Buffett/Berkshire - general news

[TREVNI]

$6.25B of stock, bought with ~$4B of Yen-denominated debt. Put another way, that's an average yield of 4.99% leveraged up 2.7x for practically free.

 

~11% yield on equity today plus any incremental growth. Not a bad deal! Kind of rhymes with preferred + warrants, I think.

 

source:

 

I don't believe the two are connected. Berkshire has historically managed the two sides of its balance sheet completely separately. They thought the stock was a good buy at current prices and the debt attractive at its cost. Connecting them only makes for a good narrative.

[kab60]

Is it me or is today's press release, the first time Berkshire Hathaway has referred to itself "as the largest company in the U.S. as measured by shareholders’ equity."

 

I get that this PR was written for a Japanese audience who may not know that, but it sounds a bit like a humble brag to me:)

 

Berkshire Hathaway, the largest company in the U.S. as measured by shareholders’ equity, has a long history of substantial, passive holdings in successful businesses. For instance, Berkshire Hathaway has held major stakes in Coca-Cola for 32 years, American Express for 29 years and Moody’s for 20 years.

  https://berkshirehathaway.com/news/aug3020.pdf

Japanese Companies are wayyy overcapitalized, I suppose he's making sure they understand Berkshire is as well to increase the chances of doing large deals together. Or he reached a personal Milestone and wanted to brag.

[gfp]

Yeah, the whole press release was different from a standard BRK press release.  Basically written for the Japanese business reader in mind.  To disarm them and also remind them BRK is open for partnerships and co-investment opportunities.

 

Another first - The contact at the bottom was not Marc Hamburg for a change.  The contact is a new one:

 

"

Investor Relations

[email protected]

402-978-5413

"

[sleepydragon]

Yeah, the whole press release was different from a standard BRK press release.  Basically written for the Japanese business reader in mind.  To disarm them and also remind them BRK is open for partnerships and co-investment opportunities.

 

Another first - The contact at the bottom was not Marc Hamburg for a change.  The contact is a new one:

 

"

Investor Relations

[email protected]

402-978-5413

"

 

Maybe it’s written by Brk’s Japanese broker

 

[sleepydragon]

Anyone know what this site is:

http://berkshirehathaway340.weebly.com/

 

 

[gfp]

Anyone know what this site is:

http://berkshirehathaway340.weebly.com/

 

Looks like a student project from 2013 to make a fake or “improved” website for Berkshire Hathaway.

[sleepydragon]

Yeah, the whole press release was different from a standard BRK press release.  Basically written for the Japanese business reader in mind.  To disarm them and also remind them BRK is open for partnerships and co-investment opportunities.

 

Another first - The contact at the bottom was not Marc Hamburg for a change.  The contact is a new one:

 

"

Investor Relations

[email protected]

402-978-5413

"

 

The top left of the letter says “Tokyo Japan”, and the time is 8am JST.

So I think it’s written by someone in Japan

[Cigarbutt]

^There was an interesting discussion about the Yen debt issue last September in this thread and gfp had contributed interesting insights. This is simply speculation and the debt may have been raised simply because of the ultra-low yields but even if agnostic about currency movements in general, i would say that investing in Japan now needs at least some consideration for unusual Yen depreciation. The timing and size of the debt issue in relation to the basket investment would tend to support this thesis. Even if seen through the lens of a debt-funded and currency-hedged investment, it's reasonable to think that the move was merit-based from an opportunity cost point of view. Looking at stakes in the Japanese companies and the basket approach, this reminds me of the float investments made at Blue Chip Stamps in the early 70s when some of the float assets were moved from fixed income to a basket of safe stocks (in this case with the potential currency effect neutralized). Even if the move is considered "small", isn't it interesting that, from an opportunity cost point of view, this is the best that Mr. Buffett could do? not only in the US but also on a global basis?

[longterminvestor]

My understanding, and Pupil alluded to this early in thread, Mr. Buffett and Berkshire ARE NOT required by any regulatory body to disclose publicly their "internationally held positions/businesses that trade in open market outside USA".  Does seem a little like an advertisement.  Think this through, so Berkshire Japan (didn't know we had an office in Japan BTW) went out of their way to write this press release stating to the business community around the world: #1 - it took us 12 months to build this position, #2 - we may go to 9.9% ownership (and we don't have to tell you if/when we do that) and #3 we may go higher if the investee companies allow us to.

