On Tuesday Warren Buffett’s Berkshire Hathaway (BRK.A) purchased an additional 825K shares of Burlington Northern (BNI)
Berkshire now holds 64.6 million shares or just under 20% of the total.
This is additions to put options he has sold on the company’s shares.
Disclosure (“none” means no position):None
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Yesterday at 3:40 aheadline passed that was contributed to a statement by GE’s (GE) CEO Jeff Immelt. It sent the Dow (.DJI) down from +300 to -74 in 15 minutes…
At a dinner in France Immelt was asked what he would do it sales dropped 10% to 15% next year (2009). He simply replied that he would “ask his managers to at least keep their profits equal to last year”.
That is it. It was reported that he said revenue would drop 10% to 15%. If revenues at GE did drop by that much, the effect on the overall economy would be bad as GE is involved in so much of it. But, Immelt never insinuated they would, he simply answered a hypothetical question.
Immelt said later that his statement was “taken way out of context”.
What was lost in it all was that current estimates are for a fall in GE profits in 2009. So, for Immelt to say with a 10% to 15% revenue fall he would ask for the same profit numbers from his managers, it was actually a very bullish statement.
One could deduce from that that should revenues come in near 2008 in 2009, recent and proposed cost cutting move may internally at Ge be expected to lead to an earnings increase in 2009.
This is a hair trigger market with its finger on the sell button. Since we know that, if one has a long time frame, this is far from the time to panic. It is, the time to be buying quality names and sitting on them. Ben Graham, Berkshire’s (BRK.A) Warren Buffett’s mentor said that “in the short term the market is a voting machine, in the long term is is a weighing one”.
Simply put the market on a daily basis votes on how it feels that day. The farther you go out, eventually to the fundamentals of a business eventually take precedence over the daily outlook.
Now we are in a period of extreme pessimism. That will lead to irrational action like yesterday’s sell-offs. Just be ready for them because they are not over. When they happen, buy your favorites at dirt cheap prices. Long term, you’ll be glad you did.
Disclosure (“none” means no position):Long GE, none
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I said yesterday there was more buying to come…
After yesterday’s insider buying announcement, today VP Greg Freiwald disclosed he purchased 16,000 at $23 a share on Tuesday spending $368k of his own money. He now holds over 103K shares directly.
That brings the two day total to almost $700k of insider money buying shares so far this week. I said yesterday “I would expect more purchases in the coming days”.
I still do… When Berkshire’s (BRK.A) Buffett sees the value and management is ponying up cash to buy shares…one might want to take a look..no?
Oh yea….and a 7% dividend..
Disclosure (“none” means no position):Long Dow
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Recent SEC filings today show Dow Chemical (DOW) insiders purchasing shares.
EVP Hienz Haller bought 10,000 shares Monday bringing his direct holding to just under 86K shares.
EVP Charles Kahlil bought 3,200 shares the same day bringing his direct holdings to 122k shares.
The executives spent in excess of $310k of their own money buying the shares in the first insider purchase since August. I would expect more to be filed in the coming days. I also recognize these are not huge purchases but again, I would expect more executives to step up to the plate soon.
Now Dow has the endorsement of Berkshire’s (BRK.A) Warren Buffett becoming the largest individual shareholder and it executives are, as Warren likes to say “eating their own cooking”.
Disclosure (“none” means no position):Long Dow, none
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Here are the final details and full SEC filing between Berkshire Hathaway (BRK.A) and Dow Chemical (DOW).
Purchase.
On the terms and subject to the conditions set forth herein, the Investor agrees that upon the furnishing of a written notice to it by the Company as set forth in Section 1.2(a) it will purchase, or will (upon giving written notice thereof to the Company) cause one or more direct or indirect subsidiaries of the Investor of which the Investor beneficially owns at least 80% of the equity interests (measured by both voting rights and value) (each, a “Permitted Transferee”) to purchase, from the Company an aggregate of 3,000,000 shares of the Company’s Cumulative Convertible Perpetual Preferred Stock, Series A (the “Convertible Preferred Stock”) convertible into shares of the common stock of the Company, par value $2.50 per share (the “Common Stock”), and having the powers, preferences and rights, and the qualifications, limitations and restrictions, as specified in the Certificate of Designations in the exact form attached hereto as Annex A (the “Certificate of Designations”), at a price per share of $1,000 (an aggregate price of $3,000,000,000).
