Investment News: Money Morning » Warren Buffett http://www.moneymorning.com Investment News Provider Sat, 21 Nov 2009 18:52:59 +0000 http://wordpress.org/?v=2.8.4 en hourly 1 Buffett Bargain Hunting Despite 2008 Losses http://www.moneymorning.com/2009/02/12/warren-buffett/ http://www.moneymorning.com/2009/02/12/warren-buffett/#comments Thu, 12 Feb 2009 10:00:18 +0000 Jason Simpkins http://www.moneymorning.com/?p=4887 By Jason Simpkins
Managing Editor
Money Morning

Famed investor Warren Buffett didn’t fare much better than anybody else in 2008. But the Oracle of Omaha remains optimistic, convinced that investors who brave today’s fierce financial tempest will be rewarded in the long run.

“I’ve been buying American stocks,” Buffett said in an editorial in The New York Times. “This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds… If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities.”

As the world’s richest man, Buffett offers a kind of comfort that few others can.  And it couldn’t come at a better time. The fourth quarter of 2008 was the worst quarter for the Standard & Poor’s 500 Index in more than two decades, as the closely watched stock-market benchmark tumbled 23%.

It’s likely that even Buffett took the same bath as the average investor.

In separate filings with the U.S. Securities and Exchange Commission (SEC), Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK B) said it spent $9.45 billion on equity securities in the first nine months of last year, Bloomberg News reported. Among the purchases:

  • Berkshire bought a majority stake in U.S. Bancorp (USB) over a period of time that never saw the bank’s share price drop below 29.09, according to Bloomberg News. That stock is currently trading at less than $15 a share.
  • Berkshire increased its Ingersoll-Rand Co. (IR) stake six-fold last year when the shares never fell below $36.54. That company’s stock has lost about half its value since Buffett made those purchases.
  • And Berkshire stocked up on shares of Eaton Corp. (ETN) between July and September  – a stretch in which the stock never fell below $52.32.  Eaton closed yesterday (Wednesday) at $44.36 a share.

With such ill-timed purchases, some analysts are beginning to think that “Warren” has lost his touch.

“People like to second guess Warren Buffett, but it’s not just a flip question to ask if he should have kept his powder dry a bit longer,” Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Ram Partners LP, told Bloomberg. “He’s paid dramatically higher prices than where some of them are now trading at, so you have to wonder if he was too quick on the trigger.”

But, as a long term investor who has said that his favorite time to hold a stock is “forever,” Buffett sees things differently.

“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,” said Buffett.  “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.”

To support this claim, Fortune points to a long-revered Buffett metric: Total U.S. stock value versus gross national product (GNP). According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP. And right now, it does.

In late January, total stock value equated to just 75% of GNP, down from a record peak of nearly 200% in March 2000. Indeed, for most of the past decade, the ratio of stock value to GNP has ranged from 150% to 190%. That makes now an ideal time to buy. And Buffett continues to do just that.

What Warren’s Buying

In addition to taking healthy stakes in U.S. Bancorp, Ingersoll-Rand, and Eaton, Buffett also committed $4.7 billion to Constellation Energy Group Inc. (CEG), $5 billion to Goldman Sachs Group Inc. (GS), and $3 billion to General Electric Co. (GE) last fall.

Buffett has also spent the past few years stocking up on railroad stocks, especially Burlington Northern Santa Fe Corp. (BNI). Berkshire’s most recent purchase of 2.6 million shares took its stake to more than 76 million shares – in excess of 20% – of the nation’s second-largest railroad.

And last week, Berkshire threw in a few surprises.

After buying 3% of Swiss Re (OTC: SWCEY) in January 2008, Berkshire last week poured another $2.6 billion into the world’s second-largest reinsurance company. Swiss Re has lost about three-quarters of its market value since Buffett’s original investment – further evidence that the investing icon remains undaunted by his losses.

Berkshire agreed to buy $300 million of corporate debt issued by motorcycle icon Harley Davidson Inc. (HOG). The senior unsecured notes purchased by Berkshire offer a 15% annual interest payment, making it one of Buffett’s many recent fixed-income investments.

Buffett agreed to buy $300 million of debt from USG Corp. (USG) in November, and his preferred shares of Goldman Sachs offer a 10% yield. The $2.6 billion he put into Swiss Re was accompanied by a 12% yield.

“He’s got cash coming in faster than most people would have a ready place to put it,” Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares, told Bloomberg. “This economy is certainly providing him with opportunities.”

With about $30 billion in cash on hand at Berkshire Hathaway, analysts are wondering where Warren’s going to strike next.

There is some speculation that if Berkshire shares continue to slide, Buffett could order a share buyback.

In the past, Buffett has said a company must meet two conditions to warrant buybacks of its stock: “First the company has available funds – cash plus sensible borrowing capacity – beyond the near-term needs of the business and, second, finds its stock selling below its intrinsic value, conservatively calculated,” he said.

Shares of Berkshire are down 37% in the past year and there’s little doubt that Buffett has the money.

Of course, Buffett also said last month in an interview with PBS that he would notify shareholders of his intentions before engaging in a buyback program.

“If I ever name a number, I’ll name it publicly,” Buffett said. “I mean, if we ever get to the point where we’re contemplating doing it, I would make a public announcement.”

The last time Buffett made such an announcement was nine years ago.

Another possibility is that Berkshire will invest in energy companies with large holdings in oil sands – notably Calgary-based Nexen Inc. (NXY).

Buffett, along with Microsoft Corp. (MSFT) mogul Bill Gates visited the Athabasca Oil Sands region in northeastern Alberta last August.

“The world will be using more oil 15 or 20 years from now,” Buffett told the Financial Post in an interview. “We are on a course that cannot be changed. It would surprise me if the world doesn’t want to use 100 million barrels a day in 15 or 20 years.”

“You need some … elephant fields [of oil to meet looming demand] and we haven’t found any elephant fields in the last 15 or 20 years,” he added. “So the sands are huge.”

However, some analysts remain skeptical.

“Seems there is a rumor that Berkshire is interested in Nexen – no one can give me comfort that this is indeed the case – they haven’t bought into [exploration and production] names before … but stranger things have happened,” investment bank Scotia Capital wrote in a note to clients.

What Buffett will do next remains unclear, but there is one certainty: He won’t be sitting on the sidelines and hoarding cash.

“Today, people who hold cash equivalents feel comfortable. They shouldn’t,” Buffett wrote back in October. “They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value,” Buffett said in October.

“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’.”

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]]> http://www.moneymorning.com/2009/02/12/warren-buffett/feed/ 1 Warren Buffett, the “Oracle of Omaha,” Tells German Audiences That the U.S. Economy is in a Deep Recession http://www.moneymorning.com/2008/05/27/warren-buffett-the-oracle-of-omaha-tells-german-audiences-that-the-us-economy-is-in-a-deep-recession/ http://www.moneymorning.com/2008/05/27/warren-buffett-the-oracle-of-omaha-tells-german-audiences-that-the-us-economy-is-in-a-deep-recession/#comments Tue, 27 May 2008 11:40:42 +0000 William Patalon III http://www.moneymorning.com/2008/05/27/warren-buffett-the-oracle-of-omaha-tells-german-audiences-that-the-u.s.-economy-is-in-a-deep-recession/ By William Patalon III
Executive Editor
Money Morning/The Money Map Report

The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investment guru Warren Buffett said in an interview published Saturday in the German magazine Der Spiegel.

