This from Indian newsletter Straight from the Hip:

As an ad line for a tobacco company once said, when such ads were permitted, ‘you’ve come a long way, baby!

The takeover of Fannie and Freddie, which, between them have outstanding mortgages of over $ 5 trillion, was necessary because a further fall in house prices would jeopardise them, as well as, given their size, the US financial system. It seems that Freddie and Fannie were adept at misreporting the true picture, and aided in so doing by all the regulatory agencies They had claimed to have enough regulatory capital, but didn’t, by hiding losses on mortgage related securities simply by claiming them to be temporary!

Now, the US is a consumer economy, with consumption accounting for some 70% of its GDP. US consumers borrow for overconsumption, and were comforted by the fact that the value of their assets, chiefly stocks and properties, were rising fast enough to enable them to borrow for consumption. With stockmarkets having fallen and property prices falling too, that comfort has disappeared. The Government tried to inject money through tax refunds, but those have been used. So, a further fall in property prices is likely to send the US economy into a deeper recession which would, of course, have its negative impact on global stock markets.

In India our political leaders are on a governance sabbatical and are ruining anything they touch, for no good reason. In West Bengal, political rhetoric has made the State lose the last hope of an industrial resurgence; negotiations between the Government and Mamta are over and Tata Motors would pull out. If a group such as the Tatas cannot succeed in as prestigious a project as the Nano, one doubts if others would be brave enough to venture. Orissa, Maharashtra, J&K are also having their own sets of problems. With general elections due before May 09, one can expect the governance and common sense sabbatical to continue.

Poor governance obviously tells on the economy. The market got elated because inflation for the week ended Aug 30 came down moderately, to 12.1% and because industrial production for July was higher than expected at 7.1%. But have a look at the indirect tax collections for the first 5 months of the year Apr-Aug. Whilst growth in indirect taxes has been 12.6% for this period, growth in excise duties has been only 3.7%. This suggests an anamoly with the better July IIP figure, for excise collections ought to move more or less in tandem with growth.

Poor governance and planning is, for example, set to derail increase in power generation capacity. Of the approximately 100,000 MW of power generation about two thirds is coal based. Well, since coal mines are managed by the Government, guess what? Coal supply has not been organised for all new projects, hence the power generating capacity would not be enough to power the forecast GDP growth! Some 68,000 MW of new capacity is doubtful because of poor coal linkages. In any case, there is a global movement to curtail the use of coal for its effect on emissions.

Oil prices have fallen to $ 100 providing some relief in our import bill. But OPEC is not likely to allow oil prices to fall further.

Our Government is doing nothing to curtail consumption of petro products; on the contrary, it encourages its overuse by subsidising petrol and diesel, for which there can be no justification on grounds of social equity. Running into a fiscal problem, it is now thinking of silly ways to have dual pricing of diesel involving a higher than subsidised price for industry, SEZs and defence. Given the fact that poor supervision only spurs greater corruption, is this not a bad idea?

In fact, the Government has a huge fiscal vested interest in encouraging the auto industry, for the various taxes it collects from it. But reality bites, and car sales are down 2.4% in August, and commercial vehicle sales down 6.3% thanks to both higher interest rates and higher fuel rates. The only viable option is efficient and affordable public transport, but the movement towards that is pathetically slow.

Because our political leaders are busier thinking of ways to embarrass the other than of thinking of ways to improve the economy, India has slipped two ranks, to # 122 (out of 181) in a World Bank list of ease of doing business. Even Pakistan and Bangladesh have higher ranks, for chrissake! Perhaps, after the Singur experience the rank next year would be even lower.

In corporate news, Tata Motors is reportedly planning a $ 500-600 m. overseas issue with differential voting rights, the first such. Tata Tele is likely to sell a 12% stake, for about Rs 5000 crores to companies like DeCoMo and France Telecom.

The sensex closed last week with a loss of 483 points, at 14,000, and the NIFTY dropped 123 to end at 4228. The increases, with arrears, permitted in the Sixth Pay commission is expected to be released soon and can be expected to lead to a splurge in Divali spending. The market may briefly rally then, providing an opportunity to exit.

Source: Henry Paulson Is Home Loan

The influential business weekly, Barrons, warns that unless the two largest US mortgage banks, Freddie Mac(FRE) and Fannie Mae (FNM), are recapitalised soon by investors, the Government would need to do so and would, in doing so, lead to its equity holders being wiped out and its preferred stock holders losing some $90b

These problems can spill over into Indian markets quite easily. Dwight Cass, writing in www.breakingviews.com, mentions that foreclosures in the US are rising, and Freddie and Fannie have sent notices of foreclosure to 1 in every 464 households Even more alarming, the article says analysts peg the cost of maintaining these properties, which belong to Freddie and Fannie after foreclosure, at 2% per month! Little wonder they would need to be capitalised, for this expense of maintenance only means that they would, in turn, need to sell off the properties, exacerbating the downslide in home prices.

The downslide in home prices filters through to the slew of structured financial products held by financial institutions. Bear Sterns went under because of that and Ken Rogoff predicts another major failure. Lehman Brothers (LEH) may face a $ 4b. write off. Strapped for cash, FIIs were net sellers each day of the week.

The US is caught between a rock and a hard place. Its producer price inflation hit a 27 year high of 9.8% last week and the Fed needs to increase interest rates to curb inflation. It can’t do so, because that would worsen the housing problem as well as the problems in its financial sector. So it is damned if it does and damned if it does not!

India would have done okay if it was governed better. It is in the process of allowing EPFO (Employee Provident Fund Organisation) assets to be partly invested in equity markets using the expertise of select fund management companies. This would pump in large funds into equity markets. Add to that the increase in allocation for equities by individual households who notice that deposit interest rates do not cover inflation, besides being tax inefficient, and there is a case for optimism. The Indian economy will get a boost once gas starts flowing, following a resolution of a family dispute. By making cost of fuel input to fertiliser units cheaper, for example, it would, in one fell swoop, remove the fertiliser subsidy, of around Rs 100,000 crores.

But India has abysmal public governance, where all politicians consider self interest as priority and damn the nation. West Bengal, a state where industry has fled due to inflexible labour laws, has its best chance for industrial revival in the showcase auto plant set up by Tata Motors, to produce the revolutionary Nano. This would attract not only investment by Tata Motors but also by several ancilliary companies supplying to it, besides providing jobs. Land acquisition for this plant became a political hot potato for which the plant would be sacrificed, alongwith hopes for revival of a moribund economy.

