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An unusual alliance - Views on News from Equitymaster
 
 
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  • Dec 10, 2008

    An unusual alliance

    This marriage is not made in heaven
    While one member of the alliance is brutally capitalistic, the other is a communist to the core. The stakes though are too high for both of them to ignore each other. If you haven't guessed by now, we are indeed talking about the biggest economy in the world, US and an economy that is widely believed to be its potential successor, China.

    Although they haven't shared the best of relations in the past, being at each other's throats for their vastly diverse policies, the need to bury differences is more pressing now than it has ever been. And to his good fortune, President elect Obama will inherit a relationship that has never been as strong as it is currently.

    And boy, does he need that badly. Roiled by the credit crisis, Obama plans to kick start a spending program that is touted to be the biggest since President Eisenhower. With both the US government as well as consumers broke, it will have to turn to China's vast forex reserves, which at US$ 2 trillion are the largest in the world and also its capacity to absorb more US debt for the financing of the same.

    Although China does not need US as badly as the latter needs it, the former still needs to keep its manufacturing juggernaut chugging along at a good pace so that more jobs could be created and a big social unrest prevented. Thus, issues such as human rights violations, unfair trade practices and currency manipulation can wait. Getting out of the mess that it is in currently seems to be the first priority of the US.

    Cash is king
    Imagine buying a house and then finding all the cash you paid for it lying unattended in one of the rooms. You would certainly go ecstatic and immediately start thanking your lucky stars, wouldn't you? Well, something not that similar but equally rewarding is happening in the stock markets currently.

    As per Bloomberg, stocks have been so badly battered this year that more than 2,200 companies around the globe are trading at market capitalisation that is less than the cash on their books. So if one were to buy a 100% stake in one of these companies by using debt, he will be able to repay the entire debt by using the surplus cash sitting on the company's balance sheet and still be left with some cash.

    Furthermore, the person would be getting all the company's tangible and intangible assets, its working capital and also its investments, virtually for free. But most investors will not take anything of that. Their rationality seemed to have been completely overpowered by fear and near term concerns, not allowing them to realise the attractiveness of the opportunity.

    Talking of opportunity, it is so big this time around that the list of companies that fall in the above mentioned category is eight times as large as at the end of the last bear market. Some value investors though are lining up to seize the opportunities on offer. It is a creed that firmly believes in the motto - 'Be fearful when others are greedy and greedy when others are fearful'. It is indeed time to be greedy.

     

     

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