Futures were looking ugly Tuesday, but news of a Buffett purchase of Burlington Northern (BNI) and surprisingly strong retail sales has brought in some dip buyers in the early going. I have never been able to figure out why investors get so excited by Warren Buffett’s every move, but they do. Investors are buying Tuesday because Buffett says his BNI bet is an “all in” bet on the U.S. economy. But Buffett will be the first to tell you that he has no idea where the economy is going in 6, 12 or 48 months. He hasn’t proven to be a global macro guru as many other great hedge fund managers have. So why are his comments news? I have no clue. Granted, a $34B merger is a big deal, but Buffett has been an owner of BNI shares for years. Perhaps most important is the fact that this merger is a bit unorthodox for Buffett.
The takeout price of $100 puts the company at roughly 19.5 times 2010 earnings and looks roughly in-line with a back of the napkin DCF calculation (and I am likely being generous with future earnings estimates of well over $5.50). The takeout price is not far from BNI’s all-time high. The most interesting facet of this deal is that Buffett seems to have purchased a fully valued slow growth railroad firm. He also dilutes his own shares in the purchase – a very unusual move for Buffett. I can’t remember the last time he did a stock deal. At first glance it does not look like the usual golden touch from the Oracle.
This isn’t the first questionable move he has made in the last few years. His purchase of Goldman (GS) looks brilliant in hindsight, but was a near disaster without the government bailout. After saying he would never buy another I-bank following his Solomon Bros. debacle Buffett ignored one of his own rules. Buffett appears to have forgotten another classic rule of his – buy when others are fearful. Furthermore, his “all in” bet appears to be a very poor one. After all, a fully valued BNI isn’t exactly the equivalent of pocket aces. We’re talking more like pocket 10’s here. Is the master losing his touch? Are we seeing a prize fighter who has stuck around for a few too many fights?
In other random economic news J&J (JNJ) is cutting 7% of their workforce. The battle over the job market is going to reach fever pitch next year. My estimates have the unemployment rate lingering in the high 9% range for the entire first half of 2010. This news is not going to help an administration that appears to have done absolutely nothing for Main Street over the last year and while the banks can buy votes on the floor of the Congress they can’t buy votes at the polls.
Retail sales were strong Tuesday. ICSC data came in at 1.9% year over year and 0.1% vs. last week. The Redbook data continued its rebound with a reading of 0.9% year over year. All in all, October retail sales appear to be shaping up nicely.
In other news the EU raised its GDP forecast for the region from -0.1% to 0.7%.
The dollar is powering higher Tuesday, but the Buffett news has the bulls out in force snatching up shares on weakness. With the market selling at roughly 19 times earnings, the Buffett purchase is about in-line with the overall greedy sentiment of this market.
