MidAmerican Energy Chairman David Sokol gives the administration a failing grade on cap and trade. For those who do not know who Sokol is, he very well may be one of the successors to Berkshire’s (BRK.A) Warren Buffett
Disclosure (“none” means no position):None
Sears Holdings (SHLD) annual meeting was a bit anti-climactic yet reassuring. Note to Chairman Lampert, stop having it around Berkshire (BRK.A) weekend, you get drowned out by the Buffett extravaganza in Omaha.
Onto the meeting. As we have discussed here countless times Sears need to leverage its brands and improve it internet presence. Both seem to be a priority and even better, both are seeing signs of real progress.
While Mr. Lampert expects that most Sears sales will continue to occur in brick and mortar stores, he said he would increase investment in Internet experiments. His goal, he said, is to capture the attention of shoppers at the crucial moment when they begin to discuss purchases with friends on social-media Web sites and to research buying choices online.
“We want to make sure we don’t become completely irrelevant as people’s way of making decisions changes,” he said, adding, “The goal is not just survival, it’s progress.”
Note: Sears Web sites will offer more than 3 million products in 2009, up from 500,000 in 2008
It continues:
But there were hopeful signs, including a spike in the company’s already leading share of the appliance market last year to 34.6% from about 30%. That share continued to increase in the first quarter of this year, company officials said.
Mr. Lampert said he expected Sears’s exclusive Kenmore appliance and Craftsman tool brands to leverage their size better by developing innovative products.
“Historically, we have been way too passive,” he said. He added that he didn’t see Sears’s lack of production ability as a hindrance. “Nike doesn’t own manufacturing,” he said.
This is a telling quote because it possibly signals brands like DieHard, Craftsmen and Kenmore might possibly be sold in outlets other than Sears or Kmart. The constant debate is whether selling them outside of Sears owned properties would lead to further erosion of foot traffic. Too some extent it would but, would that be offset by the increased sales of merchandise? For Craftsmen, it think having them in Home Depot (HD) and Lowe’s (LOW) is a no brainer. Drills, screwdrivers and pliers are more of a commodity purchase than a $1000 appliance. For that reason, people will make the special trip to a Sears to get the washer/dryer but probably not to get a socket set that can be purchases around the corner at another location.
The lower the price point, the less “shopping” in involved and the need to market saturation of the product is necessary. Let’s hope they are moving that way. For Craftsmen and DieHard. Let’s see results for those two before we do anything with appliances.
Regarding acquisitions Lampert gave the typical “we’d consider it” answer. One must not expect anything of major significance given Sears cash levels, credit markets and the uncertainty about the future. I would not be surprised to see more tech buys like the recent Delver one.
Lampert also highlighted “mygofer”, which opened its first store last week in the southwest Chicago suburb of Joliet. Shoppers go online, select items and receive curbside delivery at the location right away. The store, which operates more like a warehouse than a retail location, features few displays, think of it as a Sam’s Club drive-thru.
“We think that’s going to be a better way for people to shop,” he said. “This is not just about there being a new store experience, it’s about there being a different way for people to shop”, said Lampert.
Anyone who was at the meeting and has more detailed notes, you can email them and I will post for you.. (valueplays at gmail dot com)
Disclosure (“none” means no position):Long SHLD
For my money, I could use a whole lot more Munger. The only thing Berkshire’s (BRK.A) Warren said all weekend that was newsworthy was he would buy the rest of Wells Fargo (WFC). For those who follow here I have said that is my reason for not selling it, he would never allow it to implode, therefore it will be one of the banks left standing.
Anyway….here it is
History of the meeting:
Claymen on the weekend:
Markets effect on energy:
Buffett on the market:
On CNBC Pt. 1
Pt 2
Munger on Cap and Trade:
Munger on the Economy:
Disclosure (“none” means no position):Long WFC, none
Berkshire’s (BRK.A) Warren Buffett on what separates Wells Fargo (WFC) from the pack tat includes Bank of America (BAC), Citi (C) and JP Morgan (JPM).
Disclosure (“none” means no position):Long WFC, none
This is brain candy for the value folks….
