Nice article from equitymaster

It is said that we human beings are endowed with certain quaint characteristics that force us to make a mess of simple and easy to understand things and turn them complex. And nowhere do these habits hurt us the most than in the field of stock investments. We liken it to some IQ testing event like the Math or the Science Olympiad. Tempted by stories that they could be potential multi baggers, we tend to invest in companies with the most obscure names having the most complex business models.
But unfortunately, our rewards, which in this case are the returns, are not linked to the degree of success we have had in unraveling complex business models but the extent to which we have correctly identified its intrinsic value and obstacles that have the potential to erode the same. Not surprisingly then, these pre-requisites call for businesses, which are simple and easy to evaluate. Thus, as in life so also in investing, easy does it. This is precisely what the master has to say in his 1994 letter to shareholders. Laid out below are his comments on the issue.
"Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables."
Another habit that we often fall prey to is conforming to the herd mentality and this habit too deprives us of attractive money making opportunities. One look at the attitude of people towards investing before and after the recent correction in the Indian stock markets and you would know what we are talking about?
Before the recent correction, when the market was trading at its peak and most of the business way above their intrinsic values, investors were queuing up to buy stocks in the hope that since the times are good, there will always be buyers ready to buy from them what they themselves have bought at exorbitant prices. But alas, that was not to be the case and they had to pay dearly for their mistakes.
On the other hand, when quite a few businesses have now come down to a fraction of their intrinsic value after the correction, investors seem to be running away under the pretext that the time is not good to buy equities. These people could take a lesson or two from the master who has the following to say on this tendency among investors.
"We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?"

The Real Story of the Real Estate Debacle

The consensus story—visible in the general as well as news media—is that real estate is in trouble because of the rise in interest rates. Real estate prices as well as the stocks of real estate companies are down in the dumps because the rise in interest rates is keeping people from buying houses and apartments and so on. The idea being that since property loans have become expensive, fewer apartments will be sold. It's a convenient piece of reasoning, but it also happens to be only vaguely related to the truth.
High interest rate may be the last straw that broke the camel's back, but the business was already in deep trouble. This real estate story started out quite nicely about six to seven years ago. With rising salaries and low interest rates, the early part of this decade saw a large proportion of Indians suddenly becoming capable of buying a house quite early in their lives. Given the tax breaks on housing loans, people realised that they could easily buy an apartment with a few lakhs down payment and an EMI of roughly whatever they would have paid as rent anyway. Such a situation had never really occurred in India. A house was something that Indians bought after a lifetime of hard work and miserly savings. As a result, there was a huge overhang of unmet demand.
Typically, someone earning Rs 40,000 a month could buy an apartment worth costing Rs 20 lakh taking a loan of perhaps Rs 15 lakh. Back when interest rates were around eight per cent, such a loan would mean a monthly repayment of around Rs 13,000. Add the tax breaks and it was a great deal. However, those days didn't last all that long. Powered by the cheap and easy money that banks were pouring into real estate financing, a huge swathe of investors rushed in and pushed up prices beyond the reach of all but a handful of real users. The 20 lakh rupee apartment was now a hole-in-the-wall fifty kilometres outside the city that would not interest anyone who could pay for it. Anything that would interest a middle class buyer was now above a crore of rupees. The basic price-salary-EMI equation now implied that if a real salaried user bought an apartment that he or she actually wanted, then they would have to mortgage the rest of their lives to someone. Genuine business-owners who wanted a shop in a mall were also in the same situation.
At this point, which I believe we reached during 2005 and 2006, the real real estate market had essentially disappeared. There was breed of investors ranging from rich individuals buying two or three apartments all the way up to big syndicates with hundreds of (leveraged) crores at their disposal. These people were now buying up property either from each other, or in competition to each other. In the process, they were bidding up prices to bizarre levels. Into this morass stepped in the investor in real estate stocks, who eagerly believed in these fairy tales of fabulously valuable 'land banks'. Today, we are in a stage when the truth is sinking in. Real estate companies were being valued on the basis of fantasy land prices. In real (inflation-adjusted) terms, those land prices will not be paid by actual users for years, perhaps decades.
The party is over, and it's the investor who bought these stocks who has paid the bill.

(Please refer http://www.valueresearchonline.com/story/h2_storyview.asp?str=11593 for the original transcript of this article. Copyrights if any, are owned by the appropriate owners.)

