Looking back, the signs of a market tops and bottoms are so obvious. Hindsight is 20/20 and all that. When you’re in the middle of it all though, it’s not nearly as easy to see.
During the peak over the past couple of years a lot of records were made.
For instance, CEOs booking eight and nine figure paydays. The average bonus at Goldman Sachs passing $600,000. Thousands of part-time real estate flippers getting rich a bit too easily.
There were lots of them.
But a lot of that money was spent – err – squandered. It wasn’t saved. The smart money was saving. In fact, many of the world’s greatest investors were gladly selling out to the herd when things were getting a bit too crazy. Others were just waiting everyone out.
After all, that’s what the smart money does. They use the good times to save up and use the bad times to buy away. That’s why I like to say, to the saver goes the spoils. And right now, as the indices are retouching their liquidity crunch lows, the savers are moving.
I’m not going to give you some long-winded ants and grasshoppers speech here, it’s all pretty basic. Savers have money when no one else does. And spenders, who overspent buying assets, have to sell out to pay down debts, cover living expenses etc. (that is, of course, as long as the government doesn’t step in and change the rules to reward the spenders and punish the savers – a.k.a. bailouts).
That’s how savers buy low/sell high. It’s the essence of investing successfully. Yet so many people have a tough time following it.
Regardless, the savers appear to be changing their ways a bit. Some of the world’s biggest savers are buying.
They’re seeing the signs of a bottom (emphasis on signs – it’s still a bit early to be calling a true bottom yet) and tapping into their reserves. They’re taking this opportunity to buy assets which would have cost five or ten times as much less than a year ago.
Who are some of these savers, you ask?
Well, they’re some of the best investors in the world.
For instance, Berkshire Hathaway's (BRK-A), (BRK-B) Warren Buffett only opened up new positions last year in two stocks (keep in mind, he hasn’t been buying many stocks lately – he’s been making loans mostly). GMO’s Jeremy Grantham has quietly spotted something he’s “definitely” about to start buying. And the big money at China committed to plunge $25 billion into this asset without drawing much attention.
So let’s take a look at what spoils these savers are going after.
Buffett’s Bet on Wet
Warren Buffett’s track record speaks for itself. He entered this crisis with more than $40 billion at his command and he’s been gobbling up some fantastic deals ever since. Many of those deals, as we noted, were fantastic deals with unique structures (e.g. Goldman Sachs “synthetic convertible preferred” financing) and individual investors should not follow in behind with common shares.
Despite a number of great deals Buffett led his holding company, Berkshire Hathaway (NYSE:BRK-A), into over the past few months, he managed to buy into two positions that regular investors can to.
One of them was Constellation Energy Group (CEG, Financial). This well-publicized deal was part of a takeover deal. And it fell through when a higher bidder came along.
The other company Buffett was buying in the last quarter was common shares of Nalco (NLC, Financial). Nalco is a relatively small water services company (market cap $2.7 billion). It’s nothing near the size of the Coca-Cola’s and the Johnson & Johnson’s Buffett’s known for buying. But it has everything else Buffett looks for like solid cash flow, years of growth ahead of it, a “moat” protecting it from competition, etc..
Although only about 8.7 million shares of Nalco (currently trading for around $11.60) were picked up by Berkshire, it was good to see it uncover some value in the market somewhere. Who would have thought it would be on a global water infrastructure company?
It’s not only Buffett continuing to bet big though. Some other big savers have been waiting to for this opportunity.
Jeremy Grantham: “…I’m definitely a buyer”
By avoiding stocks for the last decade or so, Jeremy Grantham has been labeled a perma-bear. Now that the S&P 500 has fallen back to 1997 levels, he has been more or less vindicated.
So he’s been on the sidelines for a lot of the recent run and saving up for an opportunity like this. Now he’s starting to get “a bit interested” in oil and we’re close to the point where he says he will “definitely be a buyer.”
In a recent interview Grantham revealed (view video here) his thoughts on oil:
I thought that after 100 years at $16 a barrel, it had jumped to maybe $36 or $37 in real terms. And I think it has probably jumped again. It will be revealed in 20 years to what level. But my guess is $60, $65, maybe even $70.
