Every time Warren Buffett does something, a legion of Buffett-watchers immediately pass judgement on whether the world's most-admired investor has finally lost his mind.

Well, he hasn't, says one of the smartest of those Buffett-watchers, hedge-fund manager Jeff Matthews, the author of "Pilgrimage to Warren Buffett's Omaha."

Buffett's $44 billion bet on a railroad--the biggest bet of his career--is a long-term play on economic recovery and, possibly, global warming.  And it includes a nice potential option in the form of 32,000 miles of rights-of-way that could eventually form the backbone of a nationwide broadband network.

Buffett's Burlington bet probably won't earn the same eye-popping returns of some of his earlier investments, says Matthews, founder of Ram Partners and author of the popular blog, Jeff Matthews Is Not Making This Up.  He paid (relatively) a lot for it, and railroads aren't a major growth business.

But considering Buffett's desire to put a massive amount of money to work and earn a decent return, this seems like a typically smart play.

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The precipitous collapse that took stocks down almost 60% from their highs scared many small investors out of the market, says Jeff Mortimer, CIO of Charles Schwab Investment Management.  And now, sadly, these investors have missed a massive rally.

So what should they do now?

Ease their way back into the market, says Mortimer.

Yes, it hurts to buy in at prices that are 50% higher than where they were when you ran for the hills. But the alternative--missing more of the rally--is even worse.
 
Usually, Mortimer says, investors who bailed at the bottom don't get comfortable enough to buy back in until the market has doubled off the low. And we're not there yet. 

Mortimer thinks gains over the next year will be muted--5%-10%--but the alternative is near-zero returns on cash.

And, next time, don't believe those folks who tell you "buy and hold is dead"!

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Contrary to the hysterical panic you hear about inflation these days, it's actually not a problem, says the FT's chief economics commentator Martin Wolf.
 
Right now, the economy's capacity utilization and bank lending are so low, that inflation isn't taking hold.
 
All that could change, however, if the Fed blows its exit strategy.
 
If the Fed waits too long to stop giving away free money, inflation could start to gather steam. If the Fed tries to combat this by raising rates, meanwhile, the shock could hit the stock market and slow the recovery.
 
Wolf thinks the Fed will have to start making noises about raising rates within six months--faster than most people expect. Martin also thinks this move could hit the stock market.

Earlier with Wolf:

• "Still a very shaky sort of world recovery"
• Fed's massive secret Wall Street bailout still going strong
• The dollar isn't doomed, "big shocs upwards" coming!

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From The Business Insider, Oct. 28, 2009:

PIMCO's Bill Gross with a great monthly letter.  Here are the key points:

• Over the past 30 years, paper asset prices rose 2X as much as they should have based on economic fundamentals
• This was the result of leverage
• The asset price rise in turn pumped up the economy's fundamentals (Soros's reflexivity)
• The government wants to restore the "old normal" (2007) not the "new normal" (slower growth as asset prices return to trend)
• Therefore...  The Fed will keep rates at 0% for at least 18 months into sustained 4% growth
• Next year, when the inventory restocking effect wears off, 4% will be tough

Bill Gross:

[I]n a New Normal economy (1) almost all assets appear to be overvalued on a long-term basis, and, therefore, (2) policymakers need to maintain...

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More coverage from The Business Insider:

Soros: Buy hard assets, and don't keep betting on a weak dollar

Full story of how Tim Geithner secretly bailed out Wall Street and screwed the taxpayer last fall

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From The Business Insider, Oct. 28, 2009:

Tim Geithner's getting ready to shovel more taxpayer money down the rat hole, this time to GMAC. 

GMAC, in case you're in understandable denial, has been bailed out twice already.

And now Tim Geithner wants to shovel another $2.8 billion in.

What is the US taxpayer getting in exchange for all these GMAC bailouts?

Preferred stock.

Why are we getting preferred stock, which is neither a claim on the future upside of the company's equity, nor a senior debt security that will be completely repaid in the event that taxpayers finally get mad as hell and won't take it anymore?

Because Tim Geithner is worried that if he makes the folks who voluntarily lent money to GMAC -- the bondholders -- lose so much as a cent, the entire US economy will collapse...

More coverage from The Business Insider:

• Neil Barofsky Blames Geithner for AIG Bonus Rip-Off
• Look Who Really Controls Tim Geithner

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Ever since the market bottomed in March, a parade of bears have warned about all manner of coming calamities:

• An end to the "sucker's rally"
• A collapse of the financial system
• A double-dip recession
• A commercial real-estate collapse
• A decade of "deleveraging" as consumers recover from a drunken debt binge

Ridiculous, says James Altucher, managing director at Formula Capital.

The economy is recovering nicely, says Altucher, and 2010 is going to be a huge year.  Companies that stopped making things and fired thousands of employees last winter out of fear of a second Great Depression will restock their shelves and start hiring like mad. The federal stimulus, which has barely kicked in yet, will really get cranking. Consumers will find jobs much easier to get, and the resulting optimism (and income) will prompt them to start spending again.

And the market?...

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From The Business Insider, Oct. 27, 2009:

Jeremy Grantham of Boston-based GMO called the crash.  He also called the rally.  He also called a whole bunch of stuff before that--although, as he is the first to admit, like other value folks, he does have the habit of being early.