Citigroup-India Redemptions Reach $ 7 bn, expect another $ 7 bn Outflow in H2 CY08

Three points from our latest note:

1. Six weeks of redemptions totaled $6.6b while regional markets fell 16% — With Asia ex Japan being the worst performing region globally last month and also YTD, outflows from Asian funds persist without surprise. According to EPFR Global, weekly redemptions from offshore Asian funds were in the US$1.4b-1.6b range most of the time in June and total outflows of US$4.8b were the second-biggest monthly outflow in history.

2. US$6b redemptions in 2H to replay the last episode — YTD net outflows total US$11.4b or 5.5% of Asian funds’ AUM. Comparing this with 8.4% being redeemed in the 2001 global growth slowdown, we would need US$6b outflows in 2H to replay the last episode.

Asian valuations remain above average, but earnings growth is below average. Together with shrinking domestic liquidity and deteriorating investment sentiment, we reiterate 15% downside on MXASJ.

3. Cash levels at Asian funds are nowhere to suggest a bottoming of Asian markets — Current cash weights of 2.2% are 120bps below historical averages. Contrasting this with 6% and 16% for 2001 and 1998 market troughs, respectively, Asian funds are fully invested and will have to sell what they are overweight, i.e. ASEAN markets, to meet further investor redemptions. We advocate avoiding the crowd and prefer North Asia (ex China ) to ASEAN.

India's Economy Hits the Wall

Growth is slipping, stocks are down 40%, and foreign stock market investors are fleeing. Business blames the ruling coalition for failing to make reforms
by Manjeet Kripalani

Just six months ago, India was looking good. Annual growth was 9%, corporate profits were surging 20%, the stock market had risen 50% in 2007, consumer demand was huge, local companies were making ambitious international acquisitions, and foreign investment was growing. Nothing, it seemed, could stop the forward march of this Asian nation.

But stop it has. In the past month, India has joined the list of the wounded. The country is reeling from 11.4% inflation, large government deficits, and rising interest rates. Foreign investment is fleeing, the rupee is falling, and the stock market is down over 40% from the year's highs. Most economic forecasts expect growth to slow to 7%—a big drop for a country that needs to accelerate growth, not reduce it. "India has gone from hero to zero in six months," says Andrew Holland, head of proprietary trading at Merrill Lynch India (MER) in Mumbai. Many in India worry that the country's hard-earned investment-grade rating will soon be lost and that the gilded growth story has come to an end.
Global circumstances—soaring oil prices and the subprime crisis that dried up the flow of foreign funds—are certainly to blame. But so is New Delhi. Much of the crisis India faces today could have been avoided by skillful planning. India imports 75% of its oil to meet demand, which have grown exponentially as its economy expands. The government also subsidizes 60% of the price of such fuels as diesel. In 2007, when inflation was a low 3%, economists such as Standard & Poor's Subir Gokarn urged New Delhi to start cutting subsidies. Instead, the populist ruling Congress government spent $25 billion on waiving loans made to farmers and hiking bureaucrats' salaries.

Botched Opportunities
Now those expenditures, plus an additional $25 billion on upcoming fertilizer subsidies, is adding $100 billion a year—or 10% of India's gross domestic product, or equivalent to the country's entire collection of income taxes—to the national bill. This at a time when India needs urgently to spend $500 billion on new infrastructure and more on upgrading education and health-care facilities. The government's official debt, which dropped below 6% of gross domestic product last year, will now be closer to 10% this year. "Starting last year, the government missed key opportunities" to fix the economy, says Gokarn. In fact, he adds, "there has been no significant reform done at all in the past four years"—the time the Congress coalition has been in power.
Even the most bullish on India are hard-pressed to recall any significant economic reforms made in the recent past. A plan to build 30 Special Economic Zones is virtually suspended because New Delhi has not sorted out how to acquire the necessary land, a major issue in both urban and rural India, without a major social and political upheaval. Agriculture, distorted by fertilizer subsidies and technologically laggard, is woefully unproductive. Simple and nonpolitical reforms, like strengthening the legal system and adding more judges to the courtrooms, have been ignored.
A June 16 report by Goldman Sachs' (GS) Jim O'Neill and Tushar Poddar, Ten Things for India to Achieve Its 2050 Potential, is a grim reminder that India has fallen to the bottom of the four BRIC nations (Brazil, Russia, India, and China) in its growth scores, due largely to government inertia. The report states that India's rice yields are a third those of China and half of Vietnam's. While 60% of the country's labor force is employed in agriculture, farming contributes less than 1% to overall growth. The report urges India to improve governance, raise educational achievement, and control inflation. It also advises reining in profligate expenditures, liberalizing its financial markets, increasing agricultural productivity, and improving infrastructure, the environment, and energy use. "The will to implement all these needs leadership," points out Poddar. "We have a government in New Delhi with the best brains, the dream team," he says, referring to Oxford-educated Prime Minister Manmohan Singh and Harvard-educated Finance Minister P. Chidambaram. "If they don't deliver, then what?"