A similar couldn’t-care-less attitude pervades the Petroleum Ministry, which is singlehandedly destroying oil marketing companies IOC, HPCL and BPCL, once considered to be one of nine jewels in the PSU crown. It has foolishly clung to subsidising petrol and diesel prices, which, by no stretch of imagination, can be construed to be helping the underprivileged, hence, the duty of a responsible Government. Sensible recommendations of the Chaturvedi committee, to increase these in monthly steps, have been chucked out.

There is a total neglect of infrastructure, witness the criminally abysmal neglect of city roads in order simply to satiate the greed of corrupt officials and construction firms. New technologies, such as cold tarring of roads, used by South Africa, are not allowed to be adopted by vested interests, never mind the country.

Available technology of RFID to allow passthrough, without stopping, but permitting collection of road tax, is not adopted to circumvent the need to stop vehicles at octroi and toll booths. This can save enormous amounts of petrol consumption plus time and inconvenience. But vested corrupt interests prevent it.

Available technology of distance learning is not adopted. Mumbai University, as others, is facing an enormous shortage of teachers because of dismal pay scales. Distance learning can be done, at affordable costs, to spread literacy to remote areas. But there is a large vested interest in protecting the ‘donations for admission’ to a few educational institutions that have been ‘permitted’ to function.

After years one available technology has been adopted, viz. VOIP (voice over internet protocol). Using net telephony, people would be able to significantly cut costs. This would provide additional competition to telcos. Perhaps under pressure from telcos, DOT is dragging its feet on the introduction of mobile number portability (MNP) on the pretext that its introduction would cost too much to implement. However, MNP is about the only thing that can assure good service quality; witness the increasing number of call drops, for example.

The week ended with the sensex losing 322 points to end at 14401 and the Nifty dropping 122 to end at 4327. The monsoon session of Parliament has been delayed; the investment community was hopeful of reforms such as the pension bill, to provide cheer to the market.

Unless our governance improves, given the worsening global scenario, our markets would feel the heat. Its unlikely that governance will improve at least until the next general elections. So it would be better to sell on rallies.

Source: Global Problems can Hit Us; Why do We Create Our Own?

Contrastingly, our political leaders work, instead, towards personal goals, more’s the pity. This tells on various facets of life, including, of course, on the economy and hence on the stockmarket.

It tells, for example, on the law and order situation which, in the recent past, has seen random terrorist bombings in two cities, Bengaluru and Ahmedabad, on consecutive days. Ved Marwah, former director general of NSG, maintains that intelligence agencies have been completely politicised and senior intelligence officers work harder to be in the good books of political masters instead of on their jobs. Given that some two thirds of our MPs have criminal cases filed against them, such subservience is rather disconcerting. One can only hope that Bengaluru and Ahmedabad were not rehearsals for a bigger outrage, on Aug 15. To underscore the point of intelligence agencies being made ineffective, the ban on SIMI was lifted by a court which maintained that the intel agencies had not sufficiently backed their plea for it with evidence.

It tells, for example, on the sorry state of our country fiscal discipline, despite several years of a booming economy providing unprecedented growth in tax revenue. Direct tax revenues are up a whopping 47% in the Jun – Sep quarter, showing a continuation of buoyancy, despite economic growth having slowed down. DSP Merrill forecasts FY 09 growth at 7.6%. Yet the fiscal deficit is so high that Moody’s joins S&P and Fitch, to warn of a lowering of India’s sovereign outlook. Using accounting methods to hide fiscal problems that would have made Enron proud, the Finance Ministry presents a rosier-than-thou budget. This may fool the people for sometime, but not the rating agencies. It certainly manifests itself in the sorry state of 3 public sector oil marketing companies, IOC, HPCL and BPCL, who are reportedly losing Rs 600 crores/day selling petro products at Government decided, instead of market determined prices.

Not that the subsidies are well spent; they aren’t. Subsidies on petrol, for example, are helping to artificially create additional demand for cars which would cause a bigger problem in future. Oil is not made by God anymore! Why are political leaders creating an infrastructure of vehicles, and plants to build them, which will create a disposal problem in the future? In doing so, are they serving national interests or personal? Why not, instead, build a good public transport infrastructure and discourage, through taxation, private transport?

It tells, for example, on the disaster of our education system. One of the features of the India story is the demographic dividend it will get as, over the next 5 years, some 45 m. people would be added to the workforce in the age 20-25. We have the numbers, but will we have the quality? Getting admission into a college of choice is a nightmarish experience, because of the mess leaders have made of the education system largely for the same reason, i.e. placing of personal interests above national interests. The paucity of seats results in huge income flows from ‘donations’ to procure admission, making education a lucrative business rather than a Government’s duty. The IITs, for example, are institutions that have produced excellent engineers, and the IIMs excellent managers. Yet, standards for admission are being lowered as affirmative action. Affirmative action is good and necessary, but at the cost of destroying educational standards built up over decades? Far better to open up education to the private sector so that there is no paucity of education and so that the demographic dividend does not convert itself into a bounced cheque! Fast forward a decade or two into the future and India may need to send students abroad for education, at enormous foreign exchange cost.

The Indian political leaders have, in our early years of independence, spent their resources and energies investing in public sector companies (PSUs), neglecting, for want or both financial resources as well as vision, to build a safety net. There is no pension payable if a job is lost, and no medical facility for the poor who can’t afford it. Both these prevent the introduction of a flexible labour policy, which is needed in a globalized world dictated to by instantly mobile capital and vagaries of consumer demands.

What is happening to these wonderfully built and carefully nurtured PSUs? The 3 oil marketing companies are being pushed into a premature demise and will, in all likelihood, be sold to private enterprise for a pittance. Perhaps that is the intent of leaders who have now nationalistic compunctions. ONGC, the most profitable, is also being bled. The Government now want to cap its revenue at $ 75/barrel and to claim any revenue above that for itself. But companies who search for oil in the deep seas such as ONGC in the public sector, RIL, Cairn and others in the private sector, do so at enormous risks and costs. The current daily cost of hire of a deep water oil exploration rig is some $ 585,000 and there is no assurance that a discovery will be made. Those who take such risks do so with an assurance of gain should they succeed and by capping gains the Government would be reducing the number of participants willing to take such risks. This has already happened in NELP VIIth round of bids, where giants such as Exxon (NYSE:XOM) did not bid due to lack of clarity and changing of goalposts (gas, for example, has been excluded from profit computation, although oil and gas can emerge concurrently, a foolish example of myopic nitpicking).