 

This is unprecedented in my opinion.  I know nothing of these companies or Japan as a country for investment however $6B is a rounding error in Omaha so I ain't losing any sleep.  No thought on if this was good/bad or unch on longterm outlook on Berkshire however it is interesting the manner in which this was all "disclosed".  There is intent in everything they do - more so when a press release is drawn up with Berkshire letterhead. 

 

Time will tell on this one. 

[roberts1001]

Maybe Japan requires disclosure of positions over 5%?

 

Also a thought about the investments... Maybe someone here has some insights.  I find it an interesting investment approach to buy all of the largest companies in an industry that is important to the economy, and which operate as an oligopoly.  Buffett has done this with railroads, airlines, arguably banks, and now Japanese trading companies.  He could just as easily have purchased stakes in five, unrelated, Japanese companies, but he chose to buy stakes in all of the major companies in an oligopoly.  This seems to me to be more specific than just buying a basket of companies in an out-of-favor industry.  Thoughts? 

[Guest longinvestor]

These "trading" companies have been the international conduit for Japan Inc. As others have posted, it gives them a seat at the table (a window actually) with a good look at businesses coming up for purchase. Somewhat similar to the German motorcycle business and ISCAR giving them a peek at Germany's Mittelstand companies. Yeah, I know that the PCP buy in Germany blew up. 

[LearningMachine]

Maybe Japan requires disclosure of positions over 5%?

 

Also a thought about the investments... Maybe someone here has some insights.  I find it an interesting investment approach to buy all of the largest companies in an industry that is important to the economy, and which operate as an oligopoly.  Buffett has done this with railroads, airlines, arguably banks, and now Japanese trading companies.  He could just as easily have purchased stakes in five, unrelated, Japanese companies, but he chose to buy stakes in all of the major companies in an oligopoly.  This seems to me to be more specific than just buying a basket of companies in an out-of-favor industry.  Thoughts?

 

I think he does this when he hasn't gotten in deep to understand which individual companies will be winners, and makes a relatively macro bet spread across companies he doesn't understand deeply.  Sometimes, he has made it out ok with this approach, e.g. railroads before picking BNSF, South Korean stocks, and to some extent with banks before picking BAC.  Other times, not diving in deep did not turn out well and he had to admit the mistakes, e.g. Irish banks during GFC, and airlines recently.

 

I still think he bought Japanese stocks partly because he didn't want to take currency risk by buying non-Japanese stocks using proceeds from Yen-denominated bonds which will need to be paid back in Yens.  Sure, he probably also figured maybe these stocks are not that expensive relative to the interest rate he is paying for Yens.  I don't think he understands the companies he bought deeply at least so far given the peanut-butter-style investment.  Sure, maybe he also figured in the industry he purchased, companies maybe don't compete very heavily and all might have some history of coexisting and making somewhat reasonable returns at least compared to the interest rates he is paying.  I haven't looked into the companies deeply myself - a cursory glance makes it feel like they are not that simple to value.

 

The stake of 5% in each company is too little to take a year to buy if the only concern was not impacting the market price.  I wonder if he slowly yen-cost-averaged during dips because he didn't have conviction on what the true value of these companies might be, and relied on the market to figure out the value for him over a year, and because he is buying a basket, maybe thought he won't lose money in the long run given he is buying a basket and is getting low interest rates on Yens.

 

Now, the advertisement might let him borrow Yen cheaply again to deploy in fully-owned companies he will understand deeper.

 

This is similar to the advice he gives in the U.S. that if interest rates were to stay this low and taxes were to not go up, S&P 500 (a basket of stocks) is a great buy for the next 10 years.  Now, with Yen, he is able to keep the interest rates this low by selling longer-term fixed bonds and buying a basket of stocks in Japan in an industry that he thinks might be reasonable to own at a macro level.

