Newsletter August 9, 2009

InvestorsFriend Inc. Newsletter August 9, 2009

Our Performance

Check out our performance. As of of this date my own stocks are up 36% this year and have more than tripled in the last decade while the market indexes lurched around but ultimately floundered.

It was the Worst of Times… or was it the Best of Times?

Remember early March of 2009? Stock markets had crashed brutally in 2008. The Canadian and U.S. stock markets had both been down over 35% in 2008.

Heading into 2009, investors expected that the worse was over.

But at the lows of March 9, 2009, the Toronto stock market was down a further 16% and the S&P 500 was down another 25%!

This was ugly and very painful. Equity portfolios were down an average of 45% in Canada since the start of 2008 and in the U.S. they were (at that time) down on average by 53% since the start of 2008.

This was the worse stock crash since the great depression.

Retirement portfolios were absolutely decimated. Investors were despondent.

Non-investors took satisfaction in not having lost money in the markets.

And bad economic news abounded, an end to the recession was a long ways off.

So these were the Worst of times. What a horrible time to be an investor!

But braver investors looked at the bargains and wondered if it might be time to “mortgage the house” and go “all in” and scoop up bargains and reap the rewards.

And it turned out that would have been a great strategy. The horrible lows of March 9, 2009, as it now turns out, were possibly the best investment opportunity of the last generation.

That is the nature of the stock market. When stocks are at a peak investors are fat and happy and it feels like the best time to invest even more money. But if it turns out that the peak was reached then that will actually turn out to have been the worse time to invest.

Similarly at a market bottom, investors are despondent. There are warnings of Armageddon and that the market could fall a lot further. Yet if the market has indeed bottomed then it will turn out to have been the best time to invest.

It has ever been thus and it will ever be so.

Smart investors will keep their emotions in check and go against the grain, trimming positions at market bubble times and investing additional funds near market lows. Of course, in general it is extremely hard to time markets and so most investors will stay largely invested throughout but will adjust their equity exposures somewhat down at market peak times and increase equity exposures as markets fall.

Stock Markets Are Up over 44% since the March 9 Lows, Now What?

Warren Buffett consistently states that he can never predict the short term direction of markets. Therefore any attempt for me to do so is as likely as not to turn out to be quite wrong. Nevertheless, a few thoughts.

With the economy still weak I am not convinced that the recent stock market rally is sustainable. It seems wise to me to look to trim some positions and get positioned to invest at lower prices if the stock market should decline.

Most investors lived through brutal losses in 2008 and early 2009. Most investors will want to protect some of their recent gains.

S&P 500 Valuation

We have just updated our popular article that analyses valuation of the S&P 500 index. If you are wondering about whether the general stock markets are under- or over-valued, this is a must read.

Warren Buffett’s Companies and the Recession

Here we take a look at how the recession has impacted Berkshire Hathaway the giant conglomerate built and controlled by Warren Buffett.

During Q2 2009, revenues at various divisions were up or down as follows in comparison to Q2 last year.

Real Estate Brokerage (mostly involves home sales) Рdown 16%
McLane (delivery trucking service including notably for Wal-Mart) – Up 8%
Marom (a conglomerate that manufactures and sells industrial and commercial products) – down 32%
Shaw – (manufactures carpet and other flooring materials) – down 23%
Other Manufacturing – (includes building products, underwear, Benjamin Moore, RV manufacturing) – down 25%
Other service – (Fractional Jet sales, Pilot simulator training, Pampered Chef, Dairy Queen, The Buffalo News) – down 31%
Retailing – (large furniture stores, jewelry stores and Sees Candy) – down 11%
Furniture/transportation equipment leasing – down 15%

Buffett (Berkshire Hathaway) has many other businesses related to insurance, electrical power, a huge stock portfolio and other investments. I focused above on the manufacturing, retail and service business that Buffett owns. Insurance and electric power tend to be somewhat recession proof. Also investments tend to be volatile with or without recessions so I focused on the businesses where we could get a good picture of the recession impacts.

Warren Buffett is famous for acquiring only strong and growing companies. He is also very competitive. I would have expected his companies as a group to be less hurt by the recession than competitors.

But Buffett’s revenues in these companies (with the exception of McLane) are down by shocking amounts. The businesses that are industrial/ commercial in nature rather than consumer oriented are the worst hit. His Net Jets business which allows people to own fractional shares in a business jet was down a staggering 42%. Sales of new fractional jets were down an incredible 81%. Apparently the jet-set crowd has cut back remarkably. There are no green shoots here. These figures show a brutal recession.

This does not bode well for corporate profits nor in turn for stock prices. All else being equal these figures do not seem consistent with the huge rise in the stock market that we have seen.

Stocks to Buy

With my own stocks up 36% this year, (not mention my 234% return this decade while the market indexes have lurched up and down but made little or no progress for a decade) it does rather baffle me that more of you have not subscribed to our Stock Research service, where you can see all the analysis I use to pick stocks and where I reveal my own trading moves. Of course, many of you are subscribers and I thank you for that and I take satisfaction in knowing that the results from our service have been strong over the years.

Once again I am going to offer a special deal to anyone who has read this far. Click to see details of how to subscribe to our Stock Research with Buy / Sell ratings on selected stocks.

END

Shawn Allen, President
InvestorsFriend Inc.

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