Lower Gasoline Prices Won't Pay the Mortgage

In my previous post I said, "Lower oil prices and more efficient cars will leave consumers with more cash to spend on other things." While this is certainly a move in the right direction, I don't want to leave the impression that we're talking about a lot of money here.

Assuming the average driver rolled up about 12,000 miles per year and got 20 miles per gallon, he would need to purchase 600 gallons of gasoline per year. At $3.50 per gallon, he would spend $2,100 per year for gasoline.

But now gasoline costs about $1 per gallon less than it did a month ago. Furthermore, drivers are also driving less and more of them are shifting to fuel efficient cars. So let's assume our average driver now drives only 10,800 per year and gets 28 miles per gallon. At $2.50 per gallon, he spends $964 per year for gasoline.

While that might look like a big saving, it comes out to less than $100 per month. Yes, it does leave consumers with more cash, but not enough to make a mortgage payment.

Lower Oil Prices and Tax Cuts Will Boost the Economy

The financial crisis, economic turmoil, and the stock market sell-off have investors in the doldrums. One bright spot, however, is the recent plunge in oil prices. While this is a welcome development, it is not entirely unexpected. In recent years, easy monetary policy brought us the tech stock bubble, the housing bubble, and the commodities bubble.

High oil prices were largely the result of a weak dollar. They had less to do with strong demand or too little supply. Perhaps it took longer than it should have, but high oil prices finally caused the demand destruction we have been expecting. In reality, this destruction has been going on for months, but it become noticeable only recently. For example, the Department of Transportation just documented a decline of 15 billion fewer miles driven in August 2008 than in August 2007. But it's already late October. No doubt, demand has continued to fall during the last two months as well. Furthermore, as I explained more than a month ago in Forbes magazine, "with global economies slowing, the dollar strengthening and U.S. demand declining, even the threat of hurricanes can't keep oil's price up."

OPEC has long been saying there is plenty of supply. Now it is worried there is too much. Cooler heads at OPEC never wanted to see prices go as high as they did because they feared high prices would cause a global recession—something that is clearly bad for their business. Now they are just as worried that prices will plunge to levels not seen in years. This is why OPEC just announced a 1.5 million barrel per day production cut.

But just as OPEC was unable to keep prices from spiking, it is likely to find that it can't prevent prices from falling. Some OPEC nations with weak economies were already exceeding their quotas, trying to sell as much oil as they could at ridiculously high prices. On paper, these nations are entirely in favor of a production cut. However, in practice, they will find it much harder to stick to their promises.

Some economists fear that lower oil prices will cause Americans to return to their profligate ways—putting conservation aside and buying up SUVs and pick-up trucks once again. This won't happen. Every automobile company has invested millions—if not billions—retooling their factories to produce more fuel-efficient vehicles. No one is in favor of going back to old ways.

Lower oil prices and more efficient cars will leave consumers with more cash to spend on other things. This could do as much good as a meaningful tax cut, helping to revive the economy. Combine lower oil prices with a real tax cut and the economy is likely to boom. But if OPEC manages to push oil prices back up to recent highs, the U.S. and the entire world will have an extremely difficult time shaking off this recession.

Nouriel Roubini is a Star

I've been out of the office for several days. I spent a couple of enjoyable days in Blacksburg, VA, home of VA Tech University and one of my all-time favorite places. The view of the mountains as I flew into Roanoke airport was phenomenal. I went to Blackburg to give a talk about my book, Even Buffett Isn't Perfect. I was hoping to attract 100 people. About 300 showed up. In times like these, everyone is seeking Buffett's wisdom.

The Blue Ridge mountains provided much needed relief from these troubled markets. Readers of my blog know I had been bearish for quite some time. In fact, in June 2007, I even wrote a piece in Forbes magazine called Here Comes the Bear arguing that stocks were likely to sell off. Yet in all honesty, what we've seen has far exceeded my expectations. I never thought we would have this kind of selling.

One man who did is Nouriel Roubini. More than a year ago, when most economists were still very bullish on the economy, Roubini was calmly and clearly explaining why we were about to have a serious recession. When he warned about subprime mortgages and collapsing home prices and how this would cause systemic problems, he was often ridiculed. I'm sure his critics wish they could take back their words.

Roubini remains very bearish. In fact, he has been warning about widespread financial panic, arguing that fundamentals don't matter because everyone is selling. Take a look at his blog RGE Monitor. It is definitely worth a close read.