[gfp]

FT with a good article on Berkshire's investments in Japan

 

(pdf attached)

 

 

- in an unrelated note, it is remarkable to see the effect today's 138 <--> 127 trading range in AAPL shares has on Berkshire's 1 Billion share holding.  $11 Billion market value swing in half an hour.  Interesting times

Buffett_Japan.pdf

[MarioP]

Very interesting Thank you

 

Still, former executives at trading houses said the hardest challenge will be achieving potential synergies between the firms and other parts of Berkshire’s sprawling portfolio./i]

 

“But the CEOs must perform better by making use of those intangible assets, hopefully with positive pressure from Buffett,” he said./i]

 

These two phrases seem to come from people that don't know how Buffett works. But I like the part describing the trading house. And this is very interesting if true

 

“It will fuel rivalry among the CEOs and they will scramble to clinch a flagship deal with Berkshire. As a result, only the best assets will be presented to Berkshire by each of the trading houses,” Mr Kikkawa said./i]

[Xerxes]

Would folks be surprised if out of the blue there is a note from Berkshire saying that they own 5% of Reliance Industries.

Although it is hitting all time high, during the drawdown and prior to the technology cash infusion blitz, it was pretty low.

 

If the Japanese venture is more like a outside-US theme (allbeit small), why wouldn't he be interested in the major industrial player in India (with its technology optionality).

 

[LearningMachine]

Would folks be surprised if out of the blue there is a note from Berkshire saying that they own 5% of Reliance Industries.

Although it is hitting all time high, during the drawdown and prior to the technology cash infusion blitz, it was pretty low.

 

If the Japanese venture is more like a outside-US theme (allbeit small), why wouldn't he be interested in the major industrial player in India (with its technology optionality).

 

My guess would be that BRK would not be interested, partly because you can't borrow at close to 0% interest rate for the long term in Indian Rupees.  Rule of law, i.e. contract enforce-ability, truth in accounting statements and corruption, would be another issue.

[Munger_Disciple]

Looks like 100 million more shares of WFC sold after June 30, 2020:

 

https://www.sec.gov/Archives/edgar/data/72971/000119312520240131/d84250dsc13ga.htm

 

[BPCAP]

The Japanese investment was pretty simple: The five are quants that are statistically cheap and way below replacement value. The Japanese investment release was simply a "I mean to do no harm or dishonor anyone."

 

Re the Wells Fargo selling, I'm looking forward to not seeing so many WFC buys posted on this board. Banks are dead and Wells Fargo can't get out of its own way. The (overrated) CEO in NY can't change that.

[aws]

Is it possible that Buffett had to make some agreement with the fed to own more than 10% of BAC which required him to sell out of the stakes in JPM and WFC? 

[LearningMachine]

Banks are dead

 

BPCAP, would it be possible to share your reasoning behind this so that we can learn from your perspective?

[BPCAP]

Banks are dead

 

BPCAP, would it be possible to share your reasoning behind this so that we can learn from your perspective?

 

I could write 5000 words on this, but I'll try to be brief. In short, the answers lie in 1) governments, and 2) technology

 

Banks are increasingly becoming wards and agents of government. Debt, deflation, and a unified belief among central bankers and politicians (left and right) that more government borrowing and money printing is necessary to cure our ills means banks will see low and lower returns on capital. Most are holding out on the belief that banks can return to a "normal" 1% return on assets/10% return on equity. Won't happen without a lasting steepening of the yield curve.

 

Governments can't let that happen. Japan and Europe are bust if borrowing rates even double to 2%. And governments won't let that happen, especially if a rise in rates is due to inflation. Debt and deflation (which are rising) also lower the odds over time of a meaningful rise in real interest rates. And with low rates around the world, U.S. rates can't meaningfully rise. Why would they in a global marketplace with companies with global operations and individuals with high speed internet? The market will naturally just get loans outside the US if the US is too expensive.

 

The money printing means an abundance of capital. Banks' position as a supplier of capital is being diminished. That shouldn't change. European companies which have relied extensively on bank financing more so than American companies (which borrow directly from markets more), are finding it easier and easier to seek capital in public markets and non-bank institutions like their American counterparts. The supply of loanable funds is rising as the demand (the good, productive kind) is not. Or at least the supply is rising much faster than demand. Should stay this way for awhile.

 

Bank regulations are mounting to the point where the lines between bank operations and government policies are blurring. Like many industries, banks are quickly becoming winner take all (or most). Loans that have become all but standardized and regulated by government (along with all the money sloshing around the world) means that banks lose their regional or local competitive advantages. With commoditized loans, people are already finding out the advantage of looking nationally and globally for the best deals.

