Good News, Buffett Buy Signal, Trading Advice, Resource War and More!

by Addison Wiggin & Ian Mathias

  • Behold, at long last… a bit of good news
  • Buffett’s buying, but is he too early? The 5 examines a classic Oracle metric
  • Wayne Burritt with some short-term trading advice
  • Latest chapter in the coming resource war… Russia pulls strings to shut down U.S. airbase
  • Pat Cox on the 30 seconds of the Super Bowl no investor should have missed
  • Plus, more buried treasure unearthed… the latest trials of Odyssey Marine

  What’s this? A rare bit of good news: The U.S. economy may have performed better than expected in January.

Both the U.S. manufacturing and service sectors perked up during the month, the Institute for Supply Management reported this week. The ISM released its manufacturing survey Monday. It rose from a nearly three-decade low of 32.6 to 35.6 in January.

Likewise, the ISM’s measure of the U.S. services, released yesterday, jumped from 40.1 to 42.9. While the two measures still signal industries in contraction, both beat Wall Street estimates.

  Still, the major indexes slipped Wednesday, mostly due to a barrage of premarket earnings disappointments. The Dow fared the worst, falling 1.5%. The S&P 500 fell 0.8%, and tech seems back in vogue lately, as the Nasdaq managed to break even for the day.

  While traders are a mite cautious, value investors are diving in. Buffett’s Berkshire Hathaway has made two notable purchases this week.

Yesterday, Buffett picked up $300 million worth of Harley-Davidson’s debt, which comes with a fat 15% coupon. And today, Buffett bumped about $2.6 billion into Swiss Re — the world’s largest reinsurance business. Berkshire will get a 12% yield on this deal, with warrants to convert to stock three years from now… at today’s price.

Buffett’s investment was announced moments after Swiss Re announced a $860 million loss for 2008.

  We’re not surprised Buffett’s buying, frankly. The broad market has reached one of his most famous metrics for fair value. Check out this chart:

Buffett famously avoided stocks in his personal portfolio after the tech bust, when the ratio above was still around 130%. He told Fortune magazine then that “If the percentage relationship falls to the 70-80% area, buying stocks is likely to work very well for you."

As you can see, the percentage today is right in Buffett’s sweet spot.

Still, take a closer look at that chart: Stocks still look like they have a way to fall. If this current economic cycle beats the ’70s but turns out to be not quite as great as the Depression — stocks are poised to fall to 40% of GNP. If it’s an even greater depression… they’ll fall further still.

Either that or the U.S. GNP will have to improve dramatically. Heh.

  One last nugget on Buffett: This week, he topped Forbes list of wealthiest CEOs of publicly traded companies, again. That’s no surprise, but here’s the part that got our attention: Four of the CEOs on that list are Indian. Two are the Ambani brothers, famous inheritors of their father’s Indian mega-conglomerate. Lakshmi Mittal is in there too, a prolific industrialist. And Sunil Mittal made the list too, a telecom guru not related to the first Mittal.

We’ve been watching the rise of India with some interest even as the stock market there has gotten bruised during the credit crunch. We’ll continue to keep one eye on the subcontinent and let you know when we feel it’s time to put the sandals back on.

  “From a technical aspect,” notes our trading adviser Wayne Burritt, “we are now poised to take a crack at the bottom of our trading channel, just as I predicted. The trading range we’ve been talking about for weeks is firmly in place. The market is now approaching the low of the 805 area.

“Here’s my worry. After the market bounced off the trading range low in late January, it failed to reach the range top. In fact, it succeeded in climbing to only 878, just 9% from the range low and hardly a substantial move. That means that while there was a bounce, it didn’t have a ton of steam and sputtered pretty quickly.

“What I’d liked to have seen was a bounce off the range low and then a strong rise to somewhere near the range top. In that case, we could have thought about targeting put plays at the top and call plays at the bottom.

“When that didn’t happen, it was clear the technical factors — while still in place — were not strong enough to support a trade. The lousy fundamental factors weren’t helping matters much either. That’s why right now, I want you to keep your powder dry. I know we haven’t had a trade in a while, but I can’t put anything on until I feel it has a good chance of working out. Right now, my signals just aren’t convincing enough, either to the upside or downside.”

