It’s no secret that the U.S. stock market has soared in recent years. The Dow Jones Industrial Average closed last week above 17,000, an all-time high. Since March of 2009, the S&P 500 index has gone from 638 to closing last Friday at 2,007. That’s more than a 300 percent increase in just over five years! The question that all prudent investors need to be asking themselves is how long will this bull market continue? I believe the answer to this question is quite obvious for both George Soros and Warren Buffett, two highly respected investors in U.S. equities: they’re both planning for a market slowdown.
We’ve all heard the saying, “Actions speak louder than words” meaning what you do is far more significant than what you say. Now I’m tempted to get political at this point as there are some well-known politicians who are famous for giving grandiose speeches about a rising issue but whose follow through with meaningful actions is paltry. But I digress.
Both George Soros and Warren Buffett cannot be accused of not following through on their intended actions. In fact just the opposite is true. Doing a Google search of recent comments by the two titans of business has not revealed any negative comments about the U.S. stock market. They have remained very quiet about the current condition of the market. But their actions speak volumes.
For institutional investors, keeping secrets is nearly impossible. The Securities and Exchange Commission requires these entities to file a quarterly report. In the 2nd quarter filing for Soros Fund Management a major shift in investment strategy was observed. George Soros increased his bearish position by over 600%! The Soros Fund Management reported large investments in puts, which are options that give the investor the right, but not the obligation, to sell a security at a given price.
It’s not unusual for a large investment firm to place hedges on positions, whether long or short, in order to mitigate risk. It’s done all the time. But Soros’ short position jumped from about 3% to almost 17% making it the largest part of his holdings for the second quarter. That doesn’t sound like a hedge, it sounds like he’s taking a bearish position in the market.
Cash in Warren Buffett’s investment firm, Berkshire Hathaway rose past $55 billion at the end of June. Why is that significant? It’s the most accumulation of cash in the firm’s 40 year history and it’s more than double the amount that Buffett has said he likes to keep on hand should his insurance businesses have to pay unusually large claims.
Some investment analysts believe that these excess funds will be invested back into Berkshire’s capital intensive units – electric utilities, natural gas pipelines and railroad holdings that routinely require billions of dollars in spending to maintain and upgrade equipment. That may be true but I believe that Buffett realizes that the market cannot sustain its current gains and realizes it’s not time to be buying in an overpriced market. As one analyst puts it: he likes to wait for the “fat pitch,” an opportunity to buy a company at a good price. And there are few companies out there that could be described as bargains right now.
There are other legitimate concerns for a market downturn:
- Bull markets historically last about 5 years which is about the length of this bull market.
- The average S&P 500 Price/Earnings ratio is 15 while the current P/E is closer to 20.
- The strongest sector of the year has been Utilities, typically a defensive sector that performs well during recessions.
- The weakest sector this year has been Consumer Cyclicals which typically is strong during market expansions.
- The European Union is showing signs of slipping into a recession as well as Russia, China and Japan which doesn’t bode well for our exports.
So where does that put us, the everyday investor? How should we respond? I have well intentioned friends and business colleagues that are still bullish about the market. Maybe they are right but I believe that investors are becoming irrationally exuberant. It’s time to pull back or at least hedge your gains a bit. I’m reminded of the saying, “Pigs get fat, hogs get slaughtered.” Or maybe it would be more appropriate to end with a Buffett quote: “Be fearful when others are greedy. Be greedy when others are fearful.”
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Sources: George Soros is Betting Against The Market And Why Investors Should Take Notice, by Elite Wealth Management, Seeking Alpha, September 2, 2014; What Warren Buffett Will Do With Berkshire Hathaway Inc.’s $55 Billion in Cash, by Patrick Morris, The Motley Fool, August 5, 2014; Buffett Waits on Fat Pitch as Cash Hoard Tops $50 Billion, by Noah Buhayar, Bloomberg, August 4, 2014.