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Swim naked
The crisis of global liquidity stress tests yet of the financial system and various institutions around the world continue to reveal wrongdoing after another. As liquidity dries up, however, we learn that he has been swimming naked, ie at risk in a way far beyond conventional standards. Some of these companies seem to be favored by the legendary value investor Warren Buffett, which calls into question the basic assumption on Wall Street, namely that stocks at the end always go up. What if it's different this time?
We know that we are beginning a recession, but may also be at the beginning a new paradigm of social, political and economic change the face of the world. An Age of austerity and reduced expectations in the West is likely, but may have some hidden benefits. They also speculate that the new economic order can be characterized by three billion individual investors looking for performance, not growth.
Detail
If I wanted to throw in their lot with the "Oracle of Omaha" Most Viewed investors the world and decided to buy some shares of Berkshire Hathaway in December that could have paid $ 150,000 per share. Buffett has not divided the population, it was trading around $ 8 in 1962, and will not please the short-term investors and traders. On Thursday (11/13) between 11:15 am and 14:30 ET actions of one of the best holding companies in the world could be had for less than $ 100,000 per share, a discount of 33% from peak. The shares were unchanged at this level for two years.
Buffett has become the poster person responsible for investing in one was irresponsible. It is also known for not trying to anticipate market, but rather to take advantage of market weakness and irrationality to pick good stocks of companies at a discount.
American buy?
On October 17, amid one of the most terrible months in global financial history, Oracle made it clear in an article Op Ed in the New York Times he was buying the drop in U.S. market and overweight domestic stocks in his personal nonperforming irrational pessimism did prices down. Buffett was putting into practice his famous phrase: "Be fearful when others are greedy and greedy when others are fearful."
Previously, Buffett had no stock in that portfolio, bonds only, so that the switch in the allocation of assets is doubly underlined. Moreover, Buffett, who once described himself as being born "wired to allocate capital," specifically mentioned that he preferred securities U.S. on international names.
Buffett personally, and strict value investors generally have a well-deserved reputation for investors of last resort. It was the implicit approval of the credible and fiscally conservative figure who led Goldman Sachs and General Electric to make good advertising deals financing with Berkshire. Buffett bought $ 5 billion of Goldman preferred stock return of 10%, while paying $ 125/share. Buffett also $ 3,000,000,000 bought 10% of General Electric preferred shares at $ 22. Goldman has fallen by half since the deal was struck, while GE is off about 50%.
Meanwhile, some major Berkshire holdings also in serious bear markets. The holding has an important position in American Express (up to 65%), CarMax (70%), Gannett (90%), Moody (60% reduction) and Wellpoint (60% reduction). To be fair, Buffett not consider a 1 month, 1-year or five years path for a sufficient time to evaluate more than one investment strategy. For Warren, the current carnage Noise is just emotional. Goldman and its franchisee understands after running Salomon Brothers for a few years and assume that has little doubt about GE's wide moat and capacity to compete effectively in a number of companies in the future.
However, Buffett's endorsement was not enough to guarantee the solvency of General Electric. The company found it necessary to ensure the temporary support of the Federal Deposit Insurance Corp (FDIC) for up to 139 billion U.S. dollars due to obligations in their division financial. Whereas all of GE has a market capitalization of $ 168 million, not presumed catastrophic risk to the solvency of the business transaction leveraged finance.
Still, few doubt Buffett's decision for the long-term decision and we respect their values-based approach. value purchase, even temporarily unrewarding, is a proven strategy in the long term. Buffett once said that his favorite holding period of a population is "to forever, "but is not a replica of absolute rule. not you regret selling on the bubble of 1990 and sold its stake in PetroChina (PTR) after fivefold.
Naked Swimming
Buffett's investment approach, the value is sometimes used to justify the end perennially bullish stock market, however. An aspiring expert and Buffett-beige so to speak, "The key measurement is on the comparative performance for market. If, over time, becomes more than the average when the market is up and lose less when it is down, you have nothing to worry about the long term. "In Really? If there is a dogma on Wall Street, this would be it. Put another way: "In the long run, markets always go up."
We think it would be prudent to qualify the statement. To begin, we might ask: "What market?" Considering the Japanese Nikkei, has been falling for 18 years. The country has not been in a depression, although the stock market in the nation has continued to deflate. Adjusted for inflation, gold is half its 1980 peak. Then there is the Saudi Arabia market values, which peaked in March 2006 around 20,000 and was trading around 10,000 in May this year when crude was more than double to $ 140/bbl. There seems little point, but there it is. A lot is going to make a market and not necessarily end up doing higher highs.
