Is Buffet biased on US banking Sector

Wells Fargo is his favourite bank. But that apart, Warren Buffet has a good reason to stake his reputation for supporting US banks. As per Forbes, his investment in US banks is valued at US$ 24 bn of which US$ 14 bn is in Wells Fargo alone. Understandably, the legendary value investor is keen to back the sector that investors have come to despise. In America at least.

Now, not every American bank is set to go the Lehman way. Wells Fargo, in particular, is known to have conservative policies and is emulated by the best banks in India. But Buffett's wager on the likes of Bank of America were driven more by the ridiculously under-priced warrants and preference shares he pocketed. Something that retail investors cannot dream of. Also, it is true that Wall Street regulation in recent years have tried to do away with bank bailouts. Bonuses have also been pared or deferred. But that has added very little credibility to the banking system. Thus, Buffett's view on the stability of US banks is best treated as his personal view. And one of the few instances where we would beg to disagree.

Dr Doom predicts gloom

Dr Doom predicts gloom. Legendary investor Marc Faber expects stock prices all over the world to fall by nearly 20% this year. His reason for this pessimism is the state of the global economy. Countries all over the world are battling with bad fiscal positions. Unfortunately most of the countries appear to be at the losing end of this battle. At the same time, economies continue to be depressed. Higher tax rates and depressed conditions would end up harming the corporate earnings. If earnings suffer, stock prices will follow suit.

Another reason for the gloomy picture is the political tensions and social unrests. Many countries are facing this threat. With so much tension and depression gripping the world, Faber feels that the recent stock rally is unlikely to sustain itself. His logic and reasoning appears to be on the right track. Political leaders around the world need to understand the side effects of their short term, myopic policies. They all seem to be looking at ways to postpone the crisis. Rather than tackling the underlying reason for the crisis. Till such time as the cause is understood and cured, the long term outlook is not going to get any better. No wonder that even investors like Faber are drawing out insurance policies by picking up safe haven assets like gold.

Will RBI relent and finally lower rates?

f there were any hopes that the Indian economy was recovering, those were quelled by the disappointing factory output data released for November 2012. Indeed, the index of industrial production (IIP) fell by 0.1% during the month. In this, the mining sector declined by 5.5%. On the other hand, the manufacturing and electricity sectors grew by 0.3% and 2.4% respectively. In terms of industries, 13 of the 22 displayed negative growth during the month. As a result, the pressure has obviously mounted on the RBI to cut rates.

But we doubt that this will be enough for the central bank to relent. Indeed, the Indian economy has slowed down during the last couple of quarters. But the central bank is clear that inflation needs to come down. And so it has maintained a status quo on rates despite the slowdown. Now if the government pulls up its socks and takes effective measures to cut down its fiscal deficit, it will be much more meaningful in our view. And will certainly ease the pressure on the central bank.

Stagnation in Cultivation

If you are not already worried about food inflation and India's food security, today's chart of the day might perhaps make you start doing that. As the chart highlights, India's area under cultivation has remained pretty stagnant over the past couple of decades. This, even as its population is still growing and people moving up the food chain. Of course, there is always the yield to fall back on, but there's a limit to which the yield can improve we believe. Not to forget that the increased yield will lead to more usage of fertilizers and other crop nutrients. This trend is in contrast to countries like Brazil and US which can have vast tracts of land that can be brought under cultivation.

Is this the best way to avoid toxic stocks?

It may sound sadistic but we have taken great pleasure in knowing how a few people failed miserably in stocks. Simply because had that not been the case, the discipline of investing wouldn't have progressed this far. Take the father of value investing, Benjamin Graham for example. It is being believed that The Great Depression of the 1930s nearly wiped out Graham's entire net worth. And thus it was from this experience that he got the inspiration to create a framework for analysing stocks. And what an inspiration it was! Suffice to say that the tenets that he developed helped to create one of the most successful schools of investing.

Is it any wonder then in hindsight, it was actually good that Graham failed in investing. Likewise, we are also tempted to feel happy about the losses a certain investor suffered in the recent financial crisis. For it was his losses that led to the emergence of a very useful technique of analysing stocks.

The investor we are talking about is a gentleman called Mohnish Pabrai. Now, Pabrai was a very successful value investor up until financial crisis. But then disaster struck and he suffered huge losses. After lot of soul searching, he stumbled upon this wonderful idea of a checklist. And this checklist we believe is one of the simplest yet one of the most effective ways to avoiding errors in stock picking.

In Pabrai's case, he went back in history and analysed all the investment mistakes he made. Not only this, he also went back and analysed investment mistakes made by great investors like Warren Buffett and Charlie Munger. What he saw was certainly shocking. In most of the cases, the mistakes turned out to be pretty obvious. Not just that. The mistakes were also extremely basic. In other words, it wouldn't have taken a genius to figure out the source of error.

