Warren Buffett and Goldman Sachs

Warren Buffett’s return to Wall Street raises hopes

APBuffett lunch

IN 1998 Goldman Sachs was looking for help in bailing out Long-Term Capital Management, a sickly hedge fund to which it was exposed. It sought a contribution from Warren Buffett. But the Oracle of Omaha was on holiday (with Bill Gates, of course) and as the deadline approached his boat drifted out of mobile-phone range. This time there were no communication problems. Mr Buffett has answered Goldman’s latest call with a $5 billion infusion from his cash pile.

Goldman could not have wished for a more credible vote of confidence, albeit at a steep price: Mr Buffett’s holding company will receive $500m a year in dividend payments on its preferred stock. Mr Buffett knows from experience that it pays to negotiate hard with investment bankers. His only previous foray on Wall Street, a $700m bet on Salomon Brothers, went badly awry, though it eventually turned a profit.

He is, he says, betting “on brains”—and, implicitly, that Goldman’s profits will not be hit too hard by becoming a regulated bank. Some also see the move as a vote of confidence in financial firms, which Mr Buffett has thus far avoided in this crisis, preferring the relative calm of energy, railroads and chewing gum.

That may be hoping for too much. Mr Buffett made clear that he considers Goldman’s management a cut above. And he drew a contrast between its cautious valuation of illiquid assets and more “fanciful” marks at some other firms. Moreover, for all his hardheadedness he has a soft spot for Goldman, having befriended its one-time boss, Sidney Weinberg, as a young man and stayed close to the firm ever since

In any case, Mr Buffett’s skill lies more in picking undervalued stocks with strong brands than in timing market bottoms—indeed, he bought into Salomon only weeks before the 1987 crash. Even when it comes to individual holdings, he is not flawless. He held Moody’s, a rating agency, for too long.

Still, it is heartening that such a shrewd investor is beginning to spy opportunities in the rubble of a crisis he has dubbed “an economic Pearl Harbour.” He confirmed this week what must already have been obvious: that he has been approached by almost every big financial institution in recent months. After Goldman, he can expect the phone to ring off the hook. 

How Europe responds 

European Schadenfreude over the ills of American capitalism doesn't mean a shift from the free market

AFP

ONE by one, European leaders have lined up to hail the triumph of welfare over Wall Street. “The idea that markets are always right was a mad idea,” declared the French president, Nicolas Sarkozy. America’s laissez-faire ideology, as practised during the subprime crisis, “was as simplistic as it was dangerous,” chipped in Peer Steinbrück, the German finance minister. His Italian counterpart, Giulio Tremonti, claimed vindication for a best-selling book that he wrote about the dangers of globalisation.

It would be wrong to exaggerate Europe’s sense of self-righteousness over Wall Street’s fall. This week governments in Belgium, France, Germany, Ireland and the Netherlands all scrambled to bail out troubled banks, confirming how exposed Europe’s economies are to knock-on effects from America. Even left-wing editorialists in France, quick to sneer at degenerate American capitalism, have tempered their glee. “There would be something comical, even pleasurable, in watching the frenetic agitation of the banking world”, wrote Laurent Joffrin, editor of Libération newspaper, “if millions of jobs were not at stake, not to mention the economic balance of the planet.”

There is nonetheless a common thread in European responses to America’s troubles. It goes like this. We always knew that unbridled free markets were a mistake, yet we were derided for saying this; and now we are all paying the price for your excesses. In the face of popular consternation at capitalist decadence, the activist state is newly in fashion—and Europeans are taking the credit for it.

Yet there are doubts whether this will really alter any country’s policies. A good test is France. Judging by his recent declarations, the centre-right Mr Sarkozy has taken a decidedly leftward turn. In the space of two days, he twice laid into free-market capitalism. “Laissez-faire is finished,” he declared in Toulon. “The all-powerful market that is always right is finished.”

It is not just rhetoric. With unemployment climbing, Mr Sarkozy has launched a €1.5 billion ($2.1 billion) yearly welfare-to-work scheme, based on state subsidies to supplement low pay, and paid for by an extra 1.1% tax on capital income—a measure that dismayed many of his own party’s deputies. All talk of tax cuts has been shelved. And Mr Sarkozy has failed to cut public spending to keep his promise of balancing the government’s budget by 2012.

But does this imply a genuine shift of economic policy? In the past Mr Sarkozy has been labelled l’Américain, but in truth Sarkonomics has always defied classification. In industrial policy, he has a long record of supporting state bail-outs. As finance minister in 2004, he fought off European Commission disapproval to use state money to rescue Alstom, an engineering firm. In campaign speeches in 2007, he declared that “free trade cannot be a dogma” and called for financial capitalism to be “moralised”.

Yet Mr Sarkozy has also gone out of his way to press on the French the need to respond to, not deny, globalisation. He has implored the country that invented the 35-hour week to work more, take more initiative and expect fewer hand-outs from the state. He has exempted overtime work from taxes and social charges. He is tightening welfare rules to cut benefits if the jobless refuse more than two reasonable offers of work. He has strengthened the competition watchdog, and made it easier for discount retailers to set up shop. Mr Sarkozy was elected because French voters knew, however reluctantly, that they had to adapt to global capitalism.