Another successful PSU is telecom giant BSNL, in which the Government has cleared sale of a 10% stake reportedly valuing the company at $ 100b. Employees of BSNL, numbering some 300,000, are opposing the IPO, despite being offered ESOPs which would fetch each of them a gain of Rs 200,000 on listing!

What the Government ought to do is unwind its holdings in the PSUs and use the sale proceeds to build up the social security system it has failed to do. This would enable it to move towards flexible labour policy which, in turn, would help create more jobs with entrepreneurs then willing to set up companies.

That would require a political mindset of nation building not in evidence in our political leadership today.

Last week the BSE sensex climbed 511 points, to end at 15162, whilst the Nifty gained 115 to end at 4529. This was mainly in response to falling prices of oil, which went below $120 after OPEC increased output.

The monsoon session is to start soon and it is expected that the Government will go full steam ahead with economic reforms. If it takes up pension reform, and allows for divestment in PSU banks to under 51%, the market would rally sharply, probably going above 16,000 on the sensex. Thereafter, however, it just may call early elections, gambling on an assessment of inflation having been tamed to 7-8% around Dec/Jan. Should early elections be announced, there would be another sharp dip. A sustained upmove would be seen when our leaders commit themselves to economic policies that will do the nation good, not just themselves

Then we would have one flying over the chidya ghar!

Source: Wen Flew Over the Bird’s Nest

The market had either sensed the victory or, if one is wont to be cynical, anticipated it, for it had started its climb on Thursday and Friday, continuing it on Monday and Tuesday, before the trust vote on Tuesday evening. It went ecstatic the day after the trust vote, before falling to digest some of the gains. One says cynical because the rise, in anticipation, would have provided some of the funding required for the operation.

None of the political parties covered themselves with glory. The Left, for causing the crisis with a blinkered and outdated view of the world, (and they lacked even a modicum of grace when they petulantly expelled the Speaker from the Party for not having resigned!), the BJP, for its cheap theatrics in displaying wads of notes on the floor of the house instead of, as would be proper, bringing it to the notice of authorities like the Speaker and the Congress, for having created the atmosphere under which the allegation looked plausible.

The BSE sensex went up a whopping 1306 points in the first 3 days, including a Tendulkar-in-form 806 points the day after the trust vote, only to correct by 667 points over the next two days. It ended the week at 14274, for a weekly gain of 639 points. The Nifty went up 119 points to end at 4311.

Though the market has fallen in digesting some of the huge gains made earlier, it is expecting the kismet konnection to now start working towards economic reforms at a fast pace. These were blocked by the Left parties, with their Jurassic mindsets. These could have a huge, and positive, impact on both the economy as well as on the market. There are huge pools of pension money earning pitiable returns, and not allowed to invest in growing assets such as equity. Should a pending bill be approved, to allow them to invest a part, 15%, in equities, the resultant funds flow into the market would be mind boggling.

Similarly, disinvestment of public sector companies has been pending for a long time, again stymied by the dog-in-the-manger attitude of the Left. (If we can’t enjoy the bone, we will ensure you don’t, either). Governments treat PSU companies like spare cows, to be milked whenever they feel like. IOC, BPCL and HPCL, once called navratnas, or nine jewels of the Government/s crown, have been stripped to death and have lost the ability to function. Before Governments strip and ruin other companies, it would be wonderful if they got out of political control. Not that these companies are badly managed; they have some of the best management teams in the country. Its just that the management is not allowed to take independent decisions. Think of the gains to the economy if returns on capital employed which are under 5%, are brought up, post divestment, to 15% or more!

There are some necessary reforms that would not be politically expedient to undertake nine, or fewer, months before a general election. The whole gamut of petro product subsidies, barely 10% of which reach the intended beneficiary, but which negatively impact PSU oil companies, the environment, the overuse of oil and the pollution impact on health of diesel adulterated with kerosene, needs to be urgently altered. Simply delivering the subsidies to intended beneficiaries in a better manner, using technology, can save the Government a pile of money. Similarly, the fertiliser subsidy needs to be made more efficient. If these two are tackled, the true fiscal deficit would be significantly brought down. It is officially under 5% of GDP but in reality closer to 8 if accounting tricks undertaken by the Finance Minister are corrected.

So, in domestic factors, things look good for an uptrend, at least until the UPA Government decides to call elections. There would be progress on the nuclear deal, there would, hopefully, be forward movement on economic reforms now that the nay sayers are out of the reckoning and, if crude oil prices remain down, inflation would be manageable.

Internationally, the credit crisis remains a cause for concern. Last week Freddie (NYSE:FRE) and Fannie (NYSE:FNM) got a Daddy and Nanny! Freddie Mac and Fannie Mae are the two gorillas in the US home mortgage business, with $5 trillion of outstanding mortgages. The falling real estate prices led to a collapse of their share prices and worries about their inability to borrow from the market, despite such borrowing being Government guaranteed, hence at a lower cost. In fact, it was because of such a guarantee with the consequent lower cost and higher spread, that both institutions had outstretched themselves and pumped excess liquidity into the system. When their stock prices crashed 40% US Treasury secretary Henry Paulson became their daddy and US Federal Reserve Chairman, Ben Bernanke, their nanny, opening up the Fed window for them to borrow from and park part of their mortgages into. This has averted the crisis for the moment.

The other global concern remains high oil prices. Part of this high price is speculative with lots of money driving up the price, and can be tackled if the US were, e.g. to release a portion of its strategic oil reserves. Over the medium term, the US could open up for exploration, vast areas now closed to it, in response to environmental lobbies. Brazil’s oil reserves have grown nine times since it commenced deep sea drilling but US companies are debarred from looking for oil in either of the two oceans adjoining it. In the longer term, alternatives such as shale oil, of which US and Canada have huge quantities, would need to be exploited for oil finds.

The sensex would probably move in the range of 12,500 on the downside to 15,500 or so on the upside. A bottom seems to be under formation. Whether it will be or not would depend on whether we have better public governance and take sensible steps, or if we lose this opportunity to behave properly, and go back to our mindless ways. Politicians should realise that their longevity depends on taking proper steps to ensure long term solutions. The populist, short term measures can only make their term short lived. The electorate understands this; politicians still have their heads in the clouds of power where they lose their ability to think rationally.

Source: Do UPA and SP Have a Kismet Konnection?

Had she ring fenced him and Harvard educated Finance Minister Chidambaram from the Left and their Jurassic ideologies, and allowed both to do their jobs, we would not be where we are today.

