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MAKING CENTS OUT OF THE NEWS
Blog #13
(March 26th, 2009)
SPROUTS, STIMULI, AND SAGES
By Tom McAllister, CFP™
On my daily walks here in central Indiana , I'm beginning to notice green sprouts and even a few flowers. Economic gurus seem to be noticing signs of sprouting as well. Less than two weeks ago, Chairman Bernanke of the Federal Reserve Board, in an interview on CBS’ 60 Minutes program, referenced some "economic sprouts" he was starting to see. More sprouts were evident the next day, as the government reported that February housing starts were up 47% as compared with the prior month (observers had expected to hear starts were flat).
In a recent blog I mentioned seeing “a glimmer of light at the end of tunnel.” I'm now sure there is a light there. Bernanke believes the current recession in America will probably end this year, with a full recovery to follow in 2010. Everything depends, Bernanke pointed out, “on getting banks to lend more freely again, and getting the financial markets to work more normally.”
I believe the Fed’s flooding the financial markets with reserves, and the availability of an extraordinarily low (1/4% ) interest rate benchmark, are enough, in and of themselves, to ensure a recovery. Add to this the effects of the Obama stimulus bill, which is only beginning to be implemented, and we should see the economy well on its way to recovery by the end of this year.
A second economic "sage", Warren Buffet, was interviewed on CNBC. (This is a network I rarely view and which I have often panned for its extremely short term focus in its approach to financial news.) This interview, by contrast, consisting of one-hour of highlights of a three and half hour long discussion, was enlightening and reinforcing to my views as a value investing advocate.
Mr. Buffet admitted that he, along with so many of us, had been taken by surprise by the suddenness, as well as the severity, of the financial meltdown. Buffett opined that, five years from now, things would be back to normal, and in fact very good for stock investors in America . He also repeated his mantra; “I don’t invest in stocks I cannot understand!” This approach has allowed Buffett, along with his holding company Berkshire Hathaway, enormous success in recent decades.
As one example, he pointed out that Berkshire made a $5 billion dollar investment in Goldman Sachs at the depths of the financial crisis last fall. Goldman stock continued to fall, and many pundits called this play a mistake. Mr. Buffet pointed out that the investment was in preferred stock paying a 10% dividend, and also included warrants on a block of common stock as an "equity kicker". Right now this looks like another “stroke of genius” by Mr. Buffet.
Mr. Buffet further encouraged Americans to resume consumer spending, that the economy for the long term is sound, and that the credit system is being patched back together. The government cannot spend us back to prosperity but the consumer can and will, eventually.
Two giants of the American financial universe were on TV back to back on a Sunday night, both talking "sprouts", encouraging the American public to stay the course. Your financial planner presumes to agree!
With all the rapid changes in our economy and in the investment markets, there are many investors who would benefit from more consistent guidance. We are currently accepting new financial planning and investment clients, and would appreciate your referrals.
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