The United States is "already in recession … perhaps not in the sense that economists would define it [with two consecutive quarters of declining gross domestic product (GDP)] but the people are already feeling the effects," Buffett said. "It will be deeper and last longer than many think."

As Money Morning reported back in March, Buffett made a similar pronouncement to U.S. audiences during an interview with the popular cable-television network, CNBC-TV.

Buffett is the world’s richest man, with a net worth of $62 billion. As the chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B), investors have for years followed Buffett’s moves to see which investments are going to take off next. Financial-research studies actually show that mimicking Buffet’s investment moves can be a most-profitable strategy.

A New Focus

Within the last year, Buffett has shifted his focus abroad – the precise strategy that Money Morning has been advocating since this global-investing news service was formed back in 2007.

Back in October, the Oracle of Omaha’s trip to South Korea encouraged our own bullishness on that country’s stock market.

And now Buffett has decided to have a look at Germany. However, Buffett remains most interested in German companies that are family-owned and well-managed. And he’s always in the hunt for carefully selected companies with great brand names and strong market positions.

"If the world were falling apart I’d still invest in companies," he said.

Berkshire’s recent play for U.S. chewing gum icon Wm. Wrigley Jr. Co. (WWY) underscores that willingess to invest in the "right" opportunity, regardless of the general economic outlook. Just last month – against a backdrop of recessionary and inflationary fears, a weak dollar, soaring energy prices, and a spiraling credit crunch – Berkshire joined forces with closely held Mars Inc. and agreed to provide $4.4 billion in financing for the $23 billion deal. In addition to providing the debt financing, Berkshire will make a minority investment in Wrigley, valued at about $2.1 billion. It’s believed that Buffett is getting a discount on the Wrigley stake.

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Once the deal closes, Wrigley will become a separate Mars subsidiary. And there may be a lot more to the deal in the long run, sources say. By helping Mars buy Wrigley, Buffett may actually be helping himself: As one, big privately held entity, the merged Mars-Wrigley giant would be much easier for Berkshire to buy outright should the secretive family that runs the business ever decide to sell it, sources said.

On a recent trip to Europe, Buffett made stops in Germany, Switzerland, Spain and Italy. But his first priority was to meet with leaders of the German mittelstand – the family-owned, medium-sized companies that are the backbone of the German economy.

"We would like more family owners of German businesses who, when they feel some need to monetize their business, think of Berkshire Hathaway," Buffett said to the Financial Times.

Buying into privately held companies – usually those whose ownership remains in the hands of the founding family – is an investment play Buffett has run time and again – and virtually always successfully. Back in 2006, he made what then was his largest investment ever outside the U.S. market, when he spent $4 billion for an 80% stake of an Israeli metalworking firm that was family operated. At the time, Israel was out of fashion with U.S. investors, though Buffett’s headline-making deal changed those attitudes rather quickly.

Like Israel was then, and like Japan is now, Germany is currently unfashionable with U.S. analysts. As is also true of Japan, it seems to come as a surprise every time Germany comes out with a positive gross domestic product (GDP) number. Both countries had horrible periods in the 1990s, but analysts who think Germany is doomed to slow growth forever haven’t been paying attention.

Buffett also renewed his criticism of the derivatives trading that helped create the current global credit mess.

Buffett Criticizes Waste

"It’s not right that hundreds of thousands of jobs are being eliminated, that entire industrial sectors in the real economy are being wiped out by financial bets even though the sectors are actually in good health," Buffett told the German magazine.

Buffett complained about the lack of effective controls.

"That’s the problem," he said. "You can’t steer it, you can’t regulate it anymore. You can’t get the genie back in the bottle."

When it comes to choosing investment targets, Buffett favors companies that have a competitive advantage, offering products or services that can’t easily be replicated by rivals. Businesses such as Mars and Wrigley, which each have strong consumer brands, fit the bill, Jerome V. Bruni, president of J.V. Bruni and Co., a Colorado Springs, Col.-based investment banking firm, recently told the Dow Jones Newswires.

The Wrigley deal is just the latest in a string of recent deals for the so-called "Oracle of Omaha." Other recent investments include a stake in Kraft Foods Inc. (KFT) and GlaxoSmithKline PLC (GSK), Europe’s largest drugmaker.

Since taking over Berkshire Hathaway in 1965, Buffett has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies and that has a market value of $200 billion.

As of the end of last year, Berkshire owned 3.3% of Procter & Gamble Co. (PG), a consumer-products giant, along with big chunks of The Coca-Cola Co. (KO) and Anheuser-Busch Cos. Inc. (BUD).

[Editor's Note: Check out Money Morning's brand-new special investment research report on Warren Buffett's foray into Germany. The report is free of charge. Also, take a look at our recent report on the widely divergent views of the U.S. housing market between Buffett's housing expert and global-investing guru Jim Rogers. That report, too, is free of charge. Finally, click here to find out how you can obtain a free copy of his new best seller, "A Bull in China."]

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]]> http://www.moneymorning.com/2008/05/27/warren-buffett-the-oracle-of-omaha-tells-german-audiences-that-the-us-economy-is-in-a-deep-recession/feed/ 0 Dueling Views on Housing: Jim Rogers Sees More Pain to Come While Warren Buffett’s Housing Expert Sees Rebound Under Way http://www.moneymorning.com/2008/05/12/dueling-views-on-housing-jim-rogers-sees-more-pain-to-come-while-warren-buffetts-housing-expert-sees-rebound-under-way/ http://www.moneymorning.com/2008/05/12/dueling-views-on-housing-jim-rogers-sees-more-pain-to-come-while-warren-buffetts-housing-expert-sees-rebound-under-way/#comments Mon, 12 May 2008 00:59:13 +0000 Money Morning Staff http://www.moneymorning.com/2008/05/12/dueling-views-on-housing-jim-rogers-sees-more-pain-to-come-while-warren-buffetts-housing-expert-sees-rebound-under-way/ From Staff Reports

When asked about their outlook for the crisis-ridden U.S. housing and financial-services markets, two U.S. financial experts provided outlooks that completely contradicted one another – once again underscoring how tough it is for investors to predict when the U.S. economy will turn around.

Jim Rogers, a best-selling author who co-founded the famed Quantum Fund with George Soros back in 1970, told Bloomberg News Thursday that the global credit crisis caused by the subprime mortgage meltdown is nowhere near over.

"I doubt that we’re half way through the financial crisis," Rogers stated at a Barclays PLC (BCS) news conference Thursday in Singapore, where he now lives with his family. "We certainly haven’t hit the bottom as far as I’m concerned."

Not only did Rogers’ comments contradict those put forth this week by the heads of several Wall Street investment banks, they even ran counter to statements made by former partner Soros, who said this week that he believed the "acute phase" of the worldwide financial crisis was nearly done – meaning the U.S. economy might soon start displaying the benefits.

