The Weekly Three

…for two weeks

October 7th-20th

James Cullen

Portfolio Manager
CollegeAnalysts.com
 More of the Same, with a Twist
• Fall Outlook Themes (9/22, S&P 500 = 1255)
– Credit: Scarce and Expensive
– Global Slowdown Reality, But Not Priced In Yet
• Themes for Last Two Weeks
1. Unprecedented Credit Market Stress as Global
Slowdown Thesis Gains Traction
• S&P Down Another 11% to 940 (-25% 1 Mo.)
2. Governments Scramble To Do Some/Anything
3. Warren Buffett Positive On & Buying Equities
 Credit Market Stress
• Sorry Fixed Income is Boring – But It’s
Driving Equity Markets
• A Spread Problem on Short Duration
– 3 Mo. LIBOR @ 4.4% vs. 5.2% 1 Yr. Ago
– 3 Mo. Treasuries @ 0.7% vs. 4.0%
• Borrowing Costs Down 20%
• But Risk-Free Return Down 80%
Who Can/Will Take More Risk Now?
– We Can. Will We?

For more info and several graphs, visit http://collegeanalysts.com/creditstress

Credit: Bespoke Investment Group
 Credit Market Stress
• But Absolute Rate Problem on Long End
– Risk Premiums Simply Too High for
Economical Borrowing
• Goldman Sachs (Aa-rated)
– Effective Interest Rate >18% for 5-Yr. Preferred
• General Electric (Aaa-rated)
– Effective Interest Rate >13% for 5-Yr. Preferred
• And the Speculative-Grade Mess Worsens…
For more info and several graphs, visit http://collegeanalysts.com/creditstress
Effective interest rates computed net of estimated warrant grant value
Speculative Grade Borrowing Costs >20%

Credit: Bespoke Investment Group

Odds of US Recession
 The Slowdown Goes Global
• European Banks Failing
– Belgium, Netherlands, Luxembourg, Iceland,
Germany, Britain All Injecting Capital
• ECB Finally Cuts Rates; Golf Clap for Trichet
• China
– Export Dependent Economy Cooling
• Russia
– Commodity Price Rout Destroys Wealth
– Leveraged Players Forced to Sell  Crash
Saving The Markets From Themselves

• US, Western Europe • Federal Reserve

– Bank Capital Injections
for Preferred Equity
– Coordinated Rate Cut
• Russia
– Closed Markets for
Two Days
• South Korea
– Guarantee Bank Debt
– Backstopping
Commercial Paper
– Creative Policies to
Add Lending Liquidity
– Deflation Fears Driving
Monetary Policy?
Check the H.4.1
• Total Credit Out More
Than Doubled YoY
Credit: David Merkel, CFA
 What Would Warren Do?
• “Buy American. I Am.”
– 10/16 NY Times Op-Ed Article
• Investments in Goldman
Sachs, General Electric
– We Own Both Stocks
– Great Terms for Berkshire
• Personally Bought Stock in
Bank Wells Fargo (WFC),
Possibly Others
 Buffett: Buy American. I Am.
• The financial world is a mess, both in the United States and
abroad… In the near term, unemployment will rise, business
activity will falter and headlines will continue to be scary. So
... I’ve been buying American stocks.
• A simple rule dictates my buying: Be fearful when others are
greedy, and be greedy when others are fearful. And most
certainly, fear is now widespread, gripping even seasoned
investors.
• In the 20th century… the Dow rose from 66 to 11,497. [Which
investors lost money?] The hapless ones bought stocks only
when they felt comfort in doing so and then proceeded to sell
when the headlines made them queasy.
• 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.