Disillusioned Business
More worried than most are India's businessmen, who have turned in stellar performances with their investment and entrepreneurial drive and begun to look like multinational players. For them, there's plenty at stake. But lack of infrastructure, from new ports to roads, along with an undeveloped corporate bond market and high prices for real estate, commodities, and talent, are causing them to hit "choke points and structural impediments all over. We will lose years," says Bombay investor Chetan Parikh of of Jeetay Investments.
Sanjay Kirloskar, chief executive of Kirloskar Brothers (KRBR.BO), a premier $470 million maker of water pumps, already has $100 million in overseas contracts. Yet few infrastructure contracts have come from New Delhi. Kirloskar had hoped to be part of a grand project linking India's rivers, but those plans have been on hold for four years. "The infrastructure growth we had hoped for has not come about," he says. "Instead, we will now expand overseas more than in India."
Such constraints on growth at home will have an impact. Corporate earnings growth is likely to dip, says Merrill Lynch's Holland, who now predicts just 10% growth, instead of the previous year's 20%. That slowdown makes it less attractive for foreigners to invest in India's stock market. Already this year, foreigners have taken $5.5 billion out of the market, compared with the $19 billion they invested last year. Gagan Banga, chief executive of India Bulls Financial Services, an emerging finance and real estate giant, points admiringly to China's ability to maintain its growth momentum for a decade, while India's has not been able to hold up for even three years. "Serious companies are going to grow at a much slower pace, and some may even de-grow this year," he says. Unless major policy decisions are made by New Delhi immediately to keep the economy on the growth path, he says, "India will slow down even further."
New Delhi defends its four year reign in India. "We've had 9% growth for four years in a row," says Sanjaya Baru, media adviser to Prime Minister Singh. "That is unprecedented." He attributes it to the increasing rate of investment, up from 28% of GDP to 35% currently, "close to most ASEAN economies," though he admits that a large part is from the private sector. "Yes, there is a fiscal problem, but there's a price to be paid for coalition politics," adds Baru. So having growth drop "from 9% to 7% is not grim."

Social Backlash?
Chetan Modi, head of Moody's India, says the increasingly high cost of doing business in India may force global investors who had set up base in India—especially financial-services players—to move to more affordable and efficient hubs, such as Singapore and Hong Kong. If the economy slows and inflation continues to accelerate, says Sherman Chan, economist at Moody's Economy.com, "social unrest is possible."
In fact, India is becoming a dangerous social cauldron. The wealth harvested by the reforms of previous governments has made itself evident in the luxury cars and apartments in India's big cities, leaving much of India full of aspirations but few means to achieve them. There is a severe shortage of colleges, yet a plan to build 1,500 universities gathers dust. The Communists in the ruling coalition are against both globalization and industrialization, so without new factories being built, employment growth has been almost stagnant, rising to just 2%—a disappointing rate in a country where an estimated 14 million youths enter the workforce every year, but just 1 million get jobs in the regulated, above-ground economy.
Meanwhile, few expect any bold moves New Delhi, especially with national elections due in 2009 and five important state elections scheduled before the end of this year. Thus far, the ruling Congress party's record has been poor; it has lost almost every state election this year and is likely to lose all five of the upcoming ones.
The big hope for a return to the course of reform in India, businessmen hope, will be a new government in New Delhi next year. The gravest danger is that India's messy coalition politics will bring into power another indecisive alliance that will keep the country in policy limbo for another five years. If so, says S&P's Gokarn, it's a meltdown scenario: growth slipping below 6.5%, accelerating the chances of India reverting to its 1991 status when it was plunged into a balance-of-payments crisis.

Kripalani is BusinessWeek's India bureau chief.

