Why Warren Buffett Is Buying – And You Should Be Too
Legendary investor Warren Buffett recently made news with his purchase of International Business Machines Corp. (NYSE: IBM), though I can't say I'm surprised.
Despite criticism that he's buying into a top-heavy market, that IBM is at a premium, and that he's losing his touch, chances are Buffett knows exactly what he's doing.
And guess what, it's exactly what I've been counseling investors to do since this crisis began – bolster defenses by putting money to work in companies that are backed by trillions of dollars in tailwinds, and have solid defensible businesses (Buffett calls these "moats").
According to a Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) filing made Monday but dated Sept. 30, 2011, Buffett also waded into General Dynamics Corp. (NYSE: GD), DirecTV (Nasdaq: DTV), CVS Caremark Corp. (NYSE: CVS), Intel Corp. (Nasdaq: INTC) and Visa Inc. (NYSE: V).
In the third quarter, Buffett funneled $10 billion into Berkshire's IBM stake, which now stands at 5.5%. Of course, Berkshire maintains a $13.5 billion stake in The Coca-Cola Co. (NYSE: KO) that remains the firm's largest.
Buffett Pulls the Trigger
As a long time Buffett watcher, I am somewhat surprised that he picked up Intel and IBM, if only because the Oracle of Omaha has a well-documented aversion to tech.
Still, I can see the logic. Both companies are global giants poised to profit from the whirlwind of growth set to take place thousands of miles from our shores in the decades ahead.
There are technical similarities, too.
For instance, IBM's price has risen more than 29% this year. As a result, at least five analysts have removed their buy recommendations because they believe the stock may have run its course, according to Bloomberg News and YahooFinance . At the moment, less than 50% of the analysts who cover IBM recommend buying the stock.
Back in 1988, it was much the same situation. Coke had more than doubled in size and analysts had much the same reaction when it came to doubts about further growth. Many openly bashed the stock's prospects and completely ignored the global growth potential that today is Coke's mainstay.
Coke is up tenfold since then. Enough said.
Here's what I think Buffett sees:
How JPMorgan Aided and Abetted the Largest Municipal Bankruptcy in U.S. History
Alabama's Jefferson County filed for bankruptcy protection on Wednesday, making it the largest municipal bankruptcy in U.S. history.
But believe it or not, that's not the biggest story here.
The big story is how JPMorgan Chase & Co. (NYSE: JPM) – specifically, JPMorgan's Securities arm – has a filthy hand in the whole Jefferson County saga.
This isn't breaking news. I've written about it before and so have others. You just may have missed it because the spin machine was so effective that the story got buried fairly quickly.
It's really an interesting story – albeit a long one. But unfortunately, I don't have the space and you don't have the time for all the grisly details, so here's the short version.
Jefferson County is full of characters – and a few who made it into the local government turned out to be good old boy crooks.
Jefferson County, home to Birmingham, had an aging and stinky sewer system. The Environmental Protection Agency (EPA) demanded that the county do something about it as far back as 1996.
And it did.
County administrators decided that a brand new sewer system needed to be built at an expected cost of about $1.5 billion. With that decided, the county commission had to decide who would run the financing operations, craft a plan to manage the debt, and float bonds to pay for the project.
Here's where I'm cutting out all the starch and getting to the meat of the story: Local politicians, who were in cahoots with local broker-dealers (securities firms), wanted a piece of all the money that was going to be sloshing around. They ended up demanding, and getting, hefty bribes from big securities firms to let them become the chosen ones to run this lucrative muni finance deal.
I'm not going to get into how Goldman Sachs Group Inc. (NYSE: GS) got involved in 2002 and ended up being paid some $3 million (some of which it passed along to "consultants") to get in on the deal – which incidentally it ended up doing nothing on, other than participating in a back-door swap arrangement with JPMorgan Securities. Nor am I going to get into Bear Stearns' dealings, nor the small securities dealers who acted as conduits for money being exchanged between JPMorgan and others.
Instead, I'm going to focus on JPMorgan, which ended up constructing the finance arrangements and doing most of bond deals that served to finance the building of the new sewer system – because that's where the story takes a truly ugly turn.
How Much Cash Should You Hold?
As you might imagine, I receive a lot of questions from readers around the world and right now the question I'm being asked most frequently is, "How much cash should I be holding?"
There's no right answer, but given the extraordinary times we're living in, I think the more interesting thing to consider is "what to do with it?"
But first things first. Let's talk about how much cash may be appropriate, then address what to do with it.
Traditional Wall Street thinking holds that cash is a drag that actually holds you back. The argument, particularly in a low interest rate environment, is that cash actually produces a negative real return because it really isn't "earning" anything while it burns a hole in your pocket and gradually loses ground to inflation.
I have a problem with this argument in that it's based primarily on the assumption that there's nothing better down the road.
I believe cash is key when it comes to providing the flexibility needed to safeguard wealth or capitalize on new opportunities – even now.
Not to make light of the current situation in Europe or our woes here in the United States, but the way I see things you can either ignore the problems and hope they go away in which case your cash is a dead asset, or you can learn how to deal with the uncertainty and profit from it in which case your cash is an asset.
If you're retired, holding something on the order of two to five years of living expenses is prudent. That way you can plan for regular expenses like insurance, medical bills, a mortgage if you've got one, and investing. Especially investing.
Now, if you're still working and have a regular paycheck, you can take some risks and hold less cash on the assumption that future income will offset the risks associated with a lower cash "buffer" on hand. A generally accepted rule is six months, but I think given today's economy 12-months worth of expenses is more appropriate.
Either way, the goal is the same – to have enough cash on hand that you don't have to spend money you don't want to at an inopportune time nor sell something when you don't want to.
For somebody in my situation, I think having about 20% of my investable assets in cash is about right.
If that strikes you as low in today's markets with all the risks they harbor, bear in mind I also use trailing stops religiously and I'm prepared to go to cash if things roll over. If you aren't disciplined or aren't prepared to be as nimble as the markets require, perhaps a more conservative 40% to 60% is appropriate. Maybe more.
Once you've decided what level of cash is appropriate for your particular situation, you can get to the bigger question of what to actually do with it.
This is where things get really interesting because even cash can be tweaked for better performance.
Bonds can be a Cash Alternative (For Now)
As long as interest rates remain low, core bond funds may make more appropriate "bank" accounts. At the very least, they can make good complements to the usual savings, checking and money market funds most Americans have already established.
Now, I can already sense the snarky e-mails heading this way telling me I have lost my mind or don't understand the risks associated with rising rates.
I haven't. Rising rates will make bonds tumble, and bond funds – with very few exceptions – will lose money.
But consider this: The chronic state of economic misery that we live in now may be with us a while. That's going to help keep interest rates low because the government believes – wrongly I might add – in stimulative economics that don't work and have never worked in recorded history.
More to the point, the U.S. Federal Reserve, for example, has announced that it's going to keep rates near zero through 2013. To me this is a near picture perfect repeat of the "Lost Decade" in Japan, which now is actually entering its third lost decade. We're on the same path.
The uncertainty could drive investors to bonds and actually make rates fall still lower from here, as hard as that is to imagine.
SIPO Stocks: How to Profit From the Money Machine Wall Street Hopes You Won't Discover
They're called "SIPO" stocks.
They pack a massive profit punch.
And they're one of Wall Street's best-kept secrets.
In fact, Wall Street's faceless investment banks would be just as happy if you didn't know that SIPO stocks existed.
That's why it took an ex-Wall Streeter like Shah Gilani to break the silence, and to bring these stocks – and the profit opportunity they represent – right to you.
"SIPOS are as close to an entrepreneur's fantasy as you can get, without the uncertainties that come with their cousins – IPOs," says Gilani, a retired hedge-fund manager and Money Morning columnist whose investigative essays have helped thousands of Main Street investors dodge Wall Street's ruinous cons. "If you're looking for relatively low risk, deep value and multiple paths to profitability for the company and your investment, SIPOS are virtually in a category all by themselves."
That's why Gilani has created a new advisory service (click here to find out more) that's designed to exploit this hefty profit play – albeit one with a surprisingly low-risk profile.
