Another bailout, bigger and better - Views on News from Equitymaster

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Another bailout, bigger and better

Nov 26, 2008

Here comes another bailout, bigger and better
It's pouring money in the US. Even as a little more than half of the money to be utilized towards the TARP (Troubled Assets Relief Program) remains unutilised, the US Fed has unveiled two new plans that it believes will go a long way in increasing the credit availability for homebuyers, consumers and small businesses. It will - hold your breath- purchase as much as US$ 800 bn in debt issued or backed by government sponsored mortgage finance firms as well as the one taken in the form of credit card, car loans and student loans. The latest plan is seen as another attempt to kickstart lending by banks to consumers and small businesses, which was not happening to the extent desired in the previous bail out plans. Many experts were of the opinion that the first bailout package worth US$ 750 bn would prove to be inadequate and now with the government unveiling the latest plan, their stand seems to have been vindicated. Taking into account the latest plan, the total of a staggering US$ 1.6 trillion has now been poured into the troubled US credit markets.

What is the smartest money doing?
Want to know what is one of the smartest money in the world doing? Well, it's buying the Japanese Yen, its buying commodities and it is also buying the Chinese and the Taiwanese stock markets. We are referring to the adventure capitalist, Jim Rogers. After correctly predicting the rally of the US dollar earlier this year, Rogers has now turned negative on the greenback. Sensing that the US authorities are deliberately trying to keep the value of the dollar down to make the country more competitive, Rogers has cautioned that the strategy has never worked in the long term and it probably never will.

The commodity guru is also finding a lot of bargains in the agricultural commodity space, singling out sugar, which he says, is trading 80% below its all time highs. Rogers has also admitted to taking fresh positions in Chinese and Taiwanese stocks, focusing once again on the agricultural space. Thus, with two of the savviest investors in the world returning to equities ( Warren Buffett has also confessed to buying US equities in his personal portfolio), does this signal the bottom for the market? As per their own admissions, these two men are bad timers of the market and hence, calling the current market levels as absolute bottoms would not be a wise thing to do. What is near certain though is the fact that a lot of stocks globally, perhaps the most in recent years, are trading well below their intrinsic values.

Urgent over the essential
Crude prices have come down significantly and State run oil marketing companies have started making a neat profit on the petrol and diesel that they sell daily. But have they recovered fully the losses they incurred while selling the same commodities at subsidized prices, when the crude prices were touching record highs? Unlikely. But this has not stopped the government from considering a downward price revision towards the end of December. Infact, had it not been for the restrictions imposed by the Election Commission in view of the recent assembly elections, the revision would have probably happened by now. While a revision would no doubt help ease inflation further, it will come at the expense of putting pressure on the long-term resources of the country. But with national elections just few months away, that certainly seems a very small price to pay! Once again a classic case of overlooking the essential for the urgent.

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