On Wednesday, Oct. 29, we are hosting the Forbes Family Business Forum. We were hoping to sign up Roubini as a speaker. Unfortunately, he wasn't available saying he had to teach class. No doubt his students at New York University appreciate his dedication.

Roubini may be right about his views. It is extremely difficult to predict when the economy, let alone the markets, will turn. I have long believed this mess would end when housing prices stabilized, which I still expect to happen by spring 2009. However, I'm now beginning to wonder if stable housing prices are enough. Despite my concerns, I have been buying stocks anyway. I know stock prices could go much lower in the short term, yet I am comfortable buying at these levels. I feel confident that the world will avoid a great depression and that the investments I make today will appreciate over time.

One Step Forward, Two Steps Back

Today's market action was extremely disappointing. On Monday, Oct. 13, the S&P 500 rallied 11.6%. That had many investors hoping the sell-off was finally over. Unfortunately, the market wasn't able to sustain Monday's gains. It gave up 0.5% yesterday. Today it plunged 9%.

Monday's rally and today's sell-off are indicative of the kind of volatility we've been experiencing lately. To measure volatility, market traders often focus on the VIX, which is hovering near all-time highs. A simpler way to measure volatility is to look at the daily percentage changes in a major index like the S&P 500. For example, during the first six months of 2008, there were 17 days on which the S&P 500 Index changed in value by more than 2%. The biggest change during that period occurred on March 18 when the S&P 500 rallied 4.24%.

Since then, however, volatility has skyrocketed. From July 1 to Oct. 15, there were 22 days when the change in the S&P 500 exceeded 2%. In the last month alone, the change in the Index exceeded 4% on 11 days.

Monday's almost 1,000 point rally in the Dow was nice, but it would have been better to see the Dow rally 100 points a day for 10 days. Investors have no confidence in stocks right now. They need to be convinced that rallies can be sustained.

While it is true that Even Buffett Isn't Perfect, he is clearly one of the greatest, and it is encouraging to see him putting money to work at this time. Buffett has complained for several years that he couldn't find anything worth buying. By pouring $8 billion into Goldman Sachs and General Electric, and making a couple of other key investments, he has obviously changed his tune.

The Smartest CEO

It is said that the stock market is a forecasting mechanism. Let's pray it is a bad one. Otherwise, we may be in for a deep depression. The sell-off we have been witnessing is simply unbelievable. Investors, especially institutional investors, are selling everything—the good, the bad, and they ugly.

In December 2007, when I still held a bearish view of the economy and stock market, a colleague and I met with the CEO of a small biotechnology company. The purpose of the meeting was to discuss his finances and a proper asset allocation. Because of my bearish outlook, I made what I thought was an extremely conservative recommendation, suggesting he keep much of his money in cash (i.e., short-term Treasuries, CDs, and municipals) for the time being and put only about 50% in stocks.

He thanked me for my advice, but said he had an even more bearish view. He said he was convinced that leverage was going to come back to haunt us. He said he was worried about counter-party risk and did not trust the investment banks. He said he was using some cash to buy gold coins and he was shorting as many financial stocks as he could-the investment banks in particular.

When we left his office, I was in shock. I was bearish myself and had spoken with a number of bearish investors, but I had never met anyone who was so full of doom and gloom. I knew this CEO was a smart man, but I hoped he was wrong. Unfortunately, he wasn't.

If he maintained his short positions, he is no doubt a very wealthy man today. For the sake of the economy and all long-term investors, let's hope the selling is finally done. At this point, it's hard to imagine stocks going any lower.

A $700 Billion Investment, Not Bailout

The following commentary is from the October issue of the Forbes Growth Investor.

The biggest stock market sell-off occurred on October 17, 1987. The Dow Jones Industrial Average plunged 508 points or 22.6% on what has come to be known as Black Monday. Yet, on average, stocks have shown a tendency to do worse in September than in any other month and what happened this past September was nothing less than ugly. Despite a strong rally on the last day, all major market indexes took a nosedive.

September’s sell-off came in reaction to the expanding economic crisis, which has seen one major financial institution after another either go out of business or get gobbled up at fire-sale prices. Lehman Brothers, for example, filed for bankruptcy protection. One of the oldest investment banks on Wall Street was selling for $85 per share less than two years ago, but could find no buyers in its time of need. The remaining investment banks on Wall Street, Goldman Sachs and Morgan Stanley, have since decided to move to Bank Street.

