October 6, 2008

Special Update

Last December, I warned that, for some, the next year (2008) would feel like a depression. And in June, I cautioned that we have an economy with some of its sub-sectors bypassing recession, going directly into depression. (Check my latest recession watch update.) Finally, I sent you a special update on September 26 outlining why I do not support a government bailout. (More about the frightening prospect of a far-left government.)

But in the teeth of the worst financial crisis of my lifetime, Warren Buffett is a buyer—a buyer of blue-chip investment-grade preferreds like GE. I have also been a buyer, as has our family investment firm (www.younginvestments.com). Most blue-chip preferreds are down in price today, but don’t forget, prices will rebound out of nowhere like a slingshot. It would not surprise me to see 30% single-day gains once a true revival gets under way. I will continue to buy, and I hope you will continue to acquire and add to investment-grade preferreds, many of which can now be acquired with yields over 11%.

The upside of the credit crisis and the bear market is that values are improving across asset classes. Bond and preferred yields are more attractive, stock market valuations have come down significantly, and even commodities have fallen from recent highs. Valuations are the best indicator of future long-term returns. If U.S. assets get much cheaper, you are likely to see a flood of foreign money flock to U.S. stocks and bonds.

You want to be an aggressive buyer in this market, not a seller. Stocks could, of course, decline further from here, but the magnitude of further declines is likely limited. Meanwhile, I’ll have more for you about preferred stocks, the bailout and economic outlook, and the election in the next issue of Intelligence Report.

Tags: depression, federal bailout package, GE, investment-grade preferreds, recession, Warren Buffett