Tags: Warren | Buffett | Still | Worried | Dollar

Warren Buffett Still Worried by Dollar

Monday, 07 March 2005 12:00 AM

1. Buffett Hoped Dollar Bet Would Fail
2. U.S. Buyout Fund To Buy $1 Billion In UK Property
3. Boost In U.S. Productivity Soothes Inflation Worries
4. All Signs Point To A Housing Bubble Blowout
5. China's Once-Booming Mutual Funds Correct
6. Refinery Outages See Crude Price Surge

1. Buffett Hoped Dollar Bet Would Fail
2. U.S. Buyout Fund To Buy $1 Billion In UK Property
3. Boost In U.S. Productivity Soothes Inflation Worries
4. All Signs Point To A Housing Bubble Blowout
5. China's Once-Booming Mutual Funds Correct
6. Refinery Outages See Crude Price Surge

 
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1. Buffett Hoped Dollar Bet Would Fail

Warren Buffett, the world's second-richest man, bet against the U.S. dollar last year and made money on it, but he really hoped he wouldn't.

According to his annual letter sent to shareholders last week, Buffett – founder of investment firm Berkshire Hathaway, Inc. – said his company earned $1.63 billion on foreign currency investments in the fourth quarter of 2004.

Buffett's Omaha, Nebraska-based firm began betting against the dollar in 2002, on speculation the nation's continued massive trade and budget deficits would cause the dollar to lose value.

He was right; the federal government's red ink continues to grow, even as the trade deficit hit a record $617.7 billion last year. But he'd rather not have been right.

While acknowledging in this week's letter the U.S. economy is "far and away" the most vital in the world, he has been urging U.S. policymakers to adopt trade and economic policies that "quickly and substantially reduce the current account-deficit."

He has urged such policies though "a prompt solution would likely cause Berkshire to record losses on its foreign-exchange contracts."

Specifically, Buffett recommended in a November 2003 letter published by Fortune Magazine U.S. policymakers should adopt "a tariff plan that would promote exports and make imports more costly," Bloomberg News reported.

"Policymakers makers continue to hope for a 'soft landing,' meanwhile counseling other countries to stimulate (read 'inflate') their economies and Americans to save more," he wrote in this week's letter.

"In my view, these admonitions miss the mark: There are deep-rooted structural problems that will cause America to continue to run a huge current-account deficit unless trade policies either change materially or the dollar declines by a degree that could prove unsettling to financial markets."

And yet, he still sees the dollar headed downward.

2. U.S. Buyout Fund To Buy $1 Billion In UK Property
 
Previously MoneyNews has reported that American real estate may be so overpriced – major funds are now investing in offshore real estate.

3. Boost In U.S. Productivity Soothes Inflation Worries

4. All Signs Point To A Housing Bubble Blowout 
 
There are brand new warnings that home prices are unsustainable and the housing market is in a bubble that is on the verge of bursting, says a report in Forbes magazine.
 
A new study by the National Association of Realtors (NAR) claims that 23% of all homes purchased in 2004 were for investment, while another 13% were vacation homes.

Historically, the market has been protected against a sharp decline in housing prices by the fact (or belief) that most people live in their homes and would be unlikely to sell even if the market headed downward. But obviously that logic doesn't apply to investment homes or vacation homes.
 
There has long been anecdotal evidence that non-occupant buyers are fueling the rise in home prices. The NAR study, based on 2003 census data, says there are 43.8 million second homes in America. While 6.6 million of these are vacation homes, far more, 37.2 million, are investment units. This compares with 72.1 million owner-occupied homes. About a quarter of last year's home sales were for investment homes, NAR says.
 
Nearly 80% of investment buyers rent out their houses. And while an owner-occupant is unlikely to sell his or her dwelling, with an investment home the decision to sell is purely economic: If rents don't sustain a mortgage, it is pointless to own an investment property, except for the hope that home prices will inevitably rise, which has been the case in recent years.
 
Forbes says that since 2001, the median price of an investment home has risen 25.4%, from $118,000 to $146,900. (In most markets, the average price is considerably higher than the median.)
 
However, if prices start to fall or mortgage rates begin to rise, there could be a rush to sell - and that could trigger a crash.

Some investment buyers might find themselves unable to get renters at all, as rental vacancy rates are near historic highs. With many buyers putting down almost no cash, they could just let their bank foreclose and walk away.
 
According to the Mortgage Bankers Association, more than 32% of mortgages are now adjustable. The popularity of adjustable-rate mortgages is on the rise despite the spread between the so-called teaser rate and the fixed rate on a standard 30-year mortgage has narrowed.
 
At the same time, in the U.S. there have been double-digit price increases for the average new home, and 20% or more price hikes in many markets, including some of the most populous ones - in the Northeast, Southern California and Las Vegas.
 
And in the last six months, shares of major home-building companies are up 25 to 100%, while some mortgage lenders have increased their lending by as much as 40%.
 
But the fact is that while home prices have doubled in four years, they haven't been nourished by income gains anywhere near that level. So a 30 to 50% drop is completely possible.

5. China's Once-Booming Mutual Funds Correct

6. Refinery Outages See Crude Price Surge

Crude futures were at $53 a barrel Thursday amid traders' worries that refinery outages in the United States would strain supplies.

Outages, which limit the amount of fuel that energy companies are able to make, plagued refineries in California and Texas and jarred a market already shaken by an unexpectedly huge drop in refinery run rates.

An Energy Department report said that U.S. refineries used 89% of their capacity during one week in February. That was the lowest level since October, when companies were performing repairs after a hurricane hit the Gulf of Mexico.

One oil analyst said the price surge past $53 was due to the "speculative element as hedge funds are up." Investors are buying oil futures, betting that demand growth will outpace supply and push prices higher.

Oil prices are about 45% higher than a year ago, up sharply in recent weeks due to a combination of colder weather, the declining value of the dollar and fears OPEC could rein in production to guard against a seasonal drop in demand.

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1. Buffett Hoped Dollar Bet Would Fail2. U.S. Buyout Fund To Buy $1 Billion In UK Property3. Boost In U.S. Productivity Soothes Inflation Worries4. All Signs Point To A Housing Bubble Blowout5. China's Once-Booming Mutual Funds Correct6. Refinery Outages See Crude Price...
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Monday, 07 March 2005 12:00 AM
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