Had she also not given in to the propensity to continue in power as long as possible, but had, instead, taken a cue from both Gavaskar and Gates, who retired at the peak of their careers, and been bold enough to call elections last year, when things were good and inflation under control, it would have ensured another innings.

The going was ‘seemingly’ good, one could add. The fiscal deficit was apparently falling within the limits of the FRBM Act but was, in reality, shooting well past it due to creative accounting; the sort that, in the corporate world, brought down Kenneth Lay of Enron. Expenditure which ought to be shown in the Budget, such as subsidies on petro products, or on fertilisers, were not, thereby fictitiously bringing down the fiscal deficit and partly compensating PSU oil companies and fertiliser companies through issuance of bonds. These bonds become a liability for a future finance minister; hence a tax burden on a future generation.

This was accompanied by a loosish monetary policy, albeit not anywhere as loosish as what the US Federal Reserve is doing. Result: inflation, which is close to 12%.

Of the petro product subsidies of around Rs 230,000 crores an insignificant portion goes to the truly deserving, for their cooking needs. A chunk of it goes to support an oil mafia that adulterates diesel with cheaper kerosene, causing environmental and health problems. There are several other pernicious effects.

The cheaper petrol encourages overusage as people buy gas guzzlers. The resultant crude oil imports weaken the rupee. Now, instead of encouraging new oil, which NELP VII seeks to do, the Finance Ministry, starved of resources despite having got the biggest ever increases in tax revenue ever, is trying to restrict tax concessions under Sn 80(1B)(9) only for oil and not for gas. Those who take the risk of bidding for blocks do not know whether they will find oil, or gas, or both, or neither. But such has been the utter wastage of tax revenue, that the Finance Ministry is looking more to its own interest than that of the country.

The US has increase petrol prices which are now over $4/gallon, resulting in a decline in consumption for the first time in 17 years. Governments of emerging economies like Indonesia, Thailand and Malaysia have increased theirs by 30-40%, causing a drop in consumption. We do not have the courage to do so because of resistance from the Left parties. Interesting, communist China has done so!

Such servility to the Left, which has not accepted the responsibility to be a part of Government but lends outside support to it (withdrawable any time) is now leading to the stand-off that is causing nervousness in the stock market. Had the UPA Government found its backbone last year, and called the bluff, it would have had a far better chance of re-election than it has now, with inflation and the fiscal deficit running amok. The Congress should have done a Gavaskar.

Now that inflation is running high and elections may be nigh (needing inflation to be tamed fast), the RBI has gone aggressive with interest rate hikes. It hiked the repo rate (at which it lends to banks) by 0.50%, and CRR (which banks have to deposit with RBI) by 0.25%. In turn, commercial banks like SBI and Union have raised PLR by 0.5%. Deposit rates would also be raised soon; net of inflation they are hugely negative. When deposit rates rise, equity markets fall since debt becomes relatively that much more attractive than riskier equity.

This also sucks money out of the system, and farmers are finding it impossible to get loans for planting in the kharif season from co operative banks and difficult from commercial banks. So the debt waiver of Rs 70,000 crores will come to naught if farmers do not get credit and thus cannot plant crops, in the coming season. Given that there is also a huge shortage of fertilisers (despite the Rs 90,000 crores subsidy for them) this can affect agricultural growth; and hence GDP numbers.

The corporate sector is tightening its belt, cutting down costs such as travel costs and vehicle costs, and giving notice to non performers. In contrast, a recent VVIP visit to Mumbai witnessed hold up in traffic for a cavalcade of 40 cars to pass through! The pay commission has awarded steep pay increases for Government employees, none of whom are ever sacked, and the Parliament has hiked fees for MPs to witness their walk outs.

Oil prices have now hit $ 142/barrel. A lot of it is speculative demand; there are fully loaded oil tankers awaiting demand for the oil! So, it is quite likely that the speculative demand for oil would come down, bringing with it a much needed relief. This is likely when the US Fed increases interest rates; it hasn’t, unlike most other countries, including the EU and India.

Last week the sensex fell 769 points, to 13802, including a teeth shattering 619 point drop on Friday. Of the 769 points, ICICI Bank contributed 132, L&T 113 and Infosys 85. Reliance Industries (RIL) was positive at 90, followed by TCS with 1. RIL’s gas from the KG Basin is to start flowing from Sep and, as directed by the Government’s priorities, will flow first to fertiliser, then to LPG and then to existing power plants.

What is interesting is that for the four days to Thursday (Fri information not available), domestic mutual funds were net buyers on all days whilst FIIs were net buyers only on Tuesday. This indicates availability of domestic money at attractive levels..

Tata Steel produced consolidated results (with Corus) with sales at Rs 132,110 crores (second to RIL) and PAT at Rs 12,350 crores. ONGC, with a PAT of Rs 19,872 crores, has the highest profit of an Indian company even after being eaten away by Government, its majority owner. It is doing much to assure energy security for the country but its capex plans are bound to be hampered because its profits are eaten away so that you and I can get cheaper petrol today, and probably have to cycle to work tomorrow! Myopia, thy name is Government!

The fundamentals that created the India story remain. Our demographic profile, with over 40 m. people going to be added to the 19-25 years (most productive) workforce in the next 5 years, the huge domestic market for almost anything that can be produced, the entrepreneurs that pop up now they have been given freedom to be so, the growth of the service sector etc. What defeats all these advantages is poor governance. With an election coming soon one hopes that governance will also improve. After all, we have seen how good administration helped a reelection in Gujarat and how poor governance led to a defeat in Karnataka.

The sensex, having broken the 14,500 support, could now find support at around 12,250 levels. Given the political drama that will be played in the next week over the nuclear deal, the market could swing either way depending on whether the Government survives (in which case a sharp rally will ensue) or falls. It could survive either with the Left backing down (unlikely) or Mulayam lending support (more likely, given the right incentives).

The next few weeks should be spent deciding what to bottom fish for and buy. As mentioned earlier, the underlying fundamentals are good and hopefully governance will improve. And yes, spend the time also watching Wimbledon!

Source: Gandhi, Gavaskar and Gates

It is a well managed bank with healthy financials. But after 119 years, it is valued at $3.6 b., less than half the valuation Ranbaxy, a private company, achieved in 47 years, which is less than half the time.

