stock exchanges remaining shut on Thursday. With the crisis spilling over to the last day of the week, as was expected, the trading session was volatile before the benchmark indices managed to close marginally higher.
As reported on Bloomberg, crude prices settled at US$ 54 a barrel, rising by 9% this week, the biggest weekly gain since March 2007. Gold settled at US$ 819 an ounce. While the month saw gold rising by 14%, the most since September 1999, during the week the yellow metal rose 3%.
These are troubled times indeed. While the ordeal just got over today morning, many of us are still trying to come to grips with this horrific incident. But we are reminded of a Jewish wisdom folktale involving King Solomon. Reported on Wikipedia, it goes as follows:
"King Solomon once searched for a cure against depression. He assembled his wise men together. They meditated for a long time and gave him the following advice: Make yourself a ring and have thereon engraved the words "This too shall pass". The King carried out the advice. He had the ring made and wore it constantly. Every time he felt sad and depressed, he looked at the ring, where on his mood would change and he would feel cheerful".
This too shall pass, dear reader!
Indeed, the recent terrorist attacks are not new to this subcontinent nation of more than a billion people. But it has taken very little away from the rapid strides the country has taken towards growing its economy and pulling millions of people out of poverty. Infact, despite the global financial turmoil, its GDP is expected to grow at a very attractive rate of 7% in the current fiscal, the terror attacks notwithstanding, backed by its strong consumption demand and investments in fresh capacities. And it is these fundamentals that are likely to bring foreign investors back to the Indian stock markets. One leading business daily put it best when it said, "It is the fundamentals that drive markets and not guns".
The above comment was made in reference to the fixed income market, where according to him certain parts had become completely dysfunctional. On equities, for the first time in 20 years, his methodology was telling him that global equities had become reasonably cheap but not spectacularly cheap. However, he did suggest that investors who have the stomach to bear near term losses should start investing their money in stocks. And over a period of seven years, they would not regret buying stocks in the current environment. Infact, for his own firm, Grantham admitted to having already started allocating some portion to stocks. He, however, seemed to show a strong aversion towards marginal stocks, preferring instead to invest in blue chips as deterioration in global economics over the next one year or two would not harm them as badly as they would harm the marginal stocks. On the recent financial crisis, he put the blame squarely on the US Fed and called it the arch villain. Former Fed Chairman, Alan Greenspan, was particularly singled out for his thoughts on deregulation and encouragement for risk taking.
Finally, when asked if the age of permanent bullishness of equities has come to an end, he replied, "I certainly hope it's out. I'd like to say that in the short-term, we learn an enormous amount from these crises; and in the intermediate term we learn a little, and in the long-term we learn absolutely nothing." We do hope that what we have learnt from the current crisis stays with us forever, making us a much better investor.
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