Purchase for Investment.
The Investor acknowledges that the shares of Convertible Preferred Stock and the shares of Common Stock into which they are convertible (the “Securities”) have not been registered under the Securities Act or under any state securities laws. The Investor and each Purchasing Permitted Transferee (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the Securities to any person in violation of the Securities Act, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision, and has conducted an independent review and analysis of the business and affairs of the Company that it considers sufficient and reasonable for purposes of its making its investment in the Securities, and (4) is an Accredited Investor (as that term is defined by Rule 501 of the Securities Act).
Lock-up Agreement.
Until the earlier of (i) the fifth anniversary of the Closing Date or (ii) the announcement of a Make-Whole Acquisition involving the Company, the Investor shall not, without the prior written consent of the Company, directly or indirectly (x) offer, transfer, hypothecate, sell, contract to sell (including any short sale), grant any option to purchase or otherwise dispose of the Convertible Preferred Stock, any Common Stock received upon conversion of the Convertible Preferred Stock or its economic exposure to the Common Stock (“Lock-up Securities”), (y) enter into any Hedging Transaction (as defined below) involving Lock-up Securities, or (z) publicly announce any intention to do any of the foregoing. The foregoing restrictions shall not apply to any (m) transfer by the Investor and its Permitted Transferees of the Lock-Up Securities among themselves or (n) any offer, transfer, hypothecation, sale, contract to sell (including any short sale), grant of any option to purchase or other disposal of any Common Stock received in the form of dividends on the Convertible Preferred Stock or received in lieu of cash for Past Due Dividends in the event of Conversion at the Option of the Holder pursuant to Section 7 of the Certificate of Designations. “Hedging Transaction”, with respect to any Lock-Up Security, means any short sale (whether or not against the box) or any purchase, sale or grant of any right (including any put or call option, swap or other derivative transaction whether settled in cash or securities) to obtain a “short” or “put equivalent position” with respect to the Common Stock, or any other agreement or transaction that reduces, in whole or in part, directly or indirectly, the economic consequence of ownership of such Lock-Up Security. For the avoidance of doubt, a Hedging Transaction shall not include a transaction that is deemed to reduce the economic consequence of ownership of a Lock-Up Security only because the Investor is acquired by, or merges with or into, or transfers all or substantially all of its assets to, another person pursuant to such transaction.
Misc.
● The Company will pay dividends on the Convertible Preferred Stock, quarterly in arrears, at a rate of 8.5% per annum, in either cash, shares of Common Stock, or any combination thereof, at the option of the Company.
● Holders of Convertible Preferred Stock may convert all or any portion of the Convertible Preferred Stock, at their option, at any time at the conversion rate of 24.2010 shares of Common Stock for each share of Convertible Preferred Stock, subject to anti-dilution adjustments as specified in the Certificate of Designations. In addition, if holders of Convertible Preferred Stock elect to convert the Convertible Preferred Stock in connection with the occurrence of certain changes in the ownership of the Company (as specified in the Certificate of Designations), they will be entitled to receive additional shares of Common Stock upon conversion under certain circumstances as further described in the Certificate of Designations.
Each preferred share has a value of $1000. At the conversion rate it equates to a $41.32 share price for Dow.
Simply put, let’s compare a buyer of the stock today vs Buffett. For the example lets say in 4 years Buffett convert and the stock site at $42.
Warren has earned 8.5% per year on his yield and today’s common buyer has earned 7.3% (assuming no dividend growth for 4 years, which has ever happened in almost 100 years). Warren now holds common shares that have appreciated 1%, the buyer of the common today has seen his holding appreciate 86%.
Risk?
The common share price falls. In this case the holder of the common suffers a loss and Buffett keep his 8.5%. But, Buffett is sitting on dead money in the conversion price. At this much of a discount, the common holders buying today have a far better risk reward than Buffett. Even if the common only rallies 50% from here, Buffett is still sitting on a conversion loss and the common holder is far better off.