While investment and commercial banks went under, our elected officials twiddled their thumbs. Eventually, they raised investors’ hopes by finally agreeing to vote on Secretary Hank Paulson’s unpopular $700 billion rescue package. Then they quickly dashed those hopes by voting it down. Ironically, more Democrats than Republicans voted in favor of the bill, which was being pushed by the Bush administration. It remains to be seen if Republicans will pay a political price for refusing to go along. No doubt their constituents are extremely angry about the so-called bailout, yet they will be even angrier when they lose their jobs and watch their retirement savings shrink.

Those who voted against the bill say they are protecting taxpayers. How much truth is there to this statement? After all, one-third of Americans do not pay any federal income tax at all. The bulk of the taxes are actually paid by a rather small portion of the population. Most of the ones I know are in favor of the bill. Are the politicians listening to what real taxpayers have to say?

Furthermore, it is completely wrong to assume that the rescue plan will cost the quoted $700 billion. In fact, the government stands to make money on the deal. Because of mark-to-market accounting rules, financial institutions must pretend there is little if any value to these “toxic” securities. Yet once housing prices stabilize, a market for these securities will reemerge. The government is in an enviable position. It can borrow money at low Treasury rates and use that cheap money to purchase securities it will later sell—perhaps at higher prices. Even if it ends up losing money on the deal, those losses will be nowhere near $700 billion.

Warren Buffett, widely acknowledged as the world’s greatest investor, thinks Mr. Paulson’s rescue plan is a good idea. Buffett decided to take advantage of the current financial turmoil by purchasing $5 billion worth of Goldman Sachs preferred stock. He also got warrants to buy $5 billion of common stock at $115 per share. He cut a similar deal with General Electric. This kind of private investment in public equity (PIPE) is Buffett’s modus operandi. He said his decisions to invest in Goldman and GE were predicated on the assumption that the government would approve the rescue package.

There is still hope that government officials will overcome political gridlock and get their act together by week’s end. Expect a big rally once they do—or at least a smaller sell-off than we would otherwise see.

Blame the Feds, Not Wall Street

Given the unprecedented financial crisis and the government's proposed $700 billion so-called bailout, I have to say I am a little sick of hearing how greedy Wall Street bankers are to blame for getting us into this mess. I agree some of them do bear some responsibility. I also agree that many CEOs are grossly overpaid. (So are many professional athletes for that matter.) Yet the fact is that the government bears at least some of the blame for the current crisis.

Many years ago (circa 1993), I listened to a lecture delivered by a then prominent Federal Reserve governor. He argued that banks had to be pressured to lend money to those who were otherwise not creditworthy. The government in its wisdom had decided that home ownership was a good thing and wanted to see more of it. It is often argued that neighborhoods are safer, cleaner, and better kept when a large number of people own (rather than rent) the homes in which they live. The government wanted to promote home ownership so it pressured lenders to make mortgages available to those who did not qualify under traditional standards.

The New York Times (not known for espousing a conservative point of view) published a prescient article in 1999 (that's before George W. took office) exposing all this. Steven Holmes wrote, "Fannie Mae...has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people..." The article then went on to predict the current crisis. It warned, "In moving, even tentatively, into this new area of lending, Fannie Mas is taking on significantly more risk, wihch may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."

I thank Cesar Chekijian for bringing this article to my attention. Click below to read the article's full content.

Fannie Mae Eases Credit To Aid Mortgage Lending

The Perils of Long-Term Investing

The following commentary is extracted from a special report sent to subscribers of the Forbes Special Situation Survey.

Lehman Brothers was selling for more than $85 per share in early 2007. American International Group (AIG) was around $70. Both companies were thought to be among the bluest of the blue chips. So much so, that Dow Jones even added AIG to its prestigious Industrial Average in April 2004. Yet over the course of just a few short months, both Lehman and AIG have been decimated. Lehman is now a penny stock seeking bankruptcy protection. AIG is scrambling to stay alive.

Yet Lehman and AIG are not the only “great” long-term investments that have since collapsed. For years, General Motors, Ford, Fannie Mae, and Freddie Mac were included in almost all long-term oriented portfolios. Fannie Mae, for example, generated a 25% annualized return for the 20 years ending in 2000—and that does not include dividends. Unfortunately, those who bought the stock back then and are still holding it, are now sitting on a loss. As impossible as it is to believe, Fannie Mae is worth less today than it was even 30 years ago!