Disclosure (“none” means no position):
Something just has not been sitting well with me about the budget numbers being thrown around. I went and did dome digging and what I found was just scary…..really scary.
First things first. Here is the analysis of the proposed budget:
CBO Analysis of Obama Budget
Here are the main assumptions (click to enlarge):
Note: I excluded anything past 2012 because projections over a year or two are rarely accurate much less 5 or more.
Those numbers, just do not add up to me, for instance:
1- Rising unemployment and a sharp increase in GDP
– Since 1950 (as far back as CBO numbers go) there have been 18 instances in which unemployment rose year over year. In only 5 of those 18 did GDP also rise that year. The average GDP swing was 1.9% vs the 5.3% predicted by the CBO for 2009/2010. Of those 5, only two featured years in which the base year was a negative number. 1974-74 rose from -.5% to -.2% and 1991-91 rose from -.2% to 3.3%.
Put another way, the dramatic GDP increase the CBO predicts will happen in 2009/2010 in spite of rising unemployment has no actual prescedent in the past 60 years.
2- Inflation:
– The CBO projects inflation to run at an annual average rate of .725% from 2009-2012. Again, since 1950, we have only experienced a single 4 year span of inflation averaging anywhere close to this number. That was 1953 to 1956 when it averaged .57%. Good news? Not really. The 1953-58 period also featured GDP falling from 5.9% to 1.3% while unemployment rose from 2.9% to 6.8%. Both of these scenarios run counter to current CBO projections of increasing GDP and decreasing unemployment over the same span.
Note: It is extremely important to note the 1950’s and 1960’s had very low inflation as a rule due to the US being on the gold standard. Government could not “print” money the way they do now. Since the US went off the gold standard in 1971, inflation has averaged 4.4%. So despite an unprecedented and almost unfathomable increase in the money supply (inflationary) from the Federal Reserve and US Treasury in the past 6 months, the CBO predicts inflation to run 17% of its historical average. Almost defies logic.
Other possible issues. Foreigners are already balking as buying US debt due to the non-existant interest rates is now pays. That will force the Fed to raise rates to fund that massive deficit. The result will increase mortgage rates, consumer loan and business credit rates, slowing growth. Warren Buffett has called the current US Treasury market the “mother of all bubbles”. When it pops (they always do) the Fed will have no option but to rapidly raise interest rates to stop the selling and entice buyers. That will be a severe drag on any recovery
Not for nothing but Wilbur Ross and Berkshire’s (BRK.A) Buffett said from day one they would e willing to participate in this. It is beyond my ability to understand why it has taken so long to implement.
Disclosure (“none” means no position):
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I am slowly turning from wanting to unload my Wells Fargo (WFC) position to just sitting back and keeping it.
Here is the Wells Fargo 2008 annual Report to shareholders:
Wells Fargo Annual Report
Tom Brown had some interesting thoughts on it. Here are just a few:
Management is honest. Candid admission of error in CEO letters is rare, yet right up front, Stumpf concedes, “We made some mistakes but kept our credit discipline.” Nor does Stumpf sugarcoat his outlook for the future. “If you’re a pessimist, there’s a lot for you to like about 2009,” he writes. “It will be a rough year for our economy and our industry. Consumer loans will continue under stress, chargeoffs [uncollectible debt] probably will continue to rise.” Contrast that with what you’ll read in letters from banks that lost money in 2008 (which Wells Fargo did not.) You’d never guess they’re buried under problem loans! Wells Fargo is not in denial.
