Tag: buffett

Home, Geithner, Geithner, Buffett,

– More folks eating here than ever before

– Not everyone likes the choice

– Others do

– More disclosure

–

Disclosure (“none” means no position):
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Berkshire’s (BRK.A) Warren buffett sits down with Fox Biz…

Part 1:The Market & Paulson

Part 2:Economy and Jobs & Goldman Sachs (GS)

Part 3:Auto Industry: “the model must change”

Part 4:More on Paulson

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Every investor ought to be forced to read Berkshire’s (BRK.A) Buffett at least once a week..

From 1997

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire “saves” for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners’ indirect savings program will be.

Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today’s repurchases, made at loftier prices.

At the end of every year, about 97% of Berkshire’s shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.

So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: “Every putt makes someone happy.”)

We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate “saver,” Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited.

On another note, In March of this year I claimes that Berkshire shares proiced at $133,000 a share were no bargain. Then in July I said “priced at $111,000 a share, more downside is in store”.

Today we sit at $81,000 a share, a 39% drop from March and 27% since July alone. Now at 2003 price levels, Berkshire looks enticing. The current environment reminds me of when I first bought Berkshire shares late in 1999 (I sold them in 2003 for a 63% gain, don’t cheer, I sold before another 60% would have been realized)). Buffett then was being called “out of touch” and Berkshire shares had taken a beating as folks rushed into tech stocks.

Flash forward to today and Berkshire’s situation is similar. Buffett is being questioned about investments in GE (GE) and Goldman Sachs (GS) and the market is pricing the risk of default by Berkshire higher on a daily basis. Currently the market thinks Berkshire has a higher default risk on its debt than Allstate (ALL), defying all rational thought.

Buy? Well, not so fast. It all comes down to insurance for Berkshire. We know the operating businesses will not improve during a recession. Will insurance? The operating environment will stop sliding but probably not turn. There are less homes to insure, less autos and those that are being insured are being done for for lower values. Both those add up to lower insurance results and lower earnings for a while.

I still think there is more downside to shares, maybe another 10% to 20%. We’ll see….If I see that, I will be buying…

Disclosure (“none” means no position):Long GE, GS, none
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Here is my problem with the praise being heaped on Peter Schiff. Watch the following video.Great right? No.

The problem? Here is Schiff in 2002: Schiff predicts Nasdaq 500 and Dow 4000

Now, had you listened to Peter in 2002, 2003, 2004, 2005, 2006 or even 3/4 of 2007, you lost your shirt. Had you placed bets based on Schiff’s market calls, you lost everything you wagered.

The S&P (.INX) went from 1054 in May of 2002 (the date of the interview) to 1561 in Oct. 2007, a 48% gain and the Dow (.DJI) rose 40%.

Banking stocks, the primary victim of the housing bust, JP Morgan (JPM) up 36%, Bank of America (BAC) up 41%, Wells Fargo (WFC) up 39% , Wachovia (WB) up 31% and American Express (AXP) was up 51% during that time frame (dividends excluded which would dramatically add to results).

Bottom line? Had you listen to Mr. Schiff at anytime before Oct. 2007 you lost…big. To those who did, there is little consolation in the praise being heaped on him today.

Milton Freidman said “markets can stay dislocated longer than you can stay solvent”.
For those who bet with Schiff between 2002-2007, they know the statement well.

Why is it a big deal? After all, Berkshire’s (BRK.A) Warren Buffett claims he cannot time the market and often watches share prices decline in investments(like recent investments in Goldman Sachs (GS) and GE(GE)) before a rebound. How is this any different?

For one, Warren’s loss is limited to his investment. He buys 1 share of stock “a” at $25. $25 is the most he can lose.

Now, if we listen to Peter and “short” stock “a” at 25, our loss has no limit. If it goes to $100, we lose $75. In shorting, we are only limited in our upside. If “a” goes to zero, “Schiffers” profit $25.

