In this issue:
» Buffett's portfolio takes a big hit
» Bank bailouts in the offing
» World's economic engines slowing down
» Oil's sharp decline
» ...and more!
Not even Warren Buffett, the world's preeminent stock picker, could avoid losses as markets around the world tumbled last week. A 21% decline in Coca Cola and 18% in Wells Fargo has caused a 17% decline in his portfolio in the week gone by. In all, the losses amount to a whopping US$ 10 bn. Overall, Berkshire's stock price is down 20% this year (compared to S&P 500 Index's 39% decline), its first annual decline since 2001 when it fell about 6.2% and second since 1965.
||Buffett's portfolio takes a big hit
So is Buffett worried? For someone who's held on to these stocks for almost two decades now (he bought Coca Cola and Wells Fargo in 1988 and 1990 respectively), weekly declines like these do not ring panic bells. In fact, Buffett has said so many times in the past that he views market declines as opportunities to invest.
And he's walking his talk. Known for picking undervalued companies with durable advantages over competitors, Buffett has invested a total of US$ 8 bn in preferred shares of Goldman Sachs, the most profitable Wall Street firm, and General Electric Co. that pay a 10% dividend. This means that these investments will earn Berkshire US$ 800 m annually unless these companies were to collapse, which seems highly unlikely.
"Wells Fargo had a small decline in earnings because of the popping of the real estate bubble. Nevertheless, I believe its intrinsic value increased relative to competitors," he says.
And this is what he had said while making the decision to buy Wells Fargo way back in 1990 - "Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks. The disarray was appropriate: Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled - often on the heels of managerial assurances that all was well - investors understandably concluded that no bank's numbers were to be trusted. Aided by their flight from bank stocks, we purchased our 10% interest in Wells Fargo for $290 million, less than five times after-tax earnings, and less than three times pre-tax earnings."
Isn't the current situation similar to that of 1990? There is a chaotic market in bank (and financial) stocks. Foolish loan decisions of once well-regarded banks are daily put on public display. One huge loss after another is being unveiled. Investors don't seem to trust banks' numbers. And Buffett is buying bank stocks - only those that have strong competitive advantages, best managers at helm, low leverage and generating high return on capital.
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With credit literally freezing as banks become vary of lending to one another on fears of more losses on their books, governments across the developed world are looking to assume control. Just as the subprime crisis was born in the US and spread to Europe, so has government intervention spread from the US shores to countries around the world.
||Bank bailouts in the offing
A country that prided itself on its free market mechanism and least government intervention is now being forced to painfully watch this situation reverse. And the US$ 700 bn bailout package that was passed in the US has in some sense 'inspired' European central bankers to also swing into action and buy stakes in their important banks so that they can function normally. The numbers are staggering. Britain is pumping in £ 45 bn in four of its top banks. Australia and New Zealand have guaranteed bank deposits, Indonesia has raised its bank guarantee and India plans to inject more liquidity into its financial system.
Interestingly, Asian nations are being called upon to impart advice on the reshaping of the financial world. Readers would do well to recollect the fact that the Asian economies badly burnt their fingers in the crisis of 1997 causing them from thereon to pile up huge amounts of forex reserves. Given that developed countries are running helter-skelter to raise cash, the strong reserves of these Asian countries give them an edge indeed!
No, this isn't a countdown for the unfolding of some big event. Rather, the numbers denote global economic growth rates of the past as well as the future. IMF, in its world economic outlook last week, has projected global growth to slowdown to 3% next year. The same stood at 5% in 2007 and is expected to grow at 4% in the current year. This is because two of the biggest engines viz. American consumer spending and growth in emerging markets are showing signs of sputtering, thanks to the credit crisis. American consumers, on aggregate have turned poorer by US$ 2 trillion from decline in stock markets alone. This is going to have a big impact on their psyche, forcing them to go into a shell and postpone discretionary spending.
As per Bloomberg, the US consumer spending, after growing uninterruptedly since 1991, finally gave way last quarter in the face of rising unemployment, declining wealth and tightening credit. This has even led to some of the experts predicting that the world could be headed for a worst recession since 1991. It has to be borne in mind that the IMF defines growth of 3% and less as a recession. Hence, by that yardstick, 2009 could likely end up being a recession year.
What made headline news a couple of months back is now on the back burner amidst the more important news of central banks acting to save the world economy from shifting into a deep slump. We are talking about crude oil prices, which have declined by almost 45% since hitting their all time high of US$ 147 a barrel in July 2008. A barrel now costs US$ 80.
The sharp decline in oil prices has been brought about by expectations of slowing demand on the back of deteriorating economic conditions worldwide. The International Energy Agency (IEA) has in fact projected that global oil demand will rise a meager 0.5% in 2008. This will be the slowest annual rise since 1993, when demand actually declined by 0.2% YoY.
Now what is interesting here is that experts who were predicting a US$ 200 a barrel of crude have slashed their target by a whopping 75%! Goldman Sachs, which came out with its famous US$ 200 a barrel prediction for crude, now says that the commodity is more likely to be at US$ 70 at the end of this year. And it might even go to US$ 50 a barrel if the turmoil cuts deeper into the demand for oil.
We find it ironical that the super spike report came out when the crude price was climbing rapidly towards its all time high. Now that there is a slump in the prices of the commodity, the same firm does an about turn in its views. Now this makes even fortune-tellers look good!
Hopes of tangible benefits emanating from last week's rescue packages announced by the US and European governments have aided the global stock markets today. Indian markets recovered sharply from the meltdown seen last week, as the benchmark BSE-SensexBSE-30 index gained almost 800 points. Statements on the strength of the financial system from the Finance Minister also went a way in soothing nerves in India today.
||In the meanwhile...
Strong gains were also recorded in other key Asian markets. Leading the pack were the indices in Hong Kong (up 10%) and Singapore (up 7%). European markets have also opened in the positive.
Gold prices in India fell today on the back of a weaker dollar. However, buyers of the yellow metal remain on the sidelines probably expecting a bigger fall. As a matter of fact, gold has an inverse relationship with the US dollar as the two compete for funds.
In the meanwhile, inflation figure as reported late last week have is currently at its 15-week low. The Wholesale Price Index based inflation for the week ended September 27 has come in at 11.8%, down from the 11.9% rate recorded in the preceding week. Apart from the decline in crude oil prices, inflation has declines on the back of lower prices of farm products such as fruits, vegetables, pulses and cereals.
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett
||Today's investing mantra