19 March 2009

Bottom Feeders Beware

The very explosion in the number of buyers looking for great real estate investment opportunities, through foreclosure auctions and short sales, virtually guarantees that we are far away from a recovery. The field is already littered with the corpses of value investors who jumped in too early. Just look at how the big investment funds who bought into financial institutions like Washington Mutual wound up seeing their stakes wiped out.

While savvy investors have long profited from dealing in distressed properties,
the soaring rate of U.S. home foreclosures over the past few years has
attracted mainstream interest and crowds of new bidders

The experience of all these novice investors jumping into the market is likely to end in tears, as prices keep falling in the years ahead. Those 30% discounts (from peak prices) won't look so good when prices drop another 30% to 60%. There were plenty of people who bought Japanese real-estate in 1994, after it had dropped some 40% from the'89 peak, only to find the prices fall much further over the next decade. There is no reason such a thing can't happen in the US.

When we finally do hit a bottom in real-estate, there will likely be such a level of disgust with the market that few people at all will be interested in purchasing for investments.

09 March 2009

O Ye Of Little Imagination

The "Oracle" of Omaha has once again demonstrated that his crystal ball doesn't work so well. According to Warren Buffet, the economic downturn is as bad as he could possibly have predicted. He follows up by saying he doesn't see how things can get any worse.

My response is simple: Warren clearly lacks imagination if he can't conceive that things can get worse (which they will).

Buffett said economic developments have been very "close to the worst case" that he had imagined,

As I've written before, the great business people of the last 60 years are getting their come-uppance now. The principals that have served them well for decades (e.g. "value" investing) just don't work in a protracted depression with crashing asset values.

03 March 2009

A bull market at last! Storing crude.

Finally there is a bull market to invest in: storing crude oil. Traders, and producers, are awash in such a surplus of oil that the costs of storing the stuff is going through the roof.

as storage units on land have filled up, the companies that own the tankers have profited. Tanker companies charge an average of $75,000 a day, three times as much as last summer, to hold crude, said Douglas Mavrinac, an analyst with Jefferies & Co.

As I wrote a while back, speculators are betting that crude prices will be higher in a year or so. But with volumes of stored crude rising dramatically, I wonder how well that game will work out.

Meanwhile, oil-producing countries such as Iran have pumped millions of barrels of their own crude into idle tankers, effectively taking crude off the market to halt declining prices that are devastating their economies.

Traders have always played a game of store and sell, bringing oil to market when it can fetch the best price. They say this time is different because of how fast the bottom fell out of the oil market.

“Nobody expected this,” said Antoine Halff, an analyst with Newedge. “The majority of people out there thought the market would keep rising to $200, even $250, a barrel. They were tripping over each other to pick a higher forecast.”
Now the strategy is storage. Anyone who can buy cheap oil and store it might be able to sell it at a premium later, when the global economy ramps up again.

So much for peak oil. Demand for energy is much more elastic than almost anyone realized.

02 March 2009

Would you trust this man?

According to the recent financial report from Warren Buffett's holding company, "
Berkshire Hathaway reported today that its net worth fell in 2008 by $11.5 billion, a decline reducing its per-share book value by 9.6%. That was Berkshire's worst result in the 44 years that Chairman Warren Buffett has run the company."

Is this the kind of financial performance we expect to see from one of the world's greatest financial minds? According to Buffett's own words, he made a “major mistake” in buying shares when oil and gas prices were near their peak. Worse, Buffett made a bone-headed maneuver in selling derivatives, betting that markets would recover, putting Bershire on the hook for up to $37 billion dollars. And this is the same guy who called exotic financial instruments weapons of mass destruction!

Warren's great trick was buying stocks at the beginning of one of the greatest bull markets in history. Unfortunately, it looks as if the skills that had served so well in past decades are leading him astray in the new world of economic depression, and the prospect for long-term deflation.