The company wants to build value, not an empire. In 2008, Wells Fargo doubled its assets with the acquisition of Wachovia. But in discussing the deal, Stumpf emphasizes that Wells didn’t do it simply to bulk up. “Size alone means nothing to us,” he writes. Then Stumpf repeats a mantra coined more than a decade ago by his predecessor, Dick Kovacevich: “You don’t get better by getting bigger, you get bigger by getting better”. Somebody please tell that to AIG, Bank of America, and Citigroup!Management is truly focused on its teammates. In most shareholder letters, CEOs feel the need to buck up the rank and file with some gratuitous comment that “our employees are our greatest asset” or “our people are our greatest competitive strength.” They don’t mean a word of it, of course. Wells Fargo does. The company has long believed it can differentiate itself with superior employee performance; the record of the last 20 years shows that it can—and has. Stumpf writes, “we call them team members (an asset in which to invest), not employees (an expense to be managed).” At Wells, that investment has paid off. According to survey data gathered by Gallup, Wells Fargo’s community banking group has 8.7 team members who say they’re engaged in their work for each team member that’s actively disengaged. This compares with 2.5 engaged-to-disengaged team members five years ago, and a national average of 1.5 to 1. I believe the deep commitment of Wells’s employees is a key factor in the company’s long-term success.
For my money Wells Fargo’s Chairman Richard Kovacevich had the best line about the current crisis when he said last year, “I’ll never understand why bankers always seem to invent new ways to lose money when the old ones worked just fine”.
Let’s not forget Wells Fargo fought tooth and nail NOT to take TARP funds but was strong armed into it by then Treasury secretary Paulson. Now, those may say, “give it back”. I am sure Wells will repay it as soon as they can but, if the gov’t is giving all your competitors (JP Morgan (JPM), Citi (C), Bank of America (BAC))a financial boost, don’t you risk losing some competitive advantage by declining it in an uncertain market? I believe you do.
This is especially true when you consider Paulson made it clear to Kovacevich that should he decline it then and then need it later, it would a most unpleasant transaction for shareholders. In the end, Wells took the money.
Time to sit back now and watch to see how the Wachovia merger is digested. There is too much uncertainty out there politically (both good and bad)to make a concrete decision.
Disclosure (“none” means no position):Long WFC, none
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Check out the following videos…
Courtesy All Things Jim Rogers. This ought to be the first stop for Jim Rogers devotees.
Part 1
Jim Rogers told Bloomberg that the U.S. risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital.
Part 2
Visit All Things Jim Rogers for rest of videos (2 more).
Now in his recent letter to shareholders Berkshire’s (BRK.a) Warren Buffett recently said:
“Clayton’s lending operation, though not damaged by the performance of its borrowers, is nevertheless threatened by an element of the credit crisis. Funders that have access to any sort of government guarantee – banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels.
Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be. This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.
Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.”
This is the real cost of the government bailouts. Healthy enterprises are being starved for capital. If they get it, its cost is such that the scope of the economic activity they can produce from it is limited because of what it took to get it.
This is severely hampering economic recovery. The government THINKS they are helping by making the guarantees. The truth is they are hurting healthy companies.
This just ass backwards. Healthy companies MUST have a lower borrowing cost than those who aren’t. This is what is called “unintended consequences” of government action. Try to save a few companies and then you hurt thousands more.
Disclosure (“none” means no position):None
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Is it just me or was this a waste of time? Does anyone really feel after the interview Geithner clarified anything but say “none of this is my fault”? I don’t blame Rose, Geithner is just not capable of communicating well, except when passing blame.
Finally got around to watching this over the weekend.
The show:
Tom Brown had this to say:
Geithner: “The system now is burdened by a bunch of loans that probably should not have been made. These banks can’t sell those loans. They’re sort of sitting on the balance sheet of the system and they’re causing a lot of uncertainty and concern whether these institutions will be strong enough to be able to lend in the event we face a deeper recession.”
TKB: When you read something like this, it’s hard not to worry Geithner doesn’t understand how the banking business works. Here are the basics: Banks make loans and, most of the time, the borrowers pays the loans back. But there are times when a borrower doesn’t have sufficient cash flow; in that case, the bank works with the borrower to try to minimize the loss. Geithner can’t be surprised now that borrowers occasionally become delinquent and default–particularly when he and his boss keep calling this the greatest economic crisis since the Depression.
In particular, Geithner ought to know better than to say that banks’ bad loans are “sort of sitting” on their books. Banks usually work with troubled borrowers; they don’t typically dump their loans at distressed prices after defaults. Well-run banks manage bad their credits; they don’t reflexively wash their hands of them.
