October 29, 2003
Bearish Buffett Not Easily Swayed
Market bears are unloved pessimistic creatures that lurk in dark caverns because they despise the light of day.  Market bulls are insightful dare devils willing to roll the dice and profit big time. At least this is the perception you get of the marketplace today…

Despite the fact that an estimated 89.5% of day traders lost money during the 1990s, day trading is making a comeback today.  Not coincidentally, the reemergence of day trading – a risky venture unless you are the one collecting the commissions - has brought with it the absence of common sense:

“Market watchers say part of the reason for the renewed (trading) activity is many Americans have moved past the shock and grief of the tragedy of Sept. 11, 2001, and are resuming their lives.”  UPI

Not that the above quote, in any context, deserves debate – but how many day traders really called it quits after 9/11 and planned to mourn for a couple of years? No, the real reason that day trading suffered a temporary demise was because naïve greedy speculators were decimated by an unexpected bear; a bear that began well before late 2001.   

With this in mind, while it is unsurprising that the 2003 stock market rally has stoked day trading activity, what is surprising is how quickly the familiar faces of speculation and exuberance have reappeared.  Last week, Abby Joseph Cohen reappeared to reiterate that stocks are in a real bull market and that financial reports are the cleanest they have been in over a decade, and this week has been nothing short of a repeat of the 1990s: companies are merging, the Fed is keeping things loose, and Wall Street banks are competing for the next hot IPO – taken together, for some unknown reason, all this means stocks are a buy.

While it is probably true that the economic recovery in the United States will not begin to show signs of exhaustion until interest rates creep higher, it is nonetheless a grand speculation to conclude that stocks are perpetually influenced by near term economic performance. With this in mind, it is worth pointing out that as stock market speculation and exuberance have reappeared during the ‘recovery’, so to has isolated reports of investor intelligence.  For example, this week Warren Buffett announced that he is having problems parking his $24 billion in cash (in typical Buffett fashion, Mr. Buffett also announced that he has been taking ‘significant’ currency positions against the dollar – beating most other dollar bears to the punch*). Moreover, other notables such as Templeton and Soros have in recent months commented not on the 2003 bull or Wall Street’s liquidity bonanza, but on the longer term dangers the U.S. economy and U.S. currency face.

* “Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency”  Buffett

Suffice it to say, the dichotomy that is forming in the marketplace today is similar to that of the 1990s: on the one hand speculators and day traders who follow the Wall Street party line seem to be making the ‘easy money’, while on the other side of the spectrum intelligent investors are, quite quietly I might add, plotting a path away from any would be ‘easy money’ equity schemes. Given that the speculators (or traders) and investors (or Buffett’s) have contrasting outlooks – the former wants stock prices to head higher for quick profits while the latter wants prices to decline so that opportunities emerge – it is not surprising that biases have emerged in each camp. In the case of the dollar, this divergence is clearly seen: the speculators believe that near term weakness in the dollar is wonderful news because it will boost corporate profits, make imports more expensive, and/or help reduce the U.S. trade deficit. Conversely, the ‘investors’ – paying less attention to any potential immediate benefits – think that a weakening greenback brings with it the long-term threat of capital flight from U.S. assets, and the risk of rising interest rates (to support the dollar).

Needless to say, it remains to be seen whether or not the current equity mania will last long enough for some moronic speculator’s to conclude that Buffett has lost his touch (as was often done during the late 1990s). Nevertheless, thanks to the rally in share prices in 2003 the battle lines have been drawn. One needs only contrast a few words from a ‘trader’ to the well known wisdom of Buffett to illustrate the differences in investing attitude:

“Trading is way up again. And why not? There are some stocks that just since March are up 1,000 percent. People who missed this run missed a lot. You can make a lot of money.”  Toni Turner, author of the "Beginner's Guide to Day Trading Online"

Picking Sides – Choose Wisely

Because Fed “accommodation can be maintained for a considerable period” the markets rallied yesterday? No bears will escape from caverns so long as Greenspan is standing guard?

Buffett didn’t make his billions by making big bets on economic recoveries, but by making long-term bets on undervalued companies. Finding the precious few companies that can be considered fundamentally ‘undervalued’ in today’s marketplace is a daunting challenge – perhaps an impossible challenge – because, generally speaking, stocks are pricing in a spectacular and sustainable economic and profits rebound.

In short, Buffett is not willing to put more money at work in the U.S. stock market because he doesn’t believe that gambling on fiscal liquidity and supply side economics is a solid investment. To be sure, Buffett’s virgin venture into foreign currencies, and spotted enthusiasm for under appreciated foreign stocks (you may recall that Buffett also beat most to the punch in China), is a signal that one of the most successful investors of all time is look