Buffett Concerned about Inflation? Maybe Not

Good grief. I used to get so frustrated with financial media and would rant on the blog about this piece of poor reporting or how this was taken out of context. I have gotten away from that as I just read less and less financial news from financial media outlets but I couldn't help it this time after reading this Bloomberg article. I actually saw this article about midnight last night and was like, ridiculous, but hoped it would just go away. Instead it became front banner Bloomberg news this morning. Let's start with the title. "Buffett Shortens Bond-Holding Duration After Inflation Warning." I am a Buffett follower and remember no such recent chatter out of Omaha. So I look in the article.

This is the supposed warning:

Buffett, 79, urged Congress last year to guard against inflation as the U.S. economy returned to growth. In an August 2009 op-ed in the New York Times, the Berkshire chief executive officer said government must address the “monetary medicine” that was pumped into the financial system after the 2008 crisis.

Are you kidding me? From a year ago. Opinions on Wall St. have changed drastically from a year ago. Buffett was wrong like everyone else was (well, almost everyone) that inflation was coming. That has no bearing on what Buffett thinks now.

Well what about him shortening duration of his bond portfolio? From the article:

Twenty-one percent of holdings including Treasuries, municipal debt, foreign-government securities and corporate bonds were due in one year or less as of June 30, Omaha, Nebraska-based Berkshire said in a filing Aug. 6. That compares with 18 percent on March 31, and 16 percent at the end of last year’s second quarter.

So he increased his holdings in bonds due in less than one year from 16% of his portfolio to 21%. So an entire article on how Buffett is gearing up for inflation making front page news is based on a warning from a year ago and the fact a 5% increase in the portfolio in bonds due less than one year? Are you kidding me????? I mean the reporter should be fired. Now 5% is not a small move but it isn't gigantic either, but there could be an additional reason for this move THAT IS NOT MENTIONED AT ALL that has nothing to do with inflation. Credit risk!!! Ding ding ding ding. Do we have a winner? This article doesn't mention at all that in June (so only 2 months ago compared to a year ago on his other comments) he warned in front of Congress about the municipal bond market and the possible train wreck it is headed for. Many very savvy investors are also worried about a sovereign debt bubble.

Okay - so if I am worried about credit risk in municipal bonds and potentially in the future on government bonds - I may just shorten the duration of my bond portfolio. That would be logical and has nothing to do with inflation concerns.

Buffett may or may not be really worried about inflation, I would guess not, but there is nothing at all that Buffett has done in the last six months that should generate a headline article on how Buffett is concerned about inflation and we should also. Really really poor reporting.

Stage is Set

Wow, I mentioned last night on how light trading volume was worldwide and than we see a day like today in the U.S. markets. I don't know if I have ever seen a full day like it. We didn't break 1 million contracts in the e mini futures. I don't know if I have ever seen that. The NYSE didn't break 800 million shares. I mean, it was like a holiday.

Well the stage is set for the next fall in the markets. Now the question is if it occurs. I have had tomorrow circled on my calendar for a couple of weeks for when a possible top would be in or very close to in. It may not happen but the market has been buying the rumor that the Fed will save the world so we shall see if A) the market is severly disapointed or B) if it is sell the news. I have been thinking we would get a spike and slam down but that almost seems to easy. Everyone seems to be expecting that - even bulls (though they think it would be just a pause)

Assuming I am right that the market is topping there are several ways for this to play out. The market is always interested in max frustration.

A) Max frustration for the bulls

We are never positive tomorrow. The market opens down and sells off all day never looking back at 1120. The bulls were looking for a spike to take profits and never got that spike. Don't put this as very likely because the bears never have it that easy but who knows.

B) Max frustration for the bears

We get the spike above 1130, maybe even 1140, and start to roll over but the market closes with the market above resistance. Bears are sweating. Wednesday comes and the market opens flat to up or moves up some during the day, the bears give up hope and cover. Thursday another bad jobless claims number comes confirming last week wasn't a fluke and the market tanks.

C) Mix frustration for bears and bulls

Big spike tomorrow with the release causing bulls to get more bullish and bears to start covering. Market doesn't last through the day and sells off hard frustrating everyone. This is what would normally happen and I could be wrong, but it seems to be what most are talking about / expecting. For that reason, what I normally would think would happen I don't think will happen.

