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Lessons for the future - Views on News from Equitymaster
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  • Dec 6, 2008

    Lessons for the future

    If only we knew it! If only the traders at Lehman knew that the toxic trades would cost them their jobs. If only the mortgage borrowers in US knew that the loans would leave them homeless. If only the diners at Hotel Taj Palace and Trident knew that it would be their last morsel. And if only our government and security forces knew the intensity of the terrorist assault when it was planned.

    If we all had our crystal balls to gaze into, probably all problems could have been solved before they occurred. However, since that is not the case, atleast this time we should take some lessons for the future.

    The week began with some of our policy makers taking accountability in good measure and showing an act of resonance by stepping down from their pedestals to make way for better governance. Hopefully! However, mixed cues of global economic distress failed to bring any relief to investors. Instances like that of Blackstone Group withdrawing from the US$ 5 bn Indian infrastructure fund also raised doubts over the country’s resilience to recessionary trends.

    As the Big Three automakers in the US continued to beg for lines of credit, their Indian counterparts did not have things going too well for them as well. In India, biggies like Maruti and Tata Motors reported decline in sales in the region of 25% to 30% for the month of November 2008 as high interest rates and non-availability of credit continued to act spoilsport.

    It has been a sorry state of affairs, forcing companies to shut down plants and lay off workers. Tata Motors for instance has decided to shut its commercial vehicle (CV) plant in Pune for another six days, taking the total number of ‘shutdown days’ to 12 this year, highest in the last 10 year history of the plant.

    After years of being blamed for job losses in the US and elsewhere, India’s technology companies and outsourcing firms are also going through a downturn of their own. The global slowdown is forcing them to reduce hiring, freeze salaries, postpone new investments and lay off thousands of software programmers and call center operators.

    The New York Times puts it very interestingly - "The downturn is exposing a deeper concern: India has become the world’s front office, handling customer service calls, and its back office, helping to process payments and run accounting and other computer systems. But it has not yet become the head office - making major new products, pioneering marketing techniques or helping to shape corporate strategy.” This, in fact, sums it all up.

    Caught on the wrong foot with the recent happenings, the policy makers in India are urgently in need of an image makeover to save their positions. They have therefore started seriously dwelling upon a recommendation that was put in the backburner for the past two years. That was utilising a portion of India’s swelling (almost quite a bit lost in recent months) forex reserves for infrastructure investments. The government is now contemplating to infuse Rs 750 bn (US$ 17 bn) as a stimulus package comprising of US$ 10 bn of forex reserves and lines of credit to banks, financial institutions and the beleaguered textile and real estate sectors. Thus 5% of the country’s forex reserves would be utilised to form a package that would roughly be equal to 1.3% of the country’s GDP.

    Speculations about future movements in gold and crude prices remained rife with Citigroup actually predicting that gold will touch US$ 2,000 per ounce. That is 2.5 times the current price of the yellow metal at US$ 800. The firm believes the measures taken to tackle the financial crisis will not stabilise the global economy. Instead they will either cause spiraling inflation or lead to a painful depression.

    Completely dismissing a wide range of scenarios to arrive at a bullish conclusion on gold reminds us of what transpired with another commodity - crude oil. It was being predicted that crude would march on from US$ 147 per barrel to US$ 200 per barrel. Instead, it has collapsed by more than 60% since then.

    Taking cues from falling global crude prices the Indian government, in an announcement late yesterday, cut petrol and diesel prices by Rs 5 and Rs 2 a litre respectively. Price of cooking fuels like LPG and kerosene were however left untouched. While the government has termed it a ‘common man friendly’ move, the decision smells of a pre-election giveaway considering that the UPA government has already drawn a lot of flak over its economic policies, reforms and handling of geopolitical issues. As reported by Business Line, these cuts, while resulting in a saving of around Rs 60 bn for consumers, will leave the oil marketing companies with an additional burden of Rs 53 bn.

    Central bankers in the euro zone accelerated their rate cut moves in order to stimulate the credit markets and stall de-growth of their economies. Both the magnitude of the rate cuts and the bankers’ willingness to shave it down further signaled the urgency to revive the economies. The lower inflation number (WPI, 8.4%) reported in India this week also gave rise to expectations that the RBI may fall in line with its global counterparts in the coming weeks.

    Amongst global markets, key Asian indices closed with losses during the week. The Indian benchmark BSE-Sensex lost 1.4%. The European markets also languished in the red. The US markets lost as much as 2.2% of the market capitalisation with reports of further job losses and earnings downgrades from corporate heavyweights.

    Source: Yahoo
    Source: Yahoo finance
    Source: Sebi

    Movers and shakers during the week
    Company 28-Nov-08 05-Dec-08 Change 52-wk High/Low Change from 52-wk High
    Top gainers during the week (BSE-A Group)
    NDTV 74 106 42.7% 512 / 69 -79.3%
    Unitech 23 31 33.3% 547 / 22 -94.4%
    Sun TV 127 166 30.6% 442 / 125 -62.5%
    IRB Infra 68 89 30.3% 0 / 0 NA
    LIC Housing 164 212 29.3% 403 / 151 -47.4%
    Top losers during the week (BSE-A Group)
    GTL Infra. 44 37 -16.8% 107 /30 -65.5%
    Jain Irrigation 299 252 -15.9% 770 / 245 -67.3%
    Sterling Biotech 198 167 -15.9% 262 /131 -36.3%
    Blue Star 149 126 -15.4% 548 / 122 -77.0%
    Rolta India 170 144 -15.3% 390 / 134 -63.0%
    Source: Equitymaster

    Economic slowdown, movement in commodity prices, changes in monetary stances and shift in business dynamics are things that may not be predicted accurately. But these can be anticipated. That is because these are cyclical in nature. However, economic depressions and terrorist attacks are not cyclical; nor can be anticipated. They are some of things that can teach us lessons. It is important that we do not erase these from our memories with the passage of time. Or leave it for others to crystal gaze.



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