Is Berkshire Hathaway Under Attack?

[Guest JackRiver]

Does anybody else feel that Berkshires stock is under a bear raid?  I'm not trying to debate whether the price is under or over valued, but just feels to me like people are purposefully pushing down on the price.  Couple that with the large put buying in WFC and all the made up negative press lately about Buffett, it just doesn't smell right.  Am I crazy to think this?

 

Yours

 

Jack River

[link01]

it does kinda feel that way to me too. but then practically the whole market feels that way, especially stocks of a financial persuasion.

 

what's definately being subjected to a bear raid, imo, is buffett's reputation. i cant believe all the sniping & second guessing i'm seeing. cramer & kass from the street .com are especially piling on. its disgusting.

[ericd1]

Is Buffett getting margin calls?

 

MSN Money - Posted Feb 24 2009, 01:00 PM by Andrew Horowitz

 

http://blogs.moneycentral.msn.com/topstocks/?fpn=is%20buffett%20getting%20margin%20calls

 

Horowitz doesn't seem to have long term perspective...

[value-is-what-you-get]

The author is merely a cheerleader cog in the crazy cobbled-together manic depressive psyche we call Mr. Market.  These sort of articles are particularly amusing (sort of a "Spot the Glaring Untruths and Blatant Ignorance" game) and quite valuable too, as over time I am a net purchaser of value priced at a discount.  We need guys like this!  8)

[wabuffo]

the author clearly hasn't even done any research on BRK's equity put sales.  He is very confused because:

 

1) he doesn't apparently understand that these are European-style put options (exercisable only on the day of expiry) vs. American-style put options (exercisable anytime they are in the money).  Since the expiry of these equity-index puts is more than a decade away -- short-term movements in the indices shouldn't be a cause for concern.

 

2) he keeps insinuating that BRK/Buffett is facing margin calls when Buffett has been explicit on these particular put options.  The 10-Qs explicitly state that BRK does not have to post collateral against these puts even if Berkshire Hathaway is downgraded and loses its AAA rating.

 

The article and author can be ignored.

 

wabuffo

 

[ericd1]

 

I found the article laughable...and as aptly pointed out...sophomoric in financial understanding!

[zarley]

My god.  The only thing worse than that little gem is the comments that follow it.  It's days like this I feel like I'm living in an alternate universe.  Who are these people who feel compelled to comment on that, but clearly have no clue about BRK or Buffett? 

 

My alternate universe also has major media outlets that wouldn't publish that little piece of tripe or employ someone who is so willing to post that kind of nonsense.

 

:P

[tooskinneejs]

From the "article":

 

"...there is obviously something going badly wrong since Buffett's Berkshire Hathaway (BRK.A) is down over 20% in 2009."

 

Ah, letting the market guide you.  That's what I call the tail wagging the dog.

[pohick]

with the larger spread between A's and B's of 5%, it makes me suspect that B shareholders are getting margin calls

 

this reminds me of March 2000, wonder if a buyback offer will be in the AR?

[scottyjukebox]

does anybody know how buffett communicated the buyback offer to shareholders in 2000..was is through the annual report or a press release?  I was just curious.. thanks

[Guest ericopoly]

I don't think he wants to buy shares back.

 

1)  It's not like he can't find places to allocate cash at attractive prices

2)  It weakens the balance sheet (Berkshire is strong not because it returned cash to shareholders, but rather because it retains it to build a diversified earnings stream on attractive terms -- constantly adding more tributaries to the Amazon of earnings).

 

[calonego]

He's likely always been/will be willing to buy back (at the right price).

If you can get a close call on your own IV - a share buyback at a substantial discount is not only highly accretive, it's also as close to a zero risk allocation of capital as one can make (provided you are highly confident in IV).

Why on earth would you buy someone else's company for half IV, if you can buy your own for that ( exc. ego).

You get that really cool reverse compounding situation too - it's permanent and so risk free.

 

I'm sure he'd rather be back hunting snipe, rather than elephants...

He doesn't even look at small stuff anymore.

 

Although he does seem to enjoy the spotlight more now though (can this interfere with his rationality??)

[Guest ericopoly]

Why on earth would you buy someone else's company for half IV, if you can buy your own for that ( exc. ego).

