Tag: buffett

I have been saying for weeks now that big banks like Citigroup (C), Bank of America (BAC) and Wachovia (WB) were screaming buys at these levels. Insiders are buying like crazy at Wachovia and now Abu Dhabi has invested $7.5 billion in Citi.

“This investment, from one of the world’s leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business,” said Win Bischoff, Citi’s Acting Chief Executive Officer. “It builds on a series of actions we have taken over the past several months to strengthen our capital base, which have included sales of certain non-strategic assets, the issuance of trust preferred securities, and the previously announced plan to use common stock to purchase 32% of Nikko Cordial in Japan. In addition, ADIA is a significant participant in alternative investments and emerging markets financial services, two areas in which we have major positions and have been expanding.”

For its investment, Abu Dhabi will receive convertible stock in Citigroup yielding 11% annually. The shares are required to be converted into common stock at a conversion price of between $31.83 and $37.24 a share over a period of time between March 2010 and September 2011. The investment, which took about a week to put together, is expected to close within days. The payment rate reflects market terms based on the conversion premium as well as Citi’s current dividend yield.

American’s current pessimism about banks is not shared by the outside world. Why? They recognize large international banking operations will not be toppled by the US housing market. Will they be hurt? Sure. Will they recover yes. Those who have the guts to buy in when most are fleeing and ride out the storm will be handsomely rewarded just like every other financial “crisis” from the dawn of man.

If you only listen to one piece of advice during your investment career, make it Berkshire Hathaway’s (BRK.A) Warren Buffett’s, “buy fear and sell greed”.

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Berkshire Hathaway’s (BRK.A) Warren Buffett is buying banks.

Buffett bought Bank of America (BAC) during the 3-months ended 6/30. His purchase prices were between $ 48.34 and $ 50.14, with an estimated average price of $49.6 for his 8.7 million shares. Now, the BAC position is small for Berkshire as it represents 0.7 % of Berkshire’s holdings as of 6/30. His holdings was 8700000 shares as of 2007-06-30.

Buffett has long been a fan of financials holding shares in Wells Fargo (WFC), M&T Bank (MTB) and HSBC Holdings (HBC). According to the site Gurufocus, Buffett has almost 40% of Berkshire’s holding in financials.

Buffett’s buying is indeed a sign not of a short term bottom in the sector, but of the long term health of it. While Buffett’s typical holding period for a common stock has nearly evaporated for his “forever” mantra of earlier years, he still has a multi year time frame which on Wall St. is an eternity.

It also indicates “value” now exists in financials, a sentiment I post on yesterday. Do not confuse “cheap” with “value”. A cheap stock is one that will not cost you much money to purchase. A value stocks costs what it costs to buy but it is worth much more, a significant difference.

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Despite a recent $1.1 billion write on on mortgage backed securities, business at Wachovia (WB) is just fine.

Wachovia’s chief risk officer, Don Truslow said recently regarding consumer loans,”The housing market certainly has been deteriorating very quickly in certain parts of the country, and we are not immune from that deterioration.”

But, buffering Wachovia from some of the more severe declines other institutions are seeing is the acquisition of option-ARM lender Golden West Financial last year. Truslow said the bank continues to take comfort from the historically low level of charge-offs in the Golden West portfolio. Even in a “worse case scenario” in which the amount of bad loans in Golden West’s portfolio doubled to the high levels hit in the mid-1990s, the business “is still a very profitable and attractive business for us,” said Truslow. How profitable? The segment has accounted for $2.1 billion in pre-tax profits during the first nine months of 2007.

The asset backed institutions like Bank of America (BAC), Citigroup (C) and Wachovia will weather this current situation fine. Those like Countrywide (CFC) who rely almost 100% on credit markets to finance its operations, will see pain from it for considerably longer. Scores have already close operations and in a “flight to quality” scenario, the big institutions will pick up the pieces on even more favorable terms.

News today that Blackstone (BX) is forming a unit to look at the current CDO markets in a desire to “go long” on it ought to be a sign that these instruments ought to be currently valued appropriately. If that is so and investors begin to by them, then the value of them has nowhere to go but up. When they go up the end result will be the opposite of what we have seen the past two months.

Everything still has a bottom and as Citigroup CFO Gary Crittendon remarked recently “it is strange to see these things valued below their cash flows”. Simply put, the value lowering has been overdone.

Investors are treating the banks like they are all Countrywide’s and on the precipice of failure. Nothing could be further from the truth. Bank after bank has commented on the strength of every other facet of their business and for an operation like Citigroup, almost 60% of its profits are coming from international activities that have no relation to US housing.

Does that mean there will be no pain? Of course not. What it does mean is the current dividend yields, with the exception of Washington Mutual (WM), many now around or well over 6% are safe and the businesses will rebound.

I keep repeating Buffett over and over in my head “buy fear”….and because of it we bought Wachovia shares and added to our Citigroup holdings recently. Both are yielding 6.5% and are doing just fine. It may take a while to pay off but it will, of that I am sure.

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“Buy fear and sell greed” Warren Buffett

I found an very interesting chart over at Bespoke Investments. It contrasted today’s “crisis” with past ones (LTCM, Orange County & Enron). The chart (below) illustrates that this sell-off in Citigroup (C) shares is in keeping with past ones and also shows the rapid accent after the “crisis” passes.