FULL FILING
Disclosure (“none” means no position):Long Dow , None
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Here is a pdf. link to Ben Graham testimony before congress in 1955 in regards to a Stock Market Study he did for it.
For those not sure who Ben Graham is, he was Berkshire Hathaway’s (BRK.A) Warren Buffett’s mentor.
Here is the link
Disclosure (“none” means no position):None
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This is a good one. Buffett author and Legg Mason (LM) portfolio manager Robert Hagstrom is on the show.
Disclosure (“none” means no position):none
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Based on the comments by management, one should expect large buybacks from Dow Chemical (DOW) to begin early next year.
From the Q&A:
PJ Juvekar – Citigroup
“Thank you. And quickly, Geoff, you didn’t talk about stock buyback when you talked about your financial strategy. If you look around… many industrial companies are suspending stock buybacks to conserve cash. Can you just tell us how you’re thinking about buybacks?”
Geoffery E. Merszei – Executive Vice President and Chief Financial Officer
“Well, sure. As you know… thanks for the question, PJ. As you know, during the course of the third quarter, we completed our $2 billion program and we spent about $50 million on that The only reason why we haven’t announced yet another programs is because we have two very large transactions that are about to close plus, of course, your last point, which is on cash preservation.
But let me reiterate what our financial policy has been over the last two years and will continue to be is that at a minimum we’re going to cover dilution. This is on an annual basis. And you can count on a new program following the two transactions that we are about to complete.”
Peter Butler – Glen Hill Investments
“Andrew, wouldn’t Carl Gerstacker be backing up the proverbial truck right here to buy shares cheap? Gerstacker would say, “My God, if you can buy at a 7% yield, then you’re looking at good news from Kuwait and Rohm and Haas. Why wait for the stock to go higher?”
Andrew N. Liveris – Chairman and Chief Executive Officer
“Yes. Look, Peter, as Geoffery answered because we have these two or three moving parts that are close in two or three months. But I think Geoffery indicated, I don’t know backing up the truck is a colorful way of explaining it. But I said this morning, the dividend is safe. This CEO is never going to cut it. I’m not going to be the first. The yield is unbelievable. The stock is undervalued by a long mile. I mean, so clearly, your analysis is our analysis.
We’re just going to get through the two transactions. Let us go on the other side of it. And then obviously, stock buyback is going to be top of mind. And these values hang in there in equity markets for the next several months. I think Mr. Buffett said it, well, Buy American. Well, we’re American.”
Robert Koort – Goldman Sachs
“Andrew, I think you said on one of the shows this morning that you don’t think a $3 trough number is reasonable anymore. I was wondering if you could tell me what the path to the trough looks like? Is it a demand erosion trough in ’09? Or do still think ’10 or ’11 is the trough?
And then, secondly, in your performance business particularly Performance Plastics obviously a pretty horrific margin partly influenced by the hurricanes, but what do you see in terms of the progression of your performance business margins as you go through the next couple of years? Thanks.”
Andrew N. Liveris – Chairman and Chief Executive Officer
“Yes, I think, Bob, firstly on the trough. We’re going to spend a lot of November analyzing our view of ’09, ’10 and ’11 given these new market conditions. Clearly, ’09 now is going to be a tough demand year, everything we’ve just talked about. So we see an economic trough in ’09. The industry trough that we were forecasting for ’10 and ’11 is going to be impacted by both sides of that discussion.
One is the new demand forecasts are going to speak… stop projects happening. So people who are early in their project calibrations are going to delay projects compared to… this is on the commodity stuff in particular and the petrochemical stuff. In addition, there is going to be a lot of competitors out there who don’t have our leverage ratios, who are not going to make it. I mean people who are… with their debt ratios in the 90s who leveraged up in the good days are going to suffer. You pick your favorite companies, I’m sure you can find them in the commodity chain in particular.
And then, on top of that you’ve got frankly the other side of the coin, which is the people who have got low-cost feedstocks and now can negotiate better EPC contracts because everything is coming off… the price of steel, the price of copper, the price of engineering. You can start to bring these projects more in line with the better returns in the low feedstock cost regimen.