In this respect, a close reading of Mr Sarkozy’s Toulon speech is revealing. Alongside the tirades against financial capitalism, he also recalled that “capitalism is the system that has enabled the extraordinary development of western civilisation”. He argues not for blind state intervention but for a new balance between the state and the market: one that tightens the state’s role as regulator and enforcer of competition, but not—except in extremis—as owner.

Where does this leave Mr Sarkozy’s liberalising reforms? He has said that “the crisis calls for an accelerated rhythm of reforms, not a slow-down.” On financial regulation, he wants EU leaders to tighten accounting rules, and has called for a meeting of G8 leaders to rethink the global financial architecture. On domestic reform, he is urging more restrictions on executive pay and golden parachutes. But such measures are unlikely to derail Mr Sarkozy’s parallel, liberalising efforts to trim the bureaucracy, encourage entrepreneurship, discourage welfare dependency, undermine the unions and boost competition.

The French, like most Europeans, know that the old high-tax, state-heavy model had hit the limits in terms of jobs and growth. In a recent poll for Le Parisien newspaper, 60% said that Mr Sarkozy should continue or speed up his reforms; only 30% said he should slow them down. Some Americans may fret that French-style socialism has arrived on Wall Street. But the last time the French picked a real Socialist to lead their country was 20 years ago.

See Sensex resistance at 15500, Nifty at 4600: CLSA

Laurence Balanco, Asian Technical Research, CLSA, sees major resistance on the Sensex at 15000-15500 and on Nifty at 4500-4600 levels.   Balanco said the long-term downtrend is still intact, despite short-term consolidation. He believes that the rallies will be short-lived on S&P and Dow. He thinks that the Nifty has a meaningful support at 3000 levels. The Sensex could fall to 8,900 if it were to break below 12,300 levels, he said.   Balanco would accumulate gold at USD 850-860 per ounce mark.

He feels crude oil prices are likely to move sideways in the short-term.

Bears Trashing Hotel Stocks

Commentary: The recent volatility in the broad market indexes has caused many hotel stocks to trade below their 200-daymoving averages. Long-term moving averages are a common tool used by traders to track changes in the trends of financial assets by smoothing out the day-to-day price fluctuations, or noise. Once the price of an asset falls below an influential level of support, such as the 200-day moving average, it is not uncommon to see the average act as a barrier that prevents the bulls from pushing the price back above that average. A stock that trades below its 200-day moving average is deemed to be in a long-term downtrend and any move toward the average, as shown in the chart below, is often used as a sign to take profit; many short sellers will use these averages as entry points because the price often bounces off the resistance and continues its move lower. Let's take a look at the charts of a few major hotel chains; they are nearing the resistance of their respective 200-day moving averages, which has been influencing their share prices. Traders will expect the downtrends in these stocks to continue until the price is able to make a sustained move above the identified barriers. Marriott International (NYSE:MAR) - Taking a look at the daily chart of MAR, you'll notice that it is trading below the resistance of a nearby 200-day moving average, which is a barrier that has controlled the direction of the stock since early 2007. The chart clearly shows that the bears are in control of the longer-term direction and it wouldn't be surprising to see many bullish traders wait until the price closes above the average before taking a position. It it also interesting to note that there is a long-term descending trendline that is trading at the same level. This is technically significant because it will be used by the bears to confirm the strength of the downtrend. The nearby resistance suggests that the bulls will want to steer clear of this stock until they get confirmation that the trend is ready to reverse. Host Hotels & Resorts Inc. (NYSE:HST) - HST is another hotel chain that has failed to break above the resistance of its 200-day moving average since 2007. As you can see from the chart below, this stock's volatility has recently picked up as the bulls have tried hard to reverse the downtrend. Unfortunately for the bulls, the resistance that has appeared because the combination of the descending trendline and the long-term moving average has proved too strong and the price has dropped off as a result. We expect short-term traders to continue holding a bearish outlook on this stock until the price is able to close above its current resistance levels. Choice Hotels International Inc. (NYSE:CHH) - Taking a look at the chart of CHH, you'll notice that it is similar to MAR and HST. This company is trading below a level of  resistance that it has tested several times this year (shown by the black arrows). In most cases, traders will take profits off the table as the price nears the 200-day moving average (as was the case today); bearish traders may take a short position with a stop loss slightly above the trendline. A break above the resistance level would be a technical cover signal for those traders, and a signal that the bulls are taking control of the momentum. Most traders expect the bears to remain in control. If things continue as they have in the past, the bears should be able to send the price lower off of these levels. Other hotel stocks with charts that are looking extremely similar to the ones mentioned above include:  Wyndham Worldwide Corporation (NYSE:WYN) and LaSalle Hotel Properties(NYSE:LHO), which suggests that the best strategy moving forward may be to wait for resistance levels to be broken, signaling a turnaround in this industry.