Most worrying is Geithner’s comment that banks need to be “strong enough to be able to lend in the event we face a deeper recession.” Mr. Secretary, if the economy faces a deeper recession, the last thing you want to do is encourage aggressive bank lending. That’s the sort of thing that gout us into this problem in the first place.
Geithner: “To get through this and try to resolve that uncertainty and restore basic confidence, you have to stand by doing a careful assessment of how large those losses may be as we go forward.”
TKB: Given Geithner’s lack of understanding of how banking works, I worry that that he’ll give too much credence to the results of the stress tests Treasury is now conducting. By necessity, those test are overly broad, and rely on too many hypothetical inputs. My advice to the Secretary: weigh the current data much more heavily than highly subjective future loss assumptions.
Geithner: [Discussing TALF] “ We want to use a market mechanism that leaves the taxpayer with less risk and better benefit in trying to fix the system so we get credit flowing again.”
TKB: I don’t know why the administration is so torn between coming up with a plan to “get the credit flowing again” and making sure the taxpayers gets an adequate return on their investment. If fixing the banking system is as important as Geithner and Obama say, they should stop worrying so much about minimizing risk to the taxpayer. The administration sure didn’t seem this concerned about not wasting taxpayer money when it was lobbying for its stimulus plan.
Geithner: “We’re going to try to make it compelling for [banks] to clean up their balance sheets and put themselves in the position where it’s going to be easier for them in the future to raise private capital.”
TKB: News flash! Private capital is not going to rush to invest in banking companies that do dumb things–such as sell their assets for a fraction of what they are worth. Which, as regards banks’ toxic assets now, is exactly what the government seems to want banks to do. That makes no sense. If Geithner wants to know what banks should be doing with their bad assets, he should talk to President Obama’s pal, Warren Buffett.
As to the return expectations of asset buyers, meanwhile, let’s just say they’re aggressive. Yesterday I was at a full-day seminar on the current and future conditions of U.S. banking. One of the presenters was a distressed-debt buyer who gave the usual harangue about banks not being willing to sell at the true market. He said his firm has analyzed over $100 billion of debt so far, but has been able to buy only a little over $1 billion worth, since selling banks won’t “get real.” When someone asked him what assumptions his firm makes in valuing the paper, he said they assume no leverage and a terrible future economic environment–and have a cash-on-cash hurdle rate of . . . 30% to 40%.
Are you kidding me? What bank would sell at such a ridiculous price if it didn’t have to?
Geithner’s perception of banks’ toxic assets reflects the bearish conventional wisdom. But that view is not supported by the economics; Geithner ought to know better.
Geithner: “When we get through this, we want to put in place a set of more conservative, better-designed constraints on leverage through capital requirements, so that a mess like this never happens again.”
TKB: Earth to Tim: You simply can’t raise capital requirements high enough to prevent individual institutions from failing. The capital requirements of U.S. banks can’t be completely out of line with those of non-U.S. banks. I just don’t see a Tier 1 capital ratio being raised by more than 2 percent points around the globe, and even that level would not be a cure-all.
Geithner: “Most private forecasts, particularly administration forecasts, show recovery starting in the second half of this year”.
TKB: Is the economy in the tank or isn’t it? If recovery is really just a few months away as Geithner says, let’s be careful not to overreact to the Treasury’s “stress case” estimates of minus-tk% GDP growth in 2009, and minus-tk% in 2010. It would make no sense, in particular, to forcibly dilute current common shareholders based on an economic forecast the administration believes is highly unlikely. Nor would such a move help attract the private capital the administration says it’s so eager to have flow into the banking business.
Geithner: “I spent almost every day from the first time I walked into the New York Fed about five years ago working with my colleague on ways to try to make the system stronger. Our system was not designed to sustain a shock, a crisis of this magnitude. It’s the tragic failure of financial regulations in this country.”
TKB: Let me see if I have this straight. Tim Geithner says that, as president of the New York Fed, he spent every day for five years trying to strengthen the financial system. Yet when the recession finally arrived, it wreaked the havoc that it did because the regulation of the system, which Geithner himself was one of the key people in charge of, wasn’t up to the task. Where did Obama come up with this guy?