And so actually companies like Dow, who have put these joint ventures in place should benefit from the ‘010, ‘011 scenario compared to what we were before. And last point I’ll make, in a declining oil and gas environment, we have feedstock flexibility that we can bring to bear in our developed economies now, which we didn’t have up until a month or two ago.
In other words, naphtha, LPG, ethane… we’ve got flexi-crackers that we can bring to help us out in the ’10-’11 industry trough. So these are the sorts of things we’ll be discussing deeply in November and we’ll come out on the other side of that and give you guys a better view. Second question, Bob?”
So, here we are in October and in the next three months (give or take) the company will be fundamentally changed. The 7% yield is safe and starting next year, assuming the share price does not rally much from here, will feature large share repurchases.
Another point that I think is being lost here was Liveris’s comment about the competition and some of it falling by the wayside during the next year or two due to leverage ratios. Market share increases due to this need to start getting factored into estimates going forward. Along with the market share increase, the reduction in competition also give Dow enhanced pricing power with customers.
It is going to be a very interesting winter for shareholders…and an exciting one
FULL TRANSCRIPT
Disclosure (“none” means no position):Long DOW
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OK….here it is..my inbox has been flooded all morning requesting for the video..
Highlights:
– Dow now has “feedstock flexibility”
– Prices are falling
– The dividend “is safe”. Liveris said “this CEO will never cut the dividend”
– “It is ludicrous our stock price is where it is”
– Says Berkshire’s (BRK.A) Warren Buffett made a very wise investment.
On Bloomberg:
On CNBC:
Disclosure (“none” means no position):Long Dow, none
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EPS affected by $.12 from the September hurricanes. Good news? Oil prices fell. Bad news? Couldn’t produce anything when it dropped.
Highlights:
– Sales for the quarter increased 13 percent from the same period last year to $15.4 billion.
— Price increased 22 percent, with double-digit price gains in all operating segments and all geographic areas. This was the largest year-over- year percentage increase in price since the first quarter of 2005.
— Volume was down 9 percent globally, reduced by the impact of Hurricanes Gustav and Ike, further weakening of demand, and the Company’s focus on implementing price increases in the quarter. Excluding the impact of acquisitions, divestitures and the hurricanes, volume was down 5 percent.
— Earnings for the quarter of $0.46 per share were unfavorably impacted by certain items such as the hurricanes ($0.09 per share in costs and $0.03 per share in margin on lost sales), purchased in-process research and development charges of $0.03 per share, and acquisition-related expenses of $0.02 per share (see supplemental information at the end of the release for a description of these items).
— Purchased feedstock and energy costs surged 48 percent, an increase of $2.6 billion over the same quarter last year, the largest year-over-year increase in the Company’s history and the third consecutive quarter in which these costs reached new highs. Margin expansion was not achieved in both Basic and Performance segments, as the hurricanes idled approximately 80 percent of the Company’s North American capacity in September, when feedstock costs were declining.
— Agricultural Sciences set a new third quarter sales and EBIT(1) record, with sales up 24 percent to $976 million. Price was up 16 percent and volume up 8 percent compared with the same quarter last year.
— Equity earnings were $266 million for the quarter. This was the seventh consecutive quarter that earnings from joint ventures exceeded $250 million.
CEO Andrew Liveris: “The global economy is now feeling the full effects of the same economic issues that have plagued the U.S. for the past several quarters. These issues have now been exacerbated by the lack of credit, resulting in a drop in demand not only in the U.S., but around the world. In our view, we will likely see a global recession through most of 2009.
“Dow is well positioned, however, to weather this increasingly difficult economic downturn. We have a strong balance sheet, we have a track record of strong financial discipline and we are accelerating our focus on what we can control, namely costs and capital, asset restructuring, and other interventions. In addition, we will continue to implement our transformational strategic actions, such as closing our petrochemicals joint venture with PIC of Kuwait and closing our announced acquisition of Rohm and Haas (ROH).”
Here is how it breaks down. Ag and Performance Chemicals saw earnings increases. Basic Plastics, Chemicals, and Performance Plastics saw decreases. Those divisions also saw $76 million in hurricane related costs.
It is frustrating but we have to play the game for another quarter. Then the Kuwait and the Rohm deals close and the earnings profile is forever altered. Will it be an immediate panacea? No. It will remove oil (USO) as the immediate concern on the mind of investors.