Rogers’ downbeat outlook also ran counter to some upbeat observations made by Ronald J. Peltier, the chairman and chief executive officer of investing guru Warren Buffet’s HomeServices of America Inc. real estate company, who told CNBC-TV that the beaten-up U.S. housing market has leveled out and is poised for a move to higher ground.

"I think the real truth is the market has been in a phase of correction," Peltier said Thursday morning during an interview on the popular financial cable channel. "We are seeing some light at the end of the tunnel."

So who’s correct?

Rogers, currently the chairman of Rogers Holdings and the author of the new investment bestseller, "A Bull in China," seems to think that’s a pretty easy question to answer. After all, big global securities firms and commercial banking enterprises have taken about $319 billion in write-downs since the start of 2007 and have slashed away 65,000 jobs in the past 10 months as the financial crisis spread across the globe, Bloomberg reported.

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And there’s more to come.

"Most of the European banks and Asian banks haven’t taken a huge write-off yet," Rogers said. "I suspect there are more write-offs to come in Europe and Asia."

Echoing comments he made two months ago during an exclusive interview with Money Morning Investment Director Keith Fitz-Gerald, Rogers told listeners in Singapore Thursday that he’s avoiding financial stocks and is betting that the share prices of U.S. investment banks have a lot further to fall. He also sees continued major problems for U.S. homebuilders that very often doled out mortgages that did not require documentation regarding assets or income, and for government-sponsored mortgage financier Fannie Mae (FNM). That’s why he’s expecting housing stocks and Fannie Mae’s shares to decline even more than they already have as investors avoid all but the safest assets – such as U.S. Treasury debt.

Such ongoing uncertainty and fearfulness can’t help but cause overall stock-and-bond prices to fall even further, Rogers told reporters.

Indeed, during his recent exclusive interview with Money Morning’s Fitz-Gerald, Rogers said it’s even possible that the U.S. Federal Reserve could ultimately fail.

As if to defy his gloomy predictions, stocks have rallied since mid-March, when JPMorgan Chase & Co. (JPM), the No. 3 U.S. commercial bank, agreed to buy The Bear Stearns Cos. Inc. (BSC), in a central-bank-sponsored bailout deal. In fact, the MSCI World Index has gained 10% since touching a one-year low on March 17, Bloomberg reported.

While HomeServices’ Peltier agrees that was a problem – a "lot of people bought ahead of themselves," and speculators damaged the market even more – he told CNBC that he now believes the U.S. housing market has actually returned to its pre-boom times, with home sales running at an annual rate of about 5 million.

"I think that’s a normalized market and I think that’s a sustainable level," he told an interviewer. But he also divided the market into two distinct parts:

  • The primary market of discretionary sellers.
  • And the distressed market, which includes some of the regions that experienced the "meteoric" rise in housing prices – and which now are suffering the fallout.

Even after that, however, it’s clear that "housing prices are still within 8% to 10% of all-time highs," Peltier said. "The markets that have fallen off the most are actually the markets that were the most overheated."

As the housing market returns to its more-normal operation, Peltier believes stability will return and that prices and sales numbers will return to a point that was sustainable.

There is one wild card that has the executive concerned, however: Will the pressures of soaring fuel costs and a tight credit market put an inordinate amount of pressure on consumers who are attempting to work out their housing problem – as opposed to just walking away?

"A lot of people bought ahead of themselves," Peltier said in the interview. "Frankly, I think to some degree the lending industry, the mortgage business, lost its moral compass in terms of providing the proper credit standards and qualifications."

Speculators proved to be the real troublemakers: From 2001 to 2006, a full 25% of sales were made to buyers who believed they could turn a quick profit, and not to people who were planning to live in the houses and make them into a home.

In retrospect, Peltier said it’s clear the U.S. housing market got way ahead of itself from a price standpoint, with the flames of speculation getting fanned by unscrupulous appraisers and lenders who ended up putting lots of consumers into houses that they couldn’t afford.

Industry officials "knew it was an overheated market," Peltier said. "There were people for the first time ever having opportunity to buy part of the American dream under credit conditions and credit guidelines that were very, very shaky at best … And they were buying at the peak of the market with very low teaser rates, not fully understanding the implications of that adjustable-rate mortgage [re-setting at a much-higher rate] sometime in the future, and the probability that they could not afford that home under the new reset conditions. That’s a travesty, because there are a lot of people that got hurt."

He called on Congress to find a workable solution to the housing crisis, something that has been elusive as the legislators and President Bush spar over who should benefit from pending legislation.

On the broader political landscape, Peltier said the housing industry generally does better when Republicans are in office, though he did not endorse a specific candidate in the presidential race.

"There has been more showboating and discussion than actual rubber that meets the road," he said regarding the legislative impasse. "The fact of the matter is we really need to have some new legislation in place to slow down and stall the foreclosures where people basically bought into a home under mortgage financing programs they didn’t understand."

[Editor's Note: Just two months ago, Money Morning Investing Director Keith Fitz-Gerald's flew to Singapore for an exclusive interview with investing guru Jim Rogers. The two-part series that resulted is available here, free of charge. In Part 1, Jim Rogers predicted more pain for the U.S. dollar and the possible failure of the U.S. central bank. In Part II, Rogers talked about China's unstoppable economy. Please click on the book title to check out a new Money Morning offer that includes a free copy of Rogers' new bestseller, "A Bull in China."]

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]]> http://www.moneymorning.com/2008/05/12/dueling-views-on-housing-jim-rogers-sees-more-pain-to-come-while-warren-buffetts-housing-expert-sees-rebound-under-way/feed/ 1 Leading Candidate to Succeed Warren Buffett Relinquishes Role at Berkshire Subsidiary http://www.moneymorning.com/2008/03/19/leading-candidate-to-succeed-warren-buffett-relinquishes-role-at-berkshire-subsidiary/ http://www.moneymorning.com/2008/03/19/leading-candidate-to-succeed-warren-buffett-relinquishes-role-at-berkshire-subsidiary/#comments Wed, 19 Mar 2008 05:11:02 +0000 William Patalon III http://www.moneymorning.com/2008/03/19/leading-candidate-to-succeed-warren-buffett-relinquishes-role-at-berkshire-subsidiary/ By William Patalon III
Executive Editor
Money Morning/The Money Map Report

David Sokol, widely viewed as the leading candidate to eventually replace investing guru Warren Buffett as the chief executive officer of Berkshire Hathaway Inc. (BRK.A, BRK.B), is changing jobs.

Sokol announced that he plans to step down as CEO of the MidAmerican Energy Holdings Co., Berkshire’s utility unit. He will remain on as chairman.

Berkshire watchers are examining this move with great interest. Just ask Frank Betz, a principal with the Warren, N.J.-based Carret/Zane Capital Management LLP, who has played bridge with Buffett.

“I’ve been saying for three years that David Sokol is the obvious successor for Berkshire, and I may be dead wrong,” Betz told Reuters in an interview. “To me, it’s a clarion call [since Sokol] has very successfully run MidAmerican. It frees him from the day-to-day responsibilities of running MidAmerican to do whatever else might be on his menu.”

