The lesson investors cannot afford to ignore

Economists and authors have their ways of contradicting popular notions. And during times of a heated economic debate their contradicting views make a very interesting read. In yesterday's issue of 5 minute Wrapup we had quoted Nassim Taleb's view on US Treasuries. He says that if there is one trade that every human should have, it should be shorting US Treasuries.

Interestingly, Nobel Prize winning economist Paul Krugman has a pretty conflicting view on this. He believes that the US Treasuries would continue to find buyers. And that the federal budget deficit is not a looming disaster for the US economy. In an op-ed in The New York Times, Krugman writes that "contrary to what you often hear, the large deficit the federal government is running right now isn't the result of runaway spending growth." Rather, Krugman contends, more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, federal bailouts of financial institutions. We believe that whether or not the US Treasuries find takers, the US economy is certainly digging its grave by not paying sufficient heed to its burgeoning deficit.



Legendary hedge fund manager George Soros was quite emphatic in his endorsement of the US dollar recently. He's known to have said that the US dollar is not about to lose its status as the world's primary reserve currency anytime soon. This is because there is no attractive alternative to the US dollar currently. With the debt woes of European nations such as Spain, Greece, Portugal and Italy that have come to light recently, even the Euro's image, which was seen as the number-two choice, will now take a beating. And so, it seems like 'flight to safety' will continue to mean 'flight to the US dollar' for some time to come.



After the battering that US banks received due to the subprime crisis, one bank has decided to adopt a conservative stance. Even if that means foregoing US$ 1 bn in returns. We are talking about Wells Fargo, which bet US$ 1 bn on rise in US interest rates. The bank chose to cut down its bond holdings last year betting that the interest rates will rise. This is in stark contrast to what the other 3 biggies did, notably add on to their holdings. While Wells cut its bond portfolio by US$ 34 bn in the second half of last year, JPMorgan Chase, Bank of America and Citigroup increased their holdings by an average of US$ 35.5 bn.

The strategy is clear. Wells Fargo is in no hurry to make immediate profits and is waiting for the right time for the returns to accrue to them. On the other hand, the others are looking to make profits before the rate hike occurs. Therefore, will the rate hike happen anytime soon? Given that the US economy has displayed some signs of recovering, raising interest rates does seem like the right thing to do. After all, it is the prolonged expansionary monetary policy followed by the US Fed which sowed the seeds of the crisis in the first place. But with the US unemployment showing no signs of abating as of yet, raising rates does not seem a priority to the government. Therefore will Wells' long term strategy bear fruit? Only time will tell.



Lately, the primary market has been buzzing with a slew of IPOs and follow-on public offers. However, most of them, including NTPC's follow on offer, turned out to be a flop show. Almost none of the issues this week managed to garner significant interest from retail investors. As institutional investors saved their day, they managed to get fully subscribed. Most experts attribute the poor performance of IPOs to very high valuations. There are others who consider negative cues from global markets responsible for the fiasco. All said and done, given the volatility in the secondary markets, government's disinvestment plans could certainly run into rough waters. It would be most prudent for the government to price the issues at reasonable valuations rather than get carried away by the prospects of milking its stake in the PSUs.


With the European crisis taking its toll on global markets, benchmark indices across major markets saw declines this week. Asian and most European stocks were amongst the worst hit. There was no escaping the selling, even for India. Concerns that some European nations may be on the verge of defaulting on their debt payments was on top of investors' minds. India's benchmark index, the BSE-Sensex ended lower by about 3.5%, making it amongst the top losers.

investing mantra
"If you can find a company that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you've got a terrific investment." - Peter Lynch