The financial seas are producing … and paradigms are changing along with them. In the same at least the social perspectives and economic policies for the next three to five years has been materially altered by the process of global deleveraging, which is the biggest bubble relax credit in world history. As liquidity dries up, we're finding that has been swimming naked. Bear Stearns was among the first to be discovered, and makes one more example appropriate metaphor, when the company was embarrassingly short when it was liquid assets.
The next era of austerity
On the contrary, we believe the market is headed for a period of austerity caused by new regulatory requirements to increase transparency, accountability accountability and frugality. We are entering a period of diminished expectations both economically and socially. Regulation will operate as a speed limit of 55 mph on the road economic, crimping profits in favor of a more stable economy. As a consumer society, we're not immune from the Great Deleveraging, so Treasury Secretary Paulson plans to spend some money to rescue Wall Street directly to the main street.
As house prices does not recover, a lot of average road retailers go bankrupt, creating a consumer society more polarized than at present, with Wal-Mart on one end of the Tiffany's Bar and on the other. The municipalities will receive more efficient public services that once took for granted will be more costly and less frequent or disappear completely. Postage stamps, refuse collection fees, sales taxes and property taxes will become prohibitively expensive for some citizens. Rent be preferable to property in many municipalities, most depressing property values.
As the country turns inward to heal their wounds, a isolationist approach will become dominant, reducing foreign aid budgets and the military. A populist ethos will dominate the political scene, but credit will be difficult to achieve. The economy will become "cool", cash will be King and action will be the first neglected and rejected then, as a sustained period of apathy reaches Wall Street. Established social institutions, from universities to private philanthropic foundations, will be challenged to survive and many are extinguished when the funding dries up.
Unemployed bankers, brokers and enter law school in mass participate in the process of litigation lies the Great of the credit debacle, as company after company is held accountable for fraud, statement false trust and embezzlement. Standard & Poors will eventually be discredited and go bankrupt, taking down with it McGraw Hill, and the S & P 500 will be called to represent a new standard on Wall Street. A new era of fixed-income investment will replace the hedge fund driven speculation. The funds will be assessed on up prior historical achievements are considered, as the return of the triumphs of return on equity capital.
And if we are to speculate further on social change, we see some interesting possibilities. For example …
Grass Roots Society
With tensions rising aid programs, families can reaggregate dispersed, such as children living with their parents and grandparents are welcome back at home as a value that provides the network family safety. A new recognition for the most profitable, welfare and natural medicine aimed at prevention may be needed to curb rising costs healthcare in an aging society.
Micro entrepreneurship can flourish focuses on local opportunities. Residents can known again as a popular economy is restored. Waste and conspicuous consumption may be less tolerable. Bicycles and motorcycles cars could be replaced in many cities as speed limits are reduced to accommodate a vulnerable population and a slower pace of life. Community gardens and farmers' markets can become centers. We might see a greater sharing of local resources and staff rather than an emphasis on individual property investments reflecting institutional socialized made by the government in various industries.
As our army is reduced and reoriented away from foreign intervention, the soldiers could be deployed in dangerous neighborhoods to protect the citizenry and discourage organized crime in the street and rebuild neighborhoods. Meanwhile, drug trafficking and Prostitution may be decriminalized and licensed because states simply can not afford to prosecute the criminals and the home of so many.
In Trust cede
In the investment horizon than we can imagine that global growth will resume at some point, but the epicenter found in other nations than our own. Fortunately, a 4G network communication around the world to facilitate the allocation of assets to any market for any person an iPhone or laptop anywhere in the world 24 / 7. CDs denominated in foreign currency will be common, so people are able to find safety and performance quite easily.
Governments and global funds to compete on performance, the generation of massive flows of capital of three billion small investors. Fees and commissions in most financial transactions shall be nominal or waived completely to facilitate the flow in a highly competitive environment where cash deposits and assets are highly valued.
For now, we have a rally in the market as it bounces off lows in October. Again, recommend the sale of shares of poor performance or no performance in force. We do not know how long it will last or how far they will run, but we believe the market bassist has ended. Our forecast is that U.S. stock prices to be 40-50% lower in 12 months.
Published weekly by the spear Report www.spearreport.com
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Since 1995, The Spear Report has published a weekly newsletter that has guided investors with our unique Consensus methodology. We also offer a daily Professional Edition, an Options newsletter, an ETF newsletter, and a Security Industry newsletter.
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