Friday, September 22, 2017

Think Strategically: Warren Buffet’s America, Headed for a Correction



By on March 11, 2017

By Francisco Rodríguez Castro

This past week, the much-expected and -analyzed letter to stockholders of Warren Buffet’s Berkshire Hathaway was published. Buffet, considered the most successful investor in America with a unique folksy manner and down-to-earth persona, is not only impactful but also uncommon. The theme was his contention that there are “Better Days Ahead for America.” Buffet utilizes the analogy and facts of the Great Recession that impacted the United States during 2007-2009. His emphasis, that in the 238-year history of America, it has never paid to bet against the U.S. because America’s free market system is the best mechanism for growth and the creation of capital, prosperity and innovation.

In this June 14, 2016 file photo, Berkshire Hathaway Chairman and CEO Warren Buffett addresses the White House Summit on the United State of Women in Washington. Buffett is planning to release his annual letter to Berkshire Hathaway shareholders on Saturday, Feb. 25, 2017. The letter is always one of the best-read business documents every year because of Buffett's knack for explaining complex issues in simple terms and because of his remarkably successful investing record. (Cliff Owen/AP)

In this June 14, 2016 file photo, Berkshire Hathaway Chairman and CEO Warren Buffett addresses the White House Summit on the United State of Women in Washington. (Cliff Owen/AP)

See also: Warren Buffett sticks to business, avoids politics in letter

With the Dow Jones at 21,000 points this past week, we must remember Buffet’s famous quote: “Be greedy when others are fearful.” Berkshire’s magic is finding undervalued stocks that are friendly to stockholders; this combination is proving more and more difficult to obtain in the current market and with the market-cap-to-GDP ratio at 127.1%, it points to a market correction very soon. As a matter of reference, at the height of the dot-com boom in 1999, this ratio was at 153.6% and just before the 2008 crisis, it was at 108%. Verify your portfolios.

The speech that made Trump president

Eight out of 10 Americans approved the State of the Union speech last week and reacted positively to the broadly unifying statement, that it contained the right tone, manner and message. In our view, Donald Trump became president during that speech. Most Americans were expecting more of the same twitter-induced and combative President Trump that appeals negatively to most Americans. However, Trump delivered a positive speech that detailed his economic plans for America; most people favored the president’s plans for the military, trade, foreign policy, budget-deficit reduction, infrastructure investment and taxes.

According to most polls, we have reviewed approval ratings between 76% and 83% among all Americans. It is impressive how a single unifying speech can move and shake the opinions of millions of Americans who want the very best for the country. However, it takes much more than a single speech to unify a nation behind a leader; he needs to prove himself to the country.

P.R. Update: First China-P.R. Investment Forum

A select group of people was invited to the First China-Puerto Rico Investment Forum. This event, hosted by the private sector and the government, gathered more than 150 Chinese investors. The key investment message was delivered by Economic Development Secretary Manuel Laboy, who made a compelling presentation on the benefits of investing in Puerto Rico and presented a map of the island with all the available investment opportunities. We are enthused with the development of this event after meeting a diverse group of investors from all areas of China. During the event, the U.S.-China Business Association presented its annual awards and, to our delight, presented awards to President George H.W. Bush, Gov. Ricardo Rosselló and businessman and investor Nicholas Prouty, among other honorees.

Final word

Lastly, on Feb. 28, Gov. Rosselló made his first state of the government speech. During his discussion, the governor presented a mix of $3.8 billion in spending cuts, new revenues north of $1.5 billion and strategies to maximize them. Spending cuts include $300 million at the University of Puerto Rico, the pension system and the healthcare system known as La Reforma. Also, the blueprint for a debt restructuring of Puerto Rico’s debt was outlined and will establish a debt burden for each issuer based on the net cash available for debt service after payment of essential services.

While the plan is on track and focused in the right direction, it falls short of the Financial Oversight & Management Board’s (FOMB) requests that Puerto Rico cut $4.5 billion in expenses, which would have left less than $800 million in debt-service payments. The plan must wait for the FOMB’s response. It is evident Rosselló is making every effort to balance the budget while honoring Puerto Rico’s obligations. It is worth mentioning the effort that Fiscal Agency & Financial Advisory Authority Executive Director Gerardo Portela is making, and it shows with the right tone, message, in-depth knowledge and style.

 

Francisco Rodríguez-Castro, president & CEO of Birling Capital with over 25 years of experience, has been a key executive in government, global, multinational and public companies as well as a key corporate adviser to multiple entities in a diverse array of market segments. He has participated in structuring over $10 billion in municipal finance, corporate, commercial, asset-based, P.R. Industrial, Tourism, Educational, Medical & Environmental Control Facilities Financing Authority (Afica), and mergers & acquisitions transactions.

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