Geithner: “This is not about ability; it’s about will. And it’s about the will of government to do what’s necessary to act to fix this. And I’m confident that the president of this country will have the will to do that, and if you look again at the experience of the other crises from history, the crises become deeper and longer-lasting because of failure of government to act effectively”
TKB: Please! It’s all about “will”? So I guess Japanese government officials in the 1990s lacked the necessary “will” to pull the country out of its decade-long slowdown? So simple! Geithner seems to think only government programs can fix the economy’s problems and that there’s nothing to be contributed by the private sector. That’s way too simpleminded.
I was leery of the new Treasury Secretary before I read the Charlie Rose interview. Now I’m downright worried. Put aside whether Geithner’s Treasury Department can come up with the right solutions; Geithner doesn’t even seem to understand the nature of the problem. For an administration trying to deal with as deep an economic crisis as this one—and trying to a whole lot of other things as well–that’s not an encouraging sign.
Disclosure (“none” means no position):
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According to everything I am finding, we are way oversold long term. Now, that does not mean run out and blindly get yourself fully invested. We can also stay this was for a very long time. It does mean for the patient investor the are bargains out there..big ones…
Take a look at this chart (click chart for larger version):
“Davidson” submits:
The value to using this is to know that the average ROE for the SP500 is ~14% with about 57% of earnings paid out in Dividends and ~43% being reinvested. This provides for a Book Value growth rate of ~6% which has been remarkably consistent and in line with the SP500 earning’s chart showing the remarkable consistency of our economy. Knowledge of this consistency becomes a tool for the value player.
What you do is to convert the P/BV into a ROE to the investor. On 3/6/2009 the P/BV was 1.2 which converts to 14%/1.2 = ~11.7% return for investors who buy the SP500. Then, what must be done is compare this to the Wicksell Rate which is 5.4% today and falling.
You can look at this discrepancy as Buffett would and simply say that you are buying an 11.7% yield in a long term 5%-7% SP500 return range. The current SP500 provides sizable upside if inflation remains low. The lower the inflation the higher the SP500 valuation will be in the future during normal times.
For example:
If inflation is 1.8% the Wicksell Rate will be ~5% and the SP500 will reach about 20 P/E. If inflation drops to 1% then the Wicksell Rate becomes ~4.2% and the SP500 could reach ~25 P/E. You can also have inflation move in the opposite direction and should it move to 3% the Wicksell Rate will be ~ 6.2% and SP500 would price near ~16 P/E.
What permits an investor to enter the market during times of distress such as these is the knowledge of economic history and the trust that the growth of our economy is inherent within the free nature of our society and will continue in the future.
This is one instance in which knowledgeable investors expect history to repeat itself.
Did you ever hear the saying “when a pendulum swings too far one way, it then swings too far the other”?. This is your textbook example. Tonight Fitch has downgraded Berkshire Hathaway (BRK.A)
Below is the action from Fitch (hat tip to Zero Hedge for finding it).
BUT, to find out what this is really all about one need only read one paragraph in the whole document (click image to open larger).
As you read the document, the reasoning is …bizarre, for lack of a better word.
Disclosure (“none” means no position):None
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JP Morgan’s (JPM) CEO talks about banking, mark-to-market accounting, compensation and regulation.
The speech:
Dimon is right when he talks about mark-to-market accounting. It is a good idea taken to the extreme and that always ends up being a bad idea. It’s widespread use for all assets type will (has) lead to insane valuation volatility. That leads to people like Berkshire’s (BRK.A) Warren Buffett liking it due to the “opportunity it presents us”. Meaning, mark-to-market produces the extreme pricing inefficiency Buffett enjoys so much.
That cannot be the goal of the system of any accounting methodology. It ought to seek to find the true value of the asset, not simply discount it to whatever the lowest seller will let something go for in times of distress. It, in its essence, is lazy accounting.
Q&A
Disclosure (“none” means no position):none
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Berkshire’s (BRK.A) Buffett on CNBC Monday
Ask Warren – Complete Transcript – 2009-03-09
Disclosure (“none” means no position):none
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Disclosure (“none” means no position):Long
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