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| Daily Jurojin - Wednesday, May 20, 2009 |
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Wednesday, May 20, 2009 When calamity strikes and your checking account is lowTuesday's U.S. housing starts where precisely a lesson in why it doesn't pay to be overly optimistic. The excesses of the booming years for construction, which saw over 2 million homes built in 2006 are coming back to haunt the economy. Housing starts dropped to an annualized pace of 458,000 last month. While progress continued in the single-family home arena, apartment and condominium projects were inexplicably short of estimates, while building permits - a leading signal of the construction market's health - also indicate more bad news to come in the future. The equity market lost its shine as investors fumbled for excuses, yet it took all day before it fell. As regular viewers will know, we here are remarkably suspicious of the equity market recovery not least because the so-called green shoots of recovery appear a rather funny color to qualify for green. Hmm. Investors have made that leap of faith that since the data isn't getting any worse, it must be set to get better anytime soon and thus it's time to celebrate! Egged on by words of comfort from some central bankers hoping to cradle investor's feelings in cotton wool, investors have been spurred on by relief after the U.S. banking stress test results left financial companies courting private investors rather than tapping the central bank for more funds. Tuesday's revelation that Goldman, JPM and Morgan Stanley want to get the government off their backs by repaying their TARP butt-plug, had investors in a frenzy. Who can blame investors for getting excited when it would appear that Warren Buffett has been filling his boots too? But it appears that cash is getting low at his Berkshire Hathaway investment vehicle. He says that having depleted a large cash hoard that was $47 billion just eight months ago he's calling to a halt equity purchases that averaged $2.9 billion each quarter for the last four years. For investors taking a queue from the Sage of Omaha, here's a notion. He's not been buying stocks in the same old way he's always done. He's been buying what he considered distressed situations and building a printing press that would generate Berkshire Hathaway income of around $1.8 billion per year. Investors blindly following his lead across the entire market should take note of this observation. Buffett now says that he's stopped buying stocks because he's running low on cash, saying that $10 billion is the minimum he wants to sit on for fear of a calamity-style event. Indeed Buffett's recent purchases have been unconventional. At the end of 2008 he sold shares in Proctor & Gamble, Johnson & Johnson and ConocoPhillips - share he wishes he still owned. He ditched them to trade up to preferred equity in General Electric and Goldman Sachs, commanding a 10% dividend in each. In addition, the deal came with a nice little string attached that allows Buffett to buy more stock at some point in the future should he choose. He struck a similar bargain with Swiss Reinsurance Co. Inc. while he bought juicy bonds on Mars Inc. and wallboard-maker USG Corporation. According to one source at the time, Buffett made a hurried 20-minute decision to buy the chunk of GE at the time and if memory serves us right, that price was $22 per share. Subsequently shares reached about $5.50. So while Buffett might carry an irrevocable mantle earned from a lifetime of buying and holding solid companies, he'd be the first to admit that he's no day-trader and has no conception of market-timing. His strategy was largely different than those of you who would call this a brave new bull market. Buffett tackled a cash flow requirement subject to certain criteria. We think that's a little different than simply announcing a death to the bear market. Don't you? The Supreme Council of the Secret Order of Jurojin |
