Buffett Says Buy, Understand the VIX, Housing and Fed Data Worsens, A Silver Lining, and More!

by Addison Wiggin & Ian Mathias

  • Buffett says it’s time to buy… history says he’s pretty good at calling bottoms
  • The VIX fix… how you should be interpreting the latest volatility spike
  • Fed sets another record, daily lending exceeds $437 billion! Ed Bugos explains
  • John Williams on the new dollar/oil/gold paradigm
  • Data galore… housing, sentiment from bad to worse, but one release we’re happy to see

  Warren Buffett called the bottom for U.S. equities this morning. If not explicitly, then tacitly.

In a rare Op-Ed piece in The New York Times, the Oracle said he’s “been buying American stocks.” Not Berkshire, but Buffett himself.

If you’re an avid Warren-watcher, you may know his personal, non-Berkshire portfolio has been notoriously filled with U.S. Treasuries… until now: “If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities.”

  “[I feel] like an oversexed guy in a whorehouse,” he told Forbes on Nov. 1, 1974, calling the market bottom nearly to the day.

The Dow nearly doubled from its low two years later. Fifteen years later, it tripled. And in November 1999, after the Dow had gone up about 1,000%, he told Berkshire investors, “We do not think the general ownership of equities is going to be very exciting over the next 10-15 years."

Buffett goes on to predict that “most major companies will be setting new profit records 5, 10 and 20 years from now.” Of course, he issues the usual caveats… that he hasn’t “the faintest idea” where stocks are headed in the short term.

  Indeed, the stock market opened down 250 today. Regardless of Buffett’s endorsement, it’s still a “buy the dips, sell the rallies” kind of market. For specific ways to survive — even thrive — in this market, we’re hosting the first of our Free Emergency Retirement Recovery Series of “Webinars” starting next Tuesday. Sign up here today to reserve your spot…. Again, it’s free.

  Yesterday, investors endured another neck-breaking 781-point swing. The index plunged as low as 380 points in the morning, only to rise to a 401-point gain in the last hour of trading. That’s good for a 4.6% gain these days.

The Nasdaq fared even better, with a 5.4% pop. The S&P 500 finished third… a measly 4.2% gain.

  The volatility index (VIX) shot up to a record high of 81 yesterday. Looking back in the history of the VIX, this is clearly the worst (best?) of times:

While that does provide some look into the fear and uncertainty in the S&P 500, it’s really a testament to how wild the options market has become. The VIX is literally options traders’ anticipated movement of the S&P 500 over the next 30 days, annualized. So when the VIX hit 81, options are pricing an up or down annualized change of 81% over the next 30 days.

Simply put, it’s the Wild West in the options market. For that reason, we just finalized the best deal we’ve ever offered for our high-end options trading service, Options Hotline. Click here for the details.

  U.S. industrial output dropped 2.8% in September — its biggest drop in 34 years. The Fed’s latest report cited hurricanes in the Gulf and the Boeing strike as the catalysts for the lousy numbers. Year to date, industrial output is down 4.5%.

  As we forecast last week, oil dipped into the $60s yesterday… $69, to be exact. The U.S. Energy Dept. announced another bigger-than-expected inventory report. Crude inventories were up 5.6 million barrels last week, compared to the forecast increase of 1.9 million barrels. Gasoline inventories were much higher than anticipated, as well. Coupled with the industrial output report, that was all she wrote for $70 oil.

  “It has been decided to reschedule the extraordinary meeting of the OPEC conference,” read an OPEC statement yesterday. The cartel has decided to bump its Nov. 18 meeting to next Friday. With oil at a 14-month low — cut in half in the last three months — we can’t blame it.

Just about everyone and their mother expects OPEC to emerge with plans to cut production. Our mothers, too.

  Gold plunged 5% yesterday, to $795. If you’re a long-term investor, today’s $790 looks like a bargain. The dollar index is stuck to yesterday’s levels this morning, around 82.4.

“To recent strength in the dollar, weakness in oil prices and softness in gold prices,” notes John Williams, “much has been distorted by the systemic solvency crisis, where forced liquidations of related financial instruments have caused prices movements well beyond or counter to underlying fundamentals.

“In particular, as the markets begin to stabilize, the U.S. dollar should come under intense selling pressures. Regardless of the global nature of some actions taken to stabilize the system, the primary solvency crisis and the fiscally and monetarily destructive corrective actions are predominantly U.S. issues, ones that materially have weakened the already miserable underlying fundamentals for the U.S. dollar.

“When dollar selling resumes, eventually evolving into a massive flight-to-safety outside the dollar, that should put upside pressure on the prices of precious metals. Oil prices should surge in dollar terms, too, irrespective of any softening oil demand due to slower U.S. or global economic activity.”

