Buffett Buys Goldman, T. Boone’s Portfolio, A Different Look at Gold, New Pennies and More!

by Addison Wiggin & Ian Mathias

  • Buffett buys Goldman… is it “all clear” for U.S. investment banks?
  • Eric Fry on the “very important inflection point” we’ve reached, and how to invest accordingly
  • A detailed look at T. Boone Pickens’ portfolio… ouch
  • Chris Mayer on how the $700 billion bailout should really affect investors
  • Doug Casey says gold is “grossly undervalued,” brings pictures to prove it
  • Plus, why Abe Lincoln will be spending his 200th birthday spinning in his grave

  “I don’t try to time things, but I do try to price them,” Warren Buffett said this morning. But the market doesn’t care… according to the masses, Buffett’s actions today mark the end of the credit crisis. 

Read any paper today and you’ll catch the headline: “Buffett Buys Goldman.” And indeed he did — $5 billion in preferred stock in the world’s most (in)famous investment bank. 

(Heh, check out the AP’s new stock photo for Buffett… nice poster)

“There is no better firm on Wall Street,” Buffett continued. “The price is right, terms are right, people are right.” 

Buffett might be correct there. Goldman has held up better than its peers. And the terms are sweet: Buffett’s shares come with a 10% annual interest payment, plus the right to purchase up to $5 billion common stock at $115 a share — anytime in the next five years.

  Investors are using Buffett’s buy as a reason to stop the bleeding today. Goldman Sachs opened up 2% this morning, the Dow pretty much stood still out of the gate. Going nowhere is as good as it gets for major indexes this week. The Dow is down 4.7% since Monday, while the Nasdaq and S&P 500 are 5.3% lower this week.

So it’s nice to see Buffett is putting a quasi-seal of approval on the sector, but why is Goldman is desperately raising $7.5 billion despite a seemingly imminent government bailout?

As usual, Buffett’s buy came with a caveat. “If I didn’t think the government would act,” Buffett said, “I wouldn’t be doing anything this week. I would be undoing things this week. It would be a mistake to buy anything if the government were to walk away from this deal. The Paulson plan is absolutely necessary to avoid going over the precipice.”

  “I think we’ve reached an important inflexion point in the American financial markets,” says Eric Fry. “The extinction of Bear Stearns, Lehman Bros., Fannie Mae and Freddie Mac — along with the near-death experiences of AIG, Merrill Lynch, Morgan Stanley and Goldman Sachs — tell us that a very important change has occurred in the financial markets. The extreme greed and institutionalized speculation that have nourished the Wall Street brokerage firms for so many years have finally been exposed as the frauds they have always been.

“Most of the bad guys who created this mess are gone… although not yet in prison, where they belong. And most of the American regulatory agencies are eager to change the rules of the game. These two developments are very helpful. But the process of repairing and reforming the American financial system could be painful. The U.S. Treasury will absolutely, positively increase the money supply to rescue the financial system… which means investors must try to protect themselves against an almost-certain inflation.”

And you should know by now Eric’s advice for that situation… but just in case: “Sell American stocks, bonds and currencies; buy foreign stocks, bonds and currencies. And of course, buy commodities.” For more specific advice, check out his latest in Rude Awakening.

  But we’re not too proud to say that it’s been challenging to be a commodity investor this quarter. T. Boone Pickens, certainly one of the most prolific buyers of “stuff,” is reported today to have lost over $1 billion this year. According to The Wall Street Journal, his funds have lost over a billion, or about 30%, including $270 million in personal losses.

The folks at Bespoke Investments — whose knack for charting puts your 5 Min. editors to shame — recently corralled T. Boone’s portfolio. For what it’s worth…

  In the broader stock market today, all eyes are on Capitol Hill. As you know, financial bigwigs like Hank Paulson, Ben Bernanke and Chris Cox have been blabbing before Congress all week, pleading to quickly approve their $700 billion bailout. We’d love to pass on some juicy details, but really, its just typical Washington. If you want to watch all the grandstanding, public berating and scripted responses, you can turn on CNBC. We’ll let you know when something actually happens.

  “As an investor, this bailout really isn’t going to change much,” Chris Mayer assures us.
“I believe that the long-term trends we’ve identified and invested in are still in play. The energy, agriculture, water and infrastructure trends still march on. The government’s bailout plan does nothing to find new oil and gas deposits. It does nothing to help feed a hungry world or alleviate the growing shortage of arable land. It does nothing about purifying water or increasing water supplies. It does nothing about crumbling bridges, inadequate roads and power systems.

“It may help to put the $700 billion in perspective, too, when it comes to the power of some of those trends. Booz Allen Hamilton estimates that the world’s infrastructure — power, water and transportation systems — will need a $41 trillion makeover out to 2030. That’s about equal to the value of all the stocks held in all the stock markets of the world.

“Really, the bailout doesn’t even erase the losses created by all the toxic debt banks seem to be swimming in. The bailout simply shifts the burden of the losses. And guess who bears the cost? Taxpayers, of course.”

For specific advice on investing in Chris’ favorite long term trends, check out his “Paycheck Portfolio.”  