Merrill Lynch: Slowest Earnings Growth Expectation in 5 Years

* Earnings slow-down is finally here!- Expect earnings to slow to a 5-year low with net profit growth for Sensex cos at only10.8% (EPS growth forecast lower at ~7%) for Q ended June, 2008.
- While sales g is strong at near 25%, margins under pressure (100bps drop) - Slowingearnings and likely earnings downgrades is likely to continue to pressure the market.* Earnings partly clouded by forex losses, MTM hits ...- Earnings partly clouded by MTM losses on forex loans or MTM losses of State Bank on its investment books.
- These won't be repeated if currency/bond yield remain stable.* ...but earnings downgrades likely to our FY09 EPS estimates.
- While earnings may surprise on the upside again and even factoring an exaggerated slow-down in Q1 earnings, our full year FY09 EPS growth of 18% looks set to be downgraded (led by engineering & banks).* Energy, software, telecom drive growth; auto,cement lag.
- Autos and cement companies are likely to report drop in profits led by slowing salesand margin pressure.
- Energy (Reliance & ONGC) lead profit growth followed by software and telecom.* Key Result Out-performer: Bharti, Reliance Comm, United Spirits, Satyam.
* Key Result Under-performer: ITC, Tata Motors, Ambuja, Hindalco, Sterlite

Source; aiii

A Bankrupt Superpower

The Collapse of American Power

By PAUL CRAIG ROBERTS

In his famous book, The Collapse of British Power (1972), Correlli Barnett reports that in the opening days of World War II Great Britain only had enough gold and foreign exchange to finance war expenditures for a few months. The British turned to the Americans to finance their ability to wage war. Barnett writes that this dependency signaled the end of British power.

From their inception, America 's 21st century wars against Afghanistan and Iraq have been red ink wars financed by foreigners, principally the Chinese and Japanese, who purchase the US Treasury bonds that the US government issues to finance its red ink budgets. The Bush administration forecasts a $410 billion federal budget deficit for this year, an indication that, as the US saving rate is approximately zero, the US is not only dependent on foreigners to finance its wars but also dependent on foreigners to finance part of the US government's domestic expenditures. Foreign borrowing is paying US government salaries--perhaps that of the President himself--or funding the expenditures of the various cabinet departments. Financially, the US is not an independent country.

The Bush administration's $410 billion deficit forecast is based on the unrealistic assumption of 2.7% GDP growth in 2008, whereas in actual fact the US economy has fallen into a recession that could be severe. There will be no 2.7% growth, and the actual deficit will be substantially larger than $410 billion. Just as the government's budget is in disarray, so is the US dollar which continues to decline in value in relation to other currencies. The dollar is under pressure not only from budget deficits, but also from very large trade deficits and from inflation expectations resulting from the Federal Reserve's effort to stabilize the very troubled financial system with large injections of liquidity. A troubled currency and financial system and large budget and trade deficits do not present an attractive face to creditors. Yet Washington in its hubris seems to believe that the US can forever rely on the Chinese, Japanese and Saudis to finance America 's life beyond its means. Imagine the shock when the day arrives that a US Treasury auction of new debt instruments is not fully subscribed.

The US has squandered $500 billion dollars on a war that serves no American purpose. Moreover, the $500 billion is only the out-of-pocket costs. It does not include the replacement cost of the destroyed equipment, the future costs of care for veterans, the cost of the interests on the loans that have financed the war, or the lost US GDP from diverting scarce resources to war. Experts who are not part of the government's spin machine estimate the cost of the Iraq war to be as much as $3 trillion. The Republican candidate for President said he would be content to continue the war for 100 years. With what resources? When America 's creditors consider our behavior they see total fiscal irresponsibility. They see a deluded country that acts as if it is a privilege for foreigners to lend to it, and a deluded country that believes that foreigners will continue to accumulate US debt until the end of time.

The fact of the matter is that the US is bankrupt. David M. Walker, Comptroller General of the US and head of the Government Accountability Office, in his December 17, 2007, report to the US Congress on the financial statements of the US government noted that 'the federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2007.' In everyday language, the US government cannot pass an audit. Moreover, the GAO report pointed out that the accrued liabilities of the federal government 'totaled approximately $53 trillion as of September 30, 2007.' No funds have been set aside against this mind boggling liability. Just so the reader understands, $53 trillion is $53,000 billion. Frustrated by speaking to deaf ears, Walker recently resigned as head of the Government Accountability Office.

As of March 17, 2008, one Swiss franc is worth more than $1 dollar. In 1970, the exchange rate was 4.2 Swiss francs to the dollar. In 1970, $1 purchased 360 Japanese yen. Today $1 dollar purchases less than 100 yen. If you were a creditor, would you want to hold debt in a currency that has such a poor record against the currency of a small island country that was nuked and defeated in WW II, or against a small landlocked European country that clings to its independence and is not a member of the EU? Would you want to hold the debt of a country whose imports exceed its industrial production? According to the latest US statistics as reported in the February 28 issue of Manufacturing and Technology News, in 2007 imports were 14 percent of US GDP and US manufacturing comprised 12% of US GDP.

