Its raining greenbacks, hallelujah
14 AUGUST 2010
Gerri Halliwell may have sung 'its raining men, hallelujah, but Gerry Corrigan, Chairman of Goldman Sachs Bank, would be thanking the Chairman of the US Federal Reserve, Ben Bernanke, for the Greenspan-like loose monetary policy that allows greenbacks to rain. Bernanke, looking to recover from the global recession, is keeping interest rates extremely low, in the hope that the private sector would borrow, grow, and provide employment.
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Its not working quite that well. The recovery of the US economy is anaemic. GDP growth consensus estimates have been scaled down for Q3, ending Sep 2010, from 2.7%, a month ago, to 2.4% and for Q4 from 2.8 to 2.7%. Although July 2010 saw job losses of 131,000 (the census got over and the census takers lost their jobs), economists expect the private sector to create 119,000 jobs/month for the rest of 2010 and 173,000 jobs/month in 2011. But even at that rate, at the end of 2011, the recovery in jobs would be only half of the jobs lost during the global recession.
Now, over 70% of US GDP comes from consumption and without stable jobs, consumption is bound to slip, which is why GDP growth is anaemic. And which is why Bernanke is compelled to keep interest rates low.
The problem is that money is fungible, and travels at the click of a mouse. Some of the money does go, of course, into expansion and job creation; but, being fungible and transportable, it also goes into other asset classes. Such as in emerging markets, where we have seen, for the past few weeks, the FIIs being net buyers and domestic institutions being net sellers.
The bigger problem is that should there be a crisis of any sorts, this money flees back to base. Since it is transportable at the click of a mouse, markets in which the funds are deployed drop faster than the proverbial brick. When it would happen is anybody's guess.
Fortunately, the Indian economy is growing steadily and well. Though IIP (Index of industrial production) was only 7.1% in July, the indirect tax collections have shown a healthy 46% growth this fiscal year, in the 4 months ending July. Car sales are up 37% in July, proving the insatiable appetite of the Indian consumer who has, during the 5 decades of centralised planning and license raj, been denied decent products and services, and is now playing catch up with a vengeance. Food price inflation, however, is in double digits.
One reason is that the Government is sitting on mountains of procured foodgrains, which are, for want of storage, rotting in the open fields. It has taken the Supreme Court of India to point out, what should have been obvious to even a 3 year old, that it would be better to distribute that foodgrain to the poor, rather than let it be eaten by rats or to rot in the field. This points to an abysmally poor quality of governance.
The same criminally poor governance is displayed in the feeble response to the allegations of corruption in the Commonwealth Games. Several have been the instances where persons in high places accused of wrongdoing, have been asked to step down whilst the investigations into the wrongdoing are conducted, so that they cannot, by virtue of their office, interfere in them, or cause papers to disappear. It is a shameful commentary on the Prime Minister and his Cabinet that they have turned a blind eye and not even taken this step.
In this context it is laughable that the Government is considering making corporate CSR (Corporate Social Responsibility) mandatory! Its own record at social responsibility, as indicated by the CWG, amongst several other things, is nothing to write home about. In fact nothing to write anywhere about. Making CSR mandatory will not help. Companies will do token CSR activities, to fulfil a legal obligation, but without helping society in any way, and it will not be a sustainable model, as CSR activities are meant to be. It would be better for the Government to concentrate on how better to govern itself than to preach sermons to others, most of whom behave better.
In corporate news of interest, the Tata group is proving its ability to make cross border acquisitions work. Both Tata Steel, which bought Corus, and Tata Motors, which bought JLR, have returned to the black. Tata Steel's profits for the first quarter to June were Rs 1825 crores, on a consolidated basis, compared to a Rs 2200 crore loss in Q1 last year. Tata Motors made a consolidated profit of Rs 1988 crores, against a loss of Rs 328 crores in Q1 last year. Kudos to them!
The high prices paid by telecom companies for 3G is one factor for their poorer results. Reliance Communication's profits dipped 85% to Rs 251 crores and Bharti Airtel's net profits, excluding the recent African acquisition, were down 23%. Because of security concerns, they are not able to put the 3G spectrum, bought at high prices, to use.
Coal India has managed to get an anchor investor willing to take up 30% of the institutional portion of its IPO offer in October. The Government is offering to divest 10% of its stake and the valuation of the company is expected to be Rs 130,000 - 140,000 crores, which would make it one of the largest ever IPO offers.
London listed Vedanta Resources is in talks to buy a controlling stake in Cairn India, and to make an open offer to buy another 20% from minority shareholders.
SBI declared better than expected results, with a 25% rise in net profits. That, together with the willingness of the Government to dilute its stake from 59 to 51%, caused its stock to spurt, thus contributing 84 points to the sensex over the week; the sensex rose 24 points.
During the week the sensex added 24 points to close at 18167, and the Nifty gained 13 to end at 5457. The steam driving the BSE engine is foreign, especially US provided, liquidity and that is thanks to the easy money policy of Mr Bernanke. So long as he cranks the vending machine pumping out those greenbacks, the market will rise. The day there is a crisis (like a bank failure) or if his hand gets tired moving clockwise and starts to move anticlockwise, will be the day of reckoning. Given the last statement, last week, by the Federal Reserve, that day is not at hand. Join the party, but keep a stock of Alka Seltzer at hand.
J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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