Recession has already started, CFOs say-survey - Reuters

NEW YORK (Reuters) - A recession has already started and the downturn is likely to last longer than in the recent past, with the economy recovering only late next year, according to a quarterly survey of corporate finance chiefs released on Wednesday. Fifty-four percent of the CFOs said the United States is in recession, and another 24 percent said there is a high likelihood of one starting later this year, according to a Duke University/CFO Magazine survey completed on March 7.

Nearly three-quarters of the CFOs said they were more pessimistic this quarter than in the prior quarter about the U.S. economy, reflecting concerns about consumer spending, turmoil in credit and housing markets, and high energy prices.

An index of optimism, which rates the economy on a 1 to 100 scale, is at 52, the lowest in the seven-year history of the index, the survey found.

"The last two recessions lasted only eight months," said Duke professor Campbell Harvey, founding director of the survey. "In contrast, 90 percent of the CFOs do not believe the economy will turn the corner in 2008. Indeed, many of them believe it will be late 2009 before a recovery takes hold."

In response, companies are scaling back plans for capital spending and are not planning significant hiring, in part because of high labor costs, according to the survey, which has been conducted for 12 years.

Most CFOs said interest rate cuts by the U.S. Federal Reserve have had no impact on their business, and more than a third said credit conditions have directly hurt their companies by making capital tougher to get and more expensive.

The survey included responses from 1,073 CFOs, including 475 based in the United States.

Those polled in Europe and Asia have also grown more pessimistic about economies in their regions, while two-thirds of Chinese CFOs said they are concerned about U.S. recession hurting their profit margins or demand for their exports.

The CFOs in the survey largely agree with the view of economists, as polled by Reuters.

A Reuters poll on Wednesday found a 60 percent probability of a U.S. recession this year, up from 45 percent in a February poll. They forecast no economic growth for the first quarter, down from an earlier estimate of 0.2 percent growth. The poll also found higher expectations for U.S. inflation this year.

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Have faith in India's real economy: P Chidambaram

Finance minister P Chidambaram on Tuesday suggested that investors, who have panicked following the turbulence in the financial markets, need to draw confidence from the strength of India's robust real economy.

And the government would, he told ET in an exclusive interview, take special fiscal measures to shore up any weak spots in that growth story. Specifically, fiscal measures would boost consumption in the economy, if the current slowdown in the production of consumer goods persists.

The index of industrial production showed a negative growth in the overall consumer goods production for two months this fiscal, September (a marginal -0.9%) and November (-2.6%).

Mr Chidambaram said, "We will wait to see if the negative growth in consumer goods production is just a blip. If the trend persists for a quarter, we will take fiscal measures to deal with it."

The finance minister's statement comes in the backdrop of a global stock markets meltdown, which caused a 13% fall in the Indian stock indices over the past two days. He said India need not be affected that much by the turmoil in the global markets as the "Indian economy was driven by its own robust investment and consumption. Ours is a long-term growth story based on real investments and consumption."

The finance minister also sought to separate the behaviour of the real economy from that of the financial economy. Asked how much of the current risks to India's economy comes from the weaknesses in the US markets, Mr Chidambaram said, "The risks emanating from the US have more to do with liquidity flows. These risks would apply perhaps to our exchange rate management or the management of capital inflows. These are external risks, which we will manage. The real economy in India is in good shape."

Asked whether increasingly heavy losses suffered by big US banks could lead to further withdrawal of funds from the stock market here, Mr Chidambaram said those banks did not have that kind of money invested in India. Their liquidity problem will be addressed mainly by their central banks.

The finance minister suggested India just needed to focus on its real economy. In this context, the negative growth in consumer durable production since April 2007 and the overall consumer goods production growth turning negative in November is evidently causing some worry.

If the negative growth in consumer goods persists through December and January, the finance minister is most likely to activate fiscal measures to boost consumption. Theoretically, this could take many forms. One could be to put more money in the hands of the people through adjusting existing income tax slabs.

The other measures could relate to excise reductions in consumer goods, as had been suggested by the Prime Minister's Economic Advisory Council chairman C Rangarajan.

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History Repeats: Investors fail to learn much from past mistakes

KOLKATA: It was Mark Twain who said it first, "A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way". "If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats," was what Warren Buffet told shareholders of Berkshire Hathaway almost a century later, while recounting the problems experienced in exiting major re-insurance businesses like General Re.

In India right now, investors wish they would rather have Twain's cat to carry home by the tail rather than the stupendous losses from the market for which, global meltdowns and subprimes apart, they blame the rampant open F&O (futures & options) positions in the derivatives segment.

"Just take a look at the scene and you will find any number of scrips crowding in the F&O space. Compare the futures volume with the options volume where if you keep the top 10 scrips aside, it would perhaps be heavily skewed," said S Dadheech, an investment analyst in Mumbai.

