Markets Cheer the Buffett Buy

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.

Comments

[J Stew:]

A hysterical quote from the above trashy, terrible article:
"I have never been able to figure out why investors get so excited by Warren Buffett’s every move, but they do."

A possible reasons why people "get excited" (follow) Buffett (including The Pragmatic Capitalist, who publishes a large article 3 hours after the news was announced) is that Warren Buffett has absolutely destroyed the markets for 40+ years - not a good reason to follow him?

Nov 03 12:07 PM

[Papaswamp:]

Perhaps Buffet believes the RRs will be bailed out too.

Nov 03 12:25 PM

[User 504111:]

Didn't we hear the same thing from ppl a few months about his GS deal...."is he losing his touch"....Are you really that blind to not see the 40+ years of performance....Every major purchase he makes ppl say the same thing....If everyone thought his moves were so great at the time he made them then they wouldnt be possible because everyone would be doing the same thing.....So my bet is we can sit back and watch Mr. Buffet kill on this deal just as he always has in the past

Nov 03 12:45 PM

[The Geoffster:]

Another way to look at Buffet's bet on America is fuel costs. He knows that oil, like all commodities will, rise with inflation. Railroads have a competitive advantage over other forms of transportation because of their lower freight cost per mile.

Nov 03 12:49 PM

[Dave Wrixon:]

Buffet is a Patriot and that his fatal weakness. He actually believes that the US will just back to business as usual in a couple years. Personally, I think this investment will turn to rust. He would have been better off investing in railways across Asia and Africa.

Nov 03 01:15 PM

[Bob Mayo:]

To summarize, he is losing his touch because (1) his deals look terrible at the time, but (2) look great in hindsight.

Nov 03 01:25 PM

[The Pragmat...:]

Very interesting to see most of the comments here implying that Buffett's Goldman deal was some stroke of brilliance when in reality, it was a near disaster save for a hefty dose of taxpayer help. I wonder what everyone would say about Buffett if Goldman had gone bankrupt (as they almost certainly would have without taxpayer help). I think the comments here would be quite different.

There is no denying that Buffett's success is unmatched, but there is little proof showing that Buffett is anything more than an outlier in a massive statistical data set. I doubt that anyone who praises his past performance is thanking BRKA for their early retirement....

Regardless, the point remains, it is an unusual type of deal for Buffett and that was the main point here. That doesn't mean it will fail, but there's no denying that it is a bit unorthodox for a Buffett merger.

Nov 03 01:59 PM

[Victor84:]

He makes mistakes too, but I'm sure he has done 1 million times the research that this author has done regarding the deal, ergo I will give him the benefit of the doubt.
There is still no better way to transport goods across this vast nation of ours. Transportation costs will steadily increase over time (check out exploding Fedex/UPS rates) and this is a vital industry. He got a bunch of hard assets cheaply by buying with overvalued BRK stock.

Nov 03 02:03 PM

[halamok:]

Fully valued,slow growing,poor bet,questionable,losing his touch...

20+ years ago,there was the same talk about him buying KO shares.

"Buffett appears to have forgotten another classic rule of his – buy when others are fearful."

No he did not! IMO you (and many others) would be more than fearful now,if you had to buy and hold a "fully valued,slow growing poor bet" like BNI...

Nov 03 02:15 PM

[Socialism c...:]

BNI does lots of biz transporting coal. I fail to see how this is a smart buy given the current Admarxistration's extreme dislike of coal. Cap & Tax will kill BNI, if the Dems get it passed.

Nov 03 02:21 PM

[User 504111:]

"IF" GS would have went under"....of course we would have been saying something different....We also wouldn't be following Buffet "IF" all his other investments would have failed.....but they didn't....That might be the worst argument I've ever heard

Nov 03 03:15 PM

[The Pragmat...:]

Oh come on. So you're a good gambler if you bet on black and it lands on red and the pit boss comes over and moves the ball onto a black slot and hands you your "winnings"? Please explain to me how that logic computes?

That's exactly what happened. He got bailed out just like the rest of the banks. That doesn't make the GS trade a great investment it makes it a lucky gamble.


On Nov 03 03:15 PM User 504111 wrote:

> "IF" GS would have went under"....of course we would have been saying
> something different....We also wouldn't be following Buffet "IF"
> all his other investments would have failed.....but they didn't....That
> might be the worst argument I've ever heard

Nov 03 03:45 PM

[MinskyMoment:]

If Goldman Sachs and Wells Fargo had not been bailed out by the taxpayer, Buffett would have lost all his money in these investments. Buffett has not made money picking stocks since 1999. Most of the cash generated by Berkshire comes from bullish derivative bets, yes, the same derivatives that Buffett called WMDs. These bullish bets include selling large amounts of naked puts. If the big banks had not been bailed out by the taxpayer, these bullish bets would have lost even more money. The fact that fanbois defend him like schoolgirls shows the effectiveness of public relations.

Nov 03 07:07 PM

[artkarl:]

GDP is a lie.
-Karl Krachenberg

Nov 04 02:22 PM