Warren Buffett is clearly one of the greatest investors of all time. He is famous for avoiding risk and for having a long-term buy-and-hold orientation. Like Buffett, many investment professionals are also convinced that buy-and-hold is the best way to go. Yet recent events should make all investors question this advice. Buying, after all, is just half the story. Successful investing also requires selling. And despite his reputation, even Buffett engages in short-term trades from time to time. PetroChina and Pier 1 Imports provide just two recent examples.

There is no doubt that a buy-and-hold approach can be profitable. After all, those who buy and rarely sell minimize trading costs. They also minimize taxes because, if they do not sell, they do not realize their gains. However, I have seen too many investors get burned by holding onto a stock too long simply because they wanted to avoid paying taxes. Recent events should convince even the most diehard buy-and-holders that sometimes there is fate worse than taxes. (But, of course, not worse than death.)

It is extremely important to keep an eye on intrinsic value. If a stock is no longer undervalued, it makes little sense to keep holding it. In hindsight, I have gotten out of many positions much too soon. However, I would rather move on to a stock I believe is undervalued than take the risk of holding on to one that is becoming overvalued.

Whether Or Not the Facts Change

While preparing for an MSNBC interview recently about the presidential candidates' energy plans, I was struck by how similar they are. They are both in favor of reducing carbon emissions, they both want more wind and solar power, they both favor clean coal technologies, they both like cap-and-trade systems to reduce greenhouse gases, and they both want to see more nuclear power. Of course, they differ on degree and implementation on some of these issues. John McCain would rely on market forces and incentives. Barack Obama prefers more government mandates.

Until very recently, one critical difference was where they stood on offshore drilling. Obama was opposed to it. McCain is in favor. Obama stressed that oil companies already hold leases to 68 million acres of land and 40 million acres offshore. He said he would force them to drill in these areas or lose their rights to do so. However, McCain thinks it is better to let oil companies drill where the oil actually is. He has called for lifting federal restrictions on drilling in the Outer Continental Shelf.

But now Obama has changed his tune. Last weekend, he indicated a willingness to compromise on offshore drilling. Some have criticized him for changing his mind. I applaud him. Obama is moving from idealism to reality on this and other key issues. Even the Wall Street Journal applauded Obama this morning for backpedaling on his threatened tax increases. Apparently his advisors have told him that tax increases (even if they are intended to hit only the rich) can indeed slow the economy. That's not a particularly good idea when unemployment is rising and recession is a real possibility.

John Maynard Keynes once said, "When the facts change, I change my mind." Facts haven't changed, but it is encouraging to see that Senator Obama shows a willingness to change his mind as he becomes more familiar with the facts.

McCain or Obama: Who is Better for Taxes?

The following commentary is from the Sept. issue of the Forbes Growth Investor:

The stock market was open for trading last month, but as a former track & field athlete, I have to admit that the Olympics monopolized my attention. Usain Bolt was magnificent, as was the entire contingent of Jamaican sprinters. With a population of just 2.8 million, this small island country managed to win 11 medals on the track—six of them gold.

During the commercials, however, I did notice that stocks were rallying. In fact, the S&P 500 gained 1.22% in August. This is better than it did every month so far this year except for April. At least some of August’s rally was due to the 3.3% preliminary GDP figure for the second quarter, which was announced on August 28. This number was much better than expected and significantly better than the 1.9% advance figure reported a month earlier. Because the preliminary figure is based on more complete data, investors can have more confidence in it. Although overall growth was certainly robust, it came primarily from importing fewer goods and services and exporting more. It turns out the weak dollar is having a much bigger impact on international trade than almost anyone expected. I hope Barack Obama is listening.

Personal consumption expenditures were also very strong in the second quarter. Unfortunately, this is not likely to be repeated during the third quarter because the tax rebate checks have been fully disbursed. Some economists are already calling for another stimulus package. You can put me in that camp. However, tax rebates won’t do the trick. Their impact is just temporary. Tax cuts are the way to go if you really want to boost the economy in a long-lasting manner.