Berkshire Watchers – Watch Carefully

According to a recent study, buying what Buffett has bought – even a month after his purchases – is a pathway to superior returns. In fact, over the past three years, this strategy has delivered double the return of the Standard & Poor’s 500 Index, according to research by professors at both American University and the University of Nevada at Las Vegas.

Even with that one-month lag, an investor who mimicked the moves of this market master would eclipse the S&P 500 returns by 14.26%, the study concluded. [For more information, read the recent Money Morning investment research: “How Buying Like Warren Buffett Can Boost Your Portfolio Profits.” The report is free of charge].

When it comes to the game of “Who Will Succeed Buffett,” many investors right now have two specific candidates in mind – Sokol and Ajit Jain, a top Berkshire insurance executive.

Not that the 77-year-old Buffett has any plans to leave anytime soon – even though his net worth of $62 billion makes him the world’s richest person, according to Forbes magazine.

Even so, it’s key for any public company to have a succession plan in place, especially one with as remarkable a track record as Berkshire boasts. And Buffett himself has said that Berkshire has three internal candidates – including one who could step in immediately. Buffett says he would like any successor to be young enough to stay in the job for 15 years.

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Howard Buffett, Warren Buffett’s son, would likely become chairman. Four other candidates are in the running to become Berkshire’s chief investment officer, or CIO.

Thomas Russo, who helps invest $3 billion at Gardner, Russo & Gardner in Lancaster, PA, said it’s “too early” to draw any conclusions about what Sokol’s job change actually means.

“This is the first move affecting [someone on] the well-considered list of successors who is changing his day job,” Russo told Reuters.

Sokol told the Omaha World-Herald that ending his 17-year run as CEO of MidAmerican will free up time for him to work on acquisition deals. MidAmerican operates several utilities and natural gas pipeline companies, and runs HomeServices of America, the No. 2 independent U.S. real estate brokerage.

He said the change is unrelated to Berkshire’s succession plans.

“When somebody’s ready, they should get the opportunity,” Sokol, 51, told the World-Herald. “My 100% allegiance is to Berkshire and MidAmerican. I’m not going anywhere.”

Gregory Abel, who is MidAmerican’s president and runs its PacifiCorp utility, will replace Sokol as CEO sometime next month. Although MidAmerican is based in Des Moines, Iowa, Sokol works in Omaha, where Berkshire is headquartered. That gives him substantial “face time” with Buffett – no small consideration, management experts say.

A key reason that Sokol is considered a front-runner for Buffett’s seat is that many analysts regard MidAmerican as a “mini-Berkshire,” said Mohnish Pabrai, managing partner at Pabrai Investment Funds in Irvine, Calif. Pabrai models his portfolios on early Buffett partnerships.

Berkshire Hathaway operates as more like an “investment vehicle,” which buys investment securities and other companies – many of which are permitted to maintain much of their independence.

Since taking over Berkshire Hathaway in 1965, Buffett has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies. Berkshire has a market value of nearly $220 billion.

A recent Money Morning story detailed how Berkshire has recently taken an 8.6% stake in Kraft Foods Inc. (KFT), making it the foodmaker’s biggest shareholder. It also acquired a $76.1 million stake in GlaxoSmithKline PLC (GSK), Europe’s largest drugmaker.

But a company like Berkshire – with that many moving parts – can be difficult to run. So if MidAmerican already operates as a “mini-Berkshire” – and Sokol has demonstrated a talent for operating such a complex company – he might well be viewed as the leading successor candidate.

That perception probably boosts “the odds that [Sokol] is one of the three guys. He’s the perfect age and has the diverse experience. Jain is probably right there, if it happens soon,” Pabrai said.

Another Front-Runner

That’s because Jain was born in 1951, putting him close to the outer edge of an age range that would make him a viable candidate. On the other hand, Jain joined Berkshire in 1986, and both he and Buffett have said they talk to each other every single day.

Jerome Heppelmann, a portfolio manager with Liberty Ridge Capital in Berwyn, Pa., said Jain “has the expertise in Berkshire’s core business, insurance, and his stewardship has been superb.”

Jain handles coverage for “mega-catastrophes” such as Hurricane Katrina. He also runs Berkshire Hathaway Reinsurance, which provides insurance for other insurers.

That’s put him in the catbird’s seat to oversee a major Berkshire corporate project. In the past three months, Jain has spearheaded Berkshire’s drive to build a bond insurer from scratch as existing rivals such as MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABK) have stumbled badly.

It was viewed as one of the shrewdest deals that Buffett and Berkshire have cut in some time. Buffett offered to assume responsibility for $800 billion of municipal bonds guaranteed by MBIA and Ambac. However, Buffett only sought out the most-profitable – and safest – portions of the companies’ municipal guaranty business. The offer excludes subprime-related securities, and collateralized debt obligations (CDOs).

And some analysts were honest enough to say that Buffett had negotiated a great deal for his company.

“I really don’t think this does much for anyone but Warren Buffett, as the thought of an insurer ‘giving away’ its best business and only means of surviving this mess in return for the rest of its ‘junk in the trunk’ should leave them cold,” Kevin Giddis, a fixed-income analyst at Morgan Keegan & Co., told CNNMoney.com.

So it’s no surprise that Buffett thinks highly of Jain. Indeed, in his shareholder letter this year, Buffett said Jain “has built a truly great specialty reinsurance operation from scratch.” Last year, he called that business “amazing.” In 2006, he called Jain an “extraordinary manager,” and the year before he wrote: “Ajit’s value to Berkshire is enormous.”

In each of his last three letters Buffett referred to Sokol and Abel as “terrific” managers, and in the previous two called both “brilliant” managers.

The Rest of the Pack

Investors have suggested top chief executive candidates for Berkshire also include:

  • Joseph P. “Joe” Brandon of reinsurer General Re Corp.
  • Tony Nicely of auto insurer Geico Corp.
  • And Richard Santulli, of private airplane operator NetJets Inc.

But when it comes to their being considered as Buffett successors, all three of these executives face real drawbacks. Nicely and Santulli are in their mid-60s, which would seem to rule them out.

And Reuters reported that investors have also mentioned Brandon’s name less following a controversial reinsurance transaction that led last month to a federal jury convicting four former General Re executives on fraud and conspiracy charges. Brandon was not charged.

[For Money Morning’s latest investment research report on Buffett’s investment outlook, read: Now That Warren Buffett is Crazy About the Loonie, Here are Seven Ways to Profit From a Strong Canadian Dollar. The report is free of charge].

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]]> http://www.moneymorning.com/2008/03/19/leading-candidate-to-succeed-warren-buffett-relinquishes-role-at-berkshire-subsidiary/feed/ 1 Oracle of Omaha Discloses Annual Salary http://www.moneymorning.com/2008/03/17/oracle-of-omaha-discloses-annual-salary/ http://www.moneymorning.com/2008/03/17/oracle-of-omaha-discloses-annual-salary/#comments Mon, 17 Mar 2008 08:07:30 +0000 admin http://www.moneymorning.com/2008/03/18/oracle-of-omaha-discloses-annual-salary/ By Jennifer Yousfi
Managing Editor

For the 27th year in a row, Berkshire Hathaway Inc. (BRK.A, BRK.B) Chairman Warren Buffett received an annual salary of $100,000.

