Warren Buffett reported this week that his holding company,Berkshire Hathaway (NYSE: BRK-A), has over $50 billion in cash on hand. That’s the most ever in the more than four decades he’s been chief executive.

Bill Gross, the investment chief of Pimco and another contributor to our Oxford All-Star Portfolio, said this week, “It appears the only safe haven is the front end of the U.S. yield curve.” The really short-term stuff, in other words.

Should you be holding a lot of cash now too? Perhaps surprisingly – since cash and short-term bonds are paying essentially nothing – my answer is “yes.”

Don’t get me wrong. I’m not saying you should sell your stocks and flee the market. I’m only suggesting that you hold cash to put to work in the future.  

Why? One reason is that the market has gone a long time without even a middling correction. Trust me, that won’t last forever. Without cash, you can’t take advantage of stock bargains without selling other companies that may have become bargains themselves.

There are plenty of people saying you should be in cash right now, of course. Many, if not most, of them were saying the same thing two, three, four and five years ago. 

Where the Puck Is Going

But Buffett is a business evaluator, not a market timer. He did not earn his reputation by holding a giant cash hoard. Rather, he and his partner Charlie Munger have become two of the world’s richest men by following – and improving on – the value discipline pioneered by Benjamin Graham. 

When the financial crisis hit a few years ago, he told investors to get out of cash. In the fourth quarter of 2008, Buffett penned a New York Times op-ed piece titled “Buy American. I Am.” Here’s a relevant excerpt:

          Today people who hold cash equivalents feel comfortable. They shouldn’t.
          They have opted for a terrible long-term asset, one that pays virtually
          nothing and is certain to depreciate in value… Equities will almost certainly
          outperform cash over the next decade, probably by a substantial degree.
          Those investors who cling now to cash are betting they can efficiently time
          their move away from it later. In waiting for the comfort of good news, they
          are ignoring Wayne Gretzky’s advice:”I skate to where the puck is going to
          be, not to where it has been.”

Buffett’s $50 billion cash hoard speaks volumes about where he thinks the “puck” is headed now. 

Over the last few years, Buffett has put a lot of his cash to work, making some of his biggest deals ever. In hindsight, I’m sure he wishes he’d bought even more during the chaos of late 2008 and early 2009. 

Yet he’s not going to make up for that by paying too much today.

Buffett is clearly biding his time, waiting for a better buying opportunity… what he calls “a fat pitch.” He knows it’s just a matter of time.

I know, I know. It feels wrong to sit in cash and earn nothing. But even a slightly negative return after inflation beats the heck out of experiencing a 10% to 20% market correction with your freshly invested capital. 

Charlie Munger once said, “It takes character to sit there with all that cash and do nothing. But I didn’t get where I am by going after mediocre opportunities.” 

A word to the wise is sufficient. 

Good investing,

Alex

For some perspective on the current state of the stock market, today’s chart presents the long-term trend of the Russell 2000 (small-cap stocks). As the chart illustrates, the Russell 2000 rallied from late 2002 into the mid-2007 and then effectively gave all of that back during the financial crisis. Since the financial crisis, the Russell 2000 has been rallying sharply to the upside (with the exception of a brief “fiscal cliff” induced selloff in November 2012). Since early March 2014, however, the Russell 2000 has moved significantly to the downside and is now testing support of its upward sloping, post-financial crisis trend channel.

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August 25, 2014 – US Open tennis tournament begins (ends September 8th)

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Short-Term Uncertainty Following Last Week’s Selloff – Will Downtrend Continue?