Speaking of taxes, here is something to ponder. Is it possible that taxes could actually go higher in a McCain administration than in an Obama one? That certainly does not sound logical. After all, Obama has been threatening to raise taxes while McCain has been calling for tax cuts. Yet a Congress controlled by Democrats is not likely to help a president McCain reduce taxes. Instead, under McCain, Congress could very well let the Bush tax cuts expire, in effect, giving us a significant tax increase. However, with Obama in the White House, Congress will almost certainly deliver a package of tax hikes. Yet this option could be less onerous than an outright expiration of the Bush tax cuts. “You’re next stop: The Twilight Zone!”

Stocks also may have responded to the latest S&P/Case-Shiller figures on housing prices. As I discussed in last month’s issue, a bottoming out process is underway. Housing prices are still falling at an accelerating rate, but the rate of acceleration is beginning to stabilize. Because the Case-Shiller figures are delayed by almost two months, we could actually learn in October that August was not so bad. Furthermore, we have already seen an uptick in mortgage applications. Yet despite marginally better news in the housing market, Fannie Mae and Freddie Mac continue to get crushed. There is even talk that these mortgage giants will be restructured and equity investors will be wiped out completely. However, if these government sponsored entities survive, those who have the guts to buy now could eventually find themselves sitting on huge gains. While this is a distinct possibility, it is a much better bet that an American relay team will drop the baton in the next major track meet.

The Worst May Soon Be Over

The latest (June) S&P/Case-Shiller figures provide a little (and I emphasize little) comfort that housing prices are bottoming out. With year-over-year prices down a record 15.92% on average in 20 major markets, that may sound like an odd thing to say. But that decline is only a little worse than the previous month's figure. In fact, if you look at the rate of change of the rate of change of the rate of change (what a mathematician would call the third derivative), things have been improving since February.

By no means does this imply that price drops are a thing of the past. On the contrary, housing prices will likely keep falling for another 12-18 months. However, the evidence suggests that the rate of decrease is about to slow. In fact, there is a good chance that the year-over-year decline in prices for July (to be reported at the end of September) will be less than it was for June.

Because almost all of the problems in the financial sector have been related to falling real estate prices, a stabilization of prices is critical for the health of our financial institutions. And because real estate prices will keep falling on an absolute basis for many more months, banks will continue writing down assets. Yet it is encouraging to see that the worst may soon be over for both the housing and finance industries.

Added VLO to FGI and SSS

In my June 2 posting, "Avoiding Oil Related Stocks", I said I was in the bubble camp when it came to oil prices. This is why we had no energy stocks in the Forbes Growth Investor and only one in the Special Situation Survey.

Now that oil prices are starting to ease, we decided it was a good time to add an energy stock to both newsletters. That may seem a bit nonsensical, but the stock we added is a refiner. High oil prices have squeezed margins at refiners. With oil prices falling, margins should expand once again. As a result, we decided to add Valero Energy (VLO) to both newsletters. In fact, in today's earnings release, Valero said gasoline margins (aka the crack spread) fell to $6.60 per barrel in the second quarter of 2008. They were at $28.95 per barrel a year ago. This explains why the stock price has been cut by more than half during the same time.

Of course, the crack spread won't expand if gasoline prices fall as rapidly as oil prices. While we certainly expect gasoline prices to ease, we think they will hold up better than oil because they didn't climb as much as oil to begin with.

While we expect VLO's profit margins to improve, we think the bigger risk over the near term has to do with volumes. Gasoline demand is falling sharply as drivers respond to high prices by cutting back, car pooling, and switching to more efficient vehicles. That's a risk we are willing to take. Low price multiples and a recent dividend increase make this stock extremely attractive.

Supervalu Gets Clobbered

Shares of Supervalu (SVU) took a big hit last week. This is a stock on our recommended list in the Forbes Special Situation Survey. It is also a stock I own personally. The sell-off had nothing to do with any specific news related to the company. Instead, investors sold the stock in reaction to disappointing results from Safeway (SWY) and the Great Atlantic & Pacific Tea Co. (GAP). Safeway beat earnings by a penny, but missed its revenue target. A&P missed earnings by seven cents per share. On the other hand, Kroger (KR) reported strong results a month ago and the stock rallied in response.

Tight economic times are taking a toll on supermarkets. Food price inflation is prompting shoppers to seek out bargains. They are trading down from name brands to store brands. This may depress revenues, but it should also boost earnings since store brands are more profitable. However, revenues are getting a bit of a boost from consumers who are trying to save money by preparing meals at home instead of eating out in restaurants as often.