In addition, Buffett received no bonus or stock options for heading up one of the most successful investment vehicles in the world, as Berkshire Hathaway profit increased 20% in 2007 and had approximately $44 billion in cash and cash equivalents at year-end.

“This guy doesn’t care about putting the money into his own pocket, the money is his way of keeping score,” Guy Spier, who has about 15% of his Aquamarine LLC hedge fund in Berkshire shares, told Bloomberg News. “Of course, we don’t know what Warren’s private fortune is. He’s always run a separate pool of money, which could well be a billion itself, totally separate from Berkshire.”

Despite his low annual salary, for the 12 months ended Feb. 11, Buffett surpassed Microsoft Corp. (MSFT) founder Bill Gates as the world’s richest man with an estimated net value of $62 billion, according to Forbes annual list of the richest people.

Not only did Buffett only draw $100k for his duties as chairman, but the filing also disclosed that he paid Berkshire $50,000 as a reimbursement for any personal use of Berkshire postage, phones and personnel, Bloomberg reported.

And Buffett is not the only Berkshire executive to forgo a lavish compensation package.

“Neither the profitability of Berkshire Hathaway nor the market value of its stock are to be considered in the compensation of any executive officer,” the proxy said. “Berkshire does not grant stock options to executive officers.”

Vice Chairman Charles Munger also earned a $100,000 salary, while Chief Financial Officer Marc Hamburg took home $712,500, a 7.5% increase over his 2006 pay.

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]]> http://www.moneymorning.com/2008/03/17/oracle-of-omaha-discloses-annual-salary/feed/ 0 The Oracle of Omaha Makes His Newest Pronouncement: The U.S. is in a Recession http://www.moneymorning.com/2008/03/05/the-oracle-of-omaha-makes-his-newest-pronouncement-the-us-is-in-a-recession/ http://www.moneymorning.com/2008/03/05/the-oracle-of-omaha-makes-his-newest-pronouncement-the-us-is-in-a-recession/#comments Wed, 05 Mar 2008 12:13:24 +0000 Money Morning Staff http://www.moneymorning.com/2008/03/05/the-oracle-of-omaha-makes-his-newest-pronouncement-the-u.s.-is-in-a-recession/ From Staff Reports

According to economists, the U.S. economy isn’t in a recession.

Don’t tell that to Warren Buffett.

Buffett, the billionaire investor known as the "Oracle of Omaha," says he’s seen a "significant slowdown" in the businesses that are part of his company, Berkshire Hathaway Inc., (BRK.A, BRK.B) – which tells him that the U.S. economy has dropped into a recession.

Buffett also says that stocks are "not cheap," despite steep declines that have caused the Dow Jones Industrial Average to drop 14% from the record high levels it reached last year. As of Monday’s close, for example, the 30-stock Dow has shed 1,939.2 points from its peak at 14,198.10.

Speaking Monday on the popular financial cable-TV station, CNBC, Buffett said the economy is clearly deteriorating badly, even though it’s yet to actually fulfill the classic definition of a recession, with gross domestic product (GNP) having posted two straight quarters of decline.

The National Bureau of Economic Research, or NBER, determines when recessions occur, a task that happens after the fact.

Buffett also said the U.S. housing slump and the badly sputtering economy are putting the squeeze on Berkshire’s 76 operating units, which markets such products and services as furniture, jewelry, specialized metalworking services, ice cream, candy, real estate services, insurance, paint, and underwear – and which also acts as a major investment vehicle.

"By any common sense definition, we are in a recession," Buffett said. "Business is slowing down. We have retail stores in candy, home furnishings and jewelry; across the board, I’m seeing a significant slowdown."

Last week the Commerce Department said U.S. GDP rose at an annual rate of just 0.6 percent in the fourth quarter.

Often referred to – and regarded as – "the World’s Greatest Investor," the 77-year-old Buffett is one of the world’s richest people. Last summer, Forbes estimated his net worth at $52 billion.

In the cable-TV interview, Buffett said economic conditions have not yet deteriorated to levels seen in 1973 and 1974, a deep recession that was also marked by soaring oil prices and major share-price declines. But U.S. Federal Reserve Chairman Ben S. Bernanke faces a "very tough" balancing act because of two key competing problems: Inflation is escalating even as economic growth is in danger of slowing to the point that it topples into a recession [an "official" one].

In the early 1970s downturn, the U.S. economy "had this stagflation situation, and we really had a meltdown in equity prices," Buffett said during the interview. "We are seeing more fixed-income-type forced liquidations. We are seeing more indigestion at banks with a lot of loans they don’t want to have. So you’re seeing a time of easy money in terms of price, but not so easy money in terms of availability."

While Buffett said he’s always looking at beaten-down shares, this time around he’s also looking at bond-related investments that could rise in value. That’s because stocks still aren’t cheap, despite the sell-off that’s taken place since key indices hit record highs last year.

"I find more things to look at now than I did six months or a year ago, but I would say it’s changed more dramatically in the fixed-income market than it has in the equity market. That may be where I find the opportunities," Buffett said.

[Editor's Note: For a related story in today's issue on stagflation, please click here.]

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]]> http://www.moneymorning.com/2008/03/05/the-oracle-of-omaha-makes-his-newest-pronouncement-the-us-is-in-a-recession/feed/ 0 Berkshire’s Buffett Warns Government To Back Off When it Comes to Regulating the Global Cash Barons http://www.moneymorning.com/2008/03/04/berkshires-buffett-warns-government-to-back-off-when-it-comes-to-regulating-the-global-cash-barons/ http://www.moneymorning.com/2008/03/04/berkshires-buffett-warns-government-to-back-off-when-it-comes-to-regulating-the-global-cash-barons/#comments Tue, 04 Mar 2008 12:19:01 +0000 admin http://www.moneymorning.com/2008/03/04/berkshires-buffett-warns-government-to-back-off-when-it-comes-to-regulating-the-global-cash-barons/ By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Critics of sovereign wealth funds say there are sinister motives behind the multibillion investments the state-run investment pools are making in U.S. and European companies.

Investing guru Warren Buffett says that theory is bunk.

And we agree.

In his Feb. 29 letter to shareholders, Buffett, the chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B), wrote that the foreign governments in control of these sovereign funds are amassing the massive stakes in U.S. companies as a direct result of our deficit-creating trade policies – and not because of some deeply sinister motives.

"This is our doing, not some nefarious plot by foreign governments," Buffett wrote to Berkshire shareholders. "Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here."

Sovereign funds currently control between $3 trillion and $3.5 trillion, experts estimate. That’s already more than the entire world’s hedge funds currently control. But it’s the accelerated activity and ultimate projected dollar values of these massive pools of investment capital that has so concerned many government leaders in both the European region and the United States.

The International Monetary Fund (IMF) and other experts predict the state-run venture funds could control $12 trillion by 2015. But Money Morning Investment Director Keith Fitz-Gerald thinks the total will actually be nearer $20 trillion by the middle of the next decade.

The growth rate is certainly accelerating. The U.S. Treasury says that 20 new funds have been created since 2000 – more than half of them since 2005 – bringing the total to nearly 40. In the last 12 months alone, sovereign funds have invested roughly $70 billion in financial institutions worldwide, most of them in the West.

Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS) are among the financial-sector heavyweights that have received major capital infusions from sovereign wealth funds after their balance sheets were eviscerated by the subprime-spawned global credit crisis.

Both the U.S. government and the European Commission are concerned the foreign governments will use their investment stakes to advance their own geopolitical objectives. The funds don’t always disclose details on their holdings and rarely explain their investment objectives.

In the United States, The Wall Street Journal last week reported that a delegation from the U.S. Treasury Department has met with executives from the Abu Dhabi Investment Authority and from Singapore’s Government Investment Corp., to discuss their embracing a set of promises to not utilize their wealth for geopolitical gains. The talks are part of global negotiations to draft rules to oversee the behavior of such funds without discouraging them from investing in the United States, Europe and other developed markets at a time when the capital is badly needed because of a credit crunch and accelerating global financial turmoil.

The governments of Dubai, Saudi Arabia, China, Russia and Norway operate some of the biggest investment pools. The Middle East nations amassed their capital chiefly through crude oil sales, and with crude oil continuing to flirt with record highs, those funds continue to grow in size. Asian nations such as South Korea, Singapore and China built up their war chests mainly with the trade surpluses they’ve been running with Europe and the United States.

The global debate about sovereign funds has been escalating almost as fast as the funds’ holdings have grown.

Back in December, Securities and Exchange Commission Chairman Christopher Cox said the state-run investment firms don’t adequately disclose why they’re buying stocks and other assets. Then in a Bloomberg Television interview late last month, U.S. Treasury Secretary Robert Kimmitt said that "both the growth in size and number of these funds is such now that vigilance is required."

However, even as the Eurozone pursues a governing code of conduct for the sovereign funds, European Commission President José Manuel Barroso last week argued that the funds "are not a big bad wolf at the door. We want to maintain an open investment environment, in Europe and worldwide."

In the shareholder letter that was dated Friday, Buffett, 77, said overt hostility on the part of the U.S. government could backfire – something the U.S. economy can ill afford because of the stabilizing effect the sovereign-fund investments have had.

Even if the foreign investors don’t retreat because of a perceived hostility, they might back off out of confusion: The signals we’re sending out are at least contradictory – if not downright hypocritical.

"Why should we complain when [foreign governments] choose [U.S.] stocks over bonds?” Buffett wrote. "Our country’s weakening currency is not the fault of OPEC, China, etc. In defending a sensible trade policy, the U.S. should not single out countries to punish or industries to protect. Nor should we take actions likely to evoke retaliatory behavior."

For years, as the United States has routinely run the twin deficits [budget and trade], we’ve just as routinely relied upon foreign central banks to finance those shortfalls with their ongoing purchases of dollar-denominated debt.

The U.S. trade deficit was nearly $709 billion last year, down about 7% from the record deficit of $758.6 billion in 2006.

We’re only too happy to have Japan, China, Korea and others buy our bonds to [effectively] balance our budget, or to finance our trade gap. And the theories about the economic horrors that will result both here in the United States and in many economies abroad if those foreign central banks decide to stop buying our debt are well known.

But, as Buffet notes, when foreign countries opt to invest those same billions in the shares of some of our top companies, we suddenly cry "foul" and claim that it’s a huge problem.

It is a huge problem – just not the one the government is worried about and would have us believe.

Some within the SEC, Treasury Department and both houses of Congress would have us believe that by investing billions of dollars in the stock of Citigroup and Merrill Lynch – America’s largest bank and brokerage – governments in Asia and the Middle East have put themselves in positions of considerable potential influence.

The fact is, if that was the objective of these foreign states, they already hold the strategic high ground.

China – with its $1.3 trillion in foreign-exchange reserves – holds several hundred billion dollars of U.S. government debt. Believe me when I tell you that there’s far more potential for China to exert influence or extract something it wants via this route than there is because of the few measly billions it invested in a bank or brokerage house.

China could dump dollars or dump debt and cause the greenback to plunge. That could cause inflation to skyrocket – at least until the U.S. Federal Reserve was able to crank interest rates up into the stratosphere, tipping the U.S. into a downturn unlike anything we can imagine.

And that’s just one possible scenario.

When it comes to buying our stocks, China, Singapore, Kuwait and others have done us a massive favor. They’ve stabilized what was shaping up to be an even bigger sell-off in financial shares than we’d already seen. It was badly needed. Trouble is, that capital wasn’t going to come from anywhere inside the U.S. capital markets.

And for the most part, the Asian and Middle East "Cash Barons," as we here at Money Morning have labeled them, have done so with little requested in return. They’ve not demanded seats on the boards of directors. They haven’t demanded management say-so. They haven’t made across-the-board demands for specially created classes of "preferred stock," or convertible preferred shares, that feature terms shareholders like you and I could never hope to get.

Indeed, in many cases – Dubai World’s involvement with Las Vegas-based casino and hotel operator MGM Mirage (MGM) is a great example – the sovereign funds have set themselves up as a business partner, ensuring that both the target company and the sovereign fund have a long-term, unified view of the ultimate partnership goals.

Thanks to financing it’s receiving from Dubai World – as well as the contacts the state-run fund can provide – MGM is actually a high-profit play on China.

Granted, the sovereign funds expect to make a profit – and a handsome one, at that. That may involve additional future investments. And it may involve a more-direct involvement with the company’s management team. But if the sovereign funds make a profit, that should benefit U.S. investors, since ascension in the share prices of these companies means that one of several things occurred:

  • A return to profitability, which fuels a rebound in the share prices.
  • A buyout by another company that pays a nice premium over the market price for the right to make the deal.
  • Or a broad U.S. economic rebound, which creates the proverbial "rising tide that lifts all boats."

Needless to say, all of those scenarios will benefit individual investors.

"Not only are [the sovereign funds] net buyers of some of the world’s most-sophisticated companies, they’re net holders, too," Money Morning’s Fitz-Gerald says. "After all, they want many of the same things we do with our money – a stable, productive return."

There are a number of wild cards, of course, the "wildest" being Russia’s newly promulgated pledge to become much more aggressive in the foreign investment space. Russia very like won’t utilize such a "hands-off" strategy. But even its involvement will have a potentially big benefit, bringing more capital to the party and stoking demand – all bullish for the market value of the target companies.

Far from viewing these sovereign funds as a threat, U.S. investors should be looking to these as creators of a major investment opportunity.

Money Morning readers have known that for months. We’ve been tracking the Cash Barons and their forays since this service debuted. We detailed three promising profit plays in a special investment report that was part of our ongoing "Outlook 2008" global-economic-forecasting series. And it’s a key topic that we’ll continue to cover for years to come.

Money Morning subscribers should continue to view the Global Cash Barons as investment-opportunity indicators: As we noted, these savvy international investors aren’t throwing their money around – and they’re certainly not throwing it away.

They fully intend to get their investment back – with a substantial return.

"Many people feel threatened by SWFs," says Fitz-Gerald, the Money Morning Investment Director. "That’s a mistake. They’re long term investors, too, and they’re buying many of the same companies we are recommending, which provides a stabilizing influence that’s vitally important right now."