A country whose imports exceed its industrial production cannot close its trade deficit by exporting more. The dollar has even collapsed in value against the euro, the currency of a make-believe country that does not exist: the European Union. France , Germany , Italy , England and the other members of the EU still exist as sovereign nations. England even retains its own currency. Yet the euro hits new highs daily against the dollar. Noam Chomsky recently wrote that America thinks that it owns the world. That is definitely the view of the neoconized Bush administration. But the fact of the matter is that the US owes the world. The US 'superpower' cannot even finance its own domestic operations, much less its gratuitous wars except via the kindness of foreigners to lend it money that cannot be repaid. The US will never repay the loans. The American economy has been devastated by offshoring, by foreign competition, and by the importation of foreigners on work visas, while it holds to a free trade ideology that benefits corporate fat cats and shareholders at the expense of American labor. The dollar is failing in its role as reserve currency and will soon be abandoned.When the dollar ceases to be the reserve currency, the US will no longer be able to pay its bills by borrowing more from foreigners. I sometimes wonder if the bankrupt 'superpower' will be able to scrape together the resources to bring home the troops stationed in its hundreds of bases overseas, or whether they will just be abandoned.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

CLSA: More Than Half Of The Malls Built In India Will Go Defunct in 3-5 Years.

“More than half of the 600 malls expected to open in the next 3-5 years will be defunct…” - a candid view from B. S. Nagesh, CEO, Shoppers’ Stop, one of India’s largest retailers.

This is a just a sample of what you can take away from CLSA's 10th Indian company Q&A, a 500 page tome that is set to hit your desks next week. While investors planning visits to companies will find it particularly useful, for any overseas investor daunted by rising air travel prices, $500/night hotel rooms, and the headache of traveling the length and breadth of India, the 10th CLSA Indian Company Q&A is all that you need.

The Q&A quizzes company managements on all issues relevant to making an investment decision on the stock, with CLSA’s sector analysts providing their own comments and financials to help put the responses in the ‘right’ context.

The 10th CLSA Indian Company Q&A titled “ A tightrope walk” is our largest ever, including 64 companies and an interview with Dr M. S. Swaminathan, father of the Green Revolution, and is also very well timed.

The BSE Sensex is off 34% YTD, reflecting the swing in investor confidence in the economy, corporate earnings and market valuations – as India grapples with the pressures of high inflation and the burden of oil at US$130/bbl. Some blue-chips are off 50-60% YTD and, in the view of CLSA analysts, are near stress value.

The Q&A should thus help you identify companies with strong medium-term prospects, where stocks may be trading not far from stress value. Our favoured picks, among the companies that participated in the Q&A, are Bharti, BHEL, ICICI Bank, HUL.

Highlights of the Q&A report;
Q&A with 64 of India’s leading companies (39 first timers), covering 13 sectors

A survey of India Inc.’s views on key economic variables, outlook for domestic demand and key challenges .

A survey with nearly 100 fund managers on their views on the outlook for the economy and the markets
Key message from the Q&A;

· Companies remain optimistic on their prospects, notwithstanding stockmarket’s concerns on Indian growth story. On average, corporations expect India to achieve a 7-8% annual GDP growth for the next two years.

· However, 72% of companies surveyed felt the deterioration of the overall business environment versus 2007. Top three concerns were rising raw-materials costs/commodities prices (69% of respondents), potential demand slowdown and ‘higher interest rate and credit availability’. We were surprised that ‘poor infrastructure’ was less of an issue.

· Metals companies see stronger growth in FY09, while most other sectors expect growth to be in-line with FY08; only airlines, software and retailers are cautious.

· While firms across sectors were concerned about rising input costs, consumers saw good pricing power, while capital goods saw volumes offsetting margin pressures. Banks saw 20% loan growth as achievable, but admitted to a rise in delinquencies.

· Investors were far more bearish – seeing GDP-growth moderation to nearly 7%, earnings growth falling to 15-20%; 31% saw negative returns from the market, even from here. IT, consumer and pharma were seen as outperformers over a 12-month horizon; interest-rate sensitives such as property, auto and financials to be underperformers.

We sense some dissonance between these firms’ assessment of macro environment and their own growth outlook (only 26% expect their domestic business to slow) and see downside potential to their “guidance” on growth.

Overall market earnings growth could remain supported by commodity price boost for a few large companies, but variance in company performance across our universe will rise. The steep fall in stocks does provide opportunities, but for medium-term bets, we would focus on execution, risk-management skills and balance-sheet quality