  The Fed is still doing its part to devalue the greenback: Banks borrowed a record $437 billion from the Fed last week… per day!

In the week ending Oct. 15, borrowings from the Fed averaged $437.53 billion each day, an all-time high. That’s an average $99 billion a day from the discount window; $133 billion a day for the Primary Broker Credit Facility; $82 billion for “other credit extensions, namely AIG; and $122 billion (PER FREAKING DAY) for the new commercial paper swap fund.

As of Oct. 15, the Treasury has sold over $499 billion in Treasury bills to fund the Fed’s supplementary financing account, which it uses to make these loans. They sold $50 billion in T-bills last week alone. Incredible.

  “Undoubtedly, there is deflation working against all the Fed is doing,” admits our resident Fed watcher/gold bull Ed Bugos.
“But there always is. There are always reciprocal cancellations and debt defaults. But they are always overcome by the Fed — that is the very reason the Fed abandoned the gold standard in the first place. So it can print reserves.
“I still believe it is only a matter of time before the lender’s strike collapses and the banks start creating credit and money again, using the massive $150 (+/-) billion in excess reserves that have piled up during September. It is possible that it will result in the biggest annual growth in money, ever. In the meantime, my concern about gold is not deflation. It is that the panic in asset markets has created bargains in many sectors that are now going to be competition for gold.
“Ultimately, the inflation is a fundamental that will drive gold higher.
“In the short run, it could boost stock prices, and everyone could don their rosy-colored glasses… until the next economic bomb reminds them of the endgame. This could be weeks, or it could be months. But it will not be years.”

  Yesterday, the National Association of Homebuilders reported all-time low homebuilder sentiment. Their index of builder vibes dropped 3 points in the first half of October, to a score of 14. That’s the worst since they started keeping track in 1985.

And this morning, housing starts hit a 17-year low. Builders broke ground on 6.3% fewer homes in September, says the Commerce Dept. That puts us at an annual rate of 817,000 new homes, down 31% from September 2007.

  Can’t say we’re surprised to see consumer sentiment hit new lows, either. The University of Michigan/Reuters index of consumer sentiment printed an 18.2% decline, the biggest monthly fall in the history of the survey.

They currently score consumer sentiment at 57.5, down sharply from September’s 70.3 and way worse than the Street’s expected 64.5. Only two other times in the 56-year history of the survey has sentiment been lower, both in 1980.

  Here’s one silver lining to all the hand-wringing going on about the market and the economy: Americans have begun to save again… even if only a little bit:

According to a recent Dept. of Commerce report, the personal savings rate jumped up to 2.7%. Incroyable.

  “Do you know the opposite of progress?” asks a reader. “Congress. No wonder I am not at all surprised our gov’ment lost money on a whorehouse . Those boneheads can’t figure their way out of a wet paper bag and we expect them to understand derivatives and CDOs (we are so screwed).

“You did notice Secretary Paulson and the U.S. Treasury quietly and totally changed what he plans to do with the $700 billion bailout package? Are we now buying whole loans? Doing whole loan purchases might really put a dent into fixin’ this mess, and the people over time would make some money… no way. We the people… will now own proffered shares of banks, with the same ole toxic assets — can you say ‘more write-downs’? At least the banks can use the cash to surrender the high-interest bonds that are out there. That will at least slow the fall into the abyss.

“My guess is we got a $700 billion bandage for a gunshot wound, and in less than 12 months, that money will have vanished into thin air.

“BTW, do you think I.O.U.S.A. might make it to the Florida Panhandle?”

The 5: Thankfully, Congress will not be doing the derivative and CDO bartering. It only authorized the Treasury to do so, which has, in turn, tapped the Fed and private firms like Pimco. That’s not to say it’ll be perfect, but certainly better than Barney Frank.

The film will be opening in Jacksonville on Oct. 31… as well as 35 other new cities. To see if there’s one near you, click here.


Addison Wiggin,
The 5 Min. Forecast

P.S. If you’re going to be at the screening at the New Hampshire Film Fest , we’ll see you there. If you’ve already seen the movie, you’ll get a kick out of this: WMUR TV — the news program that aired the man swallowing a diamond ring rather than covering the Fiscal Wake-Up Tour — is doing a live interview with Patrick and me right before the screening tonight. I don’t think they’ve seen the movie themselves… heh.

P.S. Seats are filling up fast for our virtual seminar, the Free Emergency Retirement Recovery Series. Next Tuesday at 11 a.m. EST, we’ll broadcast the first “Webinar” in the series. The tech guys tell us you don’t need any more equipment or software than what you already use to read The 5 every day. It’s free… so why not sign up here?


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