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]]> http://www.moneymorning.com/2008/03/04/berkshires-buffett-warns-government-to-back-off-when-it-comes-to-regulating-the-global-cash-barons/feed/ 0 Warren Buffett’s Berkshire Hathaway Crafts Deals for Kraft Foods and GlaxoSmithKline http://www.moneymorning.com/2008/02/18/warren-buffetts-berkshire-hathaway-crafts-deals-for-kraft-foods-and-glaxosmithkline/ http://www.moneymorning.com/2008/02/18/warren-buffetts-berkshire-hathaway-crafts-deals-for-kraft-foods-and-glaxosmithkline/#comments Mon, 18 Feb 2008 00:46:04 +0000 William Patalon III http://www.moneymorning.com/2008/02/15/warren-buffetts-berkshire-hathaway-crafts-deals-for-kraft-foods-and-glaxosmithkline/ By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) has taken an 8.6% stake in Kraft Foods Inc. (KFT), making it the foodmaker’s biggest shareholder.

In a regulatory filing made late last week, the Omaha-based Berkshire also revealed that it had acquired a $76.1 million stake in GlaxoSmithKline PLC (GSK), Europe’s largest drugmaker.

That followed investments in several health-care companies over the last year, including drugmakers Johnson & Johnson (JNJ) and Sanofi-Aventis SA (SNY), as well as health insurers UnitedHealth Group Inc. (UNH) and WellPoint Inc. (WLP), the Reuters news service reported.

Buy Like Buffett for Added Profits

According to a recent study, buying what Buffett has bought – even a month after his purchases – is a pathway to superior returns. In fact, over the past three years, this strategy has delivered double the return of the Standard & Poor’s 500 Index, according to research by professors at both American University and the University of Nevada at Las Vegas.

Even with that one-month lag, an investor who mimicked the moves of this market master would eclipse the S&P 500 returns by 14.26%, the study concluded. [For a copy of a recent Money Morning investment research report on this topic, please click here. The report is free of charge].

In its filing with the U.S. Securities and Exchange Commission, Berkshire said it owned 132.4 million shares of Kraft as of Dec. 31, worth $4.32 billion at the time. That implies that the market price of the Kraft shares at that time was $32.63 [$4.32 billion/132.4 million shares = market price at the time of $32.63].

However, Berkshire said that it had accumulated more than half of that stake by June 30, but it didn’t disclose the investment until now. Securities regulators have often allowed Berkshire to delay the disclosure of its investment purchases so that Buffett can be certain that he’s done adding to his initial positions in a given stock.

The Berkshire stake in Kraft is more than double the size of the holding attributed to State Street Global Advisors (STT), the next-largest shareholder, according to Thomson ShareWatch.

Kraft, based in Northfield, Ill., is just the kind of brand-oriented company that Buffet likes to buy: It has a pantry of well-known products – including Oreo cookies, a reputed Buffett favorite – and the stock is out of favor. The company’s product array includes Maxwell House coffee, Oscar Mayer deli hot dogs and deli meats and Kraft-brand cheeses.

"This is a company with leading, high-quality brands with depressed margins," Matt Arnold, an analyst at Edward D. Jones & Co., told Reuters. Kraft Foods "offers significant value if management can restore profitability and drive the top line with product innovation."

China’s Dairy Demand Stings Kraft, Dean Foods and Others

Rising dairy prices have hammered Kraft, as they have such firms as Dean Foods Co. (DF), the biggest U.S. dairy producer. On Jan. 30, Kraft posted a 6% decline in fourth-quarter profits after a jump in dairy costs that exceeded 40% neutralized an 11% increase in revenue.

Escalating dairy prices are especially hurtful to a company such as Kraft, which gets about 20% of its revenue from its cheese products. Growing demand for dairy products in China is a big part of the reason dairy prices have soared.

Kraft is a spin-off from Altria Group Inc. (MO), which went public in June 2001 at $31 a share. Kraft shares gained $2.02 [a 6.89% increase] to close Friday at $31.33.
Berkshire owns big stakes in such other big consumer-products as Coca-Cola Co. (KO) and Procter & Gamble Co. (PG).
Buffett is now worth $52 billion according to Forbes magazine.

Since taking over Berkshire Hathaway in 1965, he has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies. Berkshire has a market value of nearly $220 billion.

The Moves of a Master: Recent Deals by Warren Buffett’s Berkshire Hathaway

  • Set up Berkshire Hathaway Assurance Corp. in December to enter the bond insurance market, since it’s currently straining under its connections to sub-prime loans. Bought 3% stake in Swiss Re (OTC: SWCEY), world’s largest reinsurer, which had lost a quarter of its value since taking a $900 million write-down in November. Also takes 20% stake in Swiss Re’s property/casualty reinsurance business.
  • Spent $4.5 billion for 60% stake in privately held Marmon Holdings Inc., maker of such products as railroad cars, metal fasteners and pipes for plumbing.
  • Spent $4 billion for 80% of ISCAR, an Israel-based cutting-tool business that operates in 61 countries globally.
  • Made major moves on U.S. railroad carriers last year, making first move on Burlington Northern Santa Fe Corp. (BNI) last April. Berkshire bought nearly 40 million shares – or close to 11% – of the railroad. Berkshire also snapped up 10.5 million shares of Union Pacific Corp. (UNP), and 6.4 million shares of Norfolk Southern Corp. (NSC). Berkshire added 3.3 million shares of Burlington at $80 each in August, 6,000 more in September, and 10,200 more in January – which means Buffett now owns more than 18% of the freight specialist.
  • In a highly publicized move in the past few months, Berkshire received a license to start its own bond-insurance company in New York. It also agreed to pay $440 million to buy a reinsurance unit from ING Groep NV (ING), the biggest Dutch financial-services company.
  • In late October, Buffett paid his first visit to South Korea. Berkshire has invested in 20 companies, including a 4% stake in No. 1 Korean steelmaker POSCO Ltd. (PKX).
  • During that same period, reports revealed that Buffett had pared his China investments, believing that market was overvalued.

Sources: Money Morning, Google Finance, The Financial Post.

 

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]]> http://www.moneymorning.com/2008/02/18/warren-buffetts-berkshire-hathaway-crafts-deals-for-kraft-foods-and-glaxosmithkline/feed/ 3 Foreclosure Freeze and Warren Buffet’s Bond Proposition Cause Stocks to Soar http://www.moneymorning.com/2008/02/13/foreclosure-freeze-and-warren-buffets-bond-proposition-cause-stocks-to-soar/ http://www.moneymorning.com/2008/02/13/foreclosure-freeze-and-warren-buffets-bond-proposition-cause-stocks-to-soar/#comments Tue, 12 Feb 2008 23:09:35 +0000 Jason Simpkins http://www.moneymorning.com/2008/02/13/foreclosure-freeze-and-warren-buffets-bond-proposition-cause-stocks-to-soar/ By Jason Simpkins
Associate Editor

U.S. stocks rallied for the second straight day yesterday (Tuesday) – posting their biggest gains so far this month – on news that major U.S. lenders would put a freeze on foreclosures, and major bond insurers were considering a Warren Buffet-sponsored bailout.

