When Warren Buffett speaks, Wall Street listens. The Chairman and CEO of Berkshire Hathawayand the man generally regarded as the greatest investor of our time rarely gives long interviews. When he does, I grab a pencil and paper and take notes. Seldom will Mr. Buffett recommend a specific company because he knows how his comments can make or break a corporation and therefore the shareholders who own it. But he does speak more broadly about the economy and many of the factors that influence his decisions. As Blue Collar Investors, it behooves us to have a general understanding of what’s going on with the economy and Warren Buffett’s opinion should be considered.
Two weeks ago, Becky Quick interviewed Warren on CNBCs Squak Box for a rare 3-hour interview.I came away from this discusssion with the understanding that he felt that the tough economic times would continue for the next several months or even longer ( he never specified a time frame). But he was also positive about our economy in the long run and has remained invested in the stock market. After all,he is a long term investor and feels these downturns are inevitable. As a matter of fact, he suggests that these difficult times oftentimes bring about bargains for investors.
On the Economy:Excesses in Credit:
- Problems started with inappropriate home lending that funneled into the financials.
- The credit crisis culprits are slowly being revealed.
- Wall Street firms did the wrong thing or just didn’t know what they were doing.
- All problems were not revealed initially, so many investors do not trust “The Street”.
- The retail sector and retail trade is in decline and this is NOT over yet.
- He sees a further slowing of business and the decline will be “longer and deeper”.
- This WILL turn around but not in the next several months.
On Fannie Mae and Freddie Mac:
- These agencies have a two-fold mission:
1- They insure mortgages on a huge scale.
2- They run a huge hedgefund where they buy mortgages and borrow against them.
- They operate with the backing of the US Government.
- They can borrow without the normal restraints like capital and margin requirements.
- They have dual, contradictory missions:
1- The government encourages them to promote housing almost under any circumstances.
2- Stockholders expect share appreciation via earnings acceleration.
- Numbers were skewed to create the image of a sound financial entity via accounting fraud (remeber Enron, Tyco and those characters?).
- They just couldn’t deliver the earnings that shareholders expected.
- They wrote insurance at the WRONG price. When these agencies wrote insurance to guarantee the credit of trillions of dollars worth of mortgages (and charged a premium for it), they got the WRONG price for it.
- The hedge fund aspect of these agencies borrow and lend money. This works if the spread is maintained. It doesn’t work if the underlying assets crumble. This aspect of the business failed as well.
- They are too big to fail but share equity can get totally wiped out.
- These agencies have no net worth and wouldn’t exist without the backing of the US Government.
- Fannie and Freddie WILL survive but shareholders will get crushed.
- There is not enough cash in the private sector to bail them out.
- Get this: The Office Of Federal Housing Enterprise Oversight (OFHEO) is a federal regulatory body that was created to monitor Fannie and Freddie only. They have 200 employees and report to Congress. All these people looking at only 2 companies and they failed to protect us. When asked how this happened they blamed everyone but themselves for the inability to see the failings of these 2 agencies.
On Coca Cola:
- He did mention a stock! One of his long-term favorites. (KO) is a major sponsor of the Olympics and felt that this type of “happy” and “competitive” branding is a successful way to promote this company.
On China:
- This is a terrific area for business with many attractive investments.
- He will consider more inveting in this country.
On Debt:
- Debt can help economies grow.
- There is a temptation to overuse it.
- Should not spiral out of control as a % of GDP (Gross Domestic Product) or the world will say NO to credit.
- The world does trust the dollar but if debt spirals to 300-400% of GDP, the “party” will be over.
- Mr. Buffett does NOT believe that there is an upcoming debt crisis.
On inflation:
- Best to invest in companies and products that require little capital investment like a hair product that consumers will continue to buy even if the price goes up.
On Energy:
- Not interested in investing in energy at this time…the cost of oil is too unpredictable.
- The supply and demand for oil is about equal (86 million barrels/day).The world cannot produce more so more demand will create more price increases.