Many like Bunty Dalmia, a director of Dalmia Securities, thought that derivatives expiring on cash basis must be allowed to be converted into delivery basis to stop the rampant manipulations currently going on in the market. Ajit Day, a former president of Calcutta Stock Exchange, wondered how all caution could have been thrown to the winds when the 'B' group stocks started accelerating.

"Historically, that is one of the surest signs that the market is heading for a saturation somewhere down the road. It had happened during the time of Harshad Mehta and it had happened so many times subsequently. But nobody seemed to care," he rued.

The Indian stock market has been a study in repetition. There is also no dearth of blames or no crisis of critics either. But let's put a few things straight. Initial and follow-on public offers — known as IPOs and FPOs — have raised a record Rs 45,000 crore in 2007. This was nearly 83% higher than the Rs 23,600-crore mop-up in 2006. In 2007, there have been a total of 101 IPOs that mobilised in excess of Rs 34,000 crore.

This was followed by the Reliance Power IPO in January 2008, an issue that attracted Rs 44,000 crore from 50 lakh retail applications. Historically, secondary markets have been known to fall in times of huge primary market mobilisations, specially in a firm market where profits get booked.

Some market players believe this could just be another of those phases. According to this section, correct handling of the situation could see a recovery later this week itself.

The Indian psyche vis-a-vis stock markets is essentially bull-driven. One just loves to see the market rising. So when the Sensex touched 21,077.53 points on January 8, there was already a talk of the 25k level. "Between July 6, 2007, and January 8, 2008, the Sensex had gone up all of 6,000 points from 15k to 21k. We had gained 4,000 points from 10k to 14k between February 6 to December 5, 2006, and then a drift for seven months till July, 2007, from where in six months, the Sensex had shot up 5,000 points to 20K on December 11, 2007.

The index added another 1,000 points early this year. So what's the fuss about if instead of a customary one-third technical correction, it has retraced almost a full-way back?" asked one of the biggest bulls based in Mumbai. According to him, the correction augers well for the market if there are no more bad news from the US.

It is a pity that the stock market is now bereft of an entire community, a clan that traditionally used to come in handy at times of free falls such as these — the bears. Classical bears like Manubhai Maneklal or Debu Bhalotia don't come by the dozen and yesteryear players like Giridhari Kejriwal, who could play both bull and bear with the same elan, are also limited in number.

It's largely a one-way street these days, although one of Mumbai most talked-about bulls has recently been known to have turned short from around a level of 17-18k and may have paid the penalty for the experiment.

But while marketmen hope the fall is arrested as quickly as possible, they also think it is necessary to have some checks and balances in place to avoid the retail investors from getting mauled.

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Woes of the West should not worry us: FM

NEW DELHI: Finance minister P Chidambaram chose to temper down concerns of rattled investors, exuding confidence in the strong economic fundamentals of the economy.

In a bid to boost investor confidence during the frenzy in the markets, the FM on Tuesday reassured investors that the fundamentals in the economy were still strong.

Mr Chidambaram said, "Worries of the western world should not be allowed to overwhelm us." There is no ground for sentiments to be negative in the long run as fundamentals of Indian economy are strong.

"We will grow at 9% this year. Even the Rangarajan Committee of the Prime Minister's Economic Advisory Council has said we will grow at 8.5% next year," he added.

 

"We had anticipated that markets will open today (on Tuesday) on a downward note and may hit the circuit breaker," Mr Chidambaram said in New Delhi, after exchange authorities suspended trading due to a fall in stock prices, minutes after the bourses opened.

"I am assured by RBI and all the banks that enough liquidity will be provided to brokers and market players. Liquidity will not be an issue," Mr Chidambaram said. Banks have reported that investments in the economy are running very high as the demand for credit is strong, he said.

"RBI has stated that investment in pipeline is also strong. Fundamentals of the economy are very sound. Corporate profits are high and corporate income-tax is at an all-time high," he said.

Mr Chidambaram refrained from advising whether institutions should buy stocks, and said, "We are not advising institutions to do this or that. Institutions are good judge of what are valuations today." However, he said analysts and advisers have advised investors to stay calm. Ahead of his visit to Davos for the World Economic Forum, he exuded confidence that investors would return to market as fundamentals of the economy were strong.

Retail investors typically contribute 10% to 20% of their purchase, with brokers providing the remainder. When the market slumps, the initial 10% investment is wiped out, so financiers demand cash deposit, a margin call, or sell the client's remaining holdings to recoup the losses.

"I am sure investors will take informed and matured decisions and not give any room to unwarranted apprehensions and market rumours," he added.

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What to expect from Fed's March 18 meet?

All eyes are now on the Fed meeting on March 18. What are the key risks for the US economy and what should policy makers watch out for? 

Timothy Geithnerm, President, Federal Reserve-Bank of New York said, "The critical risk in the outlook now remains the potential for these strains in the financial markets to have outsized adverse effects on the economic activity particularly by exacerbating what is happening in the housing sector. It is important to see that the monetary policy and other tolls that we have are used proactively in monitoring these risks."