But what people underestimate, even in the oil industry, is how volatile the asset class is. In other words, if the trend is $65, it is fairly routine for oil to sell below half, say $30, and more than double, say $145.
And people never get that. So you don't want to be too quick to buy into weakness or sell into strength, necessarily. But it can go a long way. But below 40, I must say, I do get a bit interested. And below 30, I'm definitely a buyer.
Now, I realize we’ve spent quite a bit of time delving into how much demand will be eroded by the economic downturn and there’s no reason at all to rush out and load up on oil, but he does raise some good points.
Oil is very volatile. It overshoots to the upside and to the downside. And now is probably one of the times it is overshooting to the downside.
The odds of a quick rebound in oil prices are still extremely low. There are massive stockpiles of oil sitting around ready to be sold on any uptick in prices. For instance, Frontline (NYSE:FRO) reported, “Trading companies are storing an additional 80 million barrels aboard 35 supertankers and a handful of smaller tankers, the most in 20 years.”
That’s a lot of oil to work through before oil prices can move up more than 10% or 15%.
From a long-term perspective, which Grantham certainly has, it’d be tough to get burned too badly buying oil under $30, which we’re not far away from. Grantham’s not the only one getting interested in oil now. China’s preparing for its post-crisis needs as well.
China Shopping Spree Continues
It’s no secret Russia is facing some problems. Nouriel Roubini, noted economist and front man for this crisis, has spoken at length at the problems Russia’s resource-based economy will be facing in the months ahead. Even Russia’s vast foreign currency reserves probably won’t be enough to allow the Russian ruble to ride out the storm very easily.
Despite it all, Russia still has what a lot of other countries want: oil and natural gas. And in bad times China has shown it’s more than willing to write some big checks to secure oil.
Even though oil prices have fallen another 10% in the past few weeks, the country hasn’t changed course. Yesterday China announced an oil-for-loan deal with Russia.
Under the terms of the deal, state owned China National Petroleum (CNPC) will loan two state-owned Russian oil companies (Rosneft and Transneft) a total of $25 billion in exchange for 20 years of guaranteed delivery of about 300,000 barrels of oil per day. This deal would have been almost impossible to complete a year ago. Let alone, at the relatively small cost of $25 billion.
Once again, a saver like China reaps the benefits patience and prudence can provide.
Searching for a Market Bottom
Now, I’m not about to tell you we’ve hit an official bottom. Grantham and Buffett will be the first to admit they’re probably a bit early.
At the Prosperity Dispatch, we’ve been over many signs of a market bottom. And we’re seeing more and more every day.
For instance, the latest one comes from a new book from Michael Panzer, When Giant’s Fall: Economic Road Map to the End of the American Era.
The book calls for the equivalent of economic Armageddon. According to its publisher, the book will show, among other things, the “ growing conflict and wars, shortages, logistical disruptions, and a breakdown of the established political and monetary order.”
I haven’t read the book and haven’t decided whether it will go on the “must read” list. But its publication does show us one very important thing.
You see, book publishers are in business to make a profit. They want to sell books that people want to read. As a result, they have to publish on “hot topics.” They want to sell to the masses – a.k.a. the herd.
So the important thing to note here is not whether the book’s predictions are right or wrong, it’s whether it sells well.
Remember, the doomsday books sell well when times are bad. They become top sellers when times are really bad and a bottom must be near. The opposite is true during good times. The overly positive books sell great when expectations are high.
I mean, imagine how many copies of the tech bubble classic, Dow 36,000, you’d be able to sell now. Not many.
Now, I’m not about to go “all in” (or think of telling anyone else to) just because a new book predicting a disastrous period is ahead of us. I will, however, add it to the list of “we should have known that was the bottom” candidates.
Its times like these, we can’t forget our mantra since all of this really kicked off last summer:
This may be the buying opportunity of a life time. Don’t forget there is the possibility for the buying opportunity in five life times to come along soon.
