Invest Now? Warren Buffett Answers
(Oct 17, 2008)
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In this issue:
» Buffett's message to investors
» The midprime crisis
» The oilmen huddle up
» Jet reverses retrenchment
» ...and more!
In an opinion editorial on the New York Times, Warren Buffett delivered an emphatic message -now is a good time to buy.
|| Warren Buffett's message to investors
When to buy?
Now that fear pervades the market, this is the right time to be greedy. Mr. Buffett says that the stock markets gauge the health of the real economy and react in anticipation. He supports his argument by going back in history and pointing out how the stock markets bottom out earlier than the underlying economy. By the time the underlying economy hits rock bottom, stock markets are generally already on their way up. "Market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over", he says.
What to buy?
Mr. Buffett advises investors to check financial leverage and competitive strength of companies before buying. If they pass the litmus test, one needn't worry about earning hiccups.
What to exit from?
Cash and cash equivalents. Mr. Buffett believes the worldwide bailout packages will be strongly inflationary over the next decade thereby eating away into the real value of cash. Of course, one expects him to walk the talk. Almost all the investments in his personal portfolio (personal portfolio mind you and not Berkshire Hathaway) are now in equities in sharp contrast to bonds earlier.
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Subprime is crisis of the past. Here comes its sibling. Of a larger size.
|| 'Midprime' brewing in the shadow of subprime
The US home loan market is estimated to be around US$ 11 trillion. Of this, US$ 1 trillion is the subprime market. What is called the 'mid-prime' is around US$ 1.4 trillion. They are between the subprime and the prime loans. These loans have a peculiar structure. For the first two years, only the interest on the loan has to be paid and then the principal portion kicks in. And that has started to happen now. While mid-prime loans are relatively safer than sub prime, they bear interest rates that are 0.5% higher than a prime loan. But what is in fact worrying is that home loan borrowers who are already running out of capacity to repay their mortgages are using credit cards to repay. This cannot continue forever. And may give birth to another trillion dollar crisis.
While the US Treasury may claim to have solved the problem through the US$ 700 bn package, it is little known that how many such packages will be needed to see the end of the crisis.
Oil prices fell below US$ 70 yesterday. That brought some cheer to the beleaguered US stock markets. Not so for the oilmen on the other side of the globe. The Organization of the Petroleum Exporting Countries (OPEC) has called for an emergency meeting next week to stabilize the falling crude prices.
|| The oilmen huddle up
It may be noted that the commodity has tanked nearly US$ 40 a barrel in the last three weeks. The main reason for the recent decline is the indication that demand for energy will slide along with slowing world economy. According to the US Department of Energy, US crude oil inventory has risen sharply as Americans are now driving less and consuming lesser fuel. In fact, natural gas prices have also slumped from their peak of nearly US$ 14 per thousand cubic feet (TCF) to lower than US$ 7 per TCF.
We believe lower crude prices bring much needed elbowroom for the economies around the world to build the foundation for the next round of real growth. However, the oil producers must be scratching their head. After all, crude price levels form an integral part of long term planning for projects and research on emerging technologies.
In what resembled like a late night soap opera, Jet Airways yesterday reversed its decision to lay off 1,900 employees in the face of mounting political pressure. The company's chairman, Mr. Naresh Goyal said he was unaware of the reasons for the sacking. The company's top management had independently taken the step to cope with adverse financial conditions. Apparently, the chairman was under no pressure from anyone to reverse the decision.
|| Jet's retrenchment plan crash lands
Air India, India's state-owned carrier is also seeking to reduce its workforce by half. However instead of sacking them, it wants to offer nearly 15,000 employees three to four years' leave without pay. With 33,000 employees, the carrier has among the highest staff to aircraft ratios of any airline. But given the political backlash, it is unlikely to fire anyone.
No doubt, Jet Airways handled the entire episode rather shabbily and it is perhaps time that Indian corporates stopped digging pits for themselves. But we wonder if this is another instance of the triumph of politics over economics all over again. If India's real economy - steel, power, automobiles, aviation etc - has to rise beyond its current abysmal standard, corporates and politicians need to take a hard look at how they engage. As things stand currently, companies are completely at the mercy of politicians of all hues.
In spite of mounting pressures, IT companies have not yet started handing over pink slips to their employees. However, freebies are being cut back as companies undertake massive cost control programs. Expenses such as laptops, stationery items, food and toiletries have been curtailed. The subsidy on canteen food is vanishing. Employees were provided the facility of daily pick up and drop. The same is no more a facility but a service, which comes at a cost.
|| IT companies saving for a rainy day?
The results announced by IT majors so far do not reflect the impact of a slowdown. However we wonder if the cost rationalisation indicates that they are saving funds to safeguard against a bigger global crisis?
However, Rick Wagoner, the current CEO of General Motors (GM) seems to be thinking otherwise. Strapped for cash in what could be termed as the worst auto market in 17 years in the US, the world's largest carmaker is making frantic efforts to forge an alliance with rival Chrysler. But the irony lies in the fact that Chrysler itself is not in the pink of health and it is the very same company that GM had earlier declined to takeover from the former's erstwhile owner Daimler. But the facts have changed and in the wake of rapidly declining sales, GM is burning cash at such a fast pace that it might well go into bankruptcy as early as next year. Although the company has firmed up an impressive turnaround plan under Wagoner, it will take time to come to fruition and hence, the urgent need to stay afloat until then. To make matters worse, the state of the US auto industry has become worse than even their most pessimistic assumptions, thus resulting in a severe cash shortage. Perhaps, the US government's proposed plan of bailing out the automakers with a US$ 25 bn plan is their last real hope. However, given the industry fundamentals, there is a strong chance that the company may survive but to die another day.
The markets in Asia witnessed a lot of volatility today and ended a mixed bag. While China and Japan managed to stay in the green, India (down 6%), Hong Kong and Indonesia (down 4% each) led the pack of losers. The BSE-Sensex and NSE-Nifty started the day on a positive note but after alternate bouts of buying and selling, steadily slipped into the red. Stocks in Europe however witnessed a rally on lower money-market rates and better than expected earnings from Internet major Google. US markets saw a strong rally yesterday and closed in the positive.
|| Two wrongs don't make a right...
Recession fears continue to take their toll on commodity prices. All major industrial raw materials have taken a hit on growing concerns over global recession. Most of the metals have lost nearly 20% to 40% in the last three months, with some of them touching their three-year lows. Aluminium is down by nearly 32%, tin by 39%, nickel by 40%, lead by 22%, zinc by 27% and copper is down by nearly 40%.
|| The commodity commotion continues
On Thursday, copper dropped almost 8% to reach its 33 month low. Zinc and lead fell by about 11% after data from the US showed industrial production posting the biggest monthly decline since 1974. Nickel fell by nearly 8%, while the price of Aluminium rose by 1%. In the past week, the price of gold have also been moving lower due to profit booking against losses in other markets. The price of gold declined to its one month low yesterday.
"The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate" - Benjamin Graham
|| Today's investing mantra
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