Buffett’s strategy is an investing one and Schiff’s is a trading and timing one.

Buffett followers can hold their shares, collect their dividend and wait for the rebound. Schiff followers collect no dividend and watched for over 5 years as their bet went wrong. How many stuck around? How many shorted into every market drop or “presumed” top over 5 years only repeatedly lose money as the market kept rising and Schiff kept pounding his message home.?

Schiff should not be getting the praise the is getting today for being “so right” after saying the same thing and being “so wrong” for the previous 5 years.

Disclosure (“none” means no position):Long GS, GE, WFC, none
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What id the Fed was not an “interest rate trader”?

I was reading the following article at the CATO Institute

The incoming administration must think about that possibility because the timing of boom and bust cycles seems to be shortening. The next bust could come five or six years from now — or about in the middle of an Obama second term. Should that happen, Mr. Obama would be unable to blame Republicans for the mess and would be tagged as the second coming of Jimmy Charter.

To avoid such a fate, Mr. Obama needs to stop the next asset bubble from being inflated by imposing a commodity standard on the Fed. A commodity standard (such as a gold standard) imposes discipline on a central bank because it forces it to acquire commodity reserves in order to increase the money supply. Today the government can inflate asset bubbles without paying a cost for it because the currency isn’t linked to the price of a commodity.

With a commodity standard in place, the government would also have price signals that would alert it to the formation of a bubble. Why? Because the price of the commodity would be continuously traded in spot and futures markets. Excessive easing by the Fed would be signaled by rising prices for the commodity. In recent years, Fed officials have claimed that they cannot know when an asset bubble is developing. With a commodity standard in place, it would be clear to anyone watching spot markets whether a bubble is forming. What’s more, if Fed officials ignored price signals, outflows of commodity reserves would force them to act against the bubble.

The point is not to deflate asset bubbles, but to avoid them in the first place. Imposing a commodity standard is a practical response to the repeated failures of central banks to maintain sound money and financial stability. What would be impractical is to believe that the next time central banks will get it right on their own.

It got me to thinking…

So, isn’t the Fed essentially a trader now? Just about once a month (assuming no inter-meeting action) they make a “trade” on interest rates (raise, lower, hold) based on the current information. The decisions they then make set the country on an economic course.

But, what if the time frame is just too short between meetings? We know based on all evidence the shorter the time frame we make between a decision the more likely that decision is going to be flawed. Yes, I know the Fed is filled with a bunch of smart folks with PH.D’s but history also tells us the number of letters following a name has no correlation to the ability to avoid making spectacular mistakes, only the ability to explain them away after (Mr. Greenspan?).

What if the Fed was only allowed to meet and make rate decisions quarterly? Berkshire’s (BRK.A) Warren Buffett has famously said that if an investor was only allowed to make ten investing decision in their lifetime, he was confident the overwhelming number of them would make far better decisions and be successful. One could say that perhaps because investors now know the Fed can almost be bullied into making inter-meeting decisions, they create the conditions needed to force it.

If that ability was taken away, then would we see less volatility? I’m becoming convinced the huge volatility we have seen for the past decade and the increasing activity of the Fed during that time span not totally correlated. It is a chicken vs egg scenario. Is the Fed activity a reaction to events, OR, are the events a reaction to Fed activity? I am leaning towards the latter.

Why are we to believe that the Fed making an almost monthly interest rate decision is any better for the economy that if they were only allowed to do it quarterly? It would place far less emphasis on “today’s” news. It would also lengthen the myopic focus of the market of what the Fed will do next week.

This is especially true when most of the actions from the Fed have no real effect on the economy for many months down the road. This means the Fed is then making another decision without any actual evidence whether or not the first decision was the correct one. Actually, they then make SEVERAL more decisions without knowing if #1 was correct.

