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Friday, October 17, 2008

Buffett says buy America.

Warren Buffett wrote an op-ed piece in the NY Times today. Perhaps you've heard of him. He's a rich, famous, smart dude.

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.

This is good advice. These are not typical times.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent.

Absolutely correct. The decline bottomed at 41 from a peak of 385 over 3 years. It was a 90% decline. The Dow topped at 14000 a year ago and is presently 9000. If he's saying this is the same thing there could be a lot more to go on the downside.

I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.

I hear you, dude. Me neither. You're right, they'll be up before people believe it. But it just seems early.

Now here's something that wasn't in his op-ed piece, from the Berkshire Hathaway 10K:

The estimated fair value of equity index and credit default derivative contracts at December 31, 2007 was approximately $6.4 billion, an increase of approximately $3.1 billion from December 31, 2006. The increase was primarily due to new contracts entered into during the year for which Berkshire received premiums of approximately $2.9 billion. As of December 31, 2007, Berkshire’s maximum exposure under these contracts was approximately $40 billion, an increase of approximately $16 billion from December 31, 2006.

Though it doesn't say it very clearly, these are put contracts Berkshire has sold to collect premium (and presumably buy indexes at some undisclosed price).

This from the last 10Q:

At June 30, 2008, the estimated fair value of these contracts was $5,845 million and the weighted average volatility was approximately 23%. The impact on fair value from changes to volatility is summarized below. The values of contracts in an actual exchange are affected by market conditions and perceptions of the buyers and sellers. Actual values in an exchange may differ significantly from the values produced by any mathematical model. Dollars are in millions.

Hypothetical change in volatility (percentage points) Hypothetical fair value

Increase 2 percentage points
$ 6,408

Increase 4 percentage points

Decrease 2 percentage points

Decrease 4 percentage points

I'm not sure what kind of mark they have on volatility but my indicator says it's through the roof. It'll be interesting to see what they have to say about these when they report.

I'm not saying his advice is right or wrong. I think the op-ed piece is intended to help build confidence in the markets. And it may work -- its the most read piece on the site today. And yes, like he says, he's buying America -- $40 billion or so worth of it if his puts come to fruition.

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