 

 

Well, because "his" company is really just an amalgam of many companies.  One of his biggest is his minority stake in WFC.  He must have extreme confidence in WFC for that.  Think hard about this -- doesn't make sense to buy all businesses back equally when you can just focus on the absolute best opportunity to increase IV in a concentrated manner.  He doesn't care about too large of positions -- he quotes Mae West "Sometimes having too much of a good thing is wonderful." (not sure if that quote is precise).  He once put 25% into KO -- we're nowhere near that level yet with WFC.

 

He could buy more WFC at $9-$11 instead.  That will add more to IV.  Remember he wrote (a year ago) that he believed IV of WFC actually increased, despite the troubles brewing.

 

Further, if WFC did go to zero the balance sheet would be no worse off from a cash standpoint than if he had bought back shares.  Sure, you'd own a fractionally higher proportion of the other businesses but from strictly a financial strength standpoint of Berkshire itself, it would be impaired equally the same.

[Guest ericopoly]

Put it this way:

 

He could sink $10b into WFC.  He is only risking $6.50b on an after-tax basis.

 

Which has more impact on Berkshire IV?  Buying back $6.5b of BRK shares, or buying $10b of WFC shares?

 

WFC is like Buffett's left hand -- does he not know his left hand at least as well as the rest of his body?  It was one of the largest stakes Berkshire owned before the collapse, and he bought it for his personal account at no less than $20 last summer.  He likely found it to be a 50cent dollar at the time.  At $10, it must have been (in his mind) a 25 cent dollar (or less).

 

Now, should he pass up 25 cent dollars in order to buy more Berkshire?

[zarley]

does anybody know how buffett communicated the buyback offer to shareholders in 2000..was is through the annual report or a press release?  I was just curious.. thanks

 

Not sure if this was the only official discussion of it, but he mentioned it in the shareholder letter.

 

Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find that repurchases make sense, we will only rarely place bids on the New York Stock Exchange (“NYSE”). Instead, we will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the “third market” or on the NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not engage in transactions involving fewer than 10 shares of A or 50 shares of B.

[calonego]

eric,

 

2009 is very different than 1999, but there were some excellent values then too.

 

Per your comments:

 

- he can find opportunity, all I'm saying is that it is generally wiser to purchase your own shares than another Co's at a similar discount to IV (maybe you're confusing another post, this had nothing to do with the IV of WFC till you brought it up).

- purchasing your own shares is tieing up cash in a way similar to buying a position you can't/won't sell. I can't see how it weakens the balance sheet if it's a correct decision based on IV.

- he only has one way to purchase more of many of his holdings. If you imply out the value of BRK via insurance op, plus CF of operating subs, it may prove prudent to buy the parent stock to purchase more of the private holdings.

- BRK would be far better off buying it's own stock back relative to buying WFC in the event something went horribly wrong. Just walk through what would happen to the BS in the event WFC went broke and he owned 800mln shares, rather than the 300mln he owns (and he cancelled some BRK shares at $75k).

- I'm confident he won't buy more WFC thinking he'll get a tax break from it going broke (which is highly unlikely). So the 10bln figure on a comparative basis should be allocated to BRK, WFC or other companies. I don't get why you'd only buy back 6.5bln relative to buying 10bln WFC.

 

In any event, WFC is now in the mid-14s (and was when you wrote out what you wrote), I hope he bought shares at $9-11, but that isn't an option and wasn't when you wrote that.

 

I'm not saying BRK vs WFC, just that buying BRK may be highly prudent.

[Guest ericopoly]

maybe you're confusing another post, this had nothing to do with the IV of WFC till you brought it up

 

 

WFC became relevant when you said: 

 

Why on earth would you buy someone else's company for half IV, if you can buy your own for that

 

 

Berkshire is an owner of WFC.  It is not "someone else's company".

 

 

I can't see how it weakens the balance sheet if it's a correct decision based on IV.

 

 

It improves the per share earnings of the company.  However, the fortress is weaker -- you are just leveraging up the company (exactly the same financial risk as paying out a huge dividend.  The rainy day fund is smaller).

 

 

"I don't get why you'd only buy back 6.5bln relative to buying 10bln WFC."

