by Joseph Hogue, CFA
Bloomberg reports yesterday that Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) jumped back into the market last quarter, with twice the amount of equity purchases as in the second quarter of this year. The last time the Oracle of Omaha invested as much was towards the 2008 market lows during the last quarters of that year.
The company’s filing with the SEC shows a purchase of $23.9 billion with $7 billion in equities, $5 billion for preferred shares in Bank of America (NYSE:BAC), and the purchase of Lubrizol Corp. for $9 billion. The company disclosed new positions in Mastercard (NYSE:MA) and Dollar General (NYSE:DG) but filed for permission to omit specific information to protect the company’s strategic plans.
The article makes a point of Buffett’s increase in purchases of company’s outside his typical financials and consumer-products purchases, but I’m not quite as impressed. Financials and consumer-products are relatively ‘cheaper’ sectors on a price multiple, so it’s natural for a value investor to have larger exposure in these companies. The sectors are typically made up of more mature companies with lower margins, ripe for a corporate buyer that can bring in new management and make profit-driving changes. The fact that Berkshire increased exposure to other sectors shows its perception of long-term value in the market. While earnings per share for S&P500 companies have increased around 16% so far this year, equity prices have languished under debt and deficit fears.
Bloomberg BusinessWeek also reports that capital spending in the United States rose 24% in the third quarter, the highest since 2008. The market has been transfixed like a deer in the headlights for all things Europe lately, while having not seen the signs of a recovering U.S. economy. While problems still persist in the U.S., a pick up in corporate spending could be enough to tip the employment picture to job growth. Weekly jobless claims dropped below the critical 400,000 mark last week, and a continued pace below that mark could nudge the unemployment rate down further. As the unemployment rate begins to decrease, the housing picture could stabilize as banks ease off tightened lending restrictions. Granted, it’s a long way to go from increased capital spending to a full economic recovery, but it has to start somewhere. Corporations have been sitting on so much cash that it just took marginal improvement in the outlook in order to drive investment.
Trailing earnings for S&P500 companies is at $94.77, meaning that the index is trading for about 13.3 times. This isn’t nearly as cheap as a month ago when the market hit its October 3rd bottom of 1,099 but is still relatively inexpensive to historical standards.
Combine this increasingly positive outlook in the U.S. with a still healthy outlook in the emerging world and investors should have reason to cheer. Alas, all is not right with the world, and we all know the name of the 800-pound gorilla-- Europe. Despite recent agreements in the E.U. and a coalition acceptance of austerity packages in Greece, I have zero faith that the debt problem is anywhere near resolved. A Reuters poll of economists puts eurozone economic growth at 1.0% this year and 1.5% in 2012. Even with proposed austerity measures, the region will not be able to put its debt problems in the rearview. Additionally, the recent ‘cooperation’ by banks in accepting a 50% haircut on Greek sovereign debt is driving many institutions to sell out of their sovereign debt positions at a loss as they try to meet recapitalization requirements. Sovereign bond demand is declining and yields are increasing as countries try to improve their balance sheets. In the end, I am not confident that the European public will have the patience to ride out necessary austerity measures. A default in Greece could be followed quickly by one in Portugal before the E.U. takes drastic measures to save Italy and Spain.
If economic data is improving in the U.S. and still relatively healthy in the emerging world but Europe may drag everything down regardless, what’s an investor to do? Gradually increasing exposure to specific companies within specific sectors could be a good bet. These include companies serving consumers in the U.S. or emerging markets like TIM Participacoes (TSU) in Brazil or Home Depot (HD) here in the States. A previous article this week looked at prior precedent in SEC settlements to show that Avon (AVP) has been oversold on recent investigations. Additionally, it might be time to increase exposure into companies related to the construction and homebuilding industry in the United States. Since my article on increasing exposure to the homebuilders on September 8th, the SPDR S&P Homebuilders Index (XHB) is up 13.6%. Investors will want to avoid companies with a large share of revenues from the eurozone, especially the banking institutions. The SPDR S&P International Financial Sector ETF (IPF) holds nearly half its exposure in eurozone financials.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.