Is US turning back to protectionism ?

THE global economic crisis has increased chances the United States will erect new barriers to trade but broad tariff increases, like those often blamed for causing the Great Depression, are unlikely, analysts said. President-elect Barack Obama’s criticism of China’s currency practices; the North American Free Trade Agreement and other trade deals have raised concern his inauguration on Tuesday could usher in an era of US protectionism. “I think President Obama is going to talk more about getting tough on trade than actually doing anything because I think he and his economic advisers realize it would be bad for the US economy to raise costs for US consumers and jeopardize US exports abroad,” said Dan Griswold, head of the free market Cato Institute’s trade policy shop. The US recession increases the temptation for politicians to shut out imports as unemployment rises. Last year, the United States lost more jobs than in any year since 1945, at the end of World War Two. That could lead to protectionism in a number of guises, even if the United States steers clears of anything like the 1930 Smoot-Hawley Tariff Act that prompted a series of retaliatory tariff hikes around the world. One of the worst things lawmakers could do is to include highly restrictive “Buy American” provisions in a proposed $825 billion economic stimulus package now taking shape in Congress, Griswold said. Lawmakers from steel-making states introduced legislation on Thursday that would require the Departments of Defense, Homeland Security and Transportation to buy US steel in any construction jobs they execute. Senior Democrats on the House of Representatives Ways and Means Committee also introduced a bill on Thursday to give the incoming Obama administration new tools to ensure that other countries play by the rules. But “enforcement” can easily become protectionism if the executive branch is allowed too much discretion to decide other countries are pursuing unfair trade practices that warrant US import curbs, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics

POSSIBLE STEPS
‘Buy American’ policies like the one mooted by steel companies.
Anti-dumping and countervailing duties on imports.
Restrictions under the guise of environmentalism, health.
Pressure on China to review its currency stance.
Curbs on companies outsourcing jobs to low-cost countries.

Will the global financial crisis halt the rise of emerging economies?

Nobody talks about “decoupling” any more. Instead, emerging economies are sinking alongside developed ones. In 2008 emerging stock markets fell by more than those in the rich world, and financial woes forced countries such as Hungary, Latvia and Pakistan to go cap in hand to the IMF. Taiwan’s exports have plunged by 42% over the past year, and South Korea’s by 17%; even China’s have shrunk. Singapore’s GDP fell by an annualized 12.5% in the fourth quarter of 2008, its biggest drop on record. Is this the end of the emerging-market boom?

Over the five years to 2007, emerging economies grew by an annual average of more than 7%. But in the past three months their total output may have fallen slightly, according to JPMorgan, as the fall in exports was exacerbated by a sudden drying up in trade finance. For 2008 as a whole, average growth in emerging economies was still above 6%, but recent private-sector forecasts suggest that this could slip to less than 4% this year. That is grim compared with the recent past, though still robust set against an expected 2% decline in the GDP of the G7 countries.

Short-term pain is only to be expected. But some economists argue that emerging markets’ longer-term prospects have been badly hurt by the global financial crisis. From Brazil to China, they claim, the boom was driven largely by exports to American consumers, easy access to cheap capital and high commodity prices. All three props have now collapsed. In particular, as America’s housing bust causes households to save more, they will import less over the coming years. This could reduce emerging economies’ future growth rates.

Yet emerging economies’ reliance on America is often exaggerated. The surge in their total exports as a share of GDP since 2000 might, on the face of it, suggest that their boom was powered by just under 20% of GDP (see chart 1). Most of the growth in exports has been within the developing world.

For sure, emerging economies will not return to their exceptional growth rates in 2007 (no bad thing either, since many of them were overheating). But it is equally wrong to assume that they cannot recover until America rebounds. There are good reasons to believe that emerging markets’ share of world growth will continue to climb (see chart 2).

Gerard Lyons, chief economist at Standard Chartered, argues that most emerging economies are not plagued by America’s deep structural problems, such as an overhang of debt, which could cramp growth for several years. Although 2009 will be a painful year for poorer countries, those with high savings and modest debt could recover fairly quickly. On many measures, such as government and external balances, emerging economies look much sounder than the big rich ones.