Briefly: In our opinion, speculative short positions are favored (with stop-loss at 1,970 and a potential profit target at 1,850, S&P 500 index)

Our intraday outlook is bearish, and our short-term outlook is bearish, following a breakout below recent consolidation:

Intraday (next 24 hours) outlook: bearish
Short-term (next 1-2 weeks) outlook: bearish
Medium-term (next 1-3 months) outlook: neutral
Long-term outlook (next year): bullish

The U.S. stock market indexes lost 0.3-0.4% on Friday, extending their recent selloff, as investors reacted to some key economic data announcements – monthly jobs report, the ISM index, among others. Investors begin to expect rising interest rates, which is putting downward pressure on stock prices. The S&P 500 index got closer to the level of 1,900, as it reached the daily low at 1,916.37, which is the lowest since early June. The market remains in a short-term downtrend, following a breakout below upward trend line. The nearest important support level is at around 1,900-1,920. On the other hand, the level of resistance is at 1,940-1,950, marked by previous local lows. There have been no confirmed positive signals so far, as we can see on the daily chart:

Click Charts For Larger Images

Expectations before the opening of today’s session are positive, with index futures currently up 0.3%. The main European stock market indexes have been mixed between -0.2% and +0.3% so far. The S&P 500 futures contract (CFD) is in an intraday consolidation, following last week’s decline. The nearest important level of support is at 1,910-1,915, and the nearest resistance level is at around 1,930, marked by Friday’s local highs, as the 15-minute chart shows:

The technology Nasdaq 100 futures contract (CFD) is in a similar consolidation, following recent move down. The resistance level is at around 3,900, and the level of support remains at around 3,850. For now, it looks like a flat correction within a short-term downtrend:

Concluding, the broad stock market is in a short-term downtrend, following last week’s breakout below two-month long upward trend line. In our opinion, speculative short positions with a stop-loss at 1,970 and a potential profit target at 1,850 (S&P 500 index) seem justified at this moment.

Thank you.

For weeks, complacency has ruled. Despite geopolitical uprisings, weak economic data or continued reductions in monetary policy, nothing has “ruffled” investor’s feathers, well, until this past week.

Byron Wien makes the case for another massive rally in stocks in his full analysis HERE. Wien spent 21 years as Chief (later Senior) U.S. Investment Strategist at Morgan Stanley and co-authored a book with George Soros. Below is a brief summary of his detailed analysis – Editor Money Talks

In his most recent market commentary, Wall Street legend Byron Wien lays out a sensible, reasonable case that the S&P 500 could climb to 2300.

That’s 17% higher from current levels.

The main ingredients for Wien’s calculation: 3% economic growth, 7% earnings growth, and continued stock buybacks.

From Wien’s latest post on Blackstone’s blog:

“One of the problems limiting investor enthusiasm may be valuation. If the S&P 500 earns $115 in 2014, it is selling at 17.1x earnings. Market peaks have occurred historically at 25x–30x times earnings. On that basis, the market is fairly valued but not exceedingly expensive. The average trailing 12-month price-earnings ratio when the inflation rate is 0%–4% is 17… If the economy grows at a rate of 3% real during the remainder of the year and inflation is 2%, then nominal growth should be 5%. With productivity increases continuing and share buybacks, the S&P 500 should be able to show improvement of 7% over the $108 in operating earnings of 2013 and that would put us at $115. With considerable cash on corporate balance sheets, share buybacks should continue. Therefore, if earnings reach my target and the S&P 500 sells at 20x, we could reach 2300, which is 17% above the present level or more than 20% above the index price at the start of 2014.”

Wien also writes that, “Very few investors see that as a possibility because the market did so well in 2012 and 2013 and strong previous performance breeds caution about the future,” but says that just because the market performed well one year doesn’t mean it won’t the next.

In fact, Wien notes that when the S&P 500 has gained 25% in a year, it has been positive the following year each time has happened since 1990.

Overall, Wien’s primary concern for the market is a negative impact from geopolitical turmoil, saying that any of the situations in Ukraine, Israel and the Middle East flaring up further could pressure oil prices or challenge the “present world order” and unsettle financial markets.

But citing a recent Bloomberg poll that indicates 61% of respondents were worried about a market bubble, or thought the market was currently in one, Wien says this is an encouraging contrary indicator. 

Wien says that of course, the market cannot go up forever, but writes: “I see neither a recession nor a bear market in sight even thought we are five years into the economic and market recovery. Let’s hope geopolitical turbulence doesn’t upset that outlook.”