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Are the fund managers listening?
Vinod K Sharma
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March 08, 2008

Warren Buffet was in the news Thursday last for being adjudged the richest man in the world by Forbes magazine. But I mention him for two other reasons.

The Oracle gazed into his crystal ball and said that though the economists will wait for two consecutive quarters of negative growth, he was of the view that the US is currently in a recession.

The sage has a fan following among top equity research houses, but I doubt the bloated club members who do not miss his annual speech in Omaha will have the courage to translate his views into short term sell calls on stocks.

The second reason we remember him is that he withdrew his offer to buy out the municipal bond portfolio aggregating $800 billion from bond insurers. Whether it was because he saw increased risk or he was put off by the tepid response of the bond insurers, is beside the point.

The fact is that bond insurers are gasping for breath, which does not augur well. One of the bond insurers, who planed to raise $3 billion, had to cut its plans by half because there is only that much appetite in the market.

A little known mortgager, Thornburg Mortgage, lost 50 per cent of its market value, or $260 million, because it couldn't meet a $28 million margin call from JPMorgan Chase.

It was only last month that Thornburg was heralded as a stalwart survivor of the subprime mess. It had also returned to the dividend list last quarter. This small tale tells you that you can't bet on small recoveries in the sector and more pain is in store.

The treasury department's payroll-tax withholdings, a genuine measure of income, fell from a 7 per cent growth YoY in early January to about 3 per cent at the end of January. In February, it tumbled to 2 per cent. This was the worst fall in tax receipts since 2001.

Consumer spending, which accounts for about two-thirds of the US economy, didn't shrink in the 2001 recession even though income growth weakened. That helped make the economic downturn then short and shallow. With credit tight and households low on savings, a deeper spending slowdown could be on the way this time.

Federal Reserve chairman Ben Bernanke last week said that delinquencies and foreclosures will continue to rise for a while. He also suggested that mortgage companies should partially write down the principal on distressed loans in order to prevent expensive, harmful and unnecessary foreclosures.

The money markets are telling us that there is a 100 per cent chance of a 50-basis-points cut in the March 18 meeting. Analysts think that the rates could tumble as low as 1.75 per cent this year.

If that happens, the Fed will merely buy additional time for the economy. He will soon have to start raising. The Bank of England and European Central Bank, which had their respective meetings last week, have not eased. The surging inflation is worrying them and sooner or later Bernanke will have to start fighting inflation.

What does it mean for India? It means that our stocks will continue to be under pressure as long as the US markets slide. While we had a 32 per cent correction in 2004 from the January highs to the May lows and another 30 per cent correction in May-June 2006, the current correction from 21,206 to 15,332 has been just 27.5 per cent.

Though smaller, it is worse than the two. While in other corrections, anybody who bought at the lower circuits never repented, some investors who did on January 22 are repenting as 50 per cent of Nifty stocks are below that day's level as I write on Friday morning.

While derivative traders and margin money investors panicked in January-February, if values don't improve investors who have put their own money to work may begin to panic. Are the fund managers listening?

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