Not this time, though.

Within days of the March low, Jeremy published "Reinvesting While Terrified," in which he observed that it was time to bet the farm.  He soon called for a stimulus-fueled rally that would take the S&P 500 to 1000-1100, which is where we are now.  He also laid out his expectation that the market would then move sideways for 7 years.

Well, we've hit the high of Jeremy's sucker's rally prediction.  Stocks are now once again significantly overvalued (Jeremy puts the overvaluation at 25%, with fair value on the S&P 500 at 860).  He thinks the market can go a bit higher but that it will break down next year.  He's looking for a "painful" pullback of at least 20%.  A new low is not likely, but not out of the question.

You can download Jeremy's quarterly letter at GMO's site here.  It's also embedded below.  Here's the part on the stock market:

The Last Hurrah and Markets Being Silly Again ...

Click here for the full story.

More coverage from The Business Insider:

• Grantham: You should buy now, even though market could tank
• Stocks now distinctly cheap

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Now that the worst of the recession is over, Americans are waking up to the fact that we're borrowing nearly $1.5 trillion per year. Instinctively, this worries us.

But why?

What's really so bad about piling on debt in excess of 10% of GDP every year?

Japan has been borrowing through the nose for years, and Japan, well... okay, maybe Japan's not a good example. Japan's economy has been in the tank for two decades.

Actually, Japan's a great example, says John Mauldin of Millennium Wave Advisors. What's happened in Japan in the past 20 years is that government borrowing has largely replaced private sector borrowing: The total debt hasn't risen, but the government's percentage of it has soared.

Unlike private-sector borrowing, which is (usually) productive, government borrowing doesn't stimulate growth, Mauldin says. This may be at least part of what's ailing Japan. And as long as we rely on the government to borrow and spend for us, the same thing could happen here. Our economy could become dominated by a huge, inefficient bureaucracy instead of lean, competitive private-sector companies.

And that's the good outcome.  The bad outcome is that China and other countries finally get sick of lending us money at rock-bottom interest rates and start demanding real compensation.  If that happens, interest rates could soar, stopping the economy in its tracks.

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From The Business Insider, Oct. 19, 2009:

It's the myth that will never die.

Jim Cramer has made a career out of promoting it, as have countless other stock-picking gurus since the dawn of time.

What is this myth?

If only you "do your homework," analyze those financial statements, (and listen to such-and-such a stock-picking guru), you, too, can pick stocks well enough to beat the pros.

If there's one thing that should ring out loud and clear from the Galleon insider-trading bust it is that this is preposterous.

Stock trading is a zero-sum game. You cannot make money from trading without other people losing money.* In order to win the stock-picking game, therefore, you have to out-trade other traders.  You have to beat the other traders by enough to offset your costs of research and trading (which are deducted from your returns).  And you have to do this consistently, year after year after year.

Even without illegal inside information, your competition is intense.  The hedge funds, mutual funds, and other professional traders you are competing with have, at a minimum:

• Professional analysts and traders with decades of experience who work 20 hours a day
• Huge industry Rolodexes filled with primary contacts at companies whose stocks they trade
• Research budgets that run into tens or hundreds of millions of dollars a year
• Dozens of Wall Street brokers calling all day with every scrap of info they can dig up
• Instant access to 100% of Wall Street research and analysts from hundreds of firms
• Proprietary research services that can cost hundreds of thousands of dollars a year
• High frequency trading computers that act on any market info in milliseconds

To win the stock-picking game, you have to consistently beat folks who have all of these advantages and more...

More coverage from The Business Insider:

• The 10 Countries Most At Risk of a Meltdown
• You Won't Believe How Good Life Is for the Super Rich

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The vacancy rate for rental apartments in the U.S. is now 7.8% and climbing, says the Wall Street Journal. This is the highest vacancy rate in 23 years.

Worse, the vacancy rate is expected to keep climbing through the winter, ultimately hitting the highest rate on record.

This is good news for renters and bad news for landlords. It's also bad news for anyone who owns and would like to sell a house.

Why are rising rental vacancies bad news for homeowners?

Because rising vacancies put pressure on rents, as landlords have to cut prices to woo a smaller pool of tenants. As rents drop, meanwhile, one of the key measures of house-price value--the price-to-rent ratio--also changes, and not for the good.

All else being equal, when rents drop, the "Housing P/E ratio" -- price to rent -- increases as rents decrease. This is the same thing that would happen to the P/E ratio of a stock if the company's earnings began to shrink.

The more the rent/earnings shrink, the most expensive the house or company is as a multiple of the rent/earnings.

Will people suddenly refuse to pay as much for houses because the price-to-rent ratio rises a bit? No. But they may decide to rent instead of buy, which will remove some demand from the housing market. And, this, in turn, will put pressure on house prices.

The chart below from Calculated Risk illustrates the price-to-rent ratio over the past 15 years. As you can see, it got way out of whack during the peak bubble years and has now fallen back within the realm of normal. As rents fall, however, the ratio will start rising again.

That is, unless house prices fall, too, which is the more likely scenario.

See also from The Business Insider:
HOUSING RECOVERY: See How Your City's Doing

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