Rabbitisrich

Keep in mind that when AXP and WFC flew high a couple of years ago, the market flew higher still. Berkshire's refusal to sell AXP and WFC might have more to do with the lower opportunity costs of 2003-2006 than with their intrinisic values. Berkshire will probably try to keep their interest in AXP below 9.9%. Now that AXP is a banking institution, holding more than that amount could subject you to regulatory issues. For example, where the government normally might let AXP earn its way out of trouble, at 11% ownership the government might require Berkshire to act as a source of strength. When WFC fell below $10.00, it's hard to imagine that Buffett didn't bite.

They might face political pressure concerning interchange fees. You hear news about that every once in a while and it's not baked into the price yet.

I doubt that shorting reduces speculative bubbles. I think the shorts stand out of the way of the bubbles, and then jump in once the weakness begins. I've seen too many ridiculous things thus far for it to be otherwise. Don't you remember 1999? I think the best arguments against shorts have less to do with shorting, and more to do with associated evils. Shorting can encourage false rumors, media corruption (cough*CNBC*Chanos*cough), collusion, etc. The longs might do the same, but the danger is a temporary misallocation of capital, whereas shorts can destroy companies.

We probably haven't seen BRK purchases of AXP because Buffett didn't want to be subjected to the "source of strength" doctrine.

The downgrade also recognizes that even the most senior obligations at the holding company level are deeply subordinated to policyholder obligations at the regulated insurance and reinsurance company subsidiaries. Fitch notes this point is not new, but rather reflects Fitch's view on appropriate weighting given to this risk in the current environment and at the current rating level. Does anyone else have trouble understanding the last sentence? Is Fitch saying that their ratings mean different things at different times?

SFWUSC, I'm also not a big fan of the puts for the reason that the method of payment is so closely related to the cause of payment. But solvency risk isn't really much of a concern. If Berkshire does have to pay, it will pay the difference between the indices and the strike prices X notional value. So you don't have to worry about Berkshire setting aside a massive cash outlay to purchase the actual notional value. There is no counterparty risk. As far as the disaster scenario, where Berkshire is forced to pay for a substantial portion of the notional amount, the main risk involves opportunity cost, since much of Berkshire's equity will be liquidated just as market prices collapse. It's possible that the recent moves into fixed income are meant to diversify Berkshire's liquidity away from the market. Pretty unlikely, but I like knowing that operating cash flows might be ridonculous going forward.

FFH is a PandC insurance company, albeit an excellent one, so you have to be prepared for some volatility. What if we have a major earthquake in California this year? Or a wave of municipal defaults shave off the market prices of their portfolio? Or what if the real estate bubble lasted until 2010 and a chunk of the CDS gains never occurred? You would still have the great team in place, but without the one time gains, FFH's market cap would have cratered. If you need consistent results, an insurance company might be too volatile.

The Schweser practice tests helped me a lot. I felt that the CFA book questions were too easy. After being humbled by the practice test, I understood, more realistically, how little I understood. I strongly recommend that you take a practice run sometime in early May. Don't worry if the questions seem tough. The actual test is easier--or maybe just different.

It's not entirely fair to look at FFH as two components, the investment house and the insurance business. The uncertain cash flows of the insurance side bear upon the investment side, and perhaps vice versa. For example, on the conference call Prem stated, "As we generally hedge our foreign exchange claim (ph) exposures, these translation losses are almost fully matched by translation gains on our investment portfolio." The hedges don't appear on the combined ratio, but as investors we should back out the translation loss for the amount of the currency swap gains (if possible).

That is a fair point about differing unemployment rates; that, and similar misallocation of capital, distinguishes Japan from the U.S. Or, I should say, similar types of misallocation of capital. Rather than pushing money to less productive workers, the U.S. will bolster inflated home prices via tax credits, deferral of GSE foreclosures, and various purchase plans for real-estate linked assets. Efforts to reflate real estate seem to be an attempt to maintain a 70% consumer economy. And Japan did lower the discount rate by about a percent a year from '90-'95, until it sat below 1% thereafter. After '95, real GDP increased by more than 1% despite the IMF crisis and the stock bubble. Meanwhile, avg. household disposable income fell by about 3.6% and expenses by 3.9% from '95 to '01. Households also saved less, down from 12% in '95 to a little over 7% in '03. So why did the Japanese watch their savings and incomes shrink without aggressively seeking yields higher than the paltry prevailing interest rates? Discouraged investors? Japan and the U.S. may be apples and oranges. But it's also possible that tremendous real estate deflation will smooth differences. Of course, I hope that the stimulus works and that the worst case scenario is a high interest rate environment to contain future inflation. I still want to prepare for an economy that goes flat for a while.

http://www.japanreview.net/essays_can_the_bank_of_japan_create_inflation.htm

Japan's experience with persistent deflation seems to offer contrary evidence. There is a fine article from the JapanReview.net titled "Can the Bank of Japan Create Inflation?" If you look at the author's "top 5" post-hoc explanations for the absence of inflation, any of them can be applied to America today.