The Oracle of Omaha says stocks in the United States aren’t cheap and instead, continues to focus on the credit markets where bargains rule in early 2008.
Berkshire Hathaway released fourth quarter results last week and showed a decline in quarterly earnings. Although Buffett holds very little derivatives exposure (only for currency hedging), his insurance holdings are facing stiffer headwinds since last fall along with the rest of the industry.
Buffett, arguably the most successful global investor in the world since the Rothschild’s dynasty, believes 2008 will be a tough year. He is focusing on distressed credits where yields have soared relative to Treasury bonds, especially in the tattered municipal bond market.
Muni bonds now yield more than 125 basis points over benchmark T-bonds – a fat yield advantage in excess of the 80 basis points historical differential. That makes municipal bonds a “buy” for shrewd investors, including Buffett and PIMCO’s Bill Gross.
Meanwhile, Buffett believes U.S. stocks don’t offer any compelling bargains thus far in 2008. The S&P 500 Index trades at a trailing 12-month 19.6 earnings and yields 2.2% -- hardly bargain-basement values.
It’s probably still too early to buy junk bonds and other riskier credits as the economic cycle continues to unwind. But some of the stronger municipalities in the United States offer good inflation-adjusted values that are tax-free at the federal level. And high quality corporate debt also looks attractive, especially those issued by the better-managed banks like Goldman Sachs.
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