Buffett Buys Banks, Rogers Slams Bernanke, Bullish Bond Movement, Chavez’s $200 Oil, and More!

by Addison Wiggin & Ian Mathias

  • Are you ready to invest in the financial sector? Buffett is… the Oracle’s picks below
  • Write-downs announced left and right… which banks are the latest to come clean
  • Jim Rogers “urges you to get out” of this investment
  • Mish and Brian identify a “very bullish development” in bonds
  • Chavez threatens $200 oil for Americans, $20 for Haitians
  • Reader advice on E*Trade, plus how to play the “Military Intelligence Investing Advantage”

 

Warren Buffett is buying banks… among other things.

The Oracle of Omaha announced this morning that Berkshire Hathaway is increasing its stake in Bank of America, US Bancorp and Wells Fargo.

“We’re looking for an entity that has durable competitive advantage,” Buffett told us in a private interview in his office at Kiewit Plaza this summer. “Somebody that not only is doing well now, but will do well 10 or 20 years from now.

“In capitalism,” Buffet pontificated, “when you have a wonderful business, it’s like having an economic castle. And the nature of capitalism is that people want to come in and take your castle. Now, what you need is a castle that has some durable competitive advantage, some castle that has a moat around it.

“One of the best moats, in many respects, is to be a low-cost producer. But sometimes the moat is just having more talent. I mean, if you’re the heavyweight champion of the world and you keep knocking out people, you’ve got a competitive advantage as long as you can keep doing it.”

Would we call Bank of America a “heavyweight champion”? Sure… in the Mike Tyson sense of the word. But Buffett reminded us:

“We’re not looking for the best brain surgeon in town. We’re looking for the Mayo Clinic, so we want an institution that, regardless of the person in charge, will maintain that competitive advantage over the decades.”

For what it’s worth, Buffett also snatched up sizable stakes in CarMax and Dow Jones and lessened his company’s positions in American Standard, Ameriprise Financial, Conoco Phillips and Nike.

Massive write-downs in the banking industry must be making Buffett salivate. Bear Stearns and Barclays both announced multibillion-dollar write-downs this week. Bear told its investors before the bell yesterday that it expects to write down $1.2 billion in the fourth quarter. Naturally, BS stock closed over 3% higher.

For its part, Barclays announced a $2.7 billion write-down this morning.

And the rumor mill is churning with expectations of a massive write-down from UBS as well.

The WSJ suggested yesterday that the Swiss bank might take a charge of as much as $7.1 billion this quarter. UBS has already written down about $3 billion; thus, an additional write-down of this magnitude would make it one of the biggest casualties of the credit crisis.

Investors with less resolve than Buffett sold off again yesterday. The Dow fell half a percent. The S&P, a little more. And the Nasdaq shed 1.1%.

The Labor Department released its Producer Price Index yesterday… it rose a subtle 0.1% in October. But that puts producer prices at 6.1% for the year — the fourth-highest level of inflation since the early ’80s.

It’s also three times the acceptable rate of inflation as determined by Federal Reserve Chairman Ben Bernanke.

“He is a total fool,” Jim Rogers said of Bernanke this morning. We’re not sure if Rogers watched the same YouTube video we sent you last week of Ron Paul berating Bernanke, but the sentiment was the same.

“[Bernanke claimed] Americans who buy only American goods are not affected if the value of the U.S. dollar goes down,” Rogers said. “I was terrified… If you only buy American products and the dollar goes down, the price of oil goes up, copper goes up, wheat goes up… That affects you.

“He doesn’t understand the economy, as far as I can see…

“If you have dollars,” Rogers said, “I urge you to get out. That’s not the currency to own.” Rogers echoed his sentiment from earlier in the month. He’s buying yen, yuan, Swiss francs and commodities.

“It’s not my prediction,” the UAE central bank governor, Sultan Nasser Suweidi, agreed this morning, “but everybody is expecting that the U.S. dollar will go down further.” Suweidi warned earlier in the week that the UAE was at a “crossroads” in terms of the dirham’s peg to the dollar.

Gov. Suweidi tipped his hand again this morning during an interview in South Korea, saying that while the dollar peg won’t be dropped entirely, he might “reduce it to a basket which will consist of more dollars, but not totally 100%.”

No official action has been taken, but if Suweidi checks the futures markets this morning, he’ll see that contracts to buy dirhams in 2008 jumped by the largest margin in 10 years, to 3.57 per dollar… a record high.

As if to defy Rogers’ and Suweidi’s comments, the dollar rallied ever so slightly overnight. This morning, the euro trades for $1.46. The pound, $2.05. And the loonie has fallen back to $1.02 — down 8 cents in a little over a week.

For its part, the Japanese yen is enjoying a bit of a rally lately, too. Overnight, it regained the 110-handle versus the dollar. It shot up 1.3% versus the kiwi dollar and 2.1% versus the South African rand.

Slowly this week, light, sweet crude has crept back up to $94 per barrel.

“With oil hitting new highs in the $90s, and with gold pushing $800 per ounce,” writes Mish Shedlock of The Survival Report, “you would think increasing inflation expectations would be driving bond yields through the roof.

“But that isn’t happening: The yield on the 10-year Treasury bond has declined almost 100 basis points (or 1%) from its June high, and continues to fall.

