Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why Warren Buffett Could Be Back on the Money

Stock-Markets / Investing 2009 May 21, 2009 - 10:55 AM GMT

By: MoneyWeek

Stock-Markets

Best Financial Markets Analysis ArticleHas Warren Buffett lost the plot?

The Sage of Omaha’s recent track record hasn’t been too hot. And he’s had a fair amount of flak for getting some things wrong.
Now, reports Bloomberg, his Berkshire Hathaway holding company is cutting back on buying shares, after the firm’s cash levels have fallen to their lowest in more than five years. Will this prove to be another mis-step? Or is Buffett back on form?


The Sage of Omaha's wobble

Even the mighty fall occasionally. Warren Buffett, whose name alone has been known to move markets, has rather gone off the boil performance-wise recently. And more unsettling for his legions of supporters was that he did so for entirely the ‘wrong’ reasons.

Remember how he used to call derivatives “Financial Weapons of Mass Destruction”? Well, unfortunately for Berkshire investors, Mr Buffett had a bit of a brainstorm. He made a $37bn punt on selling ‘put’ contracts, i.e. betting on stock markets rising, which didn’t exactly work out as planned. Buying dodgy Irish banking shares and oil stocks when the price was well above $100 a barrel didn’t help either.

So he’s seen his halo dim somewhat, as his firm made a $1.5bn first-quarter loss. Berkshire’s shares are now 37% below last September’s level, and the company has been stripped of its ‘triple–A’ status – i.e. the top-notch credit rating’s gone. Meanwhile Buffett has lost his crown as the world’s richest man.
But surely, we’re all allowed the odd wobble. After all, the guy’s long-term track record is just about second-to-none – and it’s not as if everyone else did stupendously well last year. So it’s still worth watching what he’s been up to.

Warren Buffett hasn't lost his touch

Berkshire Hathaway’s first quarter filing shows that he bought into two of his favourite banks, Wells Fargo (NYSE:WFC) and US Bancorp (NYSE:USB). Indeed, in March, Buffett said that if he had to put all his net worth into a single stock, it would be the former when it slipped below $9/share.

Well, Wells Fargo is now $25 a throw, while US Bancorp has doubled from its March lows. So it seems the Sage hasn’t lost his touch. But I wouldn’t rush to copy him now - Wells is on a current price to earnings ratio (PER) of 17 times and yields below 2%, while US Bancorp looks even pricier. But both stocks could be worth keeping an eye on for the future.

A third notable Buffett buy is healthcare product giant Johnson & Johnson (NYSE:JNJ). It’s in an area we like – nice and ‘defensive’, i.e. less dependent on the economic cycle - and what’s more, the stock price has risen less than 20% from its low. On a PER for next year of just 11.5 times and a yield of around 3.5%, J&J still looks reasonable value. This looks a good one to pick up, though we’d wait for the next pullback.

But what about the bigger picture – why’s he cutting back on buying stocks now? Buffett says it’s because he wants to maintain a $10bn ‘calamity’ cash pot, and that his available funds are shrinking towards this level. But we wonder if he’d be so keen to cut back if stock markets had slid rather than rallied in the past two months. The key thing to remember about ‘value’ investors like Buffett is that when they’re buying fewer shares, it’s because they don’t think there’s much value around.

Three warning signs that the rally's nearly over

We’ve been getting increasingly wary of the stock market rally in both Britain and the States – though not Japan, as my colleague John Stepek explained both in Money Morning recently (Japan is a mess - but it's still a buy) and in the magazine this week.

And I’ve seen three more troubling signs over the last few days.

Firstly, the professionals have gone bullish again. It seems that “experts around the world believe the global economy has turned, with a sizeable majority now saying it will improve in the next 12 months”, says The Times’ Helen Power. The Merrill Lynch May fund manager survey found that seven out of ten investment managers are now buying cyclical stocks “that will gain fastest when the economy picks up”.

Even more concerning, that’s a total turnaround from last October when a net 60% of those surveyed reckoned the outlook was worsening. And the sentiment swing has been most pronounced in Europe, where a net 35% of respondents say the economy will improve over the next year, compared with a net 26% who said – as recently as April – that it would get worse!

Why’s this sudden optimism such a worry?

Whenever the professionals turn this bullish, it normally means it’s too late for the rest of us – they’ve already piled in. As Michael Hartnett at Bank of America Merrill Lynch says, “this rush to take on risk is reminiscent of bubble-like behaviour”. I’d go further than that - it looks like a sell signal.

Secondly – and in the light of the above, no surprise - everyday my inbox gets bombarded with press releases from more fund managers proudly announcing they’re launching new funds. Note this didn’t happen at the bottom of the market, but only after prices have risen by a third or more from their lows.

It looks like the classic case of trying to pull in the mug punters after the action has largely happened. And to make even more money for those fund managers.

Thirdly, this has just crossed my desk from Societe Generale’s James Montier, one of those analysts who’s not afraid to tell investors what they don’t want to hear: “Has the market rallied too far, too fast? The swift rebound in the markets is leading to rapidly vanishing deep value opportunities”. In other words, the bargains have pretty much gone. As Montier says, “I’ll soon be worrying about a value drought”.

That could be Warren Buffett speaking. The London/Wall Street rallies may continue for a while on herd-following panic buying. But when Mr Buffett starts hoarding cash, we’d be inclined to do the same.

By David Stevenson for Money Morning, the free daily investment email from MoneyWeek magazine.

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules