What's on Buffett's mind?... Howard Marks is not finding value... Silver corrects... Sprott is selling silver, buying silver stocks... Gross' latest...
Just a quick note today, as I'm on a short break between presentations on Day 1 of the Value Investing Congress. I just want to pass along the two ideas that cropped up the most at the Berkshire Hathaway shareholder meeting in Omaha on Saturday...
Buffett mentioned two ideas at least half a dozen times each during the day. First, he repeated several times he's confident the U.S. dollar will decline and "big inflation" is coming. Buffett made it crystal clear the best way he knows to mitigate inflation risk is to own a wonderful business. Buffett emphasized owning businesses that can grow with inflation by deploying relatively small amounts of additional capital and enjoy pricing power. (Think: See's Candies or Coca-Cola.)
Also, Buffett mentioned several times throughout the day of "the resuscitative power of capitalism." He doesn't think the end of QE2 is a big deal. Everybody knows it's coming, and markets tend to adjust to known future events (like they did to Y2K, for example).
I find Buffett's focus on these two macro-oriented ideas fascinating because he's most famous as a Ben Graham-trained value investor. Value investors don't generally indulge macro views. They tend to stick to their bottom-up analytical knitting. So it's telling that the two things most on Buffett's mind are both macro concerns.
Perhaps Buffett is a little like another value-investing legend Seth Klarman. In New York several weeks ago, Klarman said he worries top down, but invests bottom up.
Just minutes ago, I watched a presentation by Oaktree Capital's Howard Marks, delivered via satellite from Copenhagen. The upshot of Marks' presentation was (1) he focuses on the most inefficient markets, and (2) he's not involved in what he calls "mainstream equity markets," which I took to mean U.S. stocks. His firm has emerging-market funds, and I assume his presence in Copenhagen indicates at least one place where he's looking for new ideas. He remarked at the end of his presentation that he's not finding any "50-cent dollar bills" lying around in the world today.
Marks has been in the investment business for 40 years. "It's very hard to do the right thing in the investment business," he said. "It's impossible to do the right thing at the right time." Like all successful investors, Marks emphasizes the role of patience. Like Jesse Livermore says, it's not the buying or the selling, but the holding that makes you all your money. You must be willing to wait for opportunity to appear. Having found it, you must wait for it to bear fruit.
Unfortunately, most investors would rather churn their accounts in an attempt to have perfect timing. They remind me of the guy in Joseph Heller's Catch-22, who said, "While none of the work we do is very important, it is important that we do a great deal of it."
We were expecting a correction in silver... The precious metal had risen too far, too fast. Silver rose from $17.50 an ounce on July 28, 2010 to $49 last week – a 180% appreciation. The silver-to-gold ratio contracted from nearly 70 in August 2010 to around 31 in late April. Despite the meteoric rise, silver couldn't break the $50 mark. It came close on April 25, but silver ended the day just above $45 an ounce – nearly a 10% drop in one day. It flirted with $50 again on April 28, but ended the day down.
Again, yesterday, silver started the day up, reaching a high of $48.10 an ounce. Then, it plunged to $43.75 – a 9% drop. The "hot money" is being shaken out of silver. If you own silver bullion, use these corrections to buy on dips. If you own more volatile silver stocks, mind your stops.
Newer silver investors won't remember 2008. But as you can see from the chart below, silver can fall just as far and fast as it rises. Last Friday, I was on a boat with Chris Weber, one of the best market forecasters we know. He said he wouldn't be surprised to see silver fall in half from here. If it does, we're buying more. But it's time to be cautious.
With so much money flowing into silver, the slightest bit of bad news can send the metal plummeting. Yesterday, two things happened. First, the Chicago Mercantile Exchange (CME), a commodities exchange, hiked the silver margin to 12%. That's on top of two margin increases last week of 9% and 10%, which failed to slow silver's rally. Higher margin requirements slow the onslaught of speculative money into an asset.
Also, one of silver's biggest cheerleaders – Canadian resource investor Eric Sprott – just sold... According to a recent filing by Sprott Asset Management, the company sold $35 million of its silver ETF (PSLV). This is actually a non-issue (though the market didn't treat it that way). PSLV was trading at a 16% premium to its net asset value. Said another way, you were paying $1.16 for every $1 of physical silver held in the fund. Why would anybody invest in that? Sprott was just taking money out of an overvalued asset.
As he told the Toronto Globe and Mail, "Every dollar of money that was raised by selling shares of [PSLV]... was reinvested in silver or silver equities." In other words, Sprott's moving money from an overvalued asset to a cheaper asset. "Silver shares have not done as well, which is almost shocking in a way," he said. "And it looked like there were opportunities in either getting some premium on PSLV shares and buying silver or buying silver equities."
We often criticize the super wealthy, like Warren Buffett, who campaign for higher taxes on the moderately wealthy. Normal income taxes do not apply to men like Buffett. The majority of their wealth is in securities and other sheltered structures. So, they don't care what absurd rate everyone else pays.
Our friends at the blog Zero Hedge ran a statistic today, putting this in perspective. The top 400 U.S. taxpayers accounted for 10% of capital gains in 2007 (or $91 billion). They paid less than 17% tax on that money.
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New 52-week highs (as of 5/2/11): Forest Laboratories (FRX), DirecTV (DTV), Automatic Data Processing (ADP), Johnson & Johnson (JNJ), EV Energy Partners (EVEP).
In today's mailbag, foreigners are storming Disney World! What other signs of a weak dollar have you seen? Tell us here... feedback@stansberryresearch.com.
"Thought you might find the following article from The Reverend Dr Giles Fraser (St Paul's Cathedral) as published in the Church Times in the UK interesting. Detailing the scandal in the US of borrowing from future generations:
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There is a big issue here of intergenerational ethics. The way in which global capitalism now runs itself by borrowing off the future is a scandal. We hide behind a general philosophy that all can be solved by encouraging more and more growth — as if growth had no limit — when, in fact, all we are doing is dipping into the piggy banks of our children and grandchildren. |
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Capitalism is underpinned by a faith that our national IOUs are all sound. Sovereign debt is now so high that some people fear that we are getting closer to a crisis of faith, in which we may even begin to lose confidence in the substantiality of the IOUs in our pocket, which we call money. We need to wake up. |
"Is he a paid up subscriber too?" – Paid-up subscriber Paul
"I spent last week at Walt Disney World – Florida, and I'd have to say what an eye opening week. I've not realized what is driving the economy in many tourist places. Porter your dead on... it's NOT Americans... rather the Brazilians, the Canadians, and the Europeans. Incidentally last week was spring break for much of Florida's schools, and I expected the parks to be full of Florida families. NOPE I'd say less than 20% of the people in the parks were native Americans.
"This got me really curious so I started small talk with the hotel and park employees about occupancy rates... park attendance etc... the resort was at 54% occupied during the week and only 66% over the weekend. Disney workers said to me that We are way off from projection. I am fortunate in that being raised in the Virgin Islands I am fluent in English, Spanish, Portuguese, and French so I started talking with other guests. Porter you're right. A majority of Americans do not seem to have the money to spend a week in something as simple as Disney. The people driving traffic into the resorts and the parks at Disney are coming in spending Canadian dollars, euros, pesos, and the real. The dollar is a huge bargain... how sad." – Paid-up subscriber Jeff
Regards,
Dan Ferris and Sean Goldsmith
Pasadena, California and Baltimore, Maryland
May 3, 2011