Okay, one may say it is in a different line of business. Fair comment. Compare ICICI Bank, with a market cap. of $ 22 b. with SBI, at $ 21b. Now SBI is no ordinary bank. It has a 200 year history and has an unbeaten record of uninterrupted dividend history for over 150 years, testimony to its financial strength and good management. With such a long history of success, why is it valued at one twentieth the value of China’s ICBC, with a market cap of over $ 450b. HDFC Bank, at $ 10.5b. is nearly 3 times PNB.

In oil and gas sector, Reliance Industries, also set up in 60s, has a valuation of $ 80 b., larger than that of ONGC, at $ 45b. even though ONGC has excellent financials. Take telecom. Bharti, an upstart, has a market value of $ 40 b. whilst MTNL, an erstwhile monopoly, is only $ 1.5b.

The reason is obvious to all but those in Government who are in denial of true facts. Government treats public sector companies as milch cows, irrespective of the fact that they have minority shareholders. ONGC is valued where it is because it has to bear a huge subsidy bill for petro products. Regrettably, most of this subsidy goes to people who don’t deserve to be subsidised, such as car owners for petrol, truck owners for diesel, the mafia who adulterate diesel with kerosene, for kerosene, and restaurants for LPG cylinders. ONGC, Oil India and GAIL pay the bill, but are still very profitable. IOC, HPCL and BPCL also pay the bill, and have been bankrupted.

There was a joke about the Chairman of a company asking his finance manager why their company’s share price was half that of their competitors when their performance and profitability was the same. A month later it had caught up, so he called in the finance manager, complimented him and asked him how he had achieved it. The manager said he had just spread a rumour…that the Chairman had resigned!

One thinks that if the Government were to resign from these companies they would be doing the companies and themselves a favour. But the disinvestment process is stuck, like a lot of other necessary and sensible reforms, in the quagmire of a failed politics.

The Government did not take the necessary and sensible decisions to hike petro product prices in line with rising oil prices, to sell companies which they have demonstrably failed to manage (look at the valuation differentials), and a whole host of other things, because of politics. The argument was that taking tough but necessary decisions would cost it votes in the next election.

Well, election time is near. Do they now think that subsidised petro product consumers are going to vote for them en masse? Why, then, have they spent Rs 200,000 crores a year subsidising them when a better targeting of subsidies to the needy would have probably cost less than a fifth of the amount?

Do they think farmers are going to vote for them when they continue to reel under inadequate financing, lack of fertiliser and unfair product pricing? Unlikely. Why, then, did they incur some Rs 100,000 crores on subsidising one bit of fertiliser, viz. urea. How much of this has gone to absentee farmers from Punjab and Haryana enjoying tax free income in Canada?

It is easy to spend money, but the spend must result in a gain in productivity. For example if a Government employs, say, 1 lac people, paying them Rs 100 to dig a hole, and another 1 lac, paying them Rs 100 to fill it, GDP will grow by Rs 2 crores without any increase in the nation’s productivity. Such spending thus results in increasing money supply, hence inflation, without increasing the economy’s ability to compete. Inflation has now hit 11%.

Not that the PM and his officials do not know all this; they have been hobbled by survival politics subjugating revival economics.

Investors know all this too, and react to it by selling shares. FIIs continued their selling last week, except on Tuesday, causing the market, which seemed to be rallying till Tuesday, to collapse. The BSE sensex ended the week at 14571, down 618 points. The NIFTY ended the week at 4347, down 170 points.

The market is at a crucial level. If it goes significantly below 14500, the sensex would then look for support at around 12,500. What are the factors that investors need to look out for.

Basically it is how domestic politics shapes up; next week there is a crucial meeting between the Government and its Left allies (is that the correct word?) over the nuclear deal with the US. There is no more time for waffling over this. If the Left continues to be obdurate and prefers to withdraw support, the 14,500 level can crack. Investors do not like political uncertainty and the withdrawal would lead to early elections. If, however, Mulayam supports the Government, it can survive and the nuclear deal can make progress. The market will rally sharply.

Added to this is the likelihood of a fall in global oil prices. A lot of the price rise in oil is now speculative with too much money chasing it. It is not a mismatch of demand and supply; in fact there are a lot of full oil tankers whose cargo cannot find buyers.

In USA consumption of petrol is likely to fall for the first time in 17 years, simply because prices of petrol have been raised. South East Asian countries like Indonesia, Thailand and Malaysia have raised prices 30-40%. They are not, perhaps, hobbled by ‘allies’ or maybe their political leaders have the necessary anatomical parts ours don’t.

So the next week is crucial. Since it involves trying to predict political behaviour it is anybody’s guess.

Source: Stark Contrasts in Creation of Value

Their erudition and their education, would, it was felt, help them steer a coalition Government hobbled by Left parties with antediluvian ideas of economic growth, on a sensible path. For four years, it seemed things were going well, with the Indian economy growing at 8% and pouring enormous amounts of tax revenues to the Government. The triumvirate, alas, forgot what they had learnt in economics classes and succumbed to the politics of survival. We will now pay the price of neglect to plan for the future.

Poor governance matters. Look at Vietnam, till now one of the tiger economies, whose fast economic growth attracted a lot of foreign capital and created a stockmarket boom. The growth was not managed. The stockmarket has fallen 70% from its peak and every single day in April was a downtick! Look at Zimbabwe, where Robert Mugabe’s neglect has turned a country once the rice bowl of Africa, feeding other nations, into one that has to beg for food as it is bankrupt. Look at North Korea where upward of 1 m. people will die of famine as the great leader chases his nuclear nightmare.

Luckily India has democracy, and democratic institutions. But economic realities must be faced, such as rising crude oil prices unable to sustain untargeted subsidies, without fully prostrating to political compulsions. The triumverate ought to have been protected from political interference, much as Narasimha Rao did when Manmohan was the Prime Minister!

GDP growth is expected to slow down this year, though we should still be over 8%. If services, which account for 55% of the economy, continue growing at above 10%, that provides 5.5% GDP growth; industry, which accounts for 28%, growing at 7% (as in April), would provide another 2% and agriculture, accounting for 18% would, with a 3% growth, chip in with 0.5%, adding up to 8%. Or more, with higher growth in any sector.

The irony is that the resources generated during the past four years in terms of tax revenues, have not been spent in ensuring the future. Most of it has been wasted in political gestures, such as the subsidy on petroleum products. Only a small fraction, perhaps not even a tenth, goes to the truly deserving, who would need subsidised kerosene and LPG as fuel for cooking.