And herein lies the biggest insight we believe. To be a successful investor, it is obvious that you have to follow an investing framework that has stood the test of time. And once you do this, you only have to keep your mental biases in check. Because even the greatest investors are susceptible of not being able to do so. Fortunately, the concept of checklist will make your task much easier.

All you have to do is note down the reasons behind the investment mistakes you've made and also the ones made by other great investors. And soon enough, you will have some 30-40 points that you could use to evaluate every new investment of yours. Of course, over time the items on the checklist will grow and we are sure you'll be amazed at your ability to make much lesser number of mistakes. Especially mistakes that are pretty obvious but others that don't use the checklist keep on making.

Subsidy : The Problem for the Centre

Huge subsidy burden has created a hole in the pocket of the government. With the divestment plan not going as per schedule, financial resources of the Centre are further getting strained. In such an environment, the only way to avoid worsening deficit is to cut expenditures. As such, the government has decided to raise the plan outlay for FY2013-14 by just 5%. The plan expenditure for the next fiscal year is pegged at Rs 5.5 trillion compared to Rs 5.2 trillion for this fiscal.

It may be noted that FY2013-14 will be the second year of the 12th five year plan. And in that year, let's assume that the plan expenditure registers just a modest increase of 5% as predicted. If that happens then the overall projections for expenditure in the 12th plan could go for a toss. It may be noted that the 11th plan had witnessed plan expenditure of Rs 15.9 trillion. And in the 12th plan the expenditure is expected to more than double to Rs 35.7 trillion. Thus, any slowdown in spend in the initial years will make the target difficult to achieve.

Govt to infuse Rs 125 bn in 10 PSU banks

Basel III norms have been deferred by around four years. But the Reserve Bank of India (RBI) may not wait until then to ensure compliance amongst Indian banks. Keeping this in mind, the government is already planning capital infusion for the PSU banks. It is after all aware of the NPA provisioning hit that the banks may have to endure in FY14 as well. Ten public sector banks will therefore get a total capital infusion of Rs 125 bn in FY13 itself. Besides capital adequacy compliance, the government also wants PSU banks to step up lending. Higher credit disbursal is seen as the lone hope to revive the economy. At the government's behest, the PSUs may also have to lend at lower rates compared to the private sector. While the higher capital infusion does mean more stability for PSU banks. But we are not so sure about the same generating higher return on equity in the longer term.

US debt problem: From fiscal cliff to debt ceiling

What is the one thing that is easy to get into but difficult to get out of? Things like troubles, lies and bad habits do indeed fit the description perfectly. But there's one more thing that fits the bill and has most Americans worried these days. Well, it answers to the name of debt! The Economist is carrying a report about how US Treasury department will soon run out of legal authority to borrow. In other words, if the US debt ceiling is not raised soon, the country may well face the prospect of a full on default.

However, raising the debt ceiling is not the easiest of jobs out there. For under US law, while the congress can sanction any budget, its ability to borrow is restricted by the debt ceiling. And this ceiling can only be raised with a separate vote. In other words, the process of arriving at the debt ceiling is separate and distinct from financing government operations. What this has done is that it has effectively given a tool in the hands of the opposition to force the Government to arrive at some sort of compromise. And the last time such compromise was being reached, it took a downgrade in US credit ratings to arrive at some sort of consensus. We just hope the history doesn't re peat itself again.

Electricity growth in India: 2001 to 2011

The electricity sector is the growth engine of an economy. In India, providing access to electricity is the function of the ruling government. As such, household access to electricity is a key indicator of the quality of governance. Today's chart of the day shows states with the highest and lowest growth in households with access to electricity over the last decade (2011 versus 2001). States such as Uttarakhand, Tripura and Andhra Pradesh (AP) displayed significant improvement in access to electricity. On the other hand, Madhya Pradesh (MP) is the only state that showed decline in the number of households with access to electricity during the period. The growth in states such as Chandigarh, Himachal Pr adesh (HP) and Goa was slow as m ore than 90% households had access to electricity even a decade ago.

Why Buffett will never buy an 'Apple'?

Apple Inc. The company is without doubt the most valuable and profitable in the world. And only a great company with great products can get there. Be it product design, manufacturing or distribution, Apple excels on all important parameters. All these factors indicate that the company has a very strong competitive advantage, or 'moat', as Warren Buffett likes to call it.

Even then, Buffett would never buy the stock we believe. The reason is that while looking at moat, the important thing to look at is its durability. Investors need to ask whether a company's moat could endure over the longer term.

