“What counts for most people in investing is not how much they know, but how realistically they define what they don’t know.”
-Warren Buffett
These days this is easier for Buffett to say than it is for most investors. As Berkshire and the cash on its balance sheet expand, Buffett gets better information. That’s the way that Wall Street works. As a result, defining what Warren doesn’t know gets de-risked. After all, no one (including the US government), gets the preferred terms that Buffett has been getting in recent months. Preferential treatment has its perks.
Swimming alongside America’s value investing sage is another big whale these days – her name is China. Like that whale called Warren, she also has the enviable position of a cash full belly and preferential terms on investments. While chewing on Steve Schwarzman’s Blackstone stock wasn’t as tasty as some American bankers forecasted it to be, the Chinese whale has said goodbye to that $3B loss on her investment and, ostensibly, gone back to feed on her domestic shores.
The Chinese feeding at home is creating a rumbling sound in the stomach of Buffett, and American bond holders alike. US Treasuries have had one heck of a time in 2009, and the objective mind can’t help but wonder what it is that we don’t know. Has the largest customer of the Greenspan debt feedbag stopped buying Treasuries? Is she selling them?
Whale watching is what Wall Street loves to do. Whales like Schwarzman and Ackman come and they go. Across economic cycles, the visibility that our manic media provides us to these whales is always the same – these self purported genius navigators of the depths of the investment oceans never miss an opportunity to smile for the camera. Life in the world’s largest fishbowl has its perks, until these whales don’t “realistically define what it is that they don’t know.”
Buffett knows this all too well. He has spent the better part of his investment career feeding on the plankton and depressed prices that these bloated whales create. I wouldn’t be surprised if that whale called Warren isn’t running the math on buying himself some preferred shares in Target today. Everything has a price, and Warren loves to eat what forced sellers have on the offer. I just hope our national mammal of the investing oceans saves some of that cash in his belly for rainier days.
Those leverage sharks who get starved by not having access to cheap capital are in trouble. This is why Blackstone’s stock was down another -8% yesterday in an up tape for the US Financials. This is why poor Billy Ackman is blowing up another hedge fund, and “apologizing profusely” for it.
Whether we know or don’t know what the Chinese are doing with their American bonds is not the point – the fact of the matter is that a lot of people are selling them back to us, and even more people have stopped buying them. As a result, you see the cost of long term capital on the long end of US Treasuries increasing, as access to long term capital tightens.
Despite putting in its second consecutive up day yesterday, at $9.90/share, the US Financials Sector etf is down -22% for the year-to-date. The whales of leverage cycles past are still for sale, and I see another -13% of downside left in that exchange traded fund before we can wipe our hands clean of that fishy smell that we have to wake up to every morning. This is Darwinian, and it should be – Americans don’t invest in losers. That’s what these government state enterprises are going to be, regardless of what Tim Geithner says at 11AM EST this morning.
The SP500 closed at 869 yesterday. It is down -3.8% for the year-to-date (outperforming those nasty financials by a considerable margin) and now looking for direction from the US government. This Obama government is not the kind of whale that American capitalists want to be invested in – at least not yet. Last night, President Obama lacked clarity on the financial front – and that doesn’t work. Investors like it to be, as Jack Nicholson said in ‘A Few Good Men’, “crystal.” Confusion breeds contempt.
If we want to be long a government, just buy China’s. As unpatriotic as that may sound, that’s what is working. Last night, the Chinese printed fantastic inflation readings on both the producer and consumer price front of -3.3% and +1% year over year, respectively. Chinese stocks raced higher on the news, closing up another +1.8%, taking the Shanghai Stock Exchange Index to +24.5% for 2009 to-date. This massive mammal is cutting taxes, cutting interest rates, and chowing down on the world’s stock market league tables – this folks, is a WHALE!
Realizing that most of the masters of the hedge fund universe told you 18-24 months ago that they “don’t do macro”, be rest assured that they all will be today. Geithner is going to have to pull off a miracle of sorts to get the US futures to turn around from the weakness born out of Obama’s first press conference last night. If the SP500 closes below the 862 line, this market will be in trouble again. My support levels are 847, then all the way back down to 811, which would be a -6.7% drop from last night’s close.
With the political rhetoric dominating the market’s dialogue right now, the only thing I have left is hope. Hope, as you know, is not an investment process… but sometimes that’s all we have left. We better hope that whatever comes out of Timmy Geithner’s mouth this morning creates US Dollar weakness. Unless we break the buck below the line of support that it held yesterday (84.51), that big Chinese whale has no incentive to buy whatever it is that our bankers are going to try to sell them next. Like Buffett, this Chinese whale likes to eat lower prices.
While I wish we were all in the preferred investor position of that American Whale called Warren, that isn’t The New Reality. The reality is that many American investors are still locked in marked-to-model and illiquid investments that they “realistically don’t know.”
Best of luck out there today.