Our view is that Supervalu has been unfairly punished for Safeway's and A&P's shortfalls. The stock was already undervalued even before the sell-off. Supervalu will announce fiscal first quarter results on Tuesday, July 22. Those who want to play it safe should wait until then. Those who prefer to take some risk, should buy on Monday.

Housing Market is Still Struggling, But Positive Signs Are Beginning to Emerge

With rising energy prices, falling nonfarm payrolls, a plunge in consumer confidence, and a host of other negative indicators, economists have plenty to worry about. Their biggest concern, however, continues to be the housing market. Yet there is finally a little hope that the worst may be over.

According to the S&P/Case-Shiller indices, housing prices are still falling. Furthermore, they are still falling at an accelerating rate. This is the bad news. However, for the second month in a row, the rate of acceleration has declined. While this is not a reason to start celebrating yet, it is a necessary sign before the crisis finally ends. And because there is a two-month delay in the numbers, things may actually be a little better than the available data suggest. Right now, economists are studying April's numbers. The figures for May won't come out until the end of July.

Another encouraging sign is the recent week-over-week increase in mortgage applications for both refinancings and home purchases. While total applications were down almost 23% from a year ago, applications for home purchases were up 2.8% from the prior week.

Some parts of the country are also seeing interest from foreign investors who are backed with stronger currencies; and vulture investors are getting interested in purchasing condos in bulk in places like Miami. The Fed is hoping for more such signs that the worst for housing is over. Because inflation is becoming a concern, the Fed is itching to start raising interest rates. It will not do so, however, until it is believes the housing debacle is nearing an end.

Discussion of Economy on CNBC

There is tremendous debate these days about oil prices. Some say given tight supplies and strong demand, $140 per barrel is fully justified. Others say there is a bubble in the oil markets. I am in the bubble camp.

I don't question that supply is tight and demand is strong. I also agree that there is much less slack than there used to be. Nonetheless, the intraday volatility tells me there is much more going on than simple supply and demand considerations. Federal Reserve policy must take some of the blame for rocketing oil prices. The Fed's policies have significantly weakened the dollar, causing investors to seek ways to hedge the Fed's actions. Oil is suddenly viewed as an investable asset. This is true for a number of other commodities as well. I recently argued in the Forbes Growth Investor that the stock market will not rally until the Fed and Treasury Department get serious about defending the dollar. I discussed this and other matters in a July 3 interview on CNBC with Peter Klein of Fifth Third Asset Management and John Ryding of RDQ Ecnomics (formerly of Bear Stearns). The segment was hosted by Michelle Caruso-Cabrera of CNBC. Steve Liesman of CNBC also took part.

Tempting Warren Buffett

I did an interview this afternoon with WBBM News Radio 780 in Chicago. The hosts, Kris Kridel and Sherman Kaplan, wanted to discuss Berkshire Hathaway. The stock is down about 15% year to date—not the kind of performance one would ordinarily expect from a company run by Warren Buffett.

Berkshire, of course, if heavily invested in the insurance business. Although it owns more than 70 subsidiary companies, many of the non-insurance companies, such as Fruit of the Loom and Jordan’s Furniture, are rather small. Most are dwarfed by the likes of GEICO and General Re.

Buffett warned at this year’s shareholders’ meeting that the insurance business would be quite difficult this year. Berkshire just can’t command the kinds of premiums it did in the recent past. Buffett also warned that Berkshire stock will not generate the kinds of returns it did in the past.

Berkshire also owns more than 40 publicly-traded stocks, but just four stocks account for more than half the value of this portfolio. This group, referred to as the Big Four, consists of Coca-Cola, American Express, Wells Fargo, and Procter & Gamble. Each of these stocks is down more than 15% year to date.

Given Berkshire’s heavy exposure to the finance industry, it is rather impressive that the stock is down only 15%. Compared to the likes of AIG, Citigroup, and the investment banks, Berkshire is doing quite well.

Buffett is sitting on a boatload of cash. Many observers have been wondering when he will put some of that money to work. We know he likes to buy when others are selling. Given, the extent of the sell-offs witnessed lately, perhaps Buffett is getting at least a little tempted. But is he willing to invest in the financial stocks that have gotten killed? With Citigroup, Fannie Mae, Freddie Mac, AIG, Lehman Brothers, Merrill Lynch, and a host of others, there is a lot to choose from. Unless Buffett is completely bearish on the future of America, chances are he is thinking hard about buying one of these companies.