Not coincidentally, we just launched a brand new service with Wayne at the helm, one that’s perfect for the beaten down market we’re stuck with today. Learn all about his strategy, here.

  U.S. credit card delinquencies hit a record high in January, Fitch Ratings said yesterday. Payments at least 60 days late jumped half a percentage point, to 3.75%, what Fitch claims is a record in the credit card industry.

What’s more, creditors wrote off loans to delinquent borrowers (“charge-offs”) at a record rate too, 7.5%. Credit card lending accounts for anywhere between 15-25% of income at banking giants like Citi and Bank of America. This sort of trend should spice things up.

  The Bank of England slashed rates to a record-low 1% this morning. Faced with a truly frightening economy, the BoE cut rates by 50bps, bringing its main lending rate to the lowest in its 315-year history.
 

  Thus, the pound gained some attention today, but in a peculiar fashion. The pound has been climbing from its recent lows all week, and even managed to rise again this morning after the BoE’s cuts. It’s up a full nickel versus the dollar since Monday, now at $1.46.
 
Traders reckon the BoE rate cut will eventually lead to a stronger pound, as lower rates decrease the odds that the U.K. will financially implode… which is strangely possible. What’s more, the street anticipated the magnitude of the cut. Some worst-case scenarios are already priced into the pound, and the lack of surprises seems to be giving traders a shot of courage.

  Gold got a nice bump this morning , thanks to the BoE’s initiative. Also helping gold’s cause, Goldman Sachs has upped its gold forecast. The investment bank now has a six-month target of $950 an ounce and a 12-month guess of $825.

This morning, gold is up about $15, to just under $920 an ounce.

  Under pressure from Russia, the Kyrgyz government has suddenly closed an airbase vital to the U.S.’ war in Afghanistan.

While Kyrgyzstan has not officially stated that Russia influenced its decision to shut down the Manas Base, it’s widely believed that Russia is wooing the leaders of the country with massive financial loans and resource agreements.

Again, we expect resource wars in the Stans region to be a major feature of the political, economic and, therefore, investment landscape of the next decade… and beyond.

“I hope you watched the Super Bowl,” notes our tech adviser Patrick Cox, “for several reasons. One is that Super Bowl 43 ranks among the best games ever played. I didn’t think the first half, ending with the longest and most dramatic play in Super Bowl history, could be topped. It was.

“The other was the most interesting aspect of the Super Bowl, and it took place just a few minutes before coin toss. It was then that approximately 95 million viewers heard that Steelers wide receiver Hines Ward had stem cell therapy for his knee injury. Moreover, we learned that, according to Ward, his knee was better than ever.

“Remember, NBC sold 30 seconds of prime Super Bowl time to advertisers for $2.4-3 million. A noncommercial celebrity endorsement for a technology in that setting is worth far more. And it came the same week that the headline on Time magazine’s cover touts, "How the Coming Revolution in Stem Cells Could Save Your Life." The article itself deals extensively with iPS cells, the transformed adult cells that have all the power, but none of the ethical problems, of embryonic cells. You already know about them, of course.

“A stem cell bubble is coming. Only the timing is uncertain, but things are happening very, very rapidly. Fortunes will be made by stem cell investors. My readers already own the two companies that have the most important patent holdings. I’m looking at adding a few of the best niche therapy companies as well.”

Again, all controversies aside, we think this stem cell movement is too big to ignore. Patrick has done a great job preparing his readers… if you’d like his advice too, check out this special report on stem cell investing.

  We’ve been watching with some fascination the travails of Odyssey Marine after they had their $500 million dollar treasure seized by the Spanish government last year. They’ve been in court trying to protect the location of the find and retrieve the booty ever since.

This morning, we have news… they’ve done it again. The treasure hunters found the remains of the HMS Victory — the pride of the British Navy. She was sunk in 1744, with all 1,150 crew members and more than 4 tons of Portuguese gold in stow.


