On Buffett

It is easy to say that I admire Warren Buffett. Most investors do. He has been a rather successful investor for a rather long time. Bank of America has been struggling for a while now, and many analysts figured the bank needed more money. Warren Buffett supplied that money in a two part deal that fit his liking perfectly.

Two of Buffett's core principles were fulfilled by the deal:

1. Get paid by your investments. The key part of the deal was $5 Billion of preferred shares which will earn 6% interest. Even if the stock market closes, Bank of America will send $300 Million a year to Berkshire Hathaway.
2. Buy good management, cheap. You may have a different opinion of the BoA management, but Buffett thinks it is top notch. He got a great price as well. Part two of the investment was warrants (an option) to buy 700 Million shares at $7.14 each. With the book value of BoA around $22, Buffett got them at a fire sale discount of about 68% off.

While rescuing a massive bank with $5 Billion of liquidity may be beyond the reach of the average investor, those two principles are not. Find well run companies and only buy them at a discount. Getting a dividend is just cream on top!

Infrastructure

Infrastructure is one of the few things that a government can quite uncontroversially be in charge of. After all, the government is just a collection of people we have chosen to represent our ideas in the big issues that we face together, as a nation. This leaves us free to tend to the little things, like, what to wear today, and where to eat.

Transportation is terribly important to the economy. If we could not easily and efficiently move goods around the country, things would get expensive, if not impossible to acquire. Entrepreneurs would have quite a chore assembling all the things they needed for business if it weren't for our roads and airports and internets bringing everything right to his door.

The government quite helpfully steps in and maintains and improves things like roads and airports - so that we don't have to.

Recently the FAA ceased to have authority to keep operating - that meant no improvements to airports. Now it appears that the highway fund is in danger. Some politicians want to end the gas tax (how we pay for roads) which would mean no money for road construction. Really? The expense and trouble caused by a declining infrastructure would be detrimental to our economy. Just think about it.

The Calendar

The market clings to the economic calendar. Market price of stocks is based on roughly six months of expectations. As economic news rolls around, people adjust their views of what will happen in the coming months, and they value, buy and sell stocks accordingly.

Unfortunately for those who loathe volatility, the economic calendar is busy, and can easily be a mixed bag. A look at the Bloomberg version shows that there were 17 indicators, including 4 market moving events going on today. Jobs and housing reports came in bad (contrast that to last weeks good employment numbers) and core inflation was flat while the Index of Leading Indicators was up. Different reports cover different aspects of the economy and even different time periods (weeks, months or quarters back).

When the calendar is packed with this myriad of events, Mr Market can change his mind many times over the course of a week, swinging from high to low as he tries to figure out what lies ahead.

what's different about this

The past few days have been a flight to quality. People have been pouring out of 'risky' assets for the solid comfort of things like US Treasuries.

The past year has been volatile for stock returns as people have generally sought out quality and yield while dabbling in stocks. The flight to yield benefitted fixed income broadly, Treasuries, high quality corporates and even junk debt have all gained over the year. People have sought yield in more exotic areas - international debt, bank loans and preferred shares, as well as trusty old dividend paying stocks.

The past few days, however, yield was no longer equated with quality as investors dumped the more exotic income instruments for the best quality corporates and US Treasuries. Yields are next to nothing (even closer to nothing than they were before!) on Treasuries while opportunities have opened up further down the credit spectrum.

Debt Deal Done

At the last minute, congress got their act together and raised the debt ceiling. Disappointingly they didn't give as much clarity to the future fiscal maneuvers that will be done to satisfy all of the cuts that are coming. Lack of clarity is bad for investors, be they individuals or businesses.

The stock market continued on its downward trend, the S&P 500 closed down 2.56% making a end of day record low for 2011. While everyone was excited about the debt deal (everything opened up!) bad economic news started rolling in and spoiling the party rather quickly.

The economic news is all backwards looking "last month this..." "previous quarter that..." and for the last month and quarter, uncertainty has abounded. This uncertainty was reflected in a slowdown of business activity which is now being reported. We will certainly have to slog through more of this before the data begins to reflect the end to business gridlock as American companies regain confidence in their investments. In the meantime, the pessimistic markets may be making buying opportunities for bargain hunters.