Inflation Ahead

According to the Hulbert Financial Digest, which tracks the performance of almost 200 investment newsletters, the Forbes Special Situation Survey is the best-performing letter year to date. Hulbert has us up 28.1% through the end of May.

Obviously, we are extremely pleased with this result. However, stocks have weakened considerably in June. Indeed, one of our holdings, Coventry Health Care (CVH), took a big hit last week when management warned that earnings would fall well short of expectations. Yet CVH will report strong revenue growth for the year, and 2008 earnings will likely exceed $3.50 per share. With a forward multiple of just nine times earnings, the stock is extremely attractive. Assuming management does not unload any more surprises, CVH should stage a bit of a rebound in the near term

Of course, macroeconomic factors continue to cast a pall over the entire market. Consumer confidence fell to a 16-year low and housing prices are still falling at an accelerating rate. It is at least a little encouraging, however, to see that the rate of change of the rate of change in housing prices is finally slowing down. Nonetheless, housing prices will probably keep falling on an absolute basis throughout 2008 and possibly into 2009.

Energy prices are another major concern. The extremely high price of gasoline is one major reason why shares of General Motors have plummeted to levels not seen in three decades. But crude oil prices are not just high; they are also remarkably volatile. Intra-day swings of 2% or more now occur on a regular basis.

As for the Fed, its most recent statement mentioned rising inflationary expectations and an uncertain outlook. The FOMC chose to hold interest rates steady at 2%, but it now has a clear upward bias. One member, Richard Fisher, voted against the decision to keep rates steady. He believes the time has come to start increasing interest rates. This comes as no surprise to Fed watchers since Mr. Fisher has dissented on every decision since being appointed to the FOMC in January. He may be a party pooper, but it looks as if he is also the only FOMC member who is ahead of the curve.

Making the Rounds in Boston

I have been in Boston the past few days. No, I did not come here to root for the Celtics. I came to give a couple of talks about my book and to attend a Forbes conference.

On Wednesday morning I spoke at the UMass Club in downtown Boston, which boasts a wonderful view. On Wednesday evening, I spoke at the Armenian Library and Museum of America in Watertown. I ran into several old friends at both venues.

On Thursday afternoon I tried to drive into the City to attend the Forbes Leadership Networks Forum. Unfortunately, I got caught up in the Celtics parade. Although the parade was officially over, the police still had not opened several key streets and I could not get to the Four Seasons Hotel where the event was taking place. I had to give up and try again a few hours later. I finally made it to the Four Seasons toward the end of the program.

When I finally got settled, I noticed that oil prices had fallen more than $4 per barrel because the Chinese said they were going to ease gasoline subsidies. It's about time they did this. By keeping gasoline artificially cheap, they have been encouraging consumption. Higher fuel prices in China should take the heat off of demand. Now if we can get the dollar to strengthen a bit, oil prices should fall back down to a level that is more in line with supply and demand considerations. I expect that level is about $80 per barrel.

The Pro-American Ahmadinejad?

There has been much debate lately about high oil prices. Some say they are fully justified simply because of the forces of supply and demand. Others say they are in a bubble. Well, I came across a rather bizarre story on Bloomberg.com. It appears that President Mahmoud Ahmadinejad of Iran believes in the bubble theory. He says there is plenty of oil available and the price rise is unjustified. He blames it on efforts by some to weaken the U.S. dollar. He also called for greater use of nuclear energy, which he called "clean and cheap."

Ahmadinejad suddenly sounds like an American. In defending the U.S. dollar, he is doing a better job than our own Treasury Secretary. And by urging greater use of nuclear energy, he is encouraging us to stop relying on OPEC. Ahmadinejad is not particularly popular in Iran. Perhaps he has aspirations for a political career in America? You can read the Bloomberg story by clicking here.

The Leon Charney Report

Although I have been interviewed dozens of times on television and radio, I always enjoy appearing on the Leon Charney Report. Charney is an extremely successful investor. He also served as an advisor to Jimmy Carter during the Camp David Accords. He hosts one of the most intelligent talk shows on television. There are no sound bites on this program. No screaming, no yelling, no cutting people off. Instead, Charney takes the time to conduct interesting conversations with interesting people. I have had the honor to appear on his show four or five times. In my most recent appearance on May 18, Charney interviewed me about my new book, Even Buffett Isn't Perfect. I thank him for the plug. You can watch this May 18 interview at the Leon Charney Report website.