May 30, 2003
This is not a Buffett Moment

Something unexpected has happened following what was initially a tame post-Iraq rally: investors have begun to load up on tech stocks.  And while investor infatuation with tech has not yet reached 1990s proportions – no Henry Bloget type character is moving individual stocks by 10% each day by saying the word ‘buy’ - it has nonetheless grown increasingly apparent that ‘tech’ is what has been leading this market roller coaster higher. For example, yesterday 25 out of 30 Dow components declined, 9 out of 10 S&P sectors declined (not IT), and bonds rallied, yet the Nasdaq closed near a yearly high. 

The conclusion many have made is that because tech stocks had/have more short interest than the average NYSE stock, this is the reason tech’s have outperformed (a classic short squeeze). This argument, along with fund managers ‘herding’ into company’s like Ebay, makes perfect sense. However, before buying into the ‘this is nothing more than a short covering rally’ argument, be careful how you perceive things.

Bias’s Work Both Ways

Bears (myself included) often note that many bullish analysts blame external shocks for every stock market and economic disappointment.  To be sure, whether it was the 2001 recession that was caused by 9/11 (a recession that began 8-months before and ended immediately following 9/11), slumping retail sales that began late last year (or well before shoppers became deathly cold), or the ongoing unemployment debacle that was supposed to end when Saddam’s likeness was toppled, some bulls have consistently ignored reality during the current bear market Quite frankly, in the biased bulls mind it is as if the U.S. economy is permanently destined for superior growth, and when this growth does not materialize it is only because some external force is temporarily restraining it...

Point being, bears are not immune to the bias infection.   For example, while short covering – the bears big ammo these days - may partially explain why the Nasdaq is up 25% since mid-March, short covering does not explain why there have been inflows into stock funds over each of the last 3-months.  Moreover, short covering doesn’t explain how the Fed rigged the bond market to make stocks the de facto choice for new capital flows, nor does it explain why some large investor may be more willing to hold on to overvalued companies that pay a dividend. In short, short covering or not, with the exception of insider sales the liquidity picture for the U.S. stock markets has been and is bullish for the moment.

These points are not made in an attempt to argue that this is a new bull market. Rather, only that bears that throw stones should not build glass encased arguments of why every stock market rally is an underserved aberration prompted from some external flukes of an unnatural nature.  I’ll be honest, regardless of whether or not the current rally lasts another day, week, month, or year, it has already lasted longer than I expected it to, and there have been many missed opportunities…(UST, NWN, LIFE, etc).

Watching Warren

In May 1969 – near the peak of the go-go years - Buffett shocked everyone when he quit the investment business and liquidated Buffett Partnership.

“I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero….The only way to slow down is to stop”.
Buffett. May 29, 1969.  Letter to Partners (Making of an American Capitalist). 

Upon acquiring and employing Berkshire Hathaway as his investment vehicle, Buffett slowly started back into stocks in the early 1970s. However, in 1974 – seemingly oblivious to the fact that the markets were crashing around him and his paper net worth had been cut in half – Buffett was growing increasingly enthusiastic about investment opportunities.  In the fall of 1974, with the bulls extinct and blood flowing on the Street, Buffett made a rare market call:

”How do you feel?” Forbes.

“Like an oversexed guy in a whorehouse.  This is the time to start investing…Now is the time to invest and get rich”.  Buffett. October 1974.

In short, it is regularly said that Warren Buffett never comments on the direction of the stock markets. The popular quotation used is “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” (WB) But while Buffett never explicitly forecasts a market price, his actions often times speak volumes.



Mixed Market Outlook is Meaningless in Grand Scheme of things

On Tuesday the markets cheered the headline consumer confidence reading from the conference board, and the better than expected housing market numbers. However, what the markets ignored may have been more telling of current realities: the consumer present situation index slumped to 67.9 from 75.2. Similarly, today’s Chicago PMI report was cheered by the markets even though the unemployment component of the report declined.

Quite frankly, just as many companies are rushing to acquire (re)financing because interest rates are low and capital is plucky, the same could be true with inventory building/manufacturing activity on a regional by regional basis. What better time to shore up inventories if prices are ‘cheap’ and it is anticipated that prices will rise as the economy picks up following Iraq?  Nevertheless, in light of today’s Chicago PMI Monday’s ISM Index report is likely to be a blockbuster…if the ISM is strong this could add fuel to the bull fire…

As I make these speculations I am reminded of Buffett’s 1974 remark: “Now is the time to invest and get rich”. Speculating on the direction of U.S. economy while interesting, and perhaps even helpful to the investor, is not something you are likely to get rich off of.

Warren Buffett is not incessantly wondering if stocks have bottomed. Moreover, Buffett is not trying to purchase a tech stock before the next replacement cycle begins, he isn’t eying a biotech before the genome is mapped or an ETF before the much anticipated economic recovery arrives. Rather, Buffett invests in enterprises that he fully understands and believes are undervalued, and to date (despite misinterpretations by the media of his interest in secured/junk bonds, utility assets, and the odd tech), Buffett has not found many opportunities in the stock market.  

In sum, if you think you know how many shorts are about to cover, whether or not deflation will be quelled, how much of Bush’s tax rebates will be placed directly in state coffers, and whether or not earnings are on the mend or just temporarily spiking because of cost cutting, then you are attuned to the current market environment. If not, sit back, enjoy summer, and occasionally tune in to watch the action at the stock casino. 

I suspect that in the not to distant future the current stock market will be looked back upon as an underserved aberration prompted from some external flukes of an unnatural nature.  These suspicions aside, all that is known – from what can be known about greed, fear, valuation, and risk – is that this is not a Buffett type moment to buy.

  

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