This population could provided the subsidy in a more effective way, using technology, without needing a blanket low price for all. The kerosene mafia, which adulterates diesel with subsidised kerosene, is a beneficiary of this largesse, as are car owners who are not discouraged from buying fuel guzzling cars. (Belatedly, the Government has woken up to its responsibility and levied a special excise of upto Rs 20,000 on fuel guzzlers; too little, too late). Contrast this with Indonesia, where the Government had the cajones to hike petrol prices by 30% last year. Demand for oil has fallen 10% since.

The BJP Government had, when in power, hiked petrol and diesel prices by an equal amount, even though the underlying crude oil price growth was much less. However, it did it in 34 small increases, without attracting public fury, instead of one large one, leading to protests. (Ironically the protestors were the very people who prevented the small hikes). So even when politics comes into economics, management of it becomes important.

Kerosene coupons, much like food coupons in America, would be one way of better targeting subsidies to reach only the intended beneficiaries. Modern day technologies like smart cards embedded with chips to distribute products can also be used. The Government could, and should, have used buoyant tax revenues to develop resources using floating turbines to generate wind power and wave power technology to generate power from waves is now advanced enough to make it equivalent to nuclear power, which would give the Government an alternative. India, with its huge coastline, would be able to develop this, had the priorities of nation building been determine by strategic thinking and economics instead of populism and accommodative politics!

Because prices of petrol and diesel have been subsidised, there is no price effect on its consumption, resulting in a ballooning import bill for crude oil. This leads to a current account deficit, taken care of by capital inflows. To attract which, and to control inflation (which in the last week of May touched a 7 year high of 8.75%), interest rates would need to be raised. RBI did just that, raising the repo rate (the one at which it lends to banks) by a quarter percentage, to 8%. The interest rate cycle is turning up, globally, which would negatively affect equity markets.

With all these untargeted, hence largely wasteful, subsidies on oil, on fertilizers, with the increase in salary after the pay commission hike and with the farm loan waiver, the Government’s fiscal position is atrocious, which is why foreign investors have been selling in spades. Which is also why the Government approved a procurement price of Rs 850/quintal for wheat, lower than the Rs 1000 recommended by CAC.

There was a lot of interesting corporate news. The promoters of Ranbaxy, India’s largest pharma company, agreed to sell their 34% stake to Japanese Dai Ichi Sankyo at a price significantly higher than market price, which consequently shot up. Dai Ichi will make an open offer for 20% at the same price, of Rs 737 per share.

Reliance Communication, which is planning a merger with MTN of South Africa which would be the largest deal from India, will have to face another complication. (The cap on foreign investment in telecom is a major complication which calls for a convoluted route to takeover). Reliance Industries has claimed that it has the right of first refusal if R Com is sold.

Idea Cellular is taking over Spice, in which Telekom Malaysia has a 39.5% stake. Post merger and preferential allotment, it would end up with 20%.

The India story is still good, largely due to the demographic dividend, with a young, well educated population who are free to pursue dreams. At a recent analyst meet of NIIT it was pointed out that India will have an addition of some 47 m. educated people in the 19-25 age group. The rest of the world (including China) will have a reduction of some 53 m. in this age group. Given proper governance, and a polity that cares for the future of the country more than for its longevity, there is no reason why the boom should not continue for years. Given good governance!

Last week the sensex fell sharply by 506 points on opening day (high oil prices, weak Dow), rallied thereafter, then fell again, to close down 382 points at 15181. The Nifty fell 110 points to end at 4517.

It is possible that the sensex can rally to over 16,000 level. One could exit if it does, for thereafter, at some point, early elections may be called. Oil prices are likely to fall, which would help control inflation. The inflationary environment would probably be most benign in Nov and Dec. An election then may probably be seen to be in the best interest of the ruling Government.

Source: Investing in India – What They Didn’t Teach Them at Harvard!

The Government, cowing like a wimp to pressure from its Left coalition partner, had tried to bury its hydra head in the sand staving off hikes in petroleum products and trying to escape the facing of reality. That left oil marketing companies gasping for breath, with no money left to buy petrol and diesel, which were under threat of being rationed, including to the armed forces. Last week the Government faced (partly) the reality of the situation and raised petrol prices by Rs 5/litre, diesel by Rs 3 and LPG cylinders by Rs 50. Even with this, the hikes absorb only about 9% of the total under recoveries estimated at Rs 245,000 crores. Fifty five percent is borne by issuing oil bonds, which is simply passing on to a future generation the cost of profligacy of the current one. Reprehensible policy!

What followed was a sheer hypocrisy by other political parties. The CPM and Trinamool Congress called bandhs in Kolkata on two successive days, never mind the hardship imposed on people or the futility of such a bandh on the decision. Price increases are not going to be reduced because of the bandh; instead, West Bengal’s GDP will suffer.

It was the Left parties, supporting Government from outside without taking the responsibility of joining it, that were, in fact, responsible for the apparent steepness of the hike. Had the Congress mustered up the spherical objects to raise petrol prices by, say Rs 1/litre five times instead of once, it would have been far more acceptable.

The fact that it did not indicates the invertebrate nature of Prime Minister Manmohan Singh’s government. Being an economist he ought to have been able to convince others of the folly of defying economic reality; sadly politics and the lack of backbone prevented it.

The BJP’s protests of economic terrorism also smacks of hypocrisy. During its incumbency, the BJP Government had raised prices of petrol and diesel to the same extent as the UPA Government, despite the fact that crude oil prices hadn’t increased as dramatically as they have under this Government. So its claim that the UPA Government has unleashed economic terror is only posturing for the next election.

Finally the Prime Minister’s appeal that ministers cut down on air travel and on unnecessary usage of cars is another display of crass hypocrisy. It does not take the public protest of a petro product price hike to make these sensible suggestions. Any good leader must prepare for bad times instead of making senseless gestures after they have arrived.

The consequences to the economy and to Government financing will be bad. For preparing the country for a future of high energy prices with shortage, even worse. By artificially curbing prices of petroleum products, the Government has not allowed demand to be curtailed, as it would be, if prices were raised. The export growth of 31.5% in April 08 (over April 07), to $ 14.4 b. seems impressive until juxtaposed with the 46.2% increase in oil imports to $8 b. and of 36.6% in total imports, to $ 24.3b.

This relates to pricing, but availability of fossil fuels is a bigger concern. An alternate energy basket has to be developed, with urgency. One of the options was to use nuclear energy, essential if India is to grow at 9% or more. However, once again politics takes precedence over sensible economics and long term planning.

The conclusion that all political parties care only about power and not about the country, thus becomes inescapable.