Trading Volume Worldwide Slowing

From Bloomberg:

Stock brokers in the United Arab Emirates are struggling to make ends meet as trading volumes tumble to the lowest in four years, forcing some to close.

The number of brokerages in the country may drop to as low as 55 from 81, according to Shuaa Securities LLC, the brokerage unit of the U.A.E.’s biggest investment bank. Twelve firms, from Abu Dhabi-based Makaseb Islamic Financial Services to Dubai- based IFA Securities LLC, filed requests to the Securities and Commodities Authority to halt operations this year as costs rose and revenue fell. Seven shut or suspended operations last year and three in 2008.

and

The average daily volume of shares traded in Dubai has slumped to 173 million so far this year from 477 million in the year-earlier period.

I have mentioned many times how volume has just disapeared. Bull markets die in low volume. However, I wonder if there isn't something more going on? If worldwide the interest to invest, to speculate, isn't slowly dying? I have no idea. Just hypothesisizing.

A Weekend Musing

Friday looked like a bear trap and I covered just a little early Friday afternoon. I wanted to have a some room to short some more if we get a market bounce Monday / Tuesday but I am ready to add it back on. Just a portfolio flexibility thing. The thinking was that we have zero economic news on Monday and the only chatter was going to be about the Fed meeting on Tuesday. Looking for a bounce up to 1130/1150 and the market is done. The possible thesis anyway but not married to that idea and we could be done right here and now. The Hewlett Packard news Friday after the bell throws a wrench into everything. Not that it means anything fundamental to anyone besides HP but it is the outside event that can mess with sentiment on the margin. Remember the Goldman SEC suit in late April? Basically marked the top for the market.

Everything in me tells me the market is getting ready to roll over in a major way. A mix of fundamental stuff, technical stuff, and gut instinct watching the market for years. I could be very wrong but I feel like we are on a tipping point where within the next two weeks the next major leg down will begin.

Bear Trap?

I could be wrong but my gut is telling me this is a bear trap. The jobs numbers were awful. Just dreadful. Huge revision to June. Miss on total jobs and private sector jobs...but, the emphasise will move to Tuesday and the Fed meeting. It is the classic bad news is good news for the equity markets. The markets will start looking towards Tuesday for possible easing from the Fed. It looks like currencies are starting to price that in. Euro up strong. Copper is flat not having any follow through from the sell off yesterday. I am not shorting additional here. It smells fishy. I do think you will know in another hour though whether this is a trap or the real thing.

2Q Letter for Kaspar Investments

Yesterday I sent you my quarterly letter. If you are a regular reader of this blog and are not on my mailing list, put your email address in the comments and I will add you to my distribution list.

Jobless Claims Number - EEEKKK

Don't look now but jobless claims came in at the highest initial claims rate since April - 479,000. Ouch. If we are rolling over like I believe we are - this number should start peculating higher. One caveat though is much fewer people are employed than they were two years ago. A week doesn't make a trend but it will be interesting to watch that number over the next month.

I sort of doubt the market will tank on this number before the non farm payroll report tomorrow morning.

Getting Super Bearish

I am starting to get super bearish again. After just sort of ignoring the market for a few weeks as we bounced around in what I think is a meaningless counter trend rally, I think we are getting close to the markets completely falling apart again. In other words 1010 on the S&P would be taken out. Economically, things appear to be hitting the skids. The market seems zeroed in on the Fed meeting on Tuesday which could be a big sell the news event. I still think the market could have another bounce left in it back towards 1140 but tonight I have been feeling like we are down to a few weeks if not a few days before this thing rolls over. The market cannot keep ignoring the economic reality for very long. Right now bad news is being bought because it increases the odds of government action. That is not sustainable.

Jim Rogers and Commodities

I was asked to comment on this CNBC piece that quotes Jim Rogers and his bullish thesis on agriculture commodities.

The July rise in wheat prices, the fastest in 51 years, indicates that shortages in agriculture are coming, Jim Rogers, chairman of Rogers Holdings, told CNBC.com Tuesday.

and

"Anybody who's got potentially good agriculture land and good weather" is likely to emerge a winner out of this situation because prices of nearly all agricultural commodities are set for steep rises, Rogers said.

"Prices aren't high enough and most people don't believe it," he said. "Unless prices are high you're not going to attract people in the business. Eventually people will go into farming again but it's going to take a while."

