Billionaires Selling Consumer Stocks: Red Flag or Profit Taking?

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The following is an excerpt from Richard Russell's Dow Theory Letters

What do billionaires Warren Buffet, John Paulson, and George Soros know that you and I don't know? I don't have the answer, but I do know what these billionaires are DOING. They, all three, are selling consumer-oriented stocks. Buffett has been a cheerleader for US stocks all along. But in the latest filing, Buffett has been drastically cutting back on his exposure to consumer stocks. Berkshire sold roughly 19 million shares of Johnson and Johnson. Berkshire has reduced his overall stake in consumer product stocks by 21%, including Kraft and Procter and Gamble. He has also cleared out his entire position in Intel. He has sold 10,000 shares of GM and 597,000 shares of IBM.

Fellow billionaire John Paulson dumped 14 million shares of JP Morgan and dumped his entire position in Family Dollar and consumer goods maker Sara Lee.

To wrap up the trio of billionaires, George Soros sold nearly all his bank stocks including JP Morgan, Citigroup and Goldman Sachs.

So I don't know exactly what the billionaires are thinking, but I do see what they're doing -- they are avoiding consumer stocks and building up cash.

One obvious answer to what the billionaires are thinking has to do with America's consumers. Consumer buying makes up roughly 70 percent of the nation's Gross Domestic Product. And with interest rates near zero, with jobs hard to find, with unemployment up, and with savings scarce, the billionaires are thinking that consumption is heading down and that America's consumers are close to going on strike.

If this is true, then why is the retail public loading up on stocks? Can't they see the picture? The answer is that the picture the retail public is seeing is --- the Dow going up. Nothing ignites the retail public's appetite for stocks like a series of new record highs in the Dow. The typical stock buyer doesn't act on his intelligence, he acts on his emotions. And his emotions say, "Look, the market is heading higher, and I want a piece of the action. If I'm lucky, I'll get back some of the money I lost during 2008-09, so wait a second while I call my broker." And so it goes, at least that's the way Richard Russell sees it.

Fed Chairman Ben Bernanke believes that he has discovered the way to ensure perpetual prosperity. He has made a careful study of the 1930s and the Great Depression, and he is convinced that the Fed made a horrible mistake when, during the Depression, the Fed pulled back on the nation's money supply. Bernanke even went so far as to apologize on the part of the Fed for the Fed's ghastly mistake. "We’re sorry," he said, "But we won't let it happen again." So the great Fed experiment continues, and the world waits anxiously for the results. So far, the Fed's action have succeeded in pressuring the Dow and other stock averages to new record highs. But a strange disconnect has appeared between the Dow and the US economy. While the Dow has surged higher, the economy appears to be dragging its heels. The problem, complains Nobel Prize winner Paul Krugman, is that the Fed is being too conservative. Krugman wants even more QE to jazz up the US economy.

But in the wings, the shadow of inflation has appeared. In Richard Russell's opinion, this is only the beginning. I expect inflation to accelerate from here on. High inflation will get the consumer's dander up. Eventually, I believe political objections will put pressure on the Fed, causing it to pull back on its production of dollars. When that happens, we'll have the makings of a stock market crash.

Coincidentally, in Sunday's LA Times (front page), we see the headline in big black letters: "Consumers Show Fresh Caution. Retail Sales Falter, Resilient Earlier in the Year, Consumers Retrench Amid Economic Worries.” Americans in recent weeks have cut spending on everything from dining out to electronics to cars, suggesting a renewed skepticism in the economy after a resilient start to the year."

That's the current story. And I'm thinking, maybe the rise in prices is beginning to have an adverse affect on consumer buying. At least the LA Times seems to have noticed it.

The latest (April 15) issue of The New Yorker magazine features a long article about my high school buddy, James Salter. Jim is recognized by some authorities as the finest writer in the US. The article about Jim is both authentic and fascinating.

More on consuming -- The Commerce Dept. reported that retail sales declined by the most in nine months after a slight 1% gain in February. Retail sales declined by 4% in March. This caused Bond buyers to bet that the Fed would continue its easing policies -- this prompted the bond crowd to rush into bonds, and below we see longer dated Treasuries breaking out to the upside.

tlt 12 apr 2013

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