 

Well then, if you are that confident that WFC won't go broke then it's by far cheaper than Berkshire.  WFC was trading at nearly 1/2 of book there for a while, but their return on equity is insane.

 

 

 

[Guest ericopoly]

In any event, WFC is now in the mid-14s (and was when you wrote out what you wrote), I hope he bought shares at $9-11, but that isn't an option and wasn't when you wrote that.

 

The day it opened at $11 and traded at $9, 11% of WFC shares changed hands!  In one day! 

 

And I was advocating on another thread that I hope he doubles down -- IV could have grown by several percentage points on that day alone (I said that in another thread where people were voting on Berkshire appreciation).

[Guest ericopoly]

I don't get why you'd only buy back 6.5bln relative to buying 10bln WFC.

 

 

I was looking at it from the standpoint of how much the fortress would be weakened if WFC failed.  A dividend is a certain way to weaken it.  I think at all times he should buy more of whatever piece of Berkshire is the cheapest before considering buying Berkshire shares back in. 

 

We don't need more of the underperforming Berkshire companies that earn low returns.  He doesn't want to jettison disappointing wholly owned subsidiaries, that's just good for relationships and good for business (brings future deals to the table).  But you are buying more of them when you buy your shares back.  Instead, buy more of the best businesses when they are on fire sale.

[Guest JackRiver]

To any takers

 

What can be said about buybacks for companies that are using float or float type cash?  The purpose of the float is to generate income from it, whether in the form of interest, dividends, or asset price appreciation.  Buybacks with float cash don't make as much sense as buying a similarly priced income producing asset.  For Buffett to buyback Berkshire stock it would have to be at a substantial discount (really substantial with no other available investments so discounted).  I don't think that is the case today at current prices. 

 

As to the discussion given the above, I hope he doubled down on WFC earlier in the week, I know I did.  Then again, I don't know anything about how to value a bank.  BTW, the same non buyback policy would hold true for a bank as an insurance company (that is unless a ridiculous discount to IV).

 

As for the operating companies of Berkshire, I think people don't appreciate them as much as they should.  These are well managed businesses.  These businesses are generally the lowest cost producers in their respective industry segments (the most efficient).  They are in businesses that don't change easily and service basic needs and wants of consumers.  These businesses may be struggling a little (a lot) right now, but unless you have a hot product (which would suggest a rapidly changing industry--a negative to business analysis) or a business that is counter cyclical, then all businesses are performing less than they otherwise would be during this recession.  Given the above, Berkshires operating subs will outperform the competition in any economic environment (moderate inflation, high inflation, deflation).  Yes, we are in a deflationary environment right now, but our economic system is designed for moderate amounts of inflation over time.  Those in charge of our economic engine understand that, and they will do anything in their power to stamp out deflation. 

 

One closing comment about deflation.  Everyone always turns to Japan to try and understand deflation.  This is fine if you like thinking about irrelevant models, but it's not relevant to the United States.  Why?  Because Japan was/is the second largest economy, and we are the largest.  It would take me too long to write about why this makes a world of difference when it comes to fighting deflation but just wanted to throw it out there.  Trust me on this, the largest economic player in our global system need never worry about persistent deflation.  The tools to fight deflation will always work for the biggest economic player in the game.  Just sit back and thank god we are not number 2. 

 

Yours

 

Jack River

[Guest ericopoly]

Just to clarify, WFC is trading, even today at close, under book value.  Paying less than book value for 18-20% returns on book value.

 

They generate 18-20% ROE.  They have best-in-show management.  Best-in-show net interest margins.

 

Can Buffett toss that much cash at any of his in-house businesses and hope to get 18-20%?  I think they were muttering something about 13% in the past.  So, screw that when you can get 18-20%.

 

Just shovel a huge chunk in.  And 18-20% is a hell of a lot better than a 50 cent dollar.

 

Anyways, not saying I'm right or anything, just my forceful opinion, and nothing more.

[arbitragr]

the author clearly hasn't even done any research on BRK's equity put sales.  He is very confused because:

 

1) he doesn't apparently understand that these are European-style put options (exercisable only on the day of expiry) vs. American-style put options (exercisable anytime they are in the money).  Since the expiry of these equity-index puts is more than a decade away -- short-term movements in the indices shouldn't be a cause for concern.

