Is Uncle Warren Bailing on Stockmarket?

Investment Analysis Clubs Macro Economic Trends and Risks
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For Steve H. Hanke, a professor of applied economics at Johns Hopkins University who served on President Ronald Reagan’s Council of Economic Advisers, Buffett’s and Berkshire Hathaway’s “recent lightening up on stocks and accumulation of a pile of cash—$157 billion—is consistent with the fact that stocks are relatively pricey right now.”

But it’s also, crucially, a sign “that a recession is right around the corner,” Hanke told Newsweek

Perhaps stock bargains are around the corner?

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I’m extremely skeptical this is a valid conclusion. Over the years Buffett has said many times he doesn’t pay attention to macroeconomics or stock market forecasts.

While the $157 cash horde is gargantuan in absolute terms, it isn’t that big relative to BRK’s percentage of cash holdings in the past.

Also, in his last interview Munger said that they were looking for large deals but expressed frustration they hadn’t closed one yet. That’s not the type of statement you’d make if you were looking to get out of the market.

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A couple of thoughts on this (maybe three).

Cash on Hand being a high number needs to be put in relation to the value of BRK. While $157 million is a record, it may not be a record in relation to book value (or other relevant metric). It probably is still a record but it tells us a lot less outside of that context.

Cash (especially for Buffett) is also paying higher than it has in decades - so when comparing stock to the “risk free” alternative leaves stock, even if forecasted to produce high single digit returns next year, not worth the risk or the opportunity cost that having a lot of cash presents (at least for those with deep pockets). I think the decision to sit on cash, at least for Buffett, says less about a potential recession and more about what he (and often uniquely) can do with a lot of cash.

I am specifically reminded of this example:

Snip:
Back in 2011, Warren Buffett made a $5 billion investment in struggling Bank of America (NYSE: BAC) .
Buffett’s company**, Berkshire Hathaway (NYSE: BRK-B)** , bought preferred stock that paid a 6% annual dividend.
Those preferred shares included a stock warrants. A warrant allows the owner to acquire stock at a pre-determined price for a specified period of time.
In the case of Buffett and Bank of America, the warrants allowed Berkshire to buy 700 million common shares of Bank of America stock at a price of $7.14. And Berkshire could “execute” the warrants any time before expiration in year 2021.
…
Fast forward six years, and Bank of America stock is trading in in the mid-$20s.
In late June, Buffett announced that he would exercise the stock warrants.
This essentially allowed Berkshire Hathaway to pay $7.14 for a stock that was now trading for over $24.
The total payout? A cool $12 billion.

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I agree. I suspect that a few things are in play here:

  1. Buffett expects that the CRE debacle will hit sometime over the next few years and many midsize banks will be in danger of going down. The Fed will, of course, engineer some sort of bailout. BUT, for real confidence building, it takes someone without an infinite balance sheet. If someone else puts their finite balance sheet at risk, it shows a lot more confidence. Maybe that’s what the cash could be used for. At great profit with any luck.
  2. The market may be overvalued in WEBs eyes right now. Maybe all the companies he would like to buy, either in whole or in part, are priced too high now.
  3. Warren knows that he is going to die sometime in the next few years. Maybe he wants to leave his successor(s) with a huge pile of cash so they can immediately begin making their own mark, without everyone saying “oh, their success/failure is still not their own because WEB made most of the decisions to date.”
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Buffett is as much a trader as an investor. The 2008 crash made him a bundle bailing out failing giants…

Note to gold bugs, he didn’t buy gold as far as I know.

The Captain

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I think what he means by that is he won’t make “public” predictions about macroeconomics or the stock market.

I think he simplifies it because he does not owe any of us s…h…i…t…

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My memory is Buffet is not fond of gold at all, ever. Makes no dividends, costs money to store, etc. etc. etc. It’s absolutely nothing he looks for in an investment.

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However, I remember he did a silver speculation back in 1997.

DB2