We then have the scenario where the investing public in mass starts speculating on the effect of all the current decisions on the economy will be. Again, all this happens with no empirical evidence of whether or not any of the decisions were correct or not. That leads to a mass mentality and the boom/bust cycles we seem to be jumping in and out of.

I’m not sure a commodity peg would solve the problem either, but I’m pretty sure no one can make “long term decisions” on a monthly basis without any quantifiable feedback…

I do think we need to make some changes though as the booms and busts differ, but Fed activism remains the same..

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This is a classic…..thanks to reader John who emailed me the link. This is Jim Grant on Berkshire’s (BRK.A) Warren Buffett’s mentor.

Disclosure (“none” means no position):
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No, it’s not a dirty movie….it does leave one feeling a bit soiled though..

The investing thesis behind American Express (AXP) has always been that it has a higher quality of creditor (creditee?) and thus its defaults will be lower than the typical credit card issuer. Unlike Visa (V) and Mastercard (MA) who issue their cards through banks and collect a “toll” each time the card is used, Amex holds the credit balances and is essentially it own bank. This has enabled Amex in good times to earn a high return on equity as it collect the interest payments that go to the banks from the other card issuers.

All that seems to have changed.

It seems, being hit by slowing consumer spending and rising defaults, AmEx is seeking roughly $3.5 billion from the TARP program.

It isn’t clear if the application under the Troubled Asset Relief Program (TARP) came before or after AmEx got Federal Reserve approval Monday to become a bank-holding company.

Why? Even the most affluent AmEx customers are cutting back on discretionary purchases, the company has acknowledged. A spending slowdown is particularly problematic for AmEx because its business model revolves around consumers who pull out plastic for their purchases.

That alone would not cause the problem. What would?

Delinquencies and defaults on credit cards are rising. Meanwhile, the company is virtually locked out of credit markets because investors who buy consumer loans are sitting on the sidelines.

All this is causing a liquidity problem. Again, like other institutions, not a solvency issue, but a liquidity one. It ia also the reason we are hearing stories about AmEx card holders with no credit problems getting credit limits decreased. AmEx is trying to decreased it liabilities.

Not good news for shareholders for two reasons. The decrease in consumer spending reduces the “toll” AmEx get when a customer uses it card. The credit limit decreases they are placing on customers now further reduces that effect and reduces interest AmEx wil earn on outstanding balances. When you add this to the increasing defaults, you have a trouble stew.

This is not the “salad oil” fiasco that hit Amex when Berkshire’s (BRK.A) Warren Buffett bought a huge chunk of the company in the late 1970’s. This is a fundamental change to the company’s structure and the way it does business. The AmEx model back then was to essentially “front” customers money who would then pay it back a month later in full. Now Amex on almost all card extends payment terms and has branched out into business lending. Now, more than ever it is exposed to the consumer and his or her credit condition, not just their current spending patterns.

Previously if you did not pay your AmEx bill each month it was shut off. Now, consumers can continue to rack up debt to their limits while making minimum payments until they are tapped out. In this case, the monetary default risk for AmEx is far higher. This is causing increasing credit losses for AmEx. The old thought that “AmEx is less sensitive to a recession” has never really been tested. The last real recession we had in the US was the 1990 one (the 2000 “recession was a pothole). AmEx then was not nearly as exposed to the consumers credit condition as it is now. Only now are we going to be able to test the thesis. Based on early results, it was wrong.

It also means the old investing thesis need to be rethought as it has now become less valid.

This is not the same AmEx Buffett bought….

Disclosure (“none” means no position):None
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U.S.News & World Report
Bruce Greenwald on Value Investing
Friday November 7, 11:43 am ET
By Kirk Shinkle

Bruce Greenwald, who holds the Robert Heilbrunn Professorship of Finance and Asset Management at Columbia Business School, is coeditor of the forthcoming sixth edition of the value investing classic Graham and Dodd’s Security Analysis (McGraw Hill).