  “We have to walk and chew gum at the same time,” urged I.O.U.S.A. protagonist David Walker in an interview on CNBC today. “I think, in the end, Congress will authorize the bailout. But let’s make a fiscal future commission too — to be sure a super subprime crisis doesn’t occur down the road. In the short term, people will buy our debt, but we need to send a signal to foreign lenders that we’re serious about our fiscal future. That’s a reason why we bailed out Fannie Mae and Freddie Mac, pressure from foreign governments.

“We are headed to third-world debt status. We do have to bring stability back, but it’s time to get serious about our own finances.”

  U.S. banks lost up to $15 billion when the government seized Fannie Mae and Freddie Mac. We warned you when it happened that banks around the world would get hit hard by the bailout, and the latest from the American Bankers Association confirms our suspicion.

According to the ABA, 27% of U.S. banks held some kind of Fannie or Freddie paper, totaling up to $15 billion. Even more frightening, 85% of those institutions were “community banks” — banks with assets lower than $1 billion. With losses like that, the mere 12 bank failures this year feels too good to be true.

  Existing home sales fell another 2% in August, said the National Association of Realtors today. Sales of previously owned homes are down 10% year over year. The median price for such a home fell again in August, to $203,100. That’s more than $20,000 less than this time last year.

  Gold has flat lined since its nice pop on Monday. An ounce still costs around $900.

  “Gold is grossly undervalued compared to the stock market,” notes our colleague Doug Casey. Doug sent over this chart today — a startling example of the potential upside for gold:

“Since 1975, the ratio between the 1-ounce price of gold and the S&P 500 has averaged just over 1.3. Even at today’s $900 gold price, the ratio remains beneath its historical average, and exponentially below the levels of the last major gold bull run, in 1980, when rampant inflation and a declining dollar plagued the U.S. economy. Sound familiar?”

Heh. Indeed, it does. For more of Doug’s thoughts on the matter, click here.  

  Oil’s creeping up today. Crude oil is selling for $109 a barrel as we write. Most of the momentum today appears to be coming from a weaker dollar and a buoying stock market.

  Also in the oil patch, the U.S. Congress has decided to allow a ban on offshore drilling to expire. The moratorium on drilling off the Atlantic and Pacific coasts will not be extended when it expires next week, Democrats announced today. Thus ends a quarter-century ban. The Interior Dept. recently estimated that there are up to 18 million barrels of recoverable oil in U.S. costal waters.

Now all we have to do is catch up on decades of underinvestment in offshore tech, edumacate a few hundred geoscientists, build some seismic survey ships, explore the region, actually find the oil, build the infrastructure to get it out, build the infrastructure to bring it to shore and refine it. But we guess it’s a move in the right direction… and a surefire investment opportunity.

  The dollar rallied a bit yesterday as traders took profits on the booming euro and pound. The dollar index rose half a point by the end of Tuesday’s trading. But this morning, the greenback is back in the doghouse. Best we can tell, traders remain skeptical of the bailout proceedings in Washington. The dollar index goes for around 76.5.

  Ugh… and what the hell is this?

The U.S. Mint proudly unveiled designs for four new pennies that will be minted in 2009. To “honor” Abe Lincoln’s 200th birthday, the U.S. government has opted to spend millions of dollars redesigning a coin that is — literally — no longer worth the metal it’s minted on. Poor Honest Abe, a man born in poverty and champion of social innovation, must be tumbling in his dusty grave.

According to the Treasury, 3.6 billion pennies have been minted so far this year — $36 million in pocket change that cost $50 million to mint.

  Last today, another bull market amid all the global crises: scooters.

Aside from the rush of air across your brow and the de facto hipster image that comes from owning a scooter… the little buggers are insanely fuel-efficient. U.S. sales have skyrocketed 66% in the first half, compared to the same time in 2007. Piaggio, the company that owns the Vespa brand, announced recently that July sales were up 173% annually. During the first half of 2008, motorcycle sales inched up only 0.5%.

  “Everywhere I can,” writes a reader, “I’m recommending that all AIG, Freddie Mac and Fannie Mae employees be immediately consolidated into the ranks of U.S. federal employees with their appropriate G.S. ranking. Oh, and government employees don’t get bonuses… and you can get retirement based on today being your first day of government service (no retroactive employment dating). See ya in 20 years.”

  “You wonder how Canadian provinces that border the Great Lakes,” writes a reader, responding to yesterday’s 5, “will respond to the new proposed legislation regarding that area? They already have such legislation in place. Canada is ahead of the U.S. on that one.”

  “In comment to your report about regulating the Great Lakes Basin," writes a reader, "if you’d check, you’d find Canada is in on it too. I live in the region, and we have to protect our resources from money-grubbers and the Southwestern states, which would drain us dry to keep their pockets lined and their golf courses green. The climate there cannot support the number of people moving in, and we are expected to support them?
The 5: Of course, this is Amerika.

And as far as Canada’s involvement is concerned… We did hear that they were partners in this “compact.” But from the details we gathered, the connection seems fuzzy.  Governments can pass bills and draw borders all they want, but we don’t really understand how that works with the Great Lakes. When push comes to shove, and we imagine it someday will, how do you decide which water “belongs” to each state, or each nation?

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. Addison sends his regards from CNN studios in Washington. They called him in this morning to talk about the bailout and its implications on our fiscal future. Check out American Morning tomorrow for his interview with Christine Romans.  


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