Drowning in Cash

The Daily Reckoning Weekend Edition
March 27-28, 2004
Paris, France
By Eric Fry

Consumers are gaining confidence!…So says a report released Friday by the University of Michigan. But didn’t Wall Street already reveal this news one day earlier, when a frenzy of stock-buying by confident consumers propelled the Dow to a 170-point gain? The Nasdaq jumped 3% on the same day – a testament to the triumph of confidence over prudence.

Resurgent confidence also manifested itself in the foreign exchange market last week, where the dollar gained more then 1% against the euro. Gone is the fear of a half-a- trillion dollar current account deficit and absent is the angst over a half-a-trillion dollar federal shortfall…

But all is still not well in the realm of dead Presidents. The dollar FELL half a percent against the Japanese yen last week. A resurgent Japanese economy is the quick-and- dirty explanation for the yen’s recent strength. (A lengthier explanation would include mention of the hair- brained American monetary policy championed by Alan Greenspan and a few other n’er-do-wells.) Japanese household spending jumped 6.9% in February compared to the year earlier – that’s the biggest jump in consumer spending since 1982.

Despite the U.S. financial market’s celebration of confidence last week, a few cautious souls shunned the festivities and loaded up on gold. For the week, the safe- haven metal climbed $9.50 to a 10-week high of $422.20 an ounce.

But gold bugs aren’t the only folks spurning the stock market these days. Some of the nation’s savviest investors have learned to "just say no" to buying overpriced U.S. stocks.

"Legendary Investors are Drowning in Cash," observes Morningstar’s Gregg Wolper. "When several of the very best managers all say they are having an extremely difficult time finding anything to buy at prices that make sense – not just in the U.S. stock market, but in the bond arena and foreign markets, too – it’s worth paying attention. In fact, it’s remarkable how many top-flight managers currently have more than 20% of assets in cash and say they find compelling opportunities scarce to nonexistent."

Warren Buffett, chairman of Berkshire Hathaway, made his billions by buying low and selling high. So is it not significant that the Oracle of Omaha is finding almost nothing to buy? At the end of 2003, Berkshire Hathaway held 23% of its assets in cash – up sharply from the single-digit levels of the previous four years.

Jean-Marie Eveillard and Charles de Vaulx, the legendary managers of First Eagle Global Fund, are also piling up cash. "Eveillard can’t find anyplace to invest the fund’s cash," Wolper reports, "which [stands] at 23% of assets. And this for a fund that can freely invest in bonds, too. Sounding like Buffett, [Eveillard’s partner], Charles de Vaulx said high-yield bonds are overpriced now, too.

"De Vaulx added that while bargains are scarce everywhere right now, the U.S. market is the most barren of all. As a result, First Eagle Global currently has a smaller percentage of assets devoted to U.S. stocks – less than 20% – than at any other time in the 25 years that Eveillard has been running the fund.

"The cash-heavy club [also] includes Clipper Fund, run by other former Managers of the Year, and Longleaf Partners, managed by past runners-up for that award…When so many justly respected managers are sounding the same cautious note, it makes sense to listen," Wolper concludes. "Even the greatest managers can’t consistently predict the direction of the markets – and by and large, they don’t try to. But right now, their words – and deeds – speak volumes."

He who has an ear, let him hear…

Regards,

Eric Fry,
The Daily Reckoning
March 27, 2004

THIS WEEK in THE DAILY RECKONING

SOMETHING WICKED THIS WAY COMES, PART II (3/26/04)
by Bill Bonner

"…Alan ‘Bubbles’ Greenspan, George W. Bush and all the great nabobs of positivism assure us that there is nothing to fear. But by this stage of a ‘recovery,’ the U.S. economy should have created 2-3 million more jobs than we have today. As Jay Leno tells his viewers, the missing jobs didn’t disappear. They just turned up in Bangalore, rather than Boston where they were supposed tobe…"

SELLING THE PAO MO (3/25/04)
by Dr. Steve Sjuggerud

"…They say they don’t ring a bell at the top of the market to let you know when to get out. No, they don’t. Yet to me, all the signs are ringing the proverbial bell – they’re very real indications that the boom in China- related stocks has peaked. Here’s a piece of advice for you: if you own any China-related stocks, sell them now…"

POLICY TRACTION (3/24/04)
by Kurt Richebächer

"…In one way the Fed’s policy has had fabulous traction. It engendered the greatest credit and debt bubble in history. Total outstanding debt, financial and non- financial, in the United States has ballooned by almost $6,500 billion since 2000, as against GDP growth of $1,238 billion. For each dollar added to GDP, there were about six dollars added to indebtedness. And it had fabulous traction in another way too: The runaway money and credit creation went with a vengeance into asset markets – stocks, bonds andhousing…."

PEARL OF THE ADRIATIC (3/23/04)
by Sven Lorenz

"…Croatia boasts nearly 1,200 islands…and what beautiful islands they are! If you ever travel to Croatia, take a boat and go out to sea: you’ll be amazed by the clarity of the water…you can still see the seafloor miles from the nearest land! The country offers some of the highest quality property in the Mediterranean, yet prices are the lowest in the region. And even though prices have already started to rise significantly, the general price level is still 50% below 1990 levels…and you won’t have to pay undefined8 for acappuccino!…"

WATCH THE GAUGES! (3/22/04)
by the Mogambo Guru

"…It’s not just cranky newsletter editors who’ve taken notice of [inflation]. Cranky financial journalists are on the case, too. ‘For the second straight month a forecasting outfit called Economic Cycle Research Institute said its inflation gauges have risen,’ John Crudele of the NY Post observes. ‘Federal Reserve Chairman Greenspan keeps close tabs on ECRI’s numbers – first because he trusts them and, second, because the organization was founded by one of Greenspan’s beloved former professors…"

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HEADLINE, NEWS And INSIGHT

Toyota’s Scoop and the Coming Oil Shortage (03/26/04)
by Lord William Rees-Mogg

"…Toyota sees China as a rapidly expanding economy, which will continue to expand. That will produce a huge increase in demand for automobiles. The motorization of China is already pushing up the price of oil, now at $37.50 a barrel. It is likely to go further and create a world oil shortage. In turn that will create a demand for ‘green’ cars. The world is changing before oureyes…"

The Itchy Need To Rescue Failure
by Christopher Mayer

"…Moral hazard is the term thrown about to denote the effect created when people are continually shielded from the consequences of their own errors. What happens is that this factors into their future decision making and they will tend to take greater risks in the future (and make more errors). Herbert Spencer, who wrote ‘The ultimate result of shielding men from the effects of folly is to people the world with fools,’ perhaps penned the most succinct and memorable expression of thisphenomenon…"

The Coming Oil Crisis: Temporary Squeeze Or Longterm Investment Opportunity?
by Martin Spring

"…Global demand for oil shows no sign of weakening. Yet oil reserves in the U.S. are at their lowest levels since 1975, while in the advanced nations as a whole they are only enough to meet 28 days’ use. Is the strength in oil prices a temporary phenomenon, or is it signaling a longer-term investment opportunity?…"