 

Why I'm Getting Bullish on Emerging Markets Right Now

Why I'm Getting Bullish on Emerging Markets Right Now 
By Chris Mayer, editor, Mayer's Special Situations

For most of the past five years, the world's biggest investment story has been the growth of the BRICs.

This is the acronym for the countries of Brazil, Russia, India, and China. All four have huge populations and rapidly growing economies. And all four draw a tremendous amount of attention from investors.

The MSCI Emerging Markets Index (which has a heavy weighting toward the BRICs) rose 40% last year, even while the credit crisis swallowed banking profits and hobbled balance sheets around the globe.And why not? The emerging market story was powerful and seductive. Large populations building more factories, power plants, and roads; burning more oil, coal, and gas; eating more meat; buying more cell phones; installing more Internet connections; and on and on. It was a huge growth curve jammed in a short amount of time. And it seemed to have a long way to go.

But this story has changed a lot in 2008...

Investors no longer love the emerging markets. With a global slowdown in the offing, investor sentiment has shifted hard and fast. Through August 29, China's Shanghai Composite dropped 52% this year. India is down 37%. Russia is off 27%. Brazil seems to have gotten off easy, down only 5%. The damage looks even worse, though, when you consider how far these markets are off their highs.

Bespoke Investment revealed the claw marks of the bear market at work. China is off by 64%. Russia down 41%. India took a breather at negative 32%. The question now is do we buy, sell, or hold? The short answer: Emerging markets are a buy – with a caveat.

The selloff is making things striking on the valuation front... which makes me bullish here. As you can see from the chart below, emerging markets haven't looked this cheap on a forward earnings basis in 20 years...The fall in emerging markets is not an isolated event. It's happening within the broader bear market hitting world markets. Based on past cycles over the last 38 years, we've still got a little way to go before we hit the average share price damage of past cycles. What's also interesting here is how strong returns are one year after reaching bottom. If we hit bottom this month, we could see strong returns in the next 12 months.

Bear Markets of the Past MSCI  World Peak MSCI  World  Trough Days from  Peak to  Trough Peak-to- Trough  Returns Return One  Year After  Trough 1/29/70 7/30/70 182 -20% 28% 1/30/73 10/30/74 638 -45% 26% 8/13/81 8/12/82 364 -20% 50% 8/25/87 12/04/87 101 -27% 23% 1/03/90 9/28/90 268 -29% 23% 7/20/98 10/08/98 80 -24% 40% 3/24/00 3/12/03 1,083 -52% 40% Average   388 -31% 33% Current Cycle Comparison* 10/12/07 7/15/08 ? -22% ? *Using Total Return Index. Price Index peaked 13 July 2007 at 1,206.3. Source: Fact Set MSCI.

Emerging markets could rebound with even bigger returns because the valuations are lower than in the mature markets and the growth rates are better.

So I think emerging markets are a long-term buy. The caveat is simply that all emerging markets are not the same. Some will perform better than others.

As for which ones specifically, my long-time readers know I favor India. I'm in the same camp as Steve and Tom (read their thoughts here and here) when it comes to that country. Russian stocks are also interesting at these levels. Russia as an investment has some "warts" on it, but it's extremely rich in natural resources. It's also cheap... trading for eight times 2009 earnings.

Which countries you ultimately choose to buy won't be as important as the larger picture here. The BRIC story is a long-term idea. These countries are going to be a lot richer and more powerful in 10 years than they are now. And right now, they're as cheap as they've been in a long time.

Good investing

Four Metal Stocks Set To Shine

Commentary: One of the most popular tools in technical analysis that is used to predict a shift in a stock's direction is known as the relative strength index (RSI). This indicator's primary purpose is to determine when a given rally is becoming overbought or oversold. Generally speaking, readings below 30 suggest that the stock has been pushed down to an unjustifiably low level, causing most bullish traders to start looking for a good entry position. Given the broad market weakness, it is not surprising that there are many companies trading with low RSI values. However, what you may find interesting is how some of the bigger players in the metals market have been dominating the list of stocks trading at bargain-basement prices based on their extremely oversold RSI readings. In most cases, traders will use other technical indicators in combination with an extreme RSI value to increase the probability that a move higher will actually occur. Let's take a look at four stocks that have recently been trading in oversold territory.

Company Market Cap RSI Value United States Steel Corporation. (NYSE:X) 8.34B 29.84 Century Aluminum Co.(Nasdaq:CENX) 1.30B 27.97 Alcoa Inc. (NYSE:AA) 17.30B 26.97 Ivanhoe Mines Ltd. (NYSE:IVN) 2.31B 28.10

In the table above, you'll notice that AA and CENX have the lowest RSI values, which is likely because of their large exposure to aluminum prices, which have fallen substantially over the past few months. Weak metal prices across the board have made it difficult for companies such as the ones listed in the table to do business compared to a year ago and this has clearly been shown in the slumping share prices. The steady decline in the price of metal and mining shares has caused many of them to drop into oversold territory according to the relative strength index. The extremely low RSI readings suggest that we are nearing a bottom and that a bounce may be in store for this group of companies.