The upstream oil companies, ONGC and GAIL, have to bear Rs 45,000 crores, or 18% of the total underrecovery of Rs 245000 crores. This means that ONGC will not be able to make the investment in both developing and acquiring, energy assets to the extent of the subsidy burden it bears. Once more example of succumbing to political follies and jeapordising the future.

Auto companies will be hit. None of the auto companies have bothered to develop alternate fuel products, including CNG, electric hybrids or other hybrids. Years ago this columnist had written to the CEO of Maruti Udyog asking why Maruti did not provide factory fitted CNG car options and why was it necessary for a consumer to bear the risk of a CNG kit not working. It was, after all both a consumer need (to cut running cost) as well as a national priority. His reply was that there wasn’t enough demand to justify the investment! How on earth would there be demand without a product on offer? Even foreign manufacturers like Toyota, with its popular Prius electric hybrid, have been slow in introducing it. Auto makers are also faced with the prospect of a 30-40% hike in contracted steel price for high grade steel.

Immediately following the price hikes, road transport freights have been hiked by 10-15%, which would add to inflation. Middlemen will take the opportunity to hike prices of e.g. vegetables, by more than the freight hike, taking advantage of the situation. It is hard to imagine inflation coming under control fast.

One hope for inflation to be reduced was in the delivery of PMT gas. This would substantially reduce the feritiliser subsidy as cost of producing fertiliser using gas instead of naphtha would be much lower. A fire at the PMT gas field has affected production of oil and gas, which may cut supply by 6 and 20 % respectively.

Lastly the effect on the fiscal deficit. To cushion the popular backlash of the petro price hike, the Government cut excise duty on petrol and diesel by Rs 1 and customs duty on crude oil by 5%, and on petrol/diesel by 2.5%. This will deprive it of revenue. Combined with a farmer debt waiver of Rs 71,000 crores, and the hike to Government servants by the sixth pay commission, the fiscal deficit will probably exceed the limit set by FRBM. It surely will, if the fudging of accounts through issuance of oil bonds, and fertiliser bonds, which do not go into the budget and hence don’t reflect in the fiscal deficit, is counted.

Meanwhile the US Fed has signalled an end to interest rate cuts and may well raise them in order to defend the dollar which Bernanke has expressed a concern over. The RBI would also follow suit. That would act as a dampner to equity markets.

Last week the sensex fell 843 points to end at 15572 and the Nifty was down 242 points to end at 4627. Should 14,500 on the sensex crack, there could be a fall of another 2000 points. India’s growth story remains intact, despite all political parties doing their hypocritic best to derail it. The strains and contradictions of coalition politics will be evidenced as elections approach; as the saying goes, it is only when the tide goes out you discover who is swimming naked!

Source: Political Hypocrisy on Display

They, therefore, maintain a majority stake in 18 public sector banks, which have 70% of the business, and have kept a cap of 74% foreign holding in the telecom sector. This hurts economic growth.

At a recent analyst meet, the CMD of Punjab National Bank, was asked by this columnist why it was that, given their pedigree (it is 113 years, SBI is over 200 years old) and their finances (both have produced excellent results), their market caps are, respectively, $4 and $ 23 b., far lower than the $450 b. commanded by ICBC of China, which is far younger and doesn’t produce such impressive results. Although, given China’s earlier start down the path of economic liberalisation, ICBC has a balance sheet more than 7 times larger than SBI.

Perhaps one of the reasons could be the reluctance of Government to bring down its ownership below 51%. In a globalised world this is stupid, because you Lilliputianise your large players (if I may coin a term). Look at the top Fortune 500 list and see how many are family owned. To grow to a global size, firms have to give up stakes and it will be institutional investors who would buy them. Bill Gates would not be the richest man in the world if he had held on to his 78% stake when he first listed; it is now down in the early teens. ICICI Bank is no less Indian even though more than 70% is held by foreign investors.

Dr Chakrabarty, PNB’s ebullient and frank CMD, made a good observation. If, he said, India is to become the third largest economy in the world by 2050, as everyone now believes, there must be financial institutions from India that have become global and will be able to serve the needs of Indian companies that would also have grown. PNB is taking steps to move in that direction.

It will not, however, happen, unless Government lets go of the fear of financial Armageddon if foreigners control the financial sector in India. One should think a majority stake in SBI plus one or two other large banks would be enough; the others must be allowed to grow through organic and inorganic growth.

In telecom the cap is at 74% for foreign holding. This is making it difficult first for Bharti Airtel and now for Reliance Communications, to make a sensible merger/acquisition of MTN of South Africa. Since foreign investors already hold 13% of R Com, Anil Ambani can offer a maximum of 61% (swapping it with a 33% stake in MTN to emerge as the largest holder of the combined entity); besides MTN has to make an open offer for 20% from minority shareholders.

The reason the Government retains majority control has less, however, to do with the wolf at the door syndrome, and more to do with controlling and appropriating the profits. That is why oil and gas companies are being looted. Indian Oil Corporation, a Fortune 500 company, has reported a loss for Q4 ended Mar 08. Prices of petrol, diesel and other petro products are kept artificially subsidised and the oil marketing companies like IOCL have to bear a part of this subsidy. They have run out of money to buy petro products and there is a looming rationing of petrol and diesel. Moreover, because they are partly compensated via issuance of non marketable petro bonds, they have had to borrow heavily from SBI which, in turn, has made its largest repo borrowing of Rs 13000 crores and has had to hike deposit rates.

There was even an asinine suggestion that in order to make up for loss of revenue if excise duties are reduced (the oil sector contributes some Rs 70000 crores, the highest, to tax revenue) the Finance Ministry was thinking of levying a cess on all taxpayers. Look at the ridiculousness of this! It means that for car owners to get cheaper petrol, all tax payers must pay! And this has got support of the Left parties!?!

Look further at the insane consequences of this. Facing a liquidity crunch for no fault of its, IOCL is thinking of selling its 7.7% stake in ONGC and 2.4% stake in GAIL!

All this to save car and truck owners the pain of paying market related prices for petrol and diesel! This reduces demand elasticity which is 16% in America and so leads to artificially high demand for them, and hence for oil, pushing up its price. Is this a responsible Government?

Under insistence from its Left coalition partners, the Government is following a policy of not selling profit making PSUs. Now that IOCL, BPCL and HPCL are hurtling towards becoming loss making PSUs one supposes they will be sold at bargain basement prices. Does no one in Government see that this is sheer idiocy?