After watching stocks plummet this year, he’s sizing up the opportunities seen through the lens of value greats like Warren Buffett who perceive a rare chance to start buying on the cheap. Excerpts:

What’s the current environment like for a value guy?

I’ll tell you the one really nice reason to be a value investor: When things like this happen, you cannot help but go nuts at the opportunity. What this looks like is the end of 1974, where good stocks are selling at three times sustainable earnings and stocks that normally wouldn’t have sold at less than 20 times earnings are selling at 10 times earnings. These are exciting times. The short-term issue is that in the near term there will be a painful macroeconomic environment and we don’t know how long it will last.

What should investors eyeing cheap stocks watch out for?

The craziest thing to do is take recent earnings and add a multiple to it. There are a lot of stocks, like steel companies, that have very high recent earnings and trade at only four to five times earnings. They look like a 20 percent return stock, but those earnings won’t be sustainable. If you look at steel companies five years ago before this huge capacity run-up, their earnings were about a third to a quarter of what they are now. You have to stay away from those kinds of enthusiasms–things that look cheap on the basis of peak earnings. You’re looking for [stocks] that are protected by assets.

How should you approach earnings predictions?

What you don’t want to do is use unmoderated price-to-earnings. Never look at current or even recent earning, especially in areas like oil companies where we know they are inflated and coming down. Typically, what a value investor will do first is get a sustainable earnings number, an average PE over a business cycle. You really have to go back 10-12 years to get a feel for what average margins typically look like in these businesses. That’s what you use for earnings. The second thing, when you look at a PE, you’re always assuming it’s sustainable. You always want to make sure it’s protected either by assets or the kind of moat that Buffet talks about. Otherwise, even if it’s been making lots of money, it’s a business that will be competitively vulnerable.

Does the weak credit environment change the value investing proposition?

The first thing is that for value investors, you are not going to try to forecast the future. Most value investors would say if it’s anything like credit crunches we’ve seen in the past, it will be gone in a year. That’s what the betting has to be. It’s a short-term problem and not something you focus on. It has, however created opportunities in debt markets. Banks are dumping senior secured debt, selling it on the market for 50-60-70 cents on the dollar. The implied returns are north of 15 percent, and because you’re senior to everybody else in the event of bankruptcy, you’re likely to get paid. That’s where opportunities have been created by the credit crunch. If you listen to Buffet, it’s where he’s been investing up until now. Those opportunities are still there, but my guess is they’re going to go a way.

Any advice for investors who are still nervous?

If you look at any (mutual) fund and you look at the average annual return–a dollar invested every year through the life of the fund–and then you look at the returns weighted by how much money was in the fund . . . , the difference in those two returns is 6 percent a year. That’s true almost across every category of funds. What that means is investors are buying in at exactly the wrong time and dumping things at the exactly wrong time. In this environment, the people who are dumping things are getting out at almost exactly the wrong time. What you want to have is a steady, well-developed policy you stick to.

What do you think of Warren Buffett’s move so far into Goldman Sachs (GS) and General Electric (GE)?

First of all, Goldman and GE are not real Warren Buffett moves. They’re literally what he did at Solomon Brothers. He got paid very handsomely both in terms of a high return and protection on the downside. His preferred carries a significant interest return on it and is protected in event of a catastrophe. He got a very favorable deal. This is not the kind of real investment he’s making. He has talked about accumulating further positions in one of two financial services companies. I don’t know if he’s had to reveal which one yet, but it’s either American Express or Wells Fargo. There you can see what he’s looking at. American Express is easier because it doesn’t have all the complexity of a bank.

