Is Warren Buffett Implying the Stock Market Will Crash?
Stock-Markets / Financial Crash Nov 05, 2009 - 01:49 AMBy: StocksBuddy
Before we begin this article we would like to clarify that neither this article nor this site is associated with Mr. Buffett. Then why did we title this article that way. Continue reading and you will figure out the relationship.
Buffett’s big bet: $34B on 2nd-largest railroad
It’s a natural fit for the Oracle of Omaha, a city with a special place in railroad history. It was the starting point for the westward push of the transcontinental railroad. Today, Omaha is the headquarters of Union Pacific, and Burlington Northern trains rumble through.
In a statement, Buffett, whose investing decisions are carefully scrutinized by the world of finance, voiced confidence in the railroad industry.
“Most important of all, however, it’s an all-in wager on the economic future of the United States. I love these bets,” he said Tuesday.
There have been many articles around this and many have analyzed this in their own perspective. Some state that this investment suggests economy is improving while others suggest that such a big investment in this climate speaks the confidence of Mr.Buffett in the future of railroad and america. Others feel that stock markets should rally now because worlds best investor himself is investing after 60% run up. However, nobody might have analyzed this in the way we would like to present.
- Mr. Buffett does NOT time markets. So the statement that his investment suggests market should rally further is completely absurd.
- This investment also means that everything in the economy is fixed and that we are on our way to recovery. This is rubbish as well. This requires a lot of detailed thought… to follow in a bit.
- Buying at the trough — things aren’t going to get much worse. Anyone remembers Pier 1 imports where the investment went sour. Nobody is perfect and there are definitely ups and downs. You really cannot take cues from anyone so to speak.
Now coming to the actual analysis. Here’s what we believe is what his recent investment is telling us.
Did it ever occur to anyone that Mr. Buffett is actually “diversifying” rather than picking tops and bottoms? Current portfolio of Mr.Buffet consists mainly of Financial and services based companies. Having a cyclical play in the portfolio is always a nice idea.
The recent investment in a RailRoad clearly states that there is a huge Crash in financials ahead of us. Why?
Did anyone figure out why one earth did Mr.Buffett buy this HUGE stake when the stock already climbed nearly 80% from it’s lows in March? During the same time he invested in Goldman Sachs without any issues. So he could have diversified into railroads with half the money then itself. So why now?
If you were Mr.Buffett and were sitting with $34B in cash, what would you do? You would probably put it in a safe investment with decent return or invest in some company which you believe in. The problem is that current climate is so messed up that CANSLIM and Mr. Buffett value investment will lead you to less to 5 stocks out of 18000 stocks trading in the US. So, how do you find value in the current climate? You do not really have any other investment options left.
Ok, i will sit in cash. Yes, that could be another option which Mr.Buffett could have pursued, but he chose to invest in a completely different sector that is NOT a growth sector at all and only a cyclical play. Why? Doesn’t that imply sitting in cash is even worse than buying into a cyclic play? Mr.Buffet has always liked financials, latest investment in GS shows the same. Then why did he chose to invest in an extremely slow moving and cyclic play and NOT just chose to sit in cash? That clearly tells us at least a couple of things.
- $$$ is going to lose more value and hence sitting in cash is not an option.
- Sitting in cash has another problem in it that what if the banks vanish into thin air?
- If financials and other sectors were good enough, Mr. Buffett would have continued investing in those companies as he has been doing all along. Biggest bet of Mr. Buffett that too in a cyclical play tells us something.
Though NOT explicit, the above two points itself suggest us that Financials are definitely going to underperform in the coming months/years. May be a financial crash yet again?
Let us see if he is the only one kind of implying this.
Stung by the financial crisis, companies are holding more cash — and a greater percentage of assets in cash — than at any time in the past 40 years.
The trend appears to have continued in the third quarter, despite an improving economy. Of those 500 companies, 248 have reported third-quarter results. Their cash increased to 11.1% of assets, from 10.1% in the second quarter. Companies as diverse as Alcoa Inc., Google Inc., PepsiCo Inc. and Texas Instruments Inc. all reported big third-quarter increases in cash holdings.
If everything was just fine, why are so many companies just hoarding more and more cash? Do they know something that we don’t?
Mother of All Carry Trades faces inevitable bust
Noted economics professor has been stating this for a while and it makes complete sense. Whenever this carry trade turns sour, $$$ is going to rally ferociously. May be 10-30% in a matter of week(s). That will turn stock markets into another 1987 or 2008.
Then there is today’s FED meeting announcement.
Fed again pledges to hold rates at record-lows
A very simple question. If US economy was doing extremely well and if GDP is REALLY increasing as stated Here and if inflation is knocking the doorsteps in the form of Gold rises to record in New York and so is OIL, then why aren’t FED folks even changing their tone on such extremely positive improvements and inflation?
You may want to check out FED’s analysis
Simply put. Things are getting worse and stock markets are going to play the catch up game sooner or later. We do NOT advice any long positions in any market including commodities. Short whole heatedly and wait for the event to happen. Indications are painted all over the place. It’s just matter of time.
Conclusion
If you haven’t already read our analysis on Why Stock Market has been going up, you should check it out. Stock markets are hanging on a thin line of wire and when US markets trip over they will take world markets on a roller coaster ride that would be worse than what we saw in 2008 and early 09.
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