The huge news regarding the stepping down of Apple CEO Steve Jobs and thus handing over the reins to current COO Tim Cook had dominated the business airwaves for about twelve hours Wednesday night until it was announced that Berkshire Hathaway CEO and legendary investor Warren Buffett was investing $5 billion in Bank of America. What does this all mean?
Regarding Jobs and Apple, short- and mid-term this should mean nothing to a company that has its product cycles well mapped out for approximately the next three years. However, over the long term it remains to be seen if the innovative Apple bench is deep enough to offset the loss of the visionary, Jobs. Despite not having Steve Jobs at the helm, at eleven times 2012 earnings, more than $73 per share in cash and no debt, along with an excellent management team, now with a chip on their shoulders and something to prove, we believe that a pullback in Apple should not be sold. We believe that the loss of Jobs is akin to the loss of Walt Disney. Both have created an environment that nurtures product creation and to a great extent institutionalized these qualities. This will be tested over the next several years.
Regarding Buffett and Bank of America. Warren Buffett will invest $5 billion in perpetual preferred stock of the beleaguered banking giant which will also provide t warrant to buy 700 million shares of common stock at $7.14 each. Has the Greenspan Put been replaced by the Buffett Put? This caused Bank of America to initially surge more than twenty percent early Thursday before settling nearly ten percent higher by the close. The entire banking sector also rallied on the belief that “the bottom must be in” if Buffett was investing. We say, not so fast. Sentiment is still very negative regarding the financial sector and it will take more time before the housing market sorts itself out. This should keep any bull markets that begin in the financial sector in check. We have not taken a stake in Bank of America and at this time, we continue to prefer JP Morgan Chase, First Niagara and FNB Corp.
Last, but not least, there has been much talk lately regarding the likelihood that the economy over the next year will be similar to 2008, when credit markets shut down and the economy sank. Although we do firmly believe that the economy is slowing and perhaps at a stall speed, we do not believe that we are setting ourselves up for another economic freefall like the one we went through during2008. We have always been of the belief that this economic recovery will be modest, at best, filled with fits and starts. We have not changed this outlook. At this point in time we are looking for this recent economic slowdown is temporary and that the economy will reaccelerate over the next two to three quarters to approximately three percent GDP growth, not great, but not another recession either.
THE BOTTOM LINE – We do not believe that we are in for a robust economy or for a robust stock market. However, valuations are reasonable for stocks, but most likely overvalued for bonds. With this in mind, there will most likely be a slow migration out of fixed income and into highly liquid, dividend paying U.S. stocks over the next year or two. We think that this would be a smart move if you have a three to five year time horizon and can stomach some risk.