Recession. Will it hurt? Yep. A global recession will hurt, well, the globe (hence the name). But, what do we have? A 7% plus dividend yield that is not going down, Berkshire’s Warren Buffett (BRK.A) as a fellow shareholder (the largest individual one) and company with a global footprint both in manufacturing and sales. It manufactures the basic building blocks for virtually every industry.
When it all shakes out the $.60 before charges did beat what the guys and gals on Wall St. expected ($.58) so we may see a bump in shares. I would also say we ought to see some Q4 expectations increase as it appears price increases are holding and oil continues its nose dive.
Also:
– The European Commission Monday cleared the creation of a joint venture between Dow Chemical Co. (DOW) and a unit of the Kuwait Petroleum Corporation. Dow and Petrochemical Industries Company will jointly control the new company, which will manufacture and market polyethylene, ethylenamines, ethanolamines, polypropylene, and polycarbonate.
– Dow AgroSciences has added 350 jobs around the world so far this year-200 of them at its Indianapolis headquarters-and the CEO of the agricultural-chemical company expects to continue expanding the work force into next year. “Global demand for food, feed, fiber and fuel reinforces the need for agricultural productivity, and Dow AgroSciences is well positioned as a technology leader to provide solutions,” CEO Jerome Peribere said in a statement.
The company in recent years has been evolving from a maker of herbicides and pesticides into a biotechnology firm using genetics to develop products that protect crops and improve yields.
Disclosure (“none” means no position):Long DOW, none
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We are underway is a vicious shakeout. Who survives, will be far stronger in the end.
A recent study by consulting firm Grant Thornton showed that for average dealer sales to match last year’s average, about 2,000 dealers need to close. With sales imploding, the firm has raised the number to 3,800. About 600 of the 2000 new car dealership in the US have closed to this point. In September alone, that number was 61.
Paul Melville, a partner at Grant Thornton, says they “badly need retail consolidation” to have healthy dealers. “Significant consolidation is necessary, especially among Ford (F), General Motors (GM) and Chrysler retailers,” he says, “because U.S. sales already have declined more than 1 million units this year.”
The domestic automakers want their dealer numbers to be more like those of Toyota (TM) or Honda (HMC). Toyota has fewer than 2,000 U.S. dealers while Ford has almost 4,000. That means your typical Toyota dealer sold 1,628 vehicles in 2007 while Ford stores averaged 236. GM dealers averaged 202. The average for all new car dealers was 322.
Domestic manufacturers want their store counts and revenue counts to look like Toyota and Honda, because many less dealerships means selling more per dealership.
“The business model of huge, irrational inventories and huge, irrational marketing budgets with razor-thin margins, à la the Bill Heard model, is obsolete,” says Mike Jackson, CEO of AutoNation (AN), the USA’s largest chain of dealerships. “It’s dead. It will not survive this downturn.” Bill Heard, which sold over 7% of Chevy’s nationwide recently closed.
Jackson says the future of car sales — coming soon — will be fewer dealerships having less need to wheel and deal. They can hold the line on price, pumping up the profit per car, and focus on customer service.
“At the dealer level, a shakeout needed to happen,” he says. “It will be painful. It will be ugly. But it is also long overdue.”
This would explain why Berkshire’s (BRK.A) Warren Buffett and Sears (SHLD) Eddie Lampert are buying shares of both AutoNation and CarMax (KMX). It is clear both will be left standing after the shakeout is over and both will have substantially increased market share through the attrition of rival dealers.
In my interview with AutoNation’s Jackson recently he said he was content to sit back and watch the industry shakeout happen as it “was necessary”.
When will things begin to turn? Clearly late 2009, perhaps into 2010 for the industry as a whole. But, as Jackson also said, when it happens there will be “significant postponed demand for autos”. What that means is that fewer dealers will be selling cars for higher profit to a surge of car buyers.
That means Jackson and his shareholders stand to profit handsomely.
Disclosure (“none” means no position):Long AN, none
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Before this recent transaction, Berkshire’s (BRK.A) Buffett had sold put options on 4.3 million Burlington Northern (BNI) shares.
