Is this the big turning point?
I’m not talking about the $700bn bail-out package that Hank Paulson is trying to bully past US politicans. No, I’m talking about something much more important – Warren Buffett’s $5bn investment in Goldman Sachs.
When the man generally known as the world’s best stock-picker makes a move, people get excited. So is it time to pile into the financial sector?
Absolutely.
But only if you can get the same terms as Mr Buffett. And unless you’re a billionaire investor called Warren, I suspect you’ll find that a tall order…
Does Warren Buffett’s investment mean it’s time to buy?
Warren Buffett has gone bargain-hunting. That’s usually a good sign. However, Mr Buffett is in a position to dictate terms that the rest of us ordinary mortals can only dream of.
If you can get Goldman Sachs to sell you ‘perpetual’ preferred stock (these rank higher than ordinary stocks if a company goes bust, and also get paid dividends ahead of other stock) with a 10% dividend yield, and throw in a stack of in-the-money warrants on the side as a little sweetener, then fair enough – fill your boots. Otherwise, I wouldn’t be buying.
You can see why Goldman has gone for the deal. Japan’s Sumitomo Mitsui was also interested, but the truth is that, regardless of whatever terms they were offering, Mr Buffett would be hard to beat. After all, as Richard Beales puts it in The Daily Telegraph, he’s about “the only investor whose endorsement could be worth more than his cash.” The deal would certainly have been part of the reason that Goldman was able to raise a full $5bn – twice as much as it had hoped – from a stock offering yesterday.
And the fact that Mr Buffett has extracted such attractive terms from the bank shows two things. One, they weren’t in a position to argue. And two, even although competition in the banking sector has been sharply reduced in recent months (bye-bye Lehman, Bear Stearns, Merrill Lynch, etc.) he still thinks it’s a risky investment. Goldman ordinary stock only yields 1.1%. A 10% dividend represents a massive safety cushion in the event that Goldman stock falls further.
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This doesn’t mean we’re approaching the bottom
OK. So Mr Buffett got a good deal and one that we can’t hope to replicate. But is his rising interest a sign that we’re at least approaching a bottom?
Tom Stevenson in The Telegraph notes that there are signs that would normally point to capitulation. There’s the fact that the average dividend yield on stocks is now matching the yield on 10-year government bonds. That marked the bottom in 2003. And there are lots of signs of rampant fear, like gold soaring and the Vix (volatility) index leaping, and grim magazine covers plastered across newsagents’ shelves.
But he also points out that it would seem a touch unreasonable to expect 20 years of debt expansion to be “purged” after just one year. And also, “markets tend to hit rock bottom in the middle of recessions. We feel closer to the beginning of this slump than the end, on this side of the Atlantic anyway.”
However, he reckons it’s a decent time to buy anyway. About a third of FTSE 100 stocks – not all of them banks – are yielding 4.7% or more. And if you feed money into the markets just now, you’ll be sure of catching the upswing when it does finally arrive.
He makes some good points. And I reckon that if you’re picky, there probably are some decent UK stocks out there. Nice, defensive big pharma groups GlaxoSmithKline and AstraZeneca, for example, are each yielding 4.9% for 2009. But I wouldn’t be keen to put money in a tracker fund at the moment – stocks could fall a lot further.
Japan has the one thing that everybody wants right now – cash
No, if I was looking to invest in any equity market right now, Japan would still be my first port of call. Now, we’ve been big fans of Japan for a long time here at MoneyWeek, and frankly, it’s not been a winning position. But I can’t help but think that Japanese banks hoovering up stakes in collapsed US banks is a good sign for Japan in general. Apart from anything else, it’ll remind investors of Japan’s greatest asset at the moment – money. That’s something that most of the Western world doesn’t have at the moment.
And of those countries that do have money, Japan’s about the only one that also has a highly-developed financial sector. China may have huge currency reserves, but it’s also got a pretty dodgy-looking banking sector, as my colleague Cris Sholto Heaton pointed out recently (see: Why China could be in for a sharp slowdown). I suspect that as Japan starts splashing this cash, global investors will start to take notice of how cheap its markets look.
As for Western stock markets, our regular commentator, Pali stockbroker and economist James Ferguson, has some pretty specific views on when he thinks they could make a major comeback. You can read his points in this week’s issue of MoneyWeek, out on Friday (subscribe to MoneyWeek magazine). Or if you can’t wait, James also runs his own email investment service,Model Investor.
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