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Five Things You Need to Know: Buffett Tops Wealthiest List, How'd He Do It?


Can we as individual investors replicate the billionaire investor's success in our own portfolios?


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. First, the Bad News...

Home foreclosures soared to an all-time high in the final quarter of last year, according to the Mortgage Bankers Association. The proportion of all mortgages nationwide that fell into foreclosure shot up to a record high of 0.83% in the fourth quarter of 2007, the MBA reported. The previous high was 0.78% in the third quarter of last year.

The delinquency rate for all residential mortgages climbed to 5.82%, up from 5.59% in the third quarter, and the highest since 1985. What's worrisome are the across board increases in delinquencies and foreclosures among all credit buckets.

Year-over-year, the foreclosure start rate for prime Adjustable Rate Mortgages (ARMs) increased from 0.41% to 1.06% and the rate for subprime ARMs increased from 2.70% to 5.29%. The foreclosure start rate for prime fixed loans increased from 0.16% to 0.22% and the rate for subprime fixed loans increased from 1.09% to 1.52%.

The association's survey covers almost 46 million homes in the U.S.

Meanwhile, the National Association of Realtors reported their index for pending existing-home sales was flat in January, quite an accomplishment considering that consensus expectations were for a decline of 1.5%.

Remember, the NAR Pending Home Sales Index is based on signed contracts, not closings. It's still almost 20% below levels of a year ago.

2. ...Now, for the Bad News

Wait, that's bad news twice in a row. Well, look, we don't make this stuff up. Wal-Mart (WMT) this morning reported February sales increased 2.5%, more than expected, which sounds like good news - and it is, for Wal-Mart - until we stop and consider that what is good for Wal-Mart may not exactly be good for the economy.

The company said consumers continue to be concerned about the economy, the cost of living and their personal financial status. Fair enough. Wal-Mart benefits from a worried consumer in trade down mode.

"Trade down" is a phrase we've noticed appearing with increasing frequency in retailer earnings conference calls (see the BJ's Wholesale (BJS) note in yesterday's Five Things, for example).

3. Everyone, Let's Put Our Tinfoil Hats On

We were sitting around this morning in our tinfoil hats waiting for the market to open when the instant messages began popping up with the following story:

WASHINGTON (Dow Jones)--Rumors that the U.S. government is going to offer an explicit backing to Fannie Mae (FNM) and Freddie Mac (FRE) are "absolutely not true," a Treasury spokeswoman said.

Yes, after suggesting in Five Things this week that we are seeing the groundwork laid before our very eyes for the nationalization of Fannie Mae and Freddie Mac, the mail came rolling in saying we were obviously wearing tinfoil hats! But let's step back for a moment and consider just what Fannie Mae really is, and how it came to be in the first place.

Fannie Mae was actually created as a government institution. It was de-nationalized (privatized) in 1968 in order to balance the budget, which if we really think about it is hilariously ironic. Fannie Mae was basically one of the first government "off balance sheet" vehicles.

Now, after 40 years of enriching private shareholders via the company's government sponsored and enabled business model, the reality, given the debt crisis and the magnitude of the collapse of the real estate market, is that Fannie Mae will almost certainly necessitate being re-privatized and returned to its original owner.

Put another way, the government will be forced to take this off balance sheet vehicle back onto its balance sheet just like banks are being forced to do with a wide variety of their own off balance sheet vehicles.

That no one cares about this, or is upset by it, and that most consider anyone who suggests there is anything wrong with this picture is "wearing a tinfoil hat," speaks to the depth of denial in the marketplace. We really have no problem with private citizens profiting from their investments in Fannie Mae, as has been the case for most of the past 40 years; we just have a problem with the company's debt and future obligations being forced onto the backs of taxpayers now that the ability for private citizens to profit from the company's business model has run its course. Like it or not, that is what is going to happen with Fannie Mae and Freddie Mac. And that's why we should all be outraged over it.

4. If It Sounds Too Good to Be True...

Saw the following headline on Bloomberg and had to stop and think for a moment:

(BN) Emerging Markets Insulated From Increasing Credit Costs, World Bank Says

India, China and other emerging markets are insulated from rising global credit costs because of surging prices for commodities they produce and the growth of domestic funding sources, a World Bank official said.

So what would happen if surging commodity prices stopped surging? We only ask because wheat, corn and soybeans futures have tripled in price since 2004, 2005 and 2006, respectively.

5. Buffett Tops Wealthiest List, How'd He Do It?

Berkshire Hathaway (BRK-A) Chairman Warren Buffett beat out Microsoft's (MSFT) Bill Gates for the top spot on Forbes magazine's annual list of billionaires worldwide, effectively ending Gates' 13-year run as the World's Richest Guy.

How does Buffett do it? And can we as individual investors replicate the billionaire investor's success in our own portfolios? We sure can! And here's how:

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No positions in stocks mentioned.

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