Unfortunately, aggregate numbers conceal many horrors, most notably in Eastern Europe. Countries such as Hungary, Estonia, Latvia and Turkey have huge current-account deficits and foreign debts. Between 2000 and 2008, the ratio of foreign debt to GDP dropped from 37% to 20% in Latin America and from 28% to 17% in emerging Asia, but jumped from 45% to 51% in central and eastern Europe.

As foreign capital dried up, GDP fell by 4.6% in Latvia and by 3.5% in Estonia in the year to the third quarter of 2008. Capital Economics, a research consultancy, expects another 5% drop this year. Hungary’s economy is expected to contract in 2009. Turkey may also be heading for trouble. Its debt service payments due in 2009 amount to 80% of its foreign reserves, the highest ratio of any big emerging economy.

Russia has run current-account surpluses for many years, yet it has also been badly hit by an outflow of capital and a credit freeze. Banks and companies are finding it hard to roll over their foreign debt. Official reserves have fallen by $160 billion, or 25%, since August. As a result of lower oil prices, Russia is likely to run its first current-account and budget deficits in a decade, and its economy may well contract in 2009.

Asia’s export-led economies have been hurt by the collapse in global demand. Output is already falling in Singapore, Hong Kong and Taiwan. However, current-account surpluses and modest domestic debts mean that most of the region is much less exposed to the credit crunch than eastern Europe is. Asia has two other advantages. First, as a large net importer of raw materials it will benefit from the plunge in commodity prices, unlike Latin America. And second, with the exception of India, Asian countries have low public-debt-to-GDP ratios, giving them more room for fiscal stimulus than other emerging economies. Such policies take time to work, but after a nasty 2009, Asia is well placed to be the first region in the world to recover.

China is crucial to Asia’s fortunes. Many economists expect GDP growth to slow to around 7% in 2009, down from almost 12% in 2007 and its slowest rate for almost two decades. Thousands of factories have closed in southern China, triggering concerns that rising unemployment will cause social unrest. This prompted the government to unveil a large fiscal stimulus in late 2008, which should help to boost growth in the second half of this year. With debts of only 18% of GDP, the government has plenty more room to boost spending. And if China has to rely more on domestic demand, this will help to steer it onto a more sustainable path.

A comparison of China with India in any case shows that exports are not the main thing that determines how vulnerable economies are to the global crisis. India’s exports as a share of GDP are much smaller than China’s, so one might expect it to be holding up better. But a big chunk of Indian investment -- the main driver of recent growth -- has been financed by overseas borrowing or new equity issuance. Both have dried up. The government’s huge budget deficit also limits its room for fiscal easing. On January 2nd India announced its second monetary and fiscal stimulus package within a month, but the extra spending is tiny. Standard Chartered thinks that GDP growth will dip to 5% in 2009, well below its recent 9% pace.

Latin America’s prospects lie somewhere between those of Asia and emerging Europe. Weak commodity prices could push the region into running a large current account deficit, just as private-capital inflows decline sharply. Latin America also has less scope for fiscal stimulus than Asia, because many governments (including Argentina and Brazil) used the windfall from higher commodity prices to boost spending rather than cut debt. Goldman Sachs forecasts that Brazil will grow by only 1.5% in 2009, whereas Mexico’s GDP could fall by 0.5% because of its stronger trade links with America. The bank reckons that both should recover fairly quickly. Argentina is another matter. Credit-default-swap spreads on its government debt have surged to horrifying levels, signaling that investors see a high risk of default.

During the past five years virtually all emerging economies boomed. Now their fortunes will diverge much more. The most important factor determining how they cope with the recession in the rich world will be whether they are high savers, able to stimulate their own economies, or big borrowers. If international investors continue to shun risk and rich-world governments swamp markets with their own borrowing, it will be hard for emerging-market governments to issue bonds and for banks and firms to roll over debts. Some developing countries will therefore remain sluggish for longer than others.

Overall, however, their long-term prospects remain good, thanks to structural reforms and better macroeconomic policies over the past decade. In December the World Bank forecast that GDP per head in poorer countries would rise at an annual pace of 4.6% during 2010-15, similar to that during the past decade, and more than twice as fast as in the 1990s. That word “decoupling” may yet get dusted off again.