Is Citi is trouble of failing? Not by a country mile. Let’s not forget these are just paper losses. Citi made $21 billion last year and sits on $2.3 TRILLION in assets as of 9/30 which is more than 2X it current debt. The dividend, now at 6.3% is safe as Citi has a plethora of options to use to pay it. Let’s not forget, aside from writing down the CDO’s, the rest of the banks operations are performing very well and the international operations are going gangbusters.

What if Citi has to sell off assets to meet obligations? Isn’t that what people want to unlock the value in it? They won’t but even if they do, let’s say they sell $50 billion in assets. That whopping amount comes to 2% of Citi’s total asset base…. am I the only one who really does not think that is a big deal? It is a bit like us selling our dishwasher.

Citi could issue $200 billion in debt to provide funds and even with that, it assets base would still be twice its debt level.

The thing of it is, a billion dollars used to be a lot of money. It just isn’t that much anymore when you are talking about institutions sitting on trillions. Some perspective is in order.

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TCI came out with a hard hitting letter is response to statements made by CSX (CSX) management after theirtheir initial letter on October 16th.

Calling management statements both “reckless” and “irresponsible”, TCI contrasted statements both CSX and the CEO’s of both Norfolk Southern (NSC) and Burlington Northern (BNI).

TCI, in its letter goes as far as calling CSX management “incompetent”.

When one reads both letters it is clear the the management at CSX at best misunderstood the TCI letters and at worst purposely misstated it in a effort to discredit it. When your now adversaries own 8% of your stock (TCI, Atticus & Icahn) and you have a board meeting coming in May, this is not the tact to go. When you add to the equation that the entire board except for current CEO Ward stands for election then, making these folks enemies is just a real bad idea. We also cannot forget that this has gotten to this point due to CSX management simply not returning phone calls and refusing to meet with TCI.

TCI claims “Over the past year we have repeatedly, but unsuccessfully, attempted to engage in a constructive dialogue with the Board and top management of CSX on concerns we have about the business. Except for a single ‘one-on-one’ meeting with Oscar Munoz, top management and the Board have refused all our offers to meet privately. Over the past few months, CSX has refused even to return our calls or to allow us to attend meetings at CSX with an analyst and other investors.” CSX has not denied these claims.

Also consider that TCI is also a shareholder in other US railroads and they have been willing to engage in an open and constructive dialogue with TCI. Through this, TCI has gained confidence in their abilities and strategies.

When TCI calls CSX’s relation with both labor and suppliers “confrontational”, based on what we have seen here, one must give that claim credence.

Of the major US railroads, CSX ranks at or near the bottom in velocity, dwell time, accident rate, labor /sales, cost inflation and cost per unit inflation. In short, TCI has a point in questioning why despite this, CSX CEO Ward is the highest paid in the industry.

In short, Ward has put himself on a CEO “death watch”. TCI and its partners will gain board seats and their first act will be to eliminate the person who has push this situation to this point.

Doesn’t anyone else wonder why Berkshire’s (BRK.A) Warren Buffet bought shares in almost every railroad around but CSX? Buffett places a huge emphasis on management and his lack of action on CSX is yet another indictment of Ward & Co.

Enjoy this winter Micheal, it’ll be a bad spring…

Read the new letter here

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The rumors are flying rampant and financial share are getting hit like crazy. There are so great opportunities out there.

Goldman Sachs (GS) on Friday denied a rumor that they could announce billions of dollars in write-downs. “We’ve said there’s no truth to these rumors,” said Ed Canaday, a spokesman for the brokerage. Despite that, shares finished down $10 or 4%. Shares that fetched an all time high earlier in the week at $249, now fetch $229.

Perhaps the epitome of the silliness was Deutsche Bank (DB) analyst Mike Mayo. Mayo predicted late Thursday night that the investment banks will need to take another $10 billion in writedowns in the fourth quarter, with hits of $4 billion each at Citigroup (C) and Merrill Lynch (MER) and a total of $2 billion at places like Wachovia (WB)and Bank of America (BAC).

Then, after the Wall Street Journal suggested Merrill Lynch could be under investigation over its handling of mortgage debt, Mayo issued a new note downgrading Merrill to “Hold” from “Buy” and saying it could face $10 billion in write-downs on its own. No additional facts were disclosed, nothing was said, just a Journal article and Mayo increased his estimates of write-offs by 150%. The Journal article essentially said Merrill Lynch struck deals with hedge funds to take certain positions that did not transfer risk, but merely delayed it so Merrill Lynch would not have to disclose its exposure now. That practice is under investigation by the Securities and Exchange Commission according to then paper.

Merrill Lynch said in a statement that it has “no reason to believe that any such inappropriate transactions occurred,” adding they would violate the company’s policy. Again a denial but no matter, the analysts are racing for the largest number.

On Thursday, the before never heard of Meredith A. Whitney of CIBC World Markets, said Wednesday night that Citigroup (C) “might” be forced to cut its dividend or sell assets to head off what she said was a $30 billion capital shortfall. The call lead to a 7% decline in Citi stock to a 4 year low.

Could they be right? Sure. Could they be wrong? Most likely. Mayo and Whitney are just guessing and giving investors guidance because of that. Investors reactions smell like fear and we all know what Warren Buffett says about fear…..”buy it”.

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