And this is exactly where Apple may leave you with a pinch of doubt. An article in Business Insider suggests that Apple is already losing its edge. For a major part of the last five years, Apple led the world in smartphones, tablets, gadget market share and cloud-based services and applications. In fact, it even enjoyed the best pricing power. But a lot has changed in the last two years. Apple has lost its lead in some areas, whereas in others it has fallen even further behind. Competitors such as Samsung and Google have posed a strong challenge to Apple's dominance in the smartphones market. In the mass smartphones market in emerging economies, Samsung has taken a significant lead over Apple. It's hardly surprising that Apple's stock price is down 25% from its peak.

Investors must understand that the problem here is not with Apple. The problem lies in the sector in which it operates. As Buffett himself says, "Technology is based on change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy." It is this changeability that poses the biggest risk to the durability of Apple's moat. On the other hand, a company like Coke still makes and sells the same products it did half a century ago. No wonder the soft drinks giant has seen its moat getting stronger and stronger over time.

So while making your investment decisions, do not solely focus on the company's current competitive position. If the future of the business seems uncertain or the sector is exposed to too many changes, it would be best to avoid such stocks. Buy stocks with durable moats and long term earnings visibility

Mad Hatter

A CEO or managerial team whose ability to lead a company is highly suspect. A mad hatter CEO will often make puzzling decisions which many, inside and outside the firm, may question. These types of CEOs are also known for making spontaneous decisions with little thought for the consequences. Sometimes these decisions are driven by personal incentives rather than the motivation to improve the overall performance of the company.
Investopedia Says...
Mad Hatter refers to one of the many strange characters in Lewis Carroll's "Alice's Adventures in Wonderland." At the tea table, Alice meets the Mad Hatter, who is eternally caught in tea time and constantly quizzing Alice with nonsensical and unanswerable questions. Typically, mad hatter CEOs don't last long in their positions

Unemployment in the US

How long will it take for unemployment in the US to hit 6.5%? Well, with more and more graduates being churned out every year and fewer jobs in the market, this situation could take years. Why is the 6.5% benchmark important? When the jobless rate reaches this magical figure, from the current level of 7.8%, the Federal Reserve will start raising interest rates. Currently interest rates in the economy are hovering at benign levels of 0-0.25%.

The only thing that can reduce the unemployment rate is growth. But, the American economy has growth only at around 2% over the last several years. If growth suddenly sees a spurt and another recession is avoided, the jobless rate could hit 6.5% over the next few years. The average Fed forecast is for unemployment to drop to 6.3% in 2015. But, is this sustainable? The fiscal cliff has been avoided for now, but with the debt ceiling deadline looming, we wonder for how long this economy can survive on pumped up steroids.

Is China witnessing green shoots of recovery?

 December 2012 seems to have been a good month for the Chinese economy. Exports rose 14.1% from a year earlier. This was the fastest in seven months and well above November's 2.9% growth. Imports rose 6% in December from a year earlier after a flattish trend in November. Both these figures were better than what most had estimated. In addition to this, China also witnessed an increase in its trade surplus to US$ 31.6 bn from US$ 19.6 bn in November.

China so far had been witnessing a slowdown in its economy. Given that it has largely been export oriented, recession in both the US and Europe had hampered growth. The December numbers have, however, increased optimism that the economy is on a rebound. And a surge in Chinese GDP growth certainly augurs well for the global economy as well. But it would make more sense to wait for a few more months before taking a call on where the economy is headed. Although the December numbers are quite good, basing predictions on the health of the economy on one month alone does not seem too prudent.

Unintended consequences of Japan's monetary easing

Voltaire, the famous French historian and philosopher has a famous quote to his credit, "Paper money eventually returns to its intrinsic value---- zero." The way central bankers and governments have been devaluing their currencies, Voltaire's insight may indeed be validated sometime in the future. The US Federal Reserve Chairman Ben Bernanke has received enough brickbats for his reckless money printing exercises. In recent times, Japan has been receiving a lot of attention, albeit for all the wrong reasons.
The newly elected Prime Minister Shinzo Abe seems ready to pull the accelerator on fiscal stimulus. And he also seems keen to control monetary policy by taking away the independence of Bank of Japan. His moves are directed towards ending Japan's decade-long fight with deflation. Export-oriented economies generally prefer to devalue their currencies to boost exports. But will a depreciating yen help the Japanese economy to bounce back? An article in Business Insider puts forth some serious doubts. For one, a depreciating yen does not have the same export-boosting power that it used to have earlier. On the other hand, a weaker yen will raise the prices of everyday necessities. This, in turn, would lower the real incomes of the Japanese people. It is worth noting that Japan has a significant aging population and relies heavily on imports of food, clothing, and energy.