The Oracle Has Spoken: Confirmation and Validation

In Ancient Greece, some were believed to have the unique power of seeing the future. Kings, nobles, and government officials consulted the Oracle on many occasions. The Oracle at Delphi was said to influence government policies, marriages, and even wars.

On Monday, the Oracle of Omaha spoke as well. During an interview on CNBC, Warren Buffet shared some market insight with the viewer audience [1]. Here is a summary of the interview:

1. We are currently in a recession.
2. The recession will last longer than most people think.
3. Current trade policies will continue to weaken the U.S. dollar.
4. An over-active Fed has damaged the financial stability with the bail out financial institutions. [2]
5. The Fed should re-evaluate decisions about further rate cuts.

Buffet's market foresight, uncanny ability to read market conditions, and insight in develop winning strategies has earned him the prestige of America's most prized investor. Mr. President, Congress, and the Fed should pay particular attention on this one. With an election year looming, there is reasonable concern that Washington politics may use the current economic situation as leverage for one candidate or another. [3]

Confirmation and Validation
As the stimulus package reaches families throughout the country, the President is anticipating a recovery, or at least temporary relief. It becomes suspicious when the government hands out checks which will go to one of three areas:

1. oil companies [4]
2. financial institutions in the forms of various credit cards
3. banks and mortgage companies [5]

The last point deserves additional remonstrance. If you live in a thriving metropolis like Denver, there is a good chance that the neighbor living to the left or right of you has either a home equity loan or is on an ARM loan. That's right, almost 30% of people in that town are in over their head. I wonder what that factor would look like if they threw in the revolving debt gauge like credit card default rates...now that would be interesting. Maybe the name of that city should be changed from the "Mile High City" to the "City of Drowning Debt."

At the end of the day, maybe it is the government's wish to give the average American a hedge bet on a wave of inflation that we are bound to see sooner than later. Is there any chance in lieu of a check, I could receive gold or silver bullion...now that would be a real gift! Let's see how much of this money is either saved or pumped back into the stock market? My guess is that figure will be less than 5%. [6]

The stimulus package may be a temporary solution to a longer term problem. As for Wall Street, companies like Capital One Financial (COF) have incredible exposure to credit risk, while a company like Wal-Mart (WMT) may be in a position to help bridge the pinch consumers are bound to feel now and even further down the road. Secondly, domestic oil companies such as PetroQuest Energy (PQ) should be able to expand margins under current market conditions. Last, non-dollar exposure should be considered with the equivalent of Rockefeller's Standard Oil in India, Reliance Petroleum Limited (RPL.NS) or even a basket like the iPath MSCXI India ETN (INP).

Sources Cited:
1. http://www.247wallst.com/2008/04/warren-buffett.html
2. http://www.federalreserve.gov/monetarypolicy/fomc.htm
3. http://www.13wmaz.com/news/national_story.aspx?storyid=51821
4. http://www.gravmag.com/oil2.html
5. http://promo.realestate.yahoo.com/worst-cities-for-homeowner-debt.html
6. http://www.nber.org/releases/

Comments

[punk_ash]

Warren Buffet must be the chief economic adviser of the US, no matter who is the president - republican or democrat. If he says something, an intelligent investor should listen carefully and act upon what he thinks...

[nmau]

Well, what a difference a day makes. Your pessimism is overdone. The stock more than reflects your concerns. And, in fact, the stimulus checks will HELP COF.

[bruin532]

One day does not a market make!

[riggle99]

Mr. Buffett has a good track record as an investor (excluding missing the entire technology boom), but I don't know that he is an economist or that I would want him setting tax and fiscal policy (although he probably would have done better than Mr. Greenspan). The people he supports politically certainly propose anti-capitalist agendas and their policies will devastate the markets if enacted. One should not take their politics from investors, or their investment decisions from politicians.

[sivere]

We need to re-evaluate the Fed: TakeBackTheFed.com