Daniel Lacalle

Why the market can’t go up… and one positive

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saupload_unemp_02272009In a letter to investors last week, Warren Buffett admitted having made some serious mistakes last October when he bought a  large stake in Conoco (purchased at $7bn worth $4bn now) and other stocks. His famous letter “buy equities, I am”, was full of confident messages about deep value and the possibilities of the American economy to recover.
All these messages were hit by harsh reality… If we distort the market dynamics through bank bail-outs, short-selling bans, rescue plans for declining industries and false messages of speedy recovery, confidence plummets further. That is what has happened.
Now for the positive. Two words: Corporate bonds.
I have seen and participated in very attractive corporate issues of three to five year bonds that yield 6% to 6.5%, with very high quality rating (single 
saupload_cons_conf_02272009A) and low risk. When the bonds yield more than the equity, and the balance sheet is strong, you get 3% risk premium for free.
So far the CDS of most single A companies have stabilized, and the healthy appetite for bonds and the good quality of their balance sheets show that when the crisis is over these companies will have survived. This is not a signal to  buy their equities yet, as multiples keep expanding while EPS is downgraded, creating a fake view that the stocks are “cheap”. It’s a signal to keep investing in corporate bonds and avoid the equity market problems for a while.
Meanwhile, the VIX keeps going crazy, so if you want to be in equities, stick to the golden rule of my previous posts… 2008 outperformers with solid balance sheets will repeat their performance this year.

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