Why a Year-End Rally Is More than Possible
Lately it seems everyone wants to know one thing: Are stocks going to rally through year-end?
The answer is an unqualified "maybe."
So while it seems like stocks have come a long way in a short time – and they have – in the big picture, we're still crawling and clawing our way up…
However, after hitting 5,048 in March 2000, the Nasdaq Composite is still almost 50% below that high-water mark.
It's the Composite's lack of traction that worries me.
It tells the story, not just of the tech wreck of 2000, but of technology and growth companies at the margins failing to get any meaningful traction. (And many are marginal indeed. Of the 3,000 companies in the Composite, most are smaller than the average companies in the S&P and Dow.)
Given that, you may find it hard to believe we can get back to old highs on the major industrial indexes.
But it is more than possible.
That's because so many of the companies in these indexes are "global" in terms of their inputs, sales, and revenues. And thanks (almost exclusively) to global growth, these big companies are momentarily well positioned. Thanks to overseas sales, their earnings have been strong. And when the revenue streams earned globally are translated back into cheaper dollars, currency gains make net profit numbers a lot stronger.
In this sense, actually, the Fed's quantitative easing programs helped hugely – both by lowering the U.S. dollar's value and by lowering interest rates. Low rates allowed companies to re-tool their balance sheets by retiring debt and reducing the cost of outstanding obligations.
Regarding this most recent rally, the European picture is what brightened the big-cap world and set the stage for this upward movement. Specifically, it's optimism that an effective backstop plan to save Europe from imploding continues to drive shorts to cover.
And if any plan put forward is even credible, it would set the stage for an even bigger market rally.
But we're not there yet…
11 Investing Terms You Have to Know
The language of investing used to be fairly simple. A limited vocabulary of investing terms gave you enough understanding to successfully navigate the markets.
Those days are gone.
Things like 24-hour media coverage and analysis, computer-driven trading systems that affect prices within minutes of breaking news, complicated macroeconomic issues, and sophisticated investment products have created an increasingly complex market environment.
This means investors must understand a variety of sometimes strange or seemingly unrelated terms if they hope to prosper – or, at the least, hold their own – in these treacherous economic times.
Failing to become familiar with these investing terms could damage to your portfolio.
Investing Terms You Must Know
The following 11 investing terms have become commonplace in today's market and economy. Study these and you'll have a much better chance of not just surviving, but profiting:
The Gilded Age of Wall Street Remains Intact
For decades, Wall Street offered the allure of big league paydays and behind-the-scenes power.
But since the 2008 financial crisis there's been a growing sense – or even hope – that The Street's stride had been broken. After all, demand for a financial system overhaul, regulatory reform, and a crackdown on Wall Street pay must take some toll.
Not hardly. Wall Street hasn't changed its ways and it never will.
Take it from a man who has spent decades on The Street, seeing everything firsthand.
Money Morning Capital Wave Strategist and retired hedge-fund manager Shah Gilani says that in the short-term, firms will have to deal with new rules and slimmer paychecks, but ultimately, they will still find a way to prosper.
"The bloom is off the rose and Wall Street is showing its thornier side, but the Street is still paved with gold," said Gilani. "On any relative basis, unless you're a rock star, star athlete or Hollywood heavy, there's no place like Wall Street to make your fortune. That's not going to change any time soon."
These Three Men Represent Everything That's Wrong with Wall Street
I've already expressed my desire to embrace the Occupy Wall Street movement.
I said last week that I would join in whole-heartedly if I knew exactly what the protesters were trying to achieve.
But I don't know – and I'm not convinced they do, either.
Still, that doesn't mean we should dismiss them entirely. After all, there are millions of Americans who sense there's something terribly wrong with our capitalist system, but they can't pinpoint exactly what it is either.
But I can.
Bad actors have done bad things to good institutions and our capitalist system. Today, I'm going to let you in on who three of those bad actors are.
You see, part of the problem is that when we think of the "bad guys" on Wall Street, or in Washington for that matter, we don't often think of specific people. We talk about "them" as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans.
I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they're using to get away with it.
So, I'm going to start today with three of the biggest perpetrators of the mess we're in.
The Three Bears
There are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are: