When Warren Buffett Goes 'All In'

When Warren Buffett Goes ‘All In’


November 5, 2009 Edition, Volume III

Inside Signature Update

- The Market – Warren Buffett Goes ‘All-In’
- The Economy – Economic Potpourri
- The Takeaway – Cautious Optimism is Still the Prudent Stance


THE MARKET – When Warren Buffet Goes ‘All-In’

The DOW broke the 10,000 point mark again Thursday in late trading to close at 10,006, suggesting Warren Buffett’s announced purchase of Burlington Northern (BNI) earlier this week may well be the most solidly bullish report the US stock markets have seen for months. Not only is the $26 billion investment the largest Buffett has made to date with his Berkshire Hathaway holding company (BRK.A, BRK.B), but it also marks the first time Buffet and his partner Charlie Munger have been willing to include Berkshire Hathaway stock as part of a deal.

Though Buffett is still sitting on an enormous amount of cash, measured in the tens of billions of dollars, he’s essentially ‘all-in’ relative to the domestic equities market. There’s little any other investor or government report could offer that would speak more boldly for the future of the US economy and investment market.

M&A (Mergers and Acquisitions) activity often confirms the strength of a bull market rally, and this week announcements, including Stanley Works’ (SWK) acquisition of Black and Decker (BDK), add weight to the term ’M&A paves the way!’. Expect more activity on the M&A front as cash-rich firms look to merge with others in an effort to increase sales and benefit from cost efficiencies – both lead to higher earnings and share values.

Ford’s posting of a $1 billion profit for the 3rd quarter on better-than-expected revenues lent an added measure of optimism for the US auto market. Ford, the only one of the ‘big three’ auto makers to turn down federal bailout funds, looks to post yet stronger 2010 and 2011 results. US auto sales, expected to lag following August’s end to ‘cash for clunkers’, have now posted monthly sales increases for August, September and October. The annual sales pace now exceeds the critical 10,000,000 unit mark for domestic manufacturers and suggests consumers are finally willing to replace outdated vehicles with newer models from dealer inventories.

Don’t be surprised to see Ford (F), now trading below $7.50 per share, to climb back to double digits. There’s still room for growth in the US stock markets for 2009 and recent activity is simply strengthening the case that 2010 will provide yet more for forward-thinking investors.




THE ECONOMY – Economic Potpourri

The Federal Reserve’s FOMC Statement released Wednesday added some focus to what must occur before interest rates are likely to increase, but not enough to strengthen the still-weakened dollar. The release once again affirms the Fed’s commitment to low rates for an extended period and support for a stable inflation environment.

Gold Bugs and other commodities speculators point to the report to strengthen their argument that the declining dollar will push prices higher; seemingly ignoring the Fed’s repeated focus towards a stable inflation environment. An article posted on Minyanville draws an argument for strong growth in precious metals pricing, and even discusses the International Monetary Fund’s (IMF) recent sale of 200 tons of bullion to India, but draws poorly supported conclusions. Gold Bugs, you’ve gotta love ‘em.

September’s ISM report (Institute of Supply Management) fueled hopes for stronger-than-projected 3rd quarter revision and 4th quarter GDP figures. Though the 3rd quarter number is already in at a positive 3.5%, the all-important revised figure isn’t due out for weeks. Consensus expectations have held at the 2-2 ½% level for the 4th quarter, but may update towards 3%+ as September’s manufacturing gains of more than 1% left inventory levels still lower than in previous months.

Lower inventories, coupled with increasing demand, equate to growing labor needs in 2010; in spite of a likely increase in the national unemployment rate to 9.9% when the Bureau of Labor Statistic (BLS) reports Friday morning. The turn around in the labor market is slow in coming, as it always is following deeply recessive periods, and will likely offer meaningful improvement in 2010, but 4%,5% and 6% unemployment levels aren’t likely to be seen for some time to come.

Though the ‘cash for clunkers’ program served to take advantage of dealer inventories and helped stimulate manufacturer and dealer employment levels, it didn’t provide the anticipated environmental benefit. Reports suggest that the $3 billion program will have reduced US oil consumption by only .2%, or less than $700 million (US News and World Report). Additionally, the program focused sufficient demand for certain models that dealers were able to sell them with little other financial incentive, and most buyers ended up paying more of a premium for the new vehicle (over what the same model could have been purchased for just one month earlier) than they received in added trade-in value for the old one.

In sum, the US taxpayer would have been better off, both long and short-term, had the Obama administration simply given money directly to auto manufacturers and dealers – it would have cost less and provided just as much benefit. Oh well…



THE TAKEAWAY – Cautious Optimism is Still the Prudent Stance

Expect further gains in the US equities markets, though not at 2nd and 3rd quarter double digit levels. Manufacturing and consumer goods are likely to benefit the most in coming months. Cautious optimism is still the prudent stance.

Don’t get caught up in ‘gold fever’ along with the Gold Bugs – it may make you feel all warm inside at first, but most often leads to disappointing results.

Look for more M&A activity to point to market segments for growth and opportunity

Don’t expect stronger dollar policies from the Fed or Treasury until after employment conditions improve by at least 2-3%.





Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC