Mr. Market

On a brutally bearish day like today, here is something more light hearted-- and yet, enlightening.

Why Foreigners Can't Ditch Their (US) Dollars

It is no secret that I greatly admire and respect Warren Buffett as an investor. I would like to share the following write up from Buffett in Fortune Magazine, on why it is not almost impossible for Foreigners to get rid of U.S. Dollars. So, next time you encounter some sort of media scare about foreigners stepping away from the de facto standard of the U.S. dollar, you can quote the following from Buffett:

HOW OFTEN HAVE YOU SEEN A COMMENT LIKE THIS IN ARTICLES ABOUT the
U.S. dollar? “Analysts say that what really worries them is that
foreigners will start moving out of the dollar.”

Next time you see something like that, dismiss it. The fact is
that foreigners— as a whole—cannot ditch their dollars. Indeed,
because our trade deficit is constantly putting new dollars into
the hands of foreigners, they have to just as constantly increase
their U.S. investments.

It’s true, of course, that the rest of the world can choose which
U.S. assets to hold. They can decide, for example, to sell
U.S. bonds to buy U.S. stocks. Or they can make a move into real
estate, as the Japanese did in the 1980s. Moreover, any of those
moves, particularly if they are carried out by anxious sellers or
buyers, can influence the price of the dollar.

But imagine that the Japanese both want to get out of their
U.S. real estate and entirely away from dollar assets. They can’t
accomplish that by selling their real estate to Americans,
because they will get paid in dollars. And if they sell their
real estate to non-Americans—say, the French, for euros—the
property will remain in the hands of foreigners. With either kind
of sale, the dollar assets held by the rest of the world will
not (except for any concurrent shift in the price of the dollar)
have changed.

The bottom line is that other nations simply can’t disinvest in
the U.S. unless they, as a universe, buy more goods and services
from us than we buy from them. That state of affairs would be
called an American trade surplus, and we don’t have one.

You can dream up some radical plots for changing the
situation. For example, the rest of the world could send the
U.S. massive foreign aid that would serve to offset our trade
deficit. But under any realistic view of things, our huge trade
deficit guarantees that the rest of the world must not only hold
the American assets it owns but consistently add to them. And
that’s why, of course, our national net worth is gradually
shifting away from our shores.

Complete Article: http://www.berkshirehathaway.com/letters/growing.pdf

September: Monthly Commentary

I am regular listener/reader of the monthly commentary by Irwin A. Michael from ABC Funds. Here is the commentary on the very volatile and emotionally charged September that just wrapped up today.

The fears, price volatility and uncertain financial direction of the market place continue to wear on investors. Overhanging the macro landscape is the $700 billion U.S. government rescue package for the American banking system and whether acceptance of this bailout would be sufficient to extricate the financial system from continued uncertainty. Moreover with a string of financial institution insolvencies and near bankruptcies such as Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, etc. investors are primed for the worst.

Negative newspaper headlines along with spreading financial fears and the expectation as who might be next to fail has produced securities trading which has become increasingly volatile, emotional and inconsistent. Amidst the overall investor insecurity, indecision and lack of confidence frenetic stock trading is producing numerous market anomalies and irrationality. In a number of cases investors, due to the perceived ascending risks, are literally throwing the baby out with the bath water. For many investors reading the bleak front-page newspaper headlines or listening to dour TV and radio commentaries on the effusive negativity is overshadowing investment clarity and is producing a “Chicken Little – the sky is falling” investment outlook.

On a micro level, investors faced with extreme emotion are demanding investment liquidity at the expense of intrinsic valuations. In consequence in a rush toward cash the market is experiencing sell-offs/redemptions of hedge funds and equity mutual funds. Unfortunately, as this motivated selling continues it breeds more selling and is exacerbated by investor margin calls. Simplistically, this situation is akin to a dog “chasing his tail.”

As long term value investors we believe, as difficult as it may be, one must be unemotional, consistent and patient. Value will eventually be recognized. However, this is not to belittle the seriousness of the present circumstances. The fact is that worldwide governments, central banks and lending institutions are working 24/7 to cobble an international financial rescue package. This will take time and considerable patience. As a result, securities prices are and will become inconceivably volatile both on the upside and downside. Not unexpectedly we have gone through extraordinary periods like this before such as the September 11, 2001 events, the late 1980s US savings and loan failures, the high tech implosion of 2000/2001 etc. Clearly, these are extremely volatile and emotional times. Investors must be on guard for opportunities. A perfect example is Warren Buffet’s opportunistic purchase of a $5 billion 10% preferred investment in Goldman Sachs and an option on its stock at $115.

Amidst all this uncertainty we were very impressed by a full page Fidelity Investments advertisement in the Wednesday, September 24, 2008 edition of the Globe and Mail newspaper. This excellent ad highlighted Fidelity’s views on the present market environment. It was well-crafted and extremely credible. In this ad Fidelity states:

“The extraordinary events of the past week are testing the portfolios and the confidence of investors worldwide…Volatility is part of investing. Markets go up and down. The past five years have seen strong equity market growth but as we’ve seen before with dot-com stocks, the Asian financial crisis and Black Monday, corrections occur. They can be extreme but they are also temporary. It is better to be invested. Markets recover. The stock market had a positive return in nearly 3 out of every 4 years since 1957. And some of the sharpest declines have been followed by the strongest rebounds. Missing out on just a few of the markets best-performing days can mean missing out on significant gains…In the current environment, careful analysis of credit and equity markets, along with prudent portfolio management may be more important than ever…”

In summary we acknowledge that the present frenetic period is most difficult for all investors. Patience is necessary. Our ABC Funds are currently holding over $135 million of short-term cash reserves. We are adhering to our deep-value disciplines and are patiently awaiting investment opportunities.

Thank you,

Irwin A. Michael, CFA

The same commentary is available in audio format from ABC funds web site.