Diane Swonk, Chief Economist, Mesirow Financials, said, "I think that no matter what the employment numbers come out. I think it would have looked very strong for them to cut before the numbers come in. now. At least they have the chance to do that tomorrow as they are going to get the employment numbers and I think they are going to move 75 bps in the next meeting and I think they have very much the sense and they have the inflation marks that are clearly disturbed out there. But at the end of the day it is the most powerful tool and they will have to keep using it."

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What does SGX Nifty indicate?

For the past few days and weeks, an important indicator of how we open up trade has been the SGX Index and how things are shaping up there. Has that come backed up with volumes and does some of it have to do with the fallout after the P-Note episode?

Over the last two years, there was no SGX Nifty and the trading and volume that has come up is only in the last two years. Since the P-Note saga, the increase in volume as well as open interest has been significant.

Since September 2007 up to March 2008, the increase in the value of the domestic futures, the value of the index futures in the domestic market has been around 1.5 times. The FIIs trading in index futures, in September it was around Rs 18,500 crore, in October it was around Rs 18,000 crore, but in March it increased to around Rs 26,000 crore. So, there has been an increase of around 1.5 times.

SGX Nifty, in September the total open interest value, which was around Rs 1,500 crore in September 2007 increased to around Rs 4,000 crore in October 2007 and now in March 2008 stands at around Rs 7,800 crore. That means a significant five-tenths increase since September 2007. It also has been backed by a good increase in volumes, which has increased around 5 times. The number of shares that were traded on the SGX Nifty was around 1.8 lakh in September '07 compared with March '08, which is around 10 lakh shares.

The Singapore Exchange has been increasingly taking some action wherein they can decrease the lot size. If you just go back and understand one thing that earlier the SGX Nifty's lot size was around 10 and now they have decreased it to 2. That means the cost of buying one lot on the SGX Nifty was around USD 47,000, has reduced to around USD 9,400. That is based on today's price. So, they are taking steps to decrease the cost and there is a gradual shift happening on the Singapore exchange. That is why this is an important indicator that we have been tracking on a daily basis.

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Investments- Senior Citizens and Investments

Senior Citizens and Investments 

Like most budgets, this years' too had some minor measures that haven't attracted too much attention but are nonetheless interesting. One such measure has been the inclusion of the Senior Citizens Savings Scheme (SCSS) into Section 80C. Why is this interesting? Because it offers a significant new tax break to older people who still have an income but are short of options on saving taxes. Let me explain. The SCSS was introduced in 2004 budget. It is a deposit with the government that is serviced through the post office and is available only to those who are older than 60 years, or 55 years for those who have taken a VRS. The deposit fetches interest at the rate of nine per cent, which is a great return for a safe, government-guaranteed investment. Until now, this deposit had no tax-saving angle to it. Money put into it did not get the depositor any kind of a tax break and the interest earned was fully taxable. Mr. Chidambaram has changed this in this budget. Now, investments made in the SCSS get deducted from the investor's taxable income under Section 80C. Of course, this is a part of the overall limit of Rs 1 lakh that all section 80C investments must fit into. However, some of the options that normally make up younger taxpayers' 80C investment basket are either unavailable (like PF) to many older ones or are considered too risky (like equity ELSS funds) for them. Any senior citizen who is still working, or receiving income from a business or investments would want to fully utilise the 80C tax break. Given the much higher tax exemption (Rs 2.2 lakh) that the finance minister announced in the budget, the tax burden for low- and middle-income seniors is now very manageable indeed.

However, this brings to my mind to what I believe is a common flaw in the way we generally think of senior citizens' investment needs. It seems to be a matter of deep belief that equity is too risky for older people and their investment needs must be met by fixed income alone. This, I believe is a mistake. The risk in equity is a function of time. The longer your period of investment, the lower the risk from equity. Of course by equity I mean equity mutual funds with a good track record and not punting on 'tips'. Over long periods in excess of ten or fifteen years, the risk from sensible equity investments is practically negligible and the benefit of big returns is enormous. A sixty-year old senior actually has a very long investment horizon of twenty or thirty years. As a matter of fact, not investing anything in equity-based instruments leaves seniors exposed to a different and more insidious risk-that of inflation. Remember, unlike a youngster who will probably earn more as the years go by, a retired senior is entirely dependent on investment income. Fixed income instruments, whether fixed deposits or debt mutual funds or post office schemes rarely deliver more than one or two per cent above the inflation rate. Remember that your real personal inflation rate is likely to be higher than the official one, specially when you take into account increasing medical expenses. When you think carefully, you will realise that not investing anything in equity leaves seniors exposed to the real risk of becoming poorer as the years go by. I'm not saying that a senior should invest primarily in equity. The right approach would be to try and estimate the actual spending requirements over the next seven to ten years and keep that in fixed income instruments. The remaining amount is your long-term holding and there's every reason to put around half of that in equity. This is probably best done by splitting that amount between two or three balanced funds.

Remember, over a genuinely long-term, equity offers an extremely good risk-to-reward trade-off and there is no reason for seniors not to take advantage of it.

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