FORBES: Will The Street Obey Buffett?

Monday, November 30, 2009

FORBES: Will The Street Obey Buffett?

Steve Schaefer, 10.17.08, 3:30 PM ET

Investors were moving back into equities Friday, as a bullish commentary from Warren Buffett outweighed the latest troubling indicator for the U.S. housing market.

Buffett wrote an op-ed urging investors not to remain in cash during the present buying opportunity, and revealing that he has already begun shifting personal holdings into equities. Previously, Buffett"s entire portfolio was in U.S. Treasury bonds, he said, noting that being greedy when others are fearful is one of his core strategies.

The billionaire"s investment firm, Berkshire Hathaway (nyse: BRK - news - people ), has been on the same path of late, making investments in blue-chip names at what appear to be bargain prices under sweet terms. In just the past few weeks, Berkshire has pumped billions into Goldman Sachs (nyse: GS - news - people ) and General Electric (nyse: GE - news - people ) in return for preferred shares with attractive 10.0% dividends. (See "Buffett Backs GE" and "Buffett"s Golden Goldman Buy.")

Still, Buffett cautioned that now is no time to be plowing money into the market willy-nilly. Investors should remain wary of "highly leveraged entities or businesses in weak competitive positions," Buffett wrote, but fear over the long-term prosperity of sound companies "makes no sense."

The remarks from the world"s richest man, which ran in the New York Times, helped enliven a market that was in the doldrums earlier Friday due to discouraging reports on housing and consumer attitudes. New residential construction was down to a 17-year low of 817,00 units in September, 7.7% below market estimates and 31.1% less than a year earlier. Meanwhile, the University of Michigan"s monthly consumer survey showed its steepest month-over-month slide in its history, falling to a reading of 57.5. (See "Housing Starts Dwindle In September.")

Plenty of investors remain on the sidelines, uneasy about the markets twists and turns, but those waiting for a bottom run the risk of missing it. With government bond yields and the value of the dollar likely to suffer from a significant debt issuance to pay for the Treasury Department"s bailout efforts, remaining in cash is no recipe for gains.

Rather, now may be a lucrative time for investors to plunge into consumer staples, industrials with solid fundamentals and certain commodity stocks. Many of the larger firms have global exposure that will help them surmount the flailing U.S. economy, and will stand to benefit from a pullback in consumer spending.

McDonald"s (nyse: MCD - news - people ) is one example. The company"s extensive worldwide footprint gives it a hedge against periods of economic weakness, and the strain on U.S. pocketbooks is likely to mean less fine dining for the everyday consumer. Shares of McDonald"s were up 98 cents, or 1.8%, to $55.44 Friday.

Technology, another traditional safety play, may be less enticing this time around. The collapse of the financial sector could eventually sap significant amounts of IT spend in the U.S. Industry leaders like IBM (nyse: IBM - news - people ) may sail through with little damage, but smaller players are likely to feel the pinch. IBM shares were up $3.04, or 3.3%, to $94.56.

Exxon Mobil (nyse: XOM - news - people ) and Chevron (nyse: CVX - news - people ), fellow Dow components, were each up over 2.0% Friday, as oil prices made a moderate comeback. Crude has shown few signs of returning to the $100.00 level, but climbed $3.62 to $73.47 a barrel as traders look ahead to the Organization of Petroleum Exporting Countries" emergency meeting Oct. 24. The cartel is widely expected to cut production.