Despite it all, it is good to see some really smart money get interested and some really big money start getting put to work.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
www.q1publishing.com
During the peak over the past couple of years a lot of records were made.
For instance, CEOs booking eight and nine figure paydays. The average bonus at Goldman Sachs passing $600,000. Thousands of part-time real estate flippers getting rich a bit too easily.
There were lots of them.
But a lot of that money was spent – err – squandered. It wasn’t saved. The smart money was saving. In fact, many of the world’s greatest investors were gladly selling out to the herd when things were getting a bit too crazy. Others were just waiting everyone out.
After all, that’s what the smart money does. They use the good times to save up and use the bad times to buy away. That’s why I like to say, to the saver goes the spoils. And right now, as the indices are retouching their liquidity crunch lows, the savers are moving.
I’m not going to give you some long-winded ants and grasshoppers speech here, it’s all pretty basic. Savers have money when no one else does. And spenders, who overspent buying assets, have to sell out to pay down debts, cover living expenses etc. (that is, of course, as long as the government doesn’t step in and change the rules to reward the spenders and punish the savers – a.k.a. bailouts).
That’s how savers buy low/sell high. It’s the essence of investing successfully. Yet so many people have a tough time following it.
Regardless, the savers appear to be changing their ways a bit. Some of the world’s biggest savers are buying.
They’re seeing the signs of a bottom (emphasis on signs – it’s still a bit early to be calling a true bottom yet) and tapping into their reserves. They’re taking this opportunity to buy assets which would have cost five or ten times as much less than a year ago.
Who are some of these savers, you ask?
Well, they’re some of the best investors in the world.
For instance, Berkshire Hathaway's (BRK-A), (BRK-B) Warren Buffett only opened up new positions last year in two stocks (keep in mind, he hasn’t been buying many stocks lately – he’s been making loans mostly). GMO’s Jeremy Grantham has quietly spotted something he’s “definitely” about to start buying. And the big money at China committed to plunge $25 billion into this asset without drawing much attention.
So let’s take a look at what spoils these savers are going after.
Buffett’s Bet on Wet
Warren Buffett’s track record speaks for itself. He entered this crisis with more than $40 billion at his command and he’s been gobbling up some fantastic deals ever since. Many of those deals, as we noted, were fantastic deals with unique structures (e.g. Goldman Sachs “synthetic convertible preferred” financing) and individual investors should not follow in behind with common shares.
Despite a number of great deals Buffett led his holding company, Berkshire Hathaway (NYSE:BRK-A), into over the past few months, he managed to buy into two positions that regular investors can to.
One of them was Constellation Energy Group (CEG, Financial). This well-publicized deal was part of a takeover deal. And it fell through when a higher bidder came along.
The other company Buffett was buying in the last quarter was common shares of Nalco (NLC, Financial). Nalco is a relatively small water services company (market cap $2.7 billion). It’s nothing near the size of the Coca-Cola’s and the Johnson & Johnson’s Buffett’s known for buying. But it has everything else Buffett looks for like solid cash flow, years of growth ahead of it, a “moat” protecting it from competition, etc..
Although only about 8.7 million shares of Nalco (currently trading for around $11.60) were picked up by Berkshire, it was good to see it uncover some value in the market somewhere. Who would have thought it would be on a global water infrastructure company?
It’s not only Buffett continuing to bet big though. Some other big savers have been waiting to for this opportunity.
Jeremy Grantham: “…I’m definitely a buyer”
By avoiding stocks for the last decade or so, Jeremy Grantham has been labeled a perma-bear. Now that the S&P 500 has fallen back to 1997 levels, he has been more or less vindicated.
So he’s been on the sidelines for a lot of the recent run and saving up for an opportunity like this. Now he’s starting to get “a bit interested” in oil and we’re close to the point where he says he will “definitely be a buyer.”
In a recent interview Grantham revealed (view video here) his thoughts on oil:
I thought that after 100 years at $16 a barrel, it had jumped to maybe $36 or $37 in real terms. And I think it has probably jumped again. It will be revealed in 20 years to what level. But my guess is $60, $65, maybe even $70.