Market Morning

FTSE 100 hit by banks to close 5 pct lower

Britain's blue-chip shares tumbled 5 percent to their lowest close in over a month on Wednesday led by financials which were thumped on anxiety over their balance sheets. British equities, already deep in the red in morning trade, fell further to mirror a slide on Wall Street after data showed that U.S. consumers cut their spending even more sharply than expected. The FTSE 100 closed down 218.51 points at 4,180.64, falling for its sixth straight session to its lowest closing level since December 5. The UK benchmark is down 5.8 percent so far this month and fell more than 31 percent last year, its worst annual drop since its launch in 1984. Mining shares were also heavy losers, denting the market as metal prices fell on slowing demand concerns. Rio Tinto, Xtsrata, Anglo-American, BHP Billiton, Antofagasta, Kazakhmys and Eurasian fell between 6.6 and 11.7 percent.

US Stocks Drop As Financials Deteriorate

U.S. stocks plunge as more losses and upheaval in the banking sector, along with dire trade and retail data, hint at an economy at risk of a deflationary spiral. The Dow Jones Industrial Average is down more than 270 points, or 3.2%, with all of its components in the red. Citigroup is off 16%.

Oil Falls

Oil fell on Wednesday due to rising inventories and flagging demand in top consumer the United States. U.S. distillate demand fell to the lowest level in five years as the economic recession battered industrial consumption, according to the Energy Information Administration. Inventories of the fuel -- which includes heating oil and diesel -- surged by 6.4 million barrels in the week to January 9, while gasoline and crude stocks likewise rose, the EIA reported. U.S. crude settled down 50 cents at $37.28 a barrel. London Brent crude -- which has been supported by the disruption of Russian gas supplies to Europe -- rose 25 cents to $45.08 a barrel.

Which is a better - active management strategy or passive management startegy?

ACTIVE PORTFOLIO MANAGEMENT VS BUY AND HOLD STRATEGY

In the fascinating world of the investments, Warren Buffet is considered God. From high flying Hedge fund managers to Ivy league management students, every body will vouch that their idol is none other then oracle of Omaha. More reams of paper must have been dedicated to his abilities and his wisdom than probably all other successful investors put together. Even his random statement is lapped up investment professionals the world over and become financial folklore. Investors would blindly pick up the stock that he buys and the sole reason is that Buffet is buying it. Although questioning the investment acumen of the of the world most successful investor would be madness, there definitely seems to be case for scrutinizing some of his most glorified statement, particularly in times like these, where neither fundamental nor technical analysis can stand the tide of negative sentiments. In 1988, in a letter to Berkshire Hathaway shareholders, Mr. Buffet wrote “our favourite holding period is for ever”. Not even trying to analyze the context in which the statement was made, the cliché hungry financial media in general and investment advisor in particularly lapped up the statement with both hands. What they actually did was further strengthen two of the biggest misconception prevalent in the worlds of the equities:

Buy and hold strategy will give great return in the long run.

Trying to time the market is a futile exercise.

Firstly, there have been numerous decade long spells, where equities have given negative returns. For example, if you had bought NASDAQ stocks about a decade ago, you would be now sitting with very hefty losses, notwithstanding whether the stocks where blue chip companies line Yahoo or Microsoft. The NASDAQ bubble was not a one off thing, it happened during the great depression, with Japanese stock in 1990’s. And if you thought this happens only when an investor is caught in a bubble, think again, there are numerous examples when investors had entered the market at absolute low, stayed there and ended making loses. A recent example is the price of Gold, after the Lehman brother collapse, the gold prices stated to rally from $798 and went up to as high as $920 per ounce before again slipping to $860 level, the only way of making money in this volatile environment is to actively trade in. Another historical example is the DJIA started rallying after hitting a multi year low 530 in 1962. Over the next decade, it went on to hit multiple highs around 1000 in 1966, 1968and 1972 but it then crashed back to the 500’s in 1974. So an investor who had managed to get in even at the absolute bottom in 1962 would have actually lost money ion 1962. The story was the same during the great depression, when the DJIA rose six fold from just 64 in 1921 to about 380 in 1929, but the cracked appeared and by the time it found its bottom in 1932 at around 41 it had given up all the gains of the eight years bull run. In fact investing in the equity market is like growing fruits, you should know when the fruits are ripe to be plucked and not left them on the tree to rot.