“From a high in June, the yield on the 10-year Treasury bond moved down and broken through its uptrend from its low in 2003. This is a very bullish development for Treasury bonds, and it’s clear that the weakening prospect for growth here in the U.S. is the main driver.

“These shifts in sentiment usually take a long time, but the signs of a slowdown are clear in the Treasury market.” Look for Treasury yields to go down from here. And look for ways to play them here.

“If the U.S. happens to invade Iran,” proclaimed Hugo Chavez, “oil will not just reach $100, but $200 per barrel. Not one drop of oil will leave Iran… The same would happen here.”

We hadn’t heard much from our favorite South American dictator in a while… we were beginning to miss him.

“How are you going to sell oil to Haiti,” asked Hugo practically in the same breath, “one of the poorest countries in the world, at $100, the same price that you sell it to the U.S.?… I would sell oil to a rich country at $100 and to a poor country perhaps at $20.”

He went on to suggest OPEC set up a preferential pricing program… that we’re sure has about as much a chance at success as Iran’s subsidy program for cheap gas for its citizens. You may recall our reports of gas rationing… and riots. Yeah, go get ’em, guys.

May we suggest you both pick up a copy of Economics for Dummies.

With the top 13 oil companies in the world owned by nation-states with similar nutjobs at the helm intent on using black goo for social agendas, we’ll be looking for alternative sources of energy far more aggressively.

“In terms of developmental processes,” reports Byron King this morning, for example, from the Geothermal Finance & Investment Summit in San Jose, Calif., “the geothermal industry today is about where the oil industry was back in the 1940s.

“At this stage, the industry is all about plucking the low-hanging fruit. Only the most evident and obvious projects are being pursued, like traditional hot springs or mud volcanoes. The areas that are not apparent constitute an immense, unexploited resource.

“Still, things are evolving fast. After a century of energy development in the U.S., ‘renewables’ generally are only 2.3% of the total electric output. But in terms of present and planned investment, renewables are coming along like gangbusters. In 2006, the U.S. overall spent $9.2 billion on renewable power investment, versus only $7.6 billion on new facilities to burn fossil fuels like coal and natural gas. Wind, biomass, solar and geothermal are gaining the upper hand for new investment.”

Byron has met with several geothermal developers whose projects are still in the private equity stage this week. They’re planning IPOs within the next 24 months. We’ll keep track of these firms for you.

In the meantime, you don’t want to miss Byron’s exclusive report on five companies already reaping the benefits of technologies developed by the Navy in this area… and already churning out electricity and energy royalties in the $200 million range. Read about “China Lake Energy” here.

“‘Even if E*Trade goes bankrupt,’ Chris Mayer said yesterday, ‘your brokerage assets are safe.
It shouldn’t affect you in any way,’” wrote a reader, furthering our E*Trade discussion.

“But, if you are on margin, you might find your sale canceled without cause. Or if the firm goes bankrupt, it might end up impossible to make trades or remove money for some period of time. Even in insured accounts, there is a limit to insurance. If your account is over that limit, you might get back pennies on the dollar or nothing.

“On the whole, it would make me very nervous.”

“True… SIPC protects investor’s accounts in brokerages,” wrote another. “But many people don’t realize that the limit is $500,000 in equity and $100,000 in cash. So if someone has an account greater than $500,000, the amount above $500,000 is at risk. While many people are below that threshold, many are also above it.”

“We should all be so lucky to have idiots like Citigroup’s Prashant Bhatia working in the financial services industry,” concluded our last reader today. “Well, E*Trade wasn’t so lucky, given that its stock tanked to $3.55 per share following Mr. Bhatia’s comments, but it is rather ironic that the firm for which Mr. Bhatia himself works is holding billions of dollars worth of bad mortgage notes and securities.

“Talk about throwing stones while living in a glass house.

“I am not the one who bought the 30 million shares of E*Trade stock following its freefall, but I am already sitting on $2,000 in profits that I made on E*Trade stock in less than two days after the freefall came to a halt. Please let me know when Mr. Bhatia opens his fat mouth and downgrades anything else again. I love free money.”

The 5 Responds:
If you bought E*Trade near its $3.55 low this week, you’re up 57% in 3 days. Even if bankruptcy isn’t in the cards, they’ve become prime buyout bait overnight. The company has about $1.9 billion in cash, or about $4.45 per share. But with stock prices now back to about $5.60, it looks more like Mr. Bhatia’s comments created a great buying opportunity… nothing more.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. In the alternative energy field, Byron King is also betting on something he calls the “Military Intelligence Investing Advantage”. On numerous occasions, the military has developed technologies for its own purposes — lasers, GPS, the Hummer, ARPANET (the Internet) — which it’s then bequeathed to private sector companies for civilian application. Many of the companies that get the “first mover” advantage in these new industries become household names… Microsoft, Honeywell, Texas Instruments…

In its effort to stave off dependence on foreign oil, the U.S. Navy has been very active in developing a source of energy for its massive China Lake base in California. They’ve been so successful, they’re producing all the energy they need, and then some. By selling the excess energy back to the California power grid, they’ve already earned some $194 million in energy royalties.

Now they are ready to bequeath this technology to the private sector, too. Byron’s got a lead on the top five companies — all selling for $3 dollars or less — that are prime candidates for the “first mover” advantage as this energy gets applied across the West. If you want to know more, read this report.

rspertzel

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