A "42-pounder" being hoisted off the ocean floor. There’s a show on the Discovery Channel tonight, 10 p.m. EST, about the expedition.

As you can imagine, just like Odyssey’s big discovery last year, the group finds themselves at the center of another huge controversy. The ship belongs to Britain, the gold is Portuguese and Odyssey says “finders keepers.”

Our friend Nick Bruyer, whom you’ve read about here in The 5, is the guy Odyssey turns to when they want to assess the value of coins found with the wreck. He hasn’t said much about this current find, as the information has been embargoed before the show tonight.

But at lunch in the fall last year, he suggested if and when the suit against the Spanish government gets resolved, we’ll get a chance to check out the fortune in coins firsthand… and then offer up the available quantities to readers of The 5 on an exclusive basis. We’re not holding our breath this will happen anytime soon. Heh. But we’ll keep you posted on the developments with the English find as they develop.

In the meantime, another of Nick’s offerings seems to have been quite popular among readers. If you haven’t had a chance, you may be interested in taking a look. Get the details here.

“Please mention to your readers,” writes a reader, “the irony in rescuing the banks by the TARP money. In that I have yet seen anyone mention the interest rate tied to the TARP funds. The bank has to pay 5% over a two-year period and then it adjusts to 8.5%.

“How can troubled banks pay back money when they are not loaning any money, and to loan money, they would have to do it at a much higher rate than 5% or 8.5%. Who is going to pay that rate? They have borrowed money they cannot pay back. Sound eerily familiar?”

The 5: Yes, it does. And now that those same banks are going to suffer a federally mandated “brain drain” because they can pay executives only $500,000 a year, their chances of survival are even more impinged. Makes you wonder why they bothered spending all that taxpayer money in the first place. Hmmn… well, at least Paulson’s buddies got their bonuses before Obama had a chance to put the kibosh on the plan.

An interesting side note: Back on Sept. 15, the day Lehman Bros. declared bankruptcy, we were giving a talk at Brown Advisory, a descendent of the once formidable investment bank Alex Brown.

A few years ago, Alex Brown was purchased by Bank Boston, which, in turn, was gobbled up by Deutsche Bank. When the management of Alex Brown agreed to the Bank Boston deal, some of the top talent decided to stay here in Baltimore. They formed Brown Advisory.

On the day of the talk, another event was taking place. Brown Advisory was merging with another spinoff from Alex Brown, the last of the independent companies that were spawned from the original bank. One of the founding members of Brown opened the meeting by holding up a plaque:

“This commemorates the IPO of Alex Brown back in 1987,” he said, “As you’ll see, it’s also somewhat of a tombstone. Now that Lehman Bros. is bankrupt and we’re conducting this merger today, none of the 60 firms involved in that IPO exists any longer.”

The sentiment behind Obama and Geithner’s decree yesterday was simple. They want to punish the “banks” for behaving irresponsibly in giving such large bonuses to management when the financial system is flailing. But top talent of these firms don’t have to stay, either. They can shop their wares at banks who didn’t apply for TARP funds.

Banks and brokerages, even reputable household names, come and go in regular market conditions. By signing this decree, the administration has effectively guaranteed the failure of all banks that have applied for TARP money… rendering the program — and a big chunk of the $1.2 trillion dollar deficit — moot. That, or they’ve created a caste of banks whose only chance of survival will be on life-support from a perpetual TARP program… all funded by borrowing money from lenders overseas.

  “I guess I’m an idiot,” writes another reader, connecting the dots for us a little further, “and I’m not sure what hole I came out of, but it seems to me that in all of history, if you borrow money from somebody, they get to dictate the terms! This is a free country, or almost. If you don’t like the terms, don’t borrow the money.
 
“As far as China dictating what happens in the I.O.U.S.A., it is already happening, and I don’t blame them a bit. If you had that much money loaned to someone and they started to devalue it like we are going to need to do, what would you do? I know I wouldn’t just sit back and do nothing.”

Cheers,

Addison Wiggin
The 5 Min. Forecast

rspertzel

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