We are not advocating against the long term investment strategy but we are against passive investment strategy. Market always goes through its cycle of ups and down, hence it becomes more important for the investors to actively mange their portfolio, skimming the profits at regular interval and most important not to panic in the falling markets. With the range of the financial products in the market now days, it is possible to make money in the rising as well as falling market.

What is a balance sheet ?

What is a balance sheet? How does it reflect a co’s finances?

A company’s balance sheet is essentially a statement of its wealth (assets) and what it owes to others (liabilities) at a particular point in time. The assets could be fixed assets like land, buildings, plant and machinery. They could be movables like cars or computers. They could also be liquid assets in the form of cash reserves or receivable payments due to the company from those it has sold goods to, for instance, or repayments on loans given. Liabilities are anything the company has to pay to others. Thus, they would include payments due to its suppliers. Loans taken from others as well as interest due on those loans would also be part of the liabilities. What is owed to the shareholders would also fall in this category.
However, balance sheets present this information not explicitly under the heads assets and liabilities, but rather as a statement that gives sources of funds on top and application of funds below. All sources of funds effectively constitute liabilities. Share capital and reserves and surpluses form liabilities owed to the shareholder, while loans are liabilities towards others. The application of funds segment is a listing of the assets, except for one entry, which is current liabilities and provisions. The gross value of assets, minus the current liabilities, gives the figure for net current assets. Net current assets must be equal to total figure at the end of the sources of funds segment. This also means that net assets and net liabilities are always equal, hence the term balance sheet.
Application of funds includes value of fixed assets, of current assets (like receivables or inventories) as well as investment. Entries in the balance sheet are explained in more detail in annexed schedules. In fact, to make the most of a balance sheet, it is important to look at these schedules closely.

If a balance sheet is always balanced, how does it indicate financial health?
To begin with, a balance sheet in itself cannot adequately tell us whether a company is in sound financial health or not. For that, we must also look at balance sheets for earlier years as well as profit and loss accounts of the company. This is because while a balance sheet presents the picture of the company’s finances at a particular point in time, the profit and loss account tells us how the company has performed over a period of time—a quarter, half-year or full year. Thus, a company may have considerable assets, but that may be a result of good performance in past years, while it may be doing badly at present. Or, it may have accumulated liabilities from bad performance in the past, but may have turned the corner and started doing very well.
Looking at the situation at one specific date will no tell us which of these is true. Looking at the current position (balance sheet) and the performance over a year (P&L account) will obviously tell us more. Subject to those caveats, a balance sheet itself can give significant pointers to the financial health of a company. For instance, while assets and liabilities will match in every balance sheet, a company whose liabilities are primarily to its shareholders is clearly better placed than one which owes a lot to the rest of the world.

What does the profit and loss account tell us?
The P&L account details the income and expenditure of the company over a quarter, half-year or year. Unlike a balance sheet, income and expenditure of course need not be balanced. Where income exceeds expenditure, the account will show a profit, where the reverse is true, we have a loss. Expenditure includes not just operating cost like inputs and wages, but also provisions that the company has to make for depreciation of its fixed assets, for interest on loans, dividend payable to shareholders and tax.

Thus, we have several different figures for profit. The first stage is operating profit that tells us whether the company is able to sell its products at higher than cost and by how much. Then, we have profit after depreciation or profit before tax (PBT).
While depreciation does not actually involve any cash outgo, the reason it is counted as if it is an expenditure, is because depreciating assets will ultimately have to be replaced. Companies are happy to have high depreciation rates, since it saves them tax and the profit that is taxable, is profit after depreciation. Next comes the provision for tax, giving us the profit after tax (PAT), which is also normally known as net profit, though in some cases there might be some other extraordinary provisions which give a lower figure for net profit.

Are large reserves a good sign?
Not necessarily. They might indicate a company that has not very bright prospects in future. Normally a highly profitable company that sees the prospect of future growth would be using its reserves to invest in expansion rather than letting cash idle in bank accounts. However, this is only a thumb rule, since investment tends to be lumpy. So it could be that cash reserves are huge at the moment, because the company is building up to a big investment sometime soon.