- We use about 1/4 of the world demand. We must use less oil!
On which candidate he supports for President:
- Barach Obama, although he disagrees with his stance on windfall profits tax on oil because he believes that the oil companies do not set the price of oil; it is a “world price”.
On The Federal Reserve and its role in this economic dilemma:
- The Fed has a dual role that are in direct conflict with each other:
1- Stimulate Growth in the economy
2- Decrease Inflation
- The Fed must deal with tough problems that have no obvious answers.
- Therefore, Mr. Buffett does not hold The Fed responsible for these problems.
On Berkshire Hathaway and Fannie and Freddie:
- Prior to 2001,BRK (currently trading @ $118,000 per share…I’ll take 1000 shares!) was the largest holder of Freddie.
- In 2001, Buffett got out because he felt that they couldn’t keep the promises they were making to Wall Street of 15% annual earnings growth and at the same time placate Congress by pushing money out to promote housing projects, even compromised ones.
On the U.S. Stock Market:
- The market has become more attractive as prices have dropped.
- Exports are increasing and now represent 12% of GDP as opposed to 5% in 1970.
- Buy on the “cheap” and think long term.
- He mentions the rail industry as an example of having a positive outlook.
Fannie and Freddie Addendum:
On Saturday, September 5th, Rep. Barney Frank (D.-Mass.) confirmed in a statement that Treasury Secretary Henry Paulson is set to put the federal government in control of the two troubled mortgage owners. This bailout and subsequent recapitalization will represent one of the biggest government rescues in U.S. history. It also confirms Warren Buffets assessment two weeks earlier. Let’s keep close watch on how this news is assessed by the institutional investors.
Last Week’s Economic News:
There was additional evidence of an economic slowdown highlighted by a 6.1% unemployment rate, the highest in five years.Strong productivity growth and modest wage growth helped moderate the inflation rate. The Federal Reserve’s “beige book” survey of its 12 districts, characterized economic activity as “weak,soft, or subdued”. For the week, the S&P 500 fell 3.2% to 1242 for a year-to-date total return of -14.1% (the word that comes to mind, although not professional or technical is YUCK!).
Finding a Gem in 15 Minutes:
Okay folks, start timing me…..
1- Go to the IBD Homepage (www.investors.com).
2- On the left you will see”IBD Stock Lists”.
3- Click on Screen of The Day which (this week) are top rated stocks for Financial
Efficiency.
4- I ran the top 20 (GILD through AMTD) through our sytem criteria. Please note that 3 of these (ARO, GYMB and TJX) are banned stocks (see page 138 of my book, Cashing in on Covered Calls).
5- 6 Stocks remained…ACL, TRLG, QSII, PEP, VAR, and AMTD.
6- Of these, ACL and VAR were in the best performing industries.
7- Since ACL is trading at a rather expensive $163 per share and VAR at a more reasonable $63 per share, I decided to hone in on VAR.
8- First let’s look at a chart of VARs Indusrty…the Medical Equipment Group:
VAR- Medical Equipment Group
I think you will all agree that it is not difficult to identify a trend here after a period of consolidation.
8- Now let’s view the StockCharts version of VAR:
VAR-StockCharts Version
CALL OPTIONS Expire at close Fri, Sep 19, 2008
CALL OPTIONS Expire at close Fri, Oct 17, 2008
Strike Symbol Last Chg Bid Ask Vol Open Int
70.00 VAR JN 0.42 0.23 0.50 0.55 14 406
75.00 VAR JO 0.20 0.00 0.10 0.20 20 50
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2 responses so far ↓
1 Robert Gardella // Sep 9, 2008 at 8:35 am
Hi, Alan,
Congrats on a great summary of Buffet’s comments. You continue to impress me.
2 Warren Buffett Analyzes the Economy in 2009 plus Cramer vs. Stewart // Mar 15, 2009 at 3:19 am
[...] year I wrote an article summarizing comments Warren Buffett made in a rare 3-hour interview with Becky Quick on CNBCs Squawk Box. Your response was [...]
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