Darshan's Blog

Thursday 20th August, 2009

The Oracle of Omaha speaks...the Sheep of The World listen...

What happened yesterday then? Seems the likely market path got blasted by rumours of a second stimulus package, a sharp drop in crude inventories and by Warren Buffett's words. However, despite all this - the market didn't really go anywhere because we still closed below 9300 on the Dow a 1000 on the SPX. However, still I'll admit I didn't see that coming - the earlier part of the week has been so predictable, so it's a shame for yesterday to throw a curve ball. However, then again - that's what markets are about.

In his New York Times op-ed - The Greenback Effect, Buffett warns that the "enormous dosages of monetary medicine" being used to rescue the U.S. economy will eventually produce a dangerous "side effect." To sum it up, he thinks that there will not be enough borrowers to meet the increase in money supply and this will lead to a swelling of paper money...thus creating dangerous levels of inflation in the long term. Perhaps far down the right he is right but for now he obviously does not want to focus on the deflation in the economy and how long that will last. Either way, his conclusion is that holding your assets in cash is the worst thing you can do, because it's value will erode. The only way of protecting it is by investing it in equities, government bonds or a rolling investment in short-term money. Either way, when the Oracle of Omaha speaks - the sheep listen and so in they piled in yesterday. Of course, the danger here is that long-term inflation can only happen if the Central Bank cannot remove excess liquidity from the system as soon as it has done it's job of kicking off the multiplier. So in the meantime, while we have deflationary forces, you might find yourself protecting your cash by piling into overpriced assets that could severly drop in value for some time. Think about it - Warren Buffett is a smart man but research has shown that had his wishes for a Stimulus Plan to be passed, not been granted - his own portfolio would have suffered tremendously more than it has done. Berkshire Hathaway has only recently shown gains because all the money plowed into the financials has ramped up the stock prices of companies such as Goldman Sachs and Wells Fargo. Seems Buffett wants to have his cake and eat it under the guise of a respected investor.

If people like Buffett had not acted in their own self-interest, we would not have Government intervention but free market economics doing what is meant to do - purging the economy of bad debt and resources being reallocated to healthy businesses. This 'too big to fail' mantra seems to be almost surreal. That is not how market forces should work - they can't work like that and they won't.

Anyway, back to the here and now. Yesterday the shocking -8.4m barrel drop in oil inventories, sent oil flying and with it the markets. However, there now seems to be strong negative divergence on the price of Nymex at these levels - so yesterday could just be a spike to squeeze a few oil bears. Also, strangely the Yen stayed strong throughout the day and is just today weakening, so seems risk is back on the table. As I thought yesterday, Shanghai did find support at a critical level and closed up 3.1% - they needed that or it was going to be a mightly big drop if support was broken. We need a close above 1018 on the SPX to signal highier and for today it is tricky. I am stll worried that tomorrow is Options Expiry and that yesterday could have been a mere bear squeeze and head fake. So today we could get the drop we need towards the 960 level on the SPX but at the same time, they can just keep goosing it up. All depends on the US dollar again - which seems to be testing levels again and taking it's time really take off to the upside. Seems today is hard to call and so I'm just going to sit it out. We do have the US Unemployment Claims at 8.30am (US Eastern) - which should show 548,000 new claimants in the last week and this figure could provide some direction to the market.

If you are watching the markets - I salute you. Seems we are really not making headway in any direction - just trading in a range. So until something interesting happens, I am going to focus on not watching paint dry.

Good luck for today!

Darshan