Greenwald on the best value bets in the market now:

American Express (AXP):
If you ask yourself what the average yearly earnings should be even in a fairly distressed economic environment, it’s probably about $3.50 a share. Typically, they commit to pay out at least half of those earnings to you in cash, so you’re getting a 7 percent cash return either in buybacks or the dividend. Then they reinvest 7 percent of your money. In the short run, where that money is going is cash to protect themselves financially against any catastrophic drop in credit card repayments, but in the long run it’s going to credit card loans, and the economics of those are fairly transparent: They lend at 15 percent, borrow at 4 or 5 percent, have a 10 percent margin, and the default rate is around 5 percent. So they make 5 percent on every dollar of loans, and they leverage up because you can because it’s fairly safe. Even if they do 7 to 1, which is a fairly conservative ratio, you’re making 5 percent times seven on your unemployed equity capital which is 35 percent, or 20-percent-plus post-tax. And billings by American Express just grow over time. It’s probably faster than GDP because they have high-income customers, and spending is skewed towards services, which are growing faster than (spending) on goods. You probably get another 5 percent even making conservative growth (projections). You’re looking at returns, without any improvement in the multiple, of well over 20 percent. That’s the sort of investment (Buffett) sees. It gives you an enormous margin of safety for long-lived bad economic conditions.

WellPoint (WLP):
You’ve got an annual earnings return of 14 to 15 percent, and mostly its going into cash. You know they’re just a toll on medical expenditures in certain parts of the country, and those will be growing at 5 percent no matter how you look at that. That’s a 20 percent return. Buffett’s not greedy. He’ll live with that all day long. These are safe companies with dominant market positions and trustworthy managements. They may go down in value before they go up, but the long-run prospects are so stable and attractive that I think he’s right to be investing in these things.

Magna (MGA):
It recently traded at a market capitalization of $3.6 billion, and it’s got $1.7 billion in net cash. They’re not going to run out of money, so you’re paying $1.8 billion or $1.9 billion for the business. That business this year, if you look at average margins–and this year it’s a little lower because they’re at the trough of the cycle–is going to earn about 5 percent on sales of about $26 billion, so you’re talking about $1.3 billion of pretax earnings you can buy for $1.9 billion. Then, if you look at the assets and the cost of reproducing those, you have about $8 billion of assets in the business to protect you. If you just take that earnings power, after tax, of about $1 billion, and you say in a risky industry like autos you want a 12 percent return, that’s an 8 multiple. That’s a case where you’re being very conservative about earnings, you’re backed by assets, there’s a lot of cash, and, even though autos are a fraught place to be, you’re buying those $8 billion in assets less than $2 billion. That’s got to be the kind of bargain you’re looking for.

Comcast (CMCSA)

Comcast, when you take out excess depreciation, is trading at an earning return of about 10 percent. Even if everything goes to hell in a basket, the one thing we’ll do is transact over the Internet. They and the phone companies have an incredibly valuable monopoly unless they screw it up. The one encouraging thing that hasn’t appeared in cable company [share] prices is price wars among some companies seem to be moderating.

Microsoft (MSFT)

Microsoft, if you take out $20-30 billion in cash, is trading at about a 10 percent earnings return or so. It’s a business that doesn’t require any incremental capital and will grow at least as fast as global GDP.

Disclosure (“none” means no position): Long GE, GS, none
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So, I got the following comment from a reader.

“the blog was not about politics before and now after the election you take shots at the new admin, so you starting to dilute your blog focus, which I thought was about undervalued companies and business.

As a reader i am not really interested in your political views, actually I am not interested in politics at all. so you can choose to continue to obsess about obama and whatever and I choose to stop visiting and reading.”

Where to start? How about a quiz.

– Can anyone name the largest investor in US financial companies?
– Can anyone name the entity that forced shareholder dilution on US banks?
– Can anyone name the entity that has control of the US mortgage market?
– Can anyone name the entity that arbitrarily changed the basic rules of investing when it banned short selling, first in financials them a gamut of US businesses?
– Can anyone name the institution, that had it’s “bailout fund” been classified as a “Sovereign Wealth Fund” would be the world largest?

The answer to all of the above is the US government.

