Warren Buffett had his worst year ever in 2008. The Oracle of Omaha released his usual folksy and pithy annual letter to shareholders. He said the economy will be in shambles this year and perhaps longer as the world's economies recover from reckless lending that caused the worst "freefall" he ever saw in the financial system.
Mr. Buffett says he will spend the remainder of the recession shopping for new investments. He has it right. Even though his company, Berkshire Hathaway saw net income fall 96% in the fourth quarter, book value dropping 9.6%, and the stock price down 44% in the past twelve months, Mr. Buffett is truly an investor of remarkable talent.
The fact that he is not giving up on America or the world as he scours for unbelievable bargains is worth noting. The stock market immediately plunged on his comments about "shambles" but really should be picking up based on his decision to keep buying. And he may very well be calling the bottom of this stinking mess once and for all. Stock market declines usually end when capitulation occurs. This is when everyone that wants to be out is out. Conversely everyone who is in wants to stay in. Often this comes in a punishing and brutal sell-off.
This year has been the whimper year of the bear market. The markets have see-sawed all year long until recently and now appear to be "giving up", meaning capitulation may be nearing but it may only be short lived. With all the banking problems still fully unknown, it is not realistic to think that this will be the final bottom. Nevertheless, the Dow Jones Industrial Average is at the lowest point today since 1997. That tells me that we are probably due for a short term rally. Markets have a way of over-shooting and then recovering. Let's hope so! |
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Most of our clients and readers are in California, at least for now. Our Governor just declared a state of emergency because of our water situation. As the eighth largest economy in the world, our state is truly in a crisis of great concern. The rest of the country looks terrific compared to us.
We are now in the third year of drought. Yes, the rain and snow have been pelting us for the past week but don't be deceived. We have problems. This drought is threatening employment, rising prices and entire towns and farms. Farmers are scrambling to fallow fields which may rise to as much as 20% of the rich, fertile farm land in the Central Valley.
Towns like Mendota, south of Fresno, are experiencing unemployment rates as high as 35%. Things are so dire that check cashing stores are closing. Social problems like violence, domestic abuse, and drunkenness are soaring. Relief is not being forecast just yet.
Last week, farmers found out that federal officials are anticipating a "zero allocation" of water from the Central Valley Project. This was a New Deal composite of reservoirs and canals that irrigates three million acres of farms. This may be the first time ever that farmers could be cut off from federal waters. So what are their options? Prayer and rain dances are the only options since the government is not here to save them. It sure does make you wonder what they are thinking. If food is not important then what is? Are they prepared for skyrocketing food costs? What about priorities? Are banks really more important than food? Worse, are we Americans truly powerless to exert any influence on our politicians?
There is an interesting twist developing in the foreclosure arena. It seems that lending was so free-wheeling and out-of-control that some folks forgot to tend to the boring things like bookkeeping. There was a bankruptcy case recently where someone got the bright idea, before they were booted out of their home to request a copy of the original loan documents. Guess what? No one could find them. The homeowners are enjoying very cheap rent today!
More and more people are doing the same thing. Curiously, this may be some relief for millions of homeowners who are in default and even for those not in default. What does happen when no one can verify the loan? What should a judge do? Can they continue to live rent free? Can you believe it? My goodness, the bankers cleaned up, collected obscene salaries, begged Congress for a bailout and refused to do something as simple as basic bookkeeping entries. We just might stimulate a boost in employment by sending unemployed bankers on a mission to find the missing loan docs! In the meantime, if any of our readers know friends or relatives facing foreclosure please insist that the original documents be produced.
The economy continues to weaken. The major reports this week are unemployment, consumer credit and factory orders. All of them are expected to be weak. Will they drive the financial markets? Probably not. The market is looking way beyond these old numbers and no one is shocked anymore. Right now with markets at twelve year lows, it is going to take more than economic reports to settle down the financial markets. Last week we discussed gold including confiscating gold back in the 1933. For years, there have been a lot of anecdotes of people having gold taken from their safe deposit boxes when opened, often due to the death of the box owner. I have not been able to verify this. What I have verified is the true confiscation came in the exchange of gold for certificates (bills). By changing the exchange rates, investors received about 40% less than they expected. If you are interested, here is one link:http://www.strike-the-root.com/columns/Chkoreff/chkoreff1.html |
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