 

Then among big banks, we find that there really is no difference between a Bank of America, Chase, Wells Fargo, US Bank, Goldman Sachs, etc. The bank or two or three that succeed in creating relative scale, technology, etc. will "win" at the expense of others. So maybe a JP Morgan, which is looking to be a software or platform company as much as a bank, can surge past others. You and I won't see a difference if 800 banks go to 20. But then, even the winners will find they will be winning on fewer fronts than they anticipated.

 

Which turns us to technology. Disruption is happening, allowing non-bank lenders to lend and customers to cut out a lot of traditional middlemen. Banks' moats are narrowing tremendously. Tech is pecking away at margins and creating new competition on every front. As we know, tech means it's never been easier to start a business (even big ones when capital is so cheap); it is also becoming harder to build a business or even maintain largess. Tech and competition means you really have to be good at something to stay relevant and grow. Banks are finding that they are not as good as they thought they were in almost every line of business they have.

 

Banks have now gotten religion on the need for fee based income rather on relying on balance sheet income (borrow at X short term, lend at Y long term). For many, however, it's too late. And more bankers will realize that banking is a very different business than investment management or payments or insurance, etc. They think that because all services involve money (and the fact they have a lot of customers) means they can cross sell and offer competitive services. But as the department stores realized, capable focused companies will win customers for each niche. (Look at how customers today buy clothes, jewelry, makeup, washing machines, etc. Not at JC Penney or Macy's). Banks will increasing find it hard to compete with their equivalents of Home Depot, TJ Maxx, Best Buy, Ulta Beauty, Amazon, etc.

 

To outperform by buying and holding banks overtime requires the yield curve to steepen and stay that way. That's the bet one's making. That isn't to say there can't be trading opportunities. Surely, even as profitability dwindles, the market can rotate and a 9x earnings bank can find itself at 13x earnings, and there will be a nice pop in the stock. But I imagine that win will be erased as investors swarm in or double up on their position, only to find the stocks going back down to 8x earnings (and at a lower level of EPS). Some banks may succeed on a relative basis by embracing focus and cutting uncompetitive lines and shrinking their business and really focus on increasing PER SHARE net worth. But that's not the banker's mindset. That's not his training or culture.

 

Ok, I'll stop here...I'd like to buy banks, but in so many ways they look like value traps. Governments and Technology will see to it.

 

[BPCAP]

Can't overestimate the concept of governments using banks for policy.

 

Notice how over time, in good economic periods, CEOs being dragged to testify to a hostile Congress that asks: "Why aren't you lending to poor people?!"

 

Then in recessions and busts, the same CEOs get dragged to hearings again to be asked (by the very same legislators): "Why did you lend to poor people?! You ruined their lives!"

 

This mentality has only grown and taken more forms. Left and Right will be hostile to banks actually making money. Especially the Left.

 

If the Dems sweep in November, do you think banks' will find it easier or harder when Elizabeth Warren is in charge? Will most banks find it easier or harder to make profits? Will markets' be more or less optimistic about the future for banks? I'm no supporter of Trump, mind you, but I don't think the Dems' impact on banks requires a partisan take. It's just arithmetic and common sense.

 

People have always hated and resented banks anyway. I don't think they change their mind on that. With higher wealth and income inequality, the people will speak through their leaders, many of whom really think banks (and Wall Street and capitalism) are the devil.

 

 

[BPCAP]

Last thing and I'll shut up.

 

Watch excess reserves. At some point there is a good chance the Fed starts to CHARGE for excess reserves rather than paying interest on it. Makes too much sense if you have the beliefs Fed leaders have and your mission is what it is: full employment, modest inflation, etc. --and soon to be income equality. Paying interest could be deemed inappropriate or worse, a sin.

[John Hjorth]

Last thing and I'll shut up.

 

Watch excess reserves. At some point there is a good chance the Fed starts to CHARGE for excess reserves rather than paying interest on it. Makes too much sense if you have the beliefs Fed leaders have and your mission is what it is: full employment, modest inflation, etc. --and soon to be income equality. Paying interest could be deemed inappropriate or worse, a sin.

 

Please keep them coming, BPCAP,

 

We all live with the FSAs [more or less political independent], which make sure, that banks aren't charitable institutions, but banks.

[BPCAP]

One of the biggest reasons I left out was because it was maybe obvious: We still don't know about what's really going on in the loan books. Some or many could be dumpster fires now or over time should the covid crisis last awhile and/or people internalize and forecast a longer, more painful economic slide.