At no time in my adult life has the day to day action of the US Government had so much effect on investors. Perhaps one could argue the election of Ronald Reagan in 1980, but since I was 12 then, we’ll omit that. The reason politics rarely entered the conversation here before was that politics before had very little effect on it content.

I can understand and enjoy hearing differing views, but to ignore Washington now as a investor is to do so at your own risk. Shareholders of Fannie, (FNM), Freddie (FRE), and AIG (AIG) held by some of the greatest investor of all time and at the time called “undervalued” were wiped out by the actions of the US gov’t.

I’m not sure I have been anything but vicious in my criticism of Bush appointee SEC Commissioner Chris Cox and have begged Treasury Secretary Paulson to take a “time out” and have criticized the current bank injection plan. I have even come off my earlier in the year support of Ben Bernake and said he is trying too many things right now. All these folks are product of the current administration. In that respect, my criticism easily crosses political party lines.

The reader says I “take shots the new administration”. Not really. I have repeatedly trashed the media’s lap dog mentality to it. As a rule if the media in mass love something, I immediately become skeptical about it. For proof one need only go back the first press conference as President Elect. We were subject to hard hitting questions like “what kind of dog will you get”, “what book are you reading”, “where will your kids go to school”. Really? That is the best you got?

The world stands on the edge of global recession and we are wondering if Obama will get a beagle or a lab? Really?

My fear of the current administration is that we know nothing about what they will do. Why? The media did a pathetic job getting answers. Even Tom Brokaw admitted post election “I don’t know” in response to a question about what Obama will do now elected. Isn’t that their job in its most basic element, to find out?

If anyone read the Sunday papers this week they were full of articles guessing about what Obama will do. Guessing…Again, at no time in my adult life have these questions been asked AFTER and election. We knew where Clinton was going and we certainly knew what GW was going to do.

The reader then says I “obsess about Obama”. We’ll, he is the new President. He will be for the next 4 years. I think by default that requires he be top of the list? I will give Obama credit for one thing, he managed to be elected President without anyone really knowing what his plans are. Kudos..

What we do know is based on Barack’s record and his words. From that we know he has never voted for a tax cuts, has had a floating “tax increase” income target and wants to spend $1 trillion more . Other than that, nada. We have some grand plans but, thank to the media, we have scant, if any details.

At least in the 1980 election Reagan had been Governor of California so people had a good idea of his plans based on how he had previously governed. That and the media then at least asked him for specifics. The media was right about one thing in this election though. This is perhaps the most important election in a generation. I just wish they had attempted to give us the information necessary to make an informed decision.

For any investor to ignore politics today is to do so at their own peril. Does anyone think shareholders of Ford (F) or GM (GM) are not wondering if the gov’t will step in, and if they do if their shares will become worthless? Does anyone really think that based on the AIG, Freddie, Fannie episode anyone thinking about buying shares is not standing by waiting to see what the gov’t is going to do first?

Need value investors look any further that Friday’s press conference to see Berkshire’s (BRK.A) Warren Buffett standing onstage for proof that the political climate has the interest in and is of primary importance to investors of all types?

One could easily argue and be correct in saying that Bush 1, Clinton and Bush 2 (until 2008) only had an effect on the fringes of the economics of the country as none faced anything like what is in front of us today.

Today we are embarking on re-writing the basics of our economic and regulatory framework that has been in place for almost 80 years. We are also doing so with an incoming administration we know very little about at a time when things will have to be done rapidly. Does anyone think the rules the banking system follows are going to be the same at this time next year? Me either. If you don’t know what the rules will be next year, how can you value and entire sector of the economy?

Do I want Obama to succeed? Of course. His failure will be all investors and America’s failure. A Carter-like Presidency from Obama is bad for all of us and no one wants that (at least not here). That being said I am not going to sit back and say that a “new day has dawned” or the “world is better today” because we have a new leader who can give a hell of a speech. For the record, had McCain won I would be saying the same thing. Changing the driver does not mean the car works better right away.