Buffett on 10/16 added another million shares to the total selling $76 strike 12/2008 puts for $6.20 a piece.
Disclosure (“none” means no position):none
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Berkshire’s (BRK.A) Warren Buffett penned the following Op-Ed in today’s NY Times.
From The NY Times
“THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.”
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
Interestingly enough, the last time Buffett opined about the general market was 1999 when he said they were over priced (soon after the tech bubble popped). Before that one has to go back to 1974 and a Forbes Op-Ed he did in which he said the market, like today was vastly undervalued. Ironically enough, that market bottomed soon after and the Dow never again touched those levels….
Buffett’s final words in 1974: “Now is the time to invest and get rich.”
Anyone who invested with Buffett and Berkshire in 1974 surely did….many times over.
Here is the 1974 Forbes Interview
Disclosure (“none” means no position):None
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There are some real dichotomies out there when it comes to Wells Fargo (WFC).
Here is a WSJ Article on it
So why isn’t the San Francisco-based lender doing more to beef up its cushion against loan losses as the country slips into a recession?
As investors sift through banks’ third-quarter numbers, they will be focusing on the strength of their loan-loss reserves, which exist to absorb losses from defaulted loans. Wells allowed a key measure of reserve strength to drop considerably.
If it had held that measure at its second-quarter level, Wells’s third-quarter earnings would have been half the 49 cents per share it reported Wednesday. At a time when bad loans are expected to continue rising, it makes sense to compare a bank’s loan-loss reserve with past-due loans.
Many of those won’t return to health and will lead to a loss.
In the third quarter, Wells’s $7.87 billion reserve was 1.57 times as big as its $5 billion in past-due loans. That’s down from 1.81 times in the second quarter. Maintaining that ratio at 1.81 times in the third quarter would have taken an extra $1.18 billion out of earnings.
After tax, that would work out to 24 cents a share.
Wells’s defenders might argue that some loan portfolios are not deteriorating as fast as they had been, allowing the bank to ease up a bit on this reserve measure. But that’s a bold step in a faltering economy.
Even after getting $25 billion under the government’s financial-rescue plan, Wells still wants to raise another $20 billion of capital on its own to support its planned purchase of Wachovia (WB).
Here is CFO Howard Atkins on the results and Wells capital situation:
So, who to listen to? I am not overly concerned about this an don’t see it a the big deal some are trying to make it out to be. The tone is that Wells is doing something sneaky in its reserves. I think to many folks are trying to be Perry Mason.
Wells is saying that it has taken the most of the losses on the worst of the loans and that while loan losses will continue to grow as the economy worsens, the size of those losses will not significantly grow. The home equity portfolio, where most of the losses are has portions being liquidated and Atkins did say that liquidation is “going orderly”
Now, Atkins did say that the Wachovia deal will “double the size of the bank” and that they “didn’t need the $25 billion from the gov’t”.
So, in August Berkkshire’s (BRK.A) Warren Buffett, Wells largest shareholder he was either buying shares in Wells or American Express (AXP). At the time I speculated it was Wells (still feel that way) and soon enough we will find out. Wells Chairman at first refused the TARP money from Treasury until Hank Paulson force fed it to him.
What can we discern from that? One of three things. Management is either:
1- Spectacularly stupid
2- Slyly dishonest
3- On top of the situation.
We can eliminate #1 as it is clear Wells Fargo and JP Morgan (JPM) are the class of the industry. Buffett has little patience for #2 and unless he believed management was being totally upfront, he would not have even alluded to increasing his stake in the company.
That leaves #3. Based on results for the past two decades, until proven different, I got to go with that…
Disclosure (“none” means no position):Long WFC, none
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This is the 4th put sale by Berkshire Hathaway’s (BRK.A) Warren Buffett in Burlington Northern (BNI) in a week.
On 10/10 Buffett sold $75 strike puts on 1,217,500 shares that expire 12/12 at a price of $7.094 each.
Buffett is clearly taking advantage of the market volatility and its effect of increases option pricing. The more the market swings in either direction, it increases the prices option buyers must pay. If you are a seller like Buffett, it increase the money you take in relative to the strike price of the option.
SEC FILING
Disclosure (“none” means no position):none
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