Thursday, May 20, 2010

Three Men and a Quandary

Another 24 hours have passed and the markets continue to fall worldwide. The baton of pain gets passed from Asia to Europe, Europe to America, and on and on. Haven't we seen this movie before? An avalanche of macroeconomic concerns that translates into indiscriminate selling. So what should investors do?

Listening to the financial press would make anyone nervous. Ignore the fundamentals and sell. One example, CNBC ran the following headline this afternoon: Stocks to Drop 20% More; Cash the Safest Place: Roubini

The media loves Roubini. He's got a catchy nickname (Dr. Doom) and he always delivers a winning headline. In a television interview with Maria Bartiromo (aka The Money Honey or Econo Babe), Roubini says that sovereign debt levels are unsustainable and that the world economy is at risk of a double dip recession. He cites problems in the euro-zone countries, Japan, China and the United States and fiscal, regulatory, and monetary risks.

There's trouble with the euro in case you hadn't heard. Economic growth is pitifully slow. Governments everywhere are running budget deficits. No really. Where is that kitchen sink? Macro troubles everywhere. Time to hide under a rock.

His solution for governments? Cut spending and raise revenues (aka taxes). No kidding. This guy is a GENIUS!

Roubini's recommendation: Cash. Of course. Sell, sell, sell. Those seeking a more risky portfolio may wish to venture into the short-term bonds of countries without debt problems (it's a short list).

Only in America can an economist and NYU professor make money selling this kind of advice. I'm sure there are more pearls of wisdom in Prof. Roubini's new book: Crisis Economics - A Crash Course in the Future of Finance. "Crash Course"? I'm sure that wasn't an intentional pun.

How convenient that CNBC found this guy for a interview on a day the DJIA fell nearly 400 points. Roubini's forecast? "From here on I see things getting worse." (Note to self: Add this to list of possible epitaphs). What did you expect Dr. Doom to say? It'd be funny if it wasn't so sad.

If all goes "well", these predictions will become self-fulfilling. Dr Doom will claim victory and the Money Honey will be there to cover it. Meanwhile, investors will have locked in their losses and put their few remaining dollars to work at near-zero rates of return.

As an investor, I prefer to take direction from two other men who also made (quieter) headlines today:

Buffett’s Scout Says Chances Rising for European Deal

Angelo Moratti is the vice chairman of Saras SpA, an energy concern which owns the largest oil refinery in the Mediterranean. He has introduced Buffett to prospective business sellers in Europe and presumably knows what the Oracle of Omaha is looking for. Moratti says Buffett probably won’t be deterred by the fiscal crisis in Greece and the slide in the euro.

“He’s not interested in the macroeconomic scenario, we hardly would talk about what the euro will be doing. He’s looking for a business that is of considerable size, that has long-term prospects, good management and comes out for a fair price.”
So with prices in Europe falling, Buffett is more likely to buy. What a crazy concept from the world's most famous value investor.

Less well known (perhaps because he lacks a memorable nickname) is Laszlo Birinyi. I grew up watching him on Wall Street Week with Louis Rukeyser and have always enjoyed his insights on the market. Since he is a value-oriented investor, it Isn't surprising to see the following story on Bloomberg: U.S. Stock Plunge Is Buying Opportunity, Birinyi Says.
Emotion and political circumstances are dictating the short-term move, and understandably,” Birinyi said. “But ultimately it comes down to good companies and proper valuations, and I don’t think there’s a big issue.”
Buffett and Birinyi have nothing on Dr. Doom when it comes to sensational headlines. That said, I take investment advice from great investors, not a media savvy professor with a book to sell.

Disclosure: I own equities (even some based in Europe).

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