Dow Jones Industrial Average (DJIA) futures point to another strong week on the stock market, up 117 points at 5.51 am Monday.
While traders remained focused on short-term US-China trade talks, Warren Buffett is still cautious about the market’s “sky-high” prices. The Oracle of Omaha is sitting on $128 billion in cash and is being forced to look beyond the stock market for value investments.
Worse, Buffett’s preferred indicator of market bubbles – the “Buffett indicator” – is at highs not seen since the dot-com crisis. And last week he was uncharacteristically cautious in bidding for startup company Tech Data.
Reading between the lines, Warren Buffett is reluctant to deploy capital in this record-high market.
Dow futures contracts were 117 points higher on Monday as China’s latest “countermeasure” in the trade war wasn’t nearly as destructive as thought. Traders feared a sharp response from China after Trump signed a bill that supported Hong Kong protestors last week. But the retaliation (sanctions on NGOs and restrictions on warships) should have little impact on negotiations.
Most of Berkshire Hathaway’s biggest investments of the last few years came from blue chip stocks like Apple, Delta, and recently Amazon and JP Morgan Chase. But with the stock market at record highs, Buffett has been scouring the private equity markets for value.
Last week, he went head to head with private equity firm Apollo Global Management in a bid to acquire startup company Tech Data. But he was unwilling to go a penny higher on the offer and was outbid. As CNBC anchor Becky Quick explained, it’s a rare move for Buffett to look at early-stage investments.
[This is] evidence of what’s been happening with Berkshire Hathaway as its cash hoard has grown. It’s topped over $128 billion according to the most recent SEC filings… It’s an interesting pivot from Buffett. He rarely goes up against private equity companies and doesn’t like to get into bidding war. But it shows how he is going further afield to deploy his large stash of cash.
Unable to find value in an overheated stock market, Buffett is looking at other avenues.
It’s no surprise to see the Oracle of Omaha looking elsewhere for value. His favored stock market valuation indicator is flashing “extreme danger.” The indicator, which tracks the market capitalization of all public US stocks against GDP, is now higher than the dot-com bubble.
In Buffett’s most recent annual letter to investors, he said that finding value was increasingly difficult in this market:
Prices are sky-high for businesses possessing decent long-term prospects.
And as CCN reported, his $128 billion cash pile is a warning sign of its own. Keeping such a large percentage of his portfolio in cash hints that the Oracle of Omaha is staying on the sidelines until there’s an inevitable market correction.
This article was edited by Samburaj Das.
Last modified: January 22, 2020 11:41 PM UTC