Shortages in agriculture are likely to add to problems created by governments who printed money to spend their way out of the financial crisis, according to Rogers.

"It's all happening at a time when governments are printing more money… it's a very dangerous situation," he said.

If there was any asset I would like to own over a five year period besides gold, it would probably be agriculture commodities. However, like gold, I do think agriculture prices are not about to skyrocket to all time highs. They could, but I just don't think the probabilities are in their favor. In the intermediate term (six to 18 months) I think gold and agriculture prices will be lower but there is no way I would put money on that bet. In fact, even though I think that, I would want to own gold currently because the possible alternative is gold goes parabolic.

Jim Rogers has been an agriculture bull for at least five years. He has been mostly right though did not see agriculture prices getting killed in late 2008 with all other commodities. I think we are in a similar situation now and it seems we are following a similar playbook to 2008 in the way the commodities are spiking right as the economy seems to be slowing. Oil going above 140 in the summer of 2008 helped add a final bullet to the head of the consumer.

Finally, there is not much money printing occurring. Only reserves being built.

Bears in Hibernation

Hey all - after being out of town for a couple of weeks, I am back. Been absolutely crazy with business related dealings where sleep has been something that has been little and far in between. Flew back from Chicago late last night. First time I have ever really been in Chicago. Absolutely lovely city.

So my thoughts on the markets. Well the last couple of weeks has all been part of this correction move from the July lows. Not surprised at all that it has happened but I have continually been surprised at the ferocity of such moves. My investing "history" is the late 90s and the early part of this last decade and things just don't go up like this with as much violence. Stair step up elevator down is the old idiom. Well it has been elevators up and down the last couple of years. Today's rally was a right hook to the jaw for many bears. Looks like a legitimate breakout and wasn't expected by many bears. There is a bearish spin which is discussed below.

Volume today again was non existent. Becoming a theme I know. It was the lightest 2% up day in the markets in years. It was also the beginning of the month which saw new money get put to work. Actually, beginning of the months usually follow the previous month if it was a violent move in one direction. Beginning of July was a very bearish day as June was very bearish. The reverse happened in the beginning of the month here. It was also seemed to be a sell the rumor buy the news type of day regardless if the news was bad. China PMI data came out over the weekend. The official government PMI number came out at 51.2 down from 52.1 The separate HSBC number fell to 49.4 from 50.4. Anything above 50 is growth and below is contraction. It was the weakest number in over a year for China and was not a good number but the spin is that China has now slowed their economy down and will now ease back on the tightening measures. The U.S. ISM number also came out today declining to 55.5 down from 56.2 but above expectations. The third month this number has declined. Once again it was met with a sense of relief even if it wasn't great.

It will be difficult for the markets to turn on a dime and so today was probably not the high. I have postulated for awhile that 1140 to 1150 was very possible. We are getting close. Looking for catalysts of potential highs is the ISM service number on Wednesday with the ADP number, jobs number on Friday, and FOMC meeting on Tuesday. All possible events that could turn around this market.

I still think the Euro's up move is getting close to being done. I was a little early but correct that a rally coming when everyone thought it was going to parity and I may be early in my thinking that it will start to roll over but anywhere between here up to 1.35 (maybe 1.40) seems prime territory for a turnaround. Inversely the dollar's sell off may be getting close to being done. One trade sentiment index has the percentage of bulls on the dollar fall from 98% (at the June high) down to 7% now. That can extend for awhile but enough of a move to potentially shake some bulls out getting ready to make another move.

The bigger breakout may be commodities with oil and copper up huge. Remember the economy was in recession for over 7 months before commodities, specifically oil made its high around July of 08. In general, oil going any higher is a net drag on the economy.

Finally, the consumer metrics index (CIM) seems to be falling off a cliff. Other blogs mention this from time to time and something I have followed for about six months. Similar to the ECRI in tracking leading indicators. The ECRI, the CIM, and the 10 year Treasury - all say the same thing. A meaningful slowdown is in process for the U.S. economy. The stock market and commodities are saying something very different. Time will tell which is correct. (it is usually not stocks or commodities - remember I just pointed out commodities peaked in July of 2008 well after the slowdown started)

So to sum up, the bulls really are in charge right now. I doubt today was a high (it could be). It seems to go with the theme of a broken market as there is no conviction in buying, it continues to melt up, and moves up or down make little sense. Just have to take side, take the gains/losses and stick with it.