The Government has to take several steps to make India a more energy efficient nation. One of these is to improve public transportation systems and to discourage private transport. During the past few years it has had hugely buoyant tax resources to allow it to do so. These, sadly, have been frittered away, a lot in subsidies which do not serve their intended purpose. Because of poor ports and roads, it is felt that power generation target of 70,000 MW would fall short by 20%, as the equipment would not be able to reach the work sites on time.

Look at the Government’s appetite for tax in the case of a tobacco company, for instance. Granted, tobacco is harmful to health and must be taxed. In the case of ITC, for the year ended Mar 08, the Government collected Rs 15,398 crores through excise and corporate tax, leaving a profit of Rs 3120 for shareholders. The ratio of Government share to shareholders’ share is 5:1. None of this has, however, been used for providing tobacco farmers an alternative livelihood to wean them away from tobacco.

In corporate news, Tata Motors is coming out with a rights issue of Rs 7200 crores to part fund its acquisition of Jaguar Land Rover.

Last week the sensex fell 234 points to close at 16415 and the NIFTY fell 76 to close at 4870. The fiscal deficit is hugely understated by all the off balance sheet bonds given to oil and fertiliser companies; the RBI Governor has quietly stated as much. Interest rates would have to be raised as inflation is not under control, partly due to Governments fiscal incontinence and largely due to its thoughtless policies of state control over important sectors (banking, oil & gas, coal). The US is also likely to end its interest rate cut cycle and start to raise them. Rising interest rates makes debt markets relatively more attractive. So it is unlikely that the sensex would do anything dramatic this calendar year.

Source:  Who’s afraid of East India Co Wolf?

The underlay of these two emotions are complacency and lethargy, respectively.

The current rally which took the sensex up from 14,700 to 17,700 may lead investor to become complacent, or sanguine, for old times sake. They ought not to. Better buying opportunities should come later.

The reason for the caution are that both domestic and global factors warrant a display of caution. General elections at the Centre are due next year, but expected to be called late this year as the ideological strains of smiling for a family picture will start telling and as a coalition Government turns into a collision Government. States like Karnataka are going to the polls shortly.

Governments, except under severe pressure as in 1991, tend to take foolish economic decisions. As elections approach, they compete even harder for foolishness, bordering asininity. Parties in Karnataka are promising things like free power, a complete waiver of farm debt and other things, in order to curry political support. This largesse, of course, comes from Government (hence tax payers) coffers and not from party coffers which, logically, it should. One way to bring a measure of sanity would be to ask political parties to bear a part of the cost (say 10%) of electoral promises from party funds!

Foolish decisions take their toll on companies and on the economy; thus on stokmarkets. The subsidy provided for petroleum products is estimated at Rs. 77,000 crores, comprising petrol (7,300), diesel (35,700) PDS kerosene (19,100) and LPG (15,500). This is borne by the Government and upstream and downstream oil & gas companies who are partly compensated for the losses through issuance of bonds. The downstream companies such as IOC, BPCL and HPCL are financially haemorrhaging and have become highly leveraged. They do not now, have money to import diesel without which road transport would come to a halt and economic growth would not be the expected 8.5% or more.

With crude oil prices relentlessly rising (they hit $ 126/b) the subsidy burden can only balloon and the foolishness of the subsidy policy only exacerbate. A rebalancing of our energy mix is needed and the main hope is gas, which, fortuitously, we have discovered in good measure. Gas, however, would remain buried under the sea until its pricing, now in dispute, is expeditiously resolved. We cannot afford the luxury of a slow moving judicial system; the issue has to be settled soon and with finality.

The foolishness of Government interference and its impact on companies is also evident in the telecom sector. In Mar 2006 BSNL, a wholly owned Government telecom company, launched a tender for some 45m lines. Being a Government entity, the tendering process was subjected to challenge by writ, and finally the tender was drastically pruned on ministerial instruction. BSNL, which then had 17.6m customers, grew to 40.7m customers two years later. Private sector Bharti Airtel, not subjected to meddling, has grown from 19. 5 to 62m customers in the same period.

Bharti is now seeking to expand overseas, by trying to acquire MTN of South Africa (not to be mistaken with MTNL, which Bharti would be reluctant to acquire, given the differences in work culture). BSNL is now opening a new tender for 93m. lines, worth some Rs. 40,000 crores, which would have equipment suppliers salivating and one hopes that the Government has learnt the errors of micromanaging and doesn’t do anything foolish to interrupt it.

Yet other examples of Government pre election actions are in its arm twist of steel companies in both public and private sector, to bring down prices, never mind higher input costs, which they have agreed to now. The prices would, naturally, play catch up once elections are over. Or in the ban on future trading in agro commodities in order to contain inflation is another. Even though a Government committee found no link between prices and futures trading, this was banned. Consequently prices of soya oil, e.g. have soared, instead of fallen!

In fact there is now an illegal market in Indore, called dabba market, which trades in commodities like soya oil and settles trades through the unofficial hawala route. The ban is completely irrational and only a gesture towards containing inflation, without success. The market for the commodity is being exported. If this is not Kafkaesque, what is?

In corporate news of interest, L&T is undertaking a restructuring which would involve hiving off of a dozen operating subsidiaries, thus unlocking a lot of value. The parent company would have a board to guide these subsidiaries and to manage the L&T brand, which is estimated to be worth $ 2b. It is one way to protect the company from takeover; perhaps the trigger was the likely sale by SUUTI (the SPV formed to take over distressed UTI 64 assets) of its 9.1% stake in L&T.

The US $ slid against the Euro and other major currencies, but, surprisingly, especially with elections around the corner, has strengthened against the rupee, which went up to over Rs. 41.5 to the dollar. Perhaps due to massive RBI intervention in buying the greenback.

Globally, too, there is need for caution. Warren Buffet has warned of further pain in the financial system, though not, thankfully, of a panic. Panic was caused by excessive fears of counter party risk having slowed credit growth and was averted by the actions of the US Fed whilst rescuing Bear Sterns. Poor quality securitised mortgages were exchanged for higher quality Government bonds. It seems to have worked in restoring confidence for now. The US Fed seems to have suggested an end to cuts in interest rates.

The sensex fell on all five days of trading last week, losing 862 points to end at 16737. Of the 30 stocks, only two, viz Tata Steel (which contributed 35 points) and HUL (1) were in the black. Major contributors to the decline were RIL (156), L&T (117) and ICICI (99). The Nifty lost 245 points to close at 4982.

It is possible that there could be another rally to take the sensex back to 17,500 levels. If and when that happens, remember the title of this column.