After rising more than 200 points in early trading, the Dow Jones Industrial Average gained 133 .4 points, or 1.09%, to close at 12,373 on the news. The broader Standard & Poor’s 500 Index climbed 9.74 points, or 0.73 %, to close at 1,348.86. The tech-heavy Nasdaq Composite was the only index to finish in the red – albeit only slightly. The Nasdaq declined 0.02 points to close at 2,320.04.

Of the 12 major sectors, only transportation traded down, declining 0.28%, although technology closed only marginally to the upside.

It was the upbeat news in the financial-services sector that fueled the advances in the Dow and the S&P.

Foreclosure Embargo

Six of the nation’s top mortgage lenders have temporarily stopped foreclosure proceedings in a joint effort to halt the torrent of mortgage defaults. Under a new program, called "Project Lifeline," there will be a 30-day moratorium on foreclosures and delinquent borrowers will be given the opportunity to work out new payment options on a case-by-case basis.

"For many families, Project Lifeline will temporarily pause the foreclosure process long enough to find a way out," Alphonso Jackson, Secretary of Housing and Urban Development, said in a prepared statement. "Loan modifications may follow. And, this program is not only available to subprime borrowers but to people with any kind of home mortgage."

There were more than 2.2 million foreclosure filings in 2007, according to RealtyTrac, an online marketer of foreclosure properties. Another 2 million homeowners will be facing higher mortgage rates over the next two years. Economists at the Federal Deposit Insurance Corp. (FDIC) estimate that foreclosures this year will exceed the annual average by more than 1 million.

Lenders that have already agreed to take part in Project Lifeline include Citigroup Inc. (C), Countrywide Financial Corp. (CFC), Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Washington Mutual Inc. (WM), and Wells Fargo & Co. (WFC). More may sign up if the program meets with success.

Repossessing homes has become an increasingly unprofitable venture. Excessive refinancing has left many borrowers owing more than their house is worth. And when the house is resold, additional expenses are incurred through general maintenance, accrued property taxes, and realtor commissions.  According to CNNMoney.com, foreclosures have resulted in an average loss of more than $50,000 per house for the lender.

Buffett Offers to Bail Out Bond Insurers

Markets were also buoyed yesterday by a surprise announcement from Buffett, entrepreneur and chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B). Buffett offered to assume responsibility for $800 billion in municipal bonds guaranteed by MBIA Inc. (MBI), Financial Guaranty Insurance Company, and Ambac Financial Group Inc. (ABK).

"We offered to take over the liabilities for the whole $800 billion of these three companies for a premium that would be equal to, essentially, one-and-a-half times the remaining premium left over the life of the bonds," Buffett said in an interview with CNBC.

The upside for the nation’s top three bond insurers would be the opportunity to retain their AAA-ratings. There is a growing concern that the companies won’t have enough money to pay claims on the $2.4 trillion in assets they’ve previously guaranteed.

However, Buffett is only offering to take the most profitable, or safest, portions of the companies’ municipal guaranty business. The offer excludes subprime-related securities, and collateralized debt obligations (CDOs). Though Buffett was quick to point out that the CDOs are going to pose a problem for the insurers no matter what.

"What this does, is it means that the municipals, in effect, get taken off the table and they know they’re good and you’ve got $800 billion of those that are good," Buffett said. "It doesn’t do anything for the CDOs, but I’m not sure anything is going to do much for the CDOs."

So far, one bond insurer already rejected the proposal, and Buffett has yet to hear back from the other two. But in conjunction with the freeze on foreclosures, the speculation was enough to turn investors bullish.

"It’s another potential solution to some of the credit problems," Mark Bronzo of Security Global Investors told Bloomberg. "That’s why the markets are responding well."

Not everyone agrees with that assessment.

"I really don’t think this does much for anyone but Warren Buffett, as the thought of an insurer ‘giving away’ its best business and only means of surviving this mess in return for the rest of its ‘junk in the trunk’ should leave them cold," Kevin Giddis, a fixed-income analyst at Morgan Keegan & Co., told CNNMoney.com.

[For a related article in today's issue of Money Morning that more fully analyzes Warren Buffet's foray into the bond market, please click here.]

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]]> http://www.moneymorning.com/2008/02/13/foreclosure-freeze-and-warren-buffets-bond-proposition-cause-stocks-to-soar/feed/ 0 Buffett Offers to Bail Out Bond Insurers, Markets Rally http://www.moneymorning.com/2008/02/12/buffett-offers-to-bail-out-bond-insurers-markets-rally/ http://www.moneymorning.com/2008/02/12/buffett-offers-to-bail-out-bond-insurers-markets-rally/#comments Tue, 12 Feb 2008 16:56:34 +0000 Jason Simpkins http://www.moneymorning.com/2008/02/12/buffett-offers-to-bail-out-bond-insurers-markets-rally/ By Jason Simpkins
Associate Editor

Warren Buffett, entrepreneur and chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B), offered yesterday (Tuesday) to assume responsibility for $800 billion of municipal bonds guaranteed by MBIA Inc. (MBI), Financial Guaranty Insurance Company, and Ambac Financial Group Inc. (ABK).

"We offered to take over the liabilities for the whole $800 billion of these three companies for a premium that would be equal to, essentially, one-and-a-half times the remaining premium left over the life of the bonds," Buffett said in an interview with CNBC.

The upside for the nation’s top three bond insurers would be the opportunity to retain their AAA-ratings. There is a growing concern that the companies won’t have enough money to pay claims on the $2.4 trillion in assets they guaranteed.

That concern has contributed to an 8.4% drop in S&P 500 financials so far this year. MBIA, the largest bond insurer, has lost 80% of its value in the last year. Ambac has slumped 88% on concern that the companies will lose their AAA-credit ratings.

However, Buffett is only asking to take the most profitable, or safest, portions of the companies’ municipal guaranty business. The offer excludes subprime-related securities, and collateralized debt obligations (CDOs).

"If you gave up your entire municipal business, that’s the book of business where the value in the companies is right now," Robert Haines, analyst at CreditSights Inc., told Bloomberg News. "You’d essentially be ceding that whole book to Buffett and what you’d be left with would be the book of business where all the troubles are."

Buffett responded to that very concern by pointing out that the CDOs are going to pose a problem for the insurers no matter what.

"What this does, is it means that the municipals, in effect, get taken off the table and they know they’re good and you’ve got $800 billion of those that are good," Buffett said. "It doesn’t do anything for the CDOs, but I’m not sure anything is going to do much for the CDOs."

Buffett said one bond insurer already turned him down, and he hasn’t yet heard from the other two. 

The markets applauded the news with the Dow Jones Industrial Average soaring 220.95 points (1.81%) by 11:00am EST. The Standard & Poor’s 500 Index climbed 21.2 points (1.56%) and the Nasdaq Composite was up 27.58 points (1.19%). 

"It’s another potential solution to some of the credit problems," Mark Bronzo of Security Global Investors told Bloomberg. "That’s why the markets are responding well."

Bloomberg also reported that Bank of America Corp. (BAC), Citigroup Inc. (C), and four other U.S. lenders will announce a plan to offer a 30-day freeze on home foreclosures. It is expected to apply to prime borrowers as well as borrowers with poor credit histories.

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