I have not commented on Obama’s foreign policy or social programs, their effect on investing in general is negligible. I do get nervous when his people use words like “rule” to describe his readiness though..

Has anyone seen or heard a politician talk recently without them using the words “Wall St.”? Why should we as investors ignore Washington when clearly they are focused on us?

I can’t think of how it would be anything but irresponsible to ignore it and the effect it will have on investing going forward in the blog. If you disagree, feel free to talk about it in the comments section but to ignore the political landscape today I think may be costly..

Disclosure (“none” means no position):None
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Here is how you know the market is totally irrational. Look at the credit spreads on Berkshire Hathaway (BRK.A) credit defaults.

From Bronte Capital

I am quite familiar with Berkshire – about as familiar as you can get by reading stat statements and the like. I can not blow it up. That means I know of no reason whatsoever that it could wind up insolvent in five years.

That does not mean it can not happen. If 9.11 had been nuclear they might have had problems – but as my “Risk Aversion Berkshire Style” post makes clear fat tail risk is not part of the formula.

So why is the five year credit default swap spread on Berkshire over 200bps? I have no idea and it makes no sense to me. Maybe it is just irrational bearishness about everything (ie BUY HARD) or maybe there is something I do not know.

So if anyone wants to post/reply a case for Berkshire CDS please…

Now, personally I have more faith in Warren Buffett and Berkshire than I do the US government at this point. That being said, a 200 point spread defies any and all rational thought.

I also can’t imagine a scenario in which Berkshire becomes insolvent. Perhaps a catastrophe the like of which we cannot imagine? If that is the case, the ability of Berkshire to pay it bills and make good on it’s debt will most likely be pretty low on everyone’s “things to worry about list”.

Insane….it also means “great opportunities”

Disclosure (“none” means no position):None
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Is it just me or did we not just spend 10 months worrying about inflation? Why, then am I seeing stories like this?

From the NY Times:

As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.

The word for this is deflation, or declining prices, a term that gives economists chills.

Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.

Here is the problem with the latest panic. If prices, due to the surge in commodities have risen above trend, then some “deflation” would be preferable as it would cause those artificially high prices to come back to normalized levels.

Look no further than housing. Note the following graph:

Can anyone argue some “deflation” in the housing market would not be a good thing? You could place up a graph of oil, wheat, corn, copper or almost any other commodity that goes into either making our food or the items we use and see the same graph.

When prices surge like they have, the best things is for them to then fall back to a historical norm. That, is deflation. Is anyone going to argue the deflation at the gas pump we have seen is not good for consumers?

Does this mean the process is simple and easy? No. It is quite often painful, especially for those who bought houses at the top of the market. But, it is good for the long run. Berkshire’s Warren Buffett (BRK.A) has called inflation the “silent tax”. It decreases the spending power of the consumer with little notice. If that is true (it is) then deflation must be a “silent tax break” as it accomplishes the opposite.

Warren says, “if does not matter how many dollars I have, what matter is how many cheeseburgers I can buy with those dollars”. In other words Buffett argue to value of the dollar, in relation to what it can buy is more important than how many of them are out there. From this, we can then say Buffett think inflation, rather than deflation is more of a concern, especially to investors.

Now again, everything in moderation. Price collapses are just as bad a price spikes. The reason is that the market needs to adjust to either trend and sudden movements eliminate that ability. Housing is the current example of that. Gas, and its slow steady decline is the other. One hurt, one helps….

Those of you who follow Rep. Ron Paul know he is a supported of the “Austrian School of Economics”. Here is their take on the deflation argument.

We are in “crisis” mode now. The MSM is simply walking around looking for the next one..

Disclosure (“none” means no position):None
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Buffett, Sync, Shorts, Sprint

– Warren the dividend investor

– This is pretty cool

– It isn’t always profitable

– Come on…get it together

Disclosure (“none” means no position):
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