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OK, Investor – Make Your Move
During the week of October 20, Warren Buffett, Bill Gates and Carlos Slim Helu – the three richest people on earth – started buying U.S. equities. One month ago, the ratio of insider buying to selling was 1-to-1. In the past several weeks, buyers now outnumber sellers by 3-to-1.
The point is, you should buy when fear is at a high and sell when fear is at a low. As Warren says, be greedy when others are fearful and fearful when others are greedy.
Although the negative news and credit crisis issues are not going away immediately, you may start to look at companies with top-notch management, strong balance sheets and secular growth stories. The markets may be in turmoil but there are always strong companies turning out solid results, and you should continually be ready to play these opportunities that aren't making it to others' radars.
One area that strikes us as attractive is the oil service industry. With the liquidation of several commodity hedge funds and with the commodity cut in half from its high, this sector could do well.
Long-Term Credit Crisis Concern
Our biggest long-term concern with the current financial market turmoil is what happens to all of our debt. Rather than reducing America's debt burden, the actions of the government so far have been to transfer debt from the private sector to the public sector.
For example, we are committed to injecting $123 billion into American International Group (AIG-http://optionszone.com/getaquote/index.html?symbolsearch=AIG). Where are our taxpayer dollars going? They are going to hedge funds that bought credit-default swap (CDS) contracts from AIG-http://optionszone.com/getaquote/index.html?symbolsearch=AIG.
The company's CDS portfolio is estimated to be $447 billion. How does transferring our tax dollars to several large hedge funds through the payment of AIG's CDS contracts make America stronger?
In plain English, we believe you fix a problem of too much debt by reducing debt. The debt load is to big even for the U.S. government. To saddle the taxpayer with this debt will hamstring the economy for decades and very much restrict the ability of our leaders to lead.
Taxpayer revenues will be almost entirely used to pay debt-service and support-entitlement programs. Almost no budget dollars will be available for programs that represent investments in America.
We believe that, when the dust settles and historians are able to perform a detailed study of why the credit market is not responding to government stimulus programs, it will be in large part caused by the massive, unbalanced potential liability of credit-default swaps.
Anna Schwartz (a highly respected and experienced economist – she has worked with the National Bureau of Economic Research since 1941) stated that banks are not lending because credit-default swaps make unclear who is solvent and who is not. The problem is not liquidity; it is not being able to judge counter-party risk.
According to Federal Reserve statistics for the week ended Oct. 1, banks held $167 billion of balances with the Federal Reserve. On July 2, the balance was $14 billion. Banks are hoarding cash because of the unknown liability embedded in the $55 trillion CDS market.
Rather than having the problems of the CDS market transferred from banks and insurance companies to the taxpayer, the federal government should declare these contracts invalid, thereby reducing our nation's debt load by trillions of dollars and restoring transparency to our financial system.
Bottom line: The CDS market is a major obstacle in the path of recovery. (For more information about the CDS market, check out our article "Using Credit-Default Swaps in Your Options Trading" here.)
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