But what people underestimate, even in the oil industry, is how volatile the asset class is. In other words, if the trend is $65, it is fairly routine for oil to sell below half, say $30, and more than double, say $145.
And people never get that. So you don't want to be too quick to buy into weakness or sell into strength, necessarily. But it can go a long way. But below 40, I must say, I do get a bit interested. And below 30, I'm definitely a buyer.
Now, I realize we’ve spent quite a bit of time delving into how much demand will be eroded by the economic downturn and there’s no reason at all to rush out and load up on oil, but he does raise some good points.
Oil is very volatile. It overshoots to the upside and to the downside. And now is probably one of the times it is overshooting to the downside.
The odds of a quick rebound in oil prices are still extremely low. There are massive stockpiles of oil sitting around ready to be sold on any uptick in prices. For instance, Frontline (NYSE:FRO) reported, “Trading companies are storing an additional 80 million barrels aboard 35 supertankers and a handful of smaller tankers, the most in 20 years.”
That’s a lot of oil to work through before oil prices can move up more than 10% or 15%.
From a long-term perspective, which Grantham certainly has, it’d be tough to get burned too badly buying oil under $30, which we’re not far away from. Grantham’s not the only one getting interested in oil now. China’s preparing for its post-crisis needs as well.
China Shopping Spree Continues
It’s no secret Russia is facing some problems. Nouriel Roubini, noted economist and front man for this crisis, has spoken at length at the problems Russia’s resource-based economy will be facing in the months ahead. Even Russia’s vast foreign currency reserves probably won’t be enough to allow the Russian ruble to ride out the storm very easily.
Despite it all, Russia still has what a lot of other countries want: oil and natural gas. And in bad times China has shown it’s more than willing to write some big checks to secure oil.
Even though oil prices have fallen another 10% in the past few weeks, the country hasn’t changed course. Yesterday China announced an oil-for-loan deal with Russia.
Under the terms of the deal, state owned China National Petroleum (CNPC) will loan two state-owned Russian oil companies (Rosneft and Transneft) a total of $25 billion in exchange for 20 years of guaranteed delivery of about 300,000 barrels of oil per day. This deal would have been almost impossible to complete a year ago. Let alone, at the relatively small cost of $25 billion.
Once again, a saver like China reaps the benefits patience and prudence can provide.
Searching for a Market Bottom
Now, I’m not about to tell you we’ve hit an official bottom. Grantham and Buffett will be the first to admit they’re probably a bit early.
At the Prosperity Dispatch, we’ve been over many signs of a market bottom. And we’re seeing more and more every day.
For instance, the latest one comes from a new book from Michael Panzer, When Giant’s Fall: Economic Road Map to the End of the American Era.
The book calls for the equivalent of economic Armageddon. According to its publisher, the book will show, among other things, the “ growing conflict and wars, shortages, logistical disruptions, and a breakdown of the established political and monetary order.”
I haven’t read the book and haven’t decided whether it will go on the “must read” list. But its publication does show us one very important thing.
You see, book publishers are in business to make a profit. They want to sell books that people want to read. As a result, they have to publish on “hot topics.” They want to sell to the masses – a.k.a. the herd.
So the important thing to note here is not whether the book’s predictions are right or wrong, it’s whether it sells well.
Remember, the doomsday books sell well when times are bad. They become top sellers when times are really bad and a bottom must be near. The opposite is true during good times. The overly positive books sell great when expectations are high.
I mean, imagine how many copies of the tech bubble classic, Dow 36,000, you’d be able to sell now. Not many.
Now, I’m not about to go “all in” (or think of telling anyone else to) just because a new book predicting a disastrous period is ahead of us. I will, however, add it to the list of “we should have known that was the bottom” candidates.
Its times like these, we can’t forget our mantra since all of this really kicked off last summer:
This may be the buying opportunity of a life time. Don’t forget there is the possibility for the buying opportunity in five life times to come along soon.
Despite it all, it is good to see some really smart money get interested and some really big money start getting put to work.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
www.q1publishing.com