 

2) he keeps insinuating that BRK/Buffett is facing margin calls when Buffett has been explicit on these particular put options.  The 10-Qs explicitly state that BRK does not have to post collateral against these puts even if Berkshire Hathaway is downgraded and loses its AAA rating.

 

The article and author can be ignored.

 

wabuffo

 

 

Although I have long term faith in BRK, I do have concerns about the derivative contracts. Of course they are European contracts, which begs the question why BRK has made some small loss payments upfront of $56 million and $91 million in late 2008??

I wouldn't be suprised if they were margin calls, albeit small ... as any sort of long term contractual position like that would probably require some form of margin maintenance to keep the contracts in good faith - much like a futures contract. Maintaining margin vs. exercising option rights are not the same thing.

It is not completely black and white.

???

 

[zarley]

Although I have long term faith in BRK, I do have concerns about the derivative contracts. Of course they are European contracts, which begs the question why BRK has made some small loss payments upfront of $56 million and $91 million in late 2008??  I wouldn't be suprised if they were margin calls, albeit small ... as any sort of long term contractual position like that would probably require some form of margin maintenance to keep the contracts in good faith - much like a futures contract. Maintaining margin vs. exercising option rights are not the same thing.  It is not completely black and white.

 

Arbitragr, I haven't read anything about those loss payments you mention.  Do you have a link to something describing them, or giving them context?

 

As of the Nov. 7th quarterly report, BRK hadn't needed to post any collateral for the puts.

 

zarley

[arbitragr]

Although I have long term faith in BRK, I do have concerns about the derivative contracts. Of course they are European contracts, which begs the question why BRK has made some small loss payments upfront of $56 million and $91 million in late 2008??  I wouldn't be suprised if they were margin calls, albeit small ... as any sort of long term contractual position like that would probably require some form of margin maintenance to keep the contracts in good faith - much like a futures contract. Maintaining margin vs. exercising option rights are not the same thing.  It is not completely black and white.

 

Arbitragr, I haven't read anything about those loss payments you mention.  Do you have a link to something describing them, or giving them context?

 

As of the Nov. 7th quarterly report, BRK hadn't needed to post any collateral for the puts.

 

zarley

 

Hi Zarely,

 

See p. 24 of Berkshire's Q3 2008 10Q, about 5 paragraphs down:

 

The estimated fair value of credit default contracts at September 30, 2008 was $2,525 million, an increase of $687

million from December 31, 2007. The increase included fair value pre-tax losses of $478 million and premiums from

contracts entered into in 2008 of $265 million, partially offset by loss payments of $56 million. Berkshire made additional

loss payments of approximately $91 million in October 2008. The estimated fair value of equity index put option contracts

at September 30, 2008 was $6,725 million, an increase of approximately $2.1 billion from December 31, 2007. The

increase was primarily due to fair value pre-tax losses of $1,731 million as well as $383 million in premiums from new

contracts entered into in 2008.

 

My only hope is that the Q4 result won't have any negative and nasty suprises on the derivative front.

 

I trust Warren.

 

 

 

 

 

[zarley]

See p. 24 of Berkshire's Q3 2008 10Q, about 5 paragraphs down:

 

The estimated fair value of credit default contracts at September 30, 2008 was $2,525 million, an increase of $687

million from December 31, 2007. The increase included fair value pre-tax losses of $478 million and premiums from

contracts entered into in 2008 of $265 million, partially offset by loss payments of $56 million. Berkshire made additional

loss payments of approximately $91 million in October 2008.  The estimated fair value of equity index put option contracts at September 30, 2008 was $6,725 million, an increase of approximately $2.1 billion from December 31, 2007. The increase was primarily due to fair value pre-tax losses of $1,731 million as well as $383 million in premiums from new contracts entered into in 2008.

 

My only hope is that the Q4 result won't have any negative and nasty suprises on the derivative front.

 

I trust Warren.

 

Ah, I see.  Thanks.  That's referring to payments on CDS, not the market puts.  Maybe a hairsplitting distinction, but I was simply thinking of the puts and was confused about the possibility of making current payouts on those.  Paying small amounts on CDS makes more sense.

 

I'm looking forward to WEB's discussion of the derivatives contracts in the annual letter.  I'll be enjoying it with my coffee in the morning.  ;)