Follow Buffett For All-Weather Stocks In Uncertain Times

| About: Berkshire Hathaway (BRK.B)

There may have been a little bit more than meets the eye when it comes to the Employment Report issued by the Bureau of Labor Statistics (BLS) this past Friday, February 3rd.

All the headlines were quite positive, highlighting the good news in the report concerning much better than expected growth in employment, a bigger than expected drop in unemployment, and for good measure gains that were spread throughout the economy in the service, manufacturing, education and other sectors.

But as with all things, the devil is sometimes in the details. And in this case, the details are still not glaringly clear. For one thing, typically in December, normally a very cold month, well over 400,000 workers are removed from payrolls because of the weather. However, the uncommonly warm December we had in 2011 translated into only 200,000 or so victims of weather-related unemployment, according to the report. That number, of course, is the difference between what was a roaringly good employment report and what could have been a miserable one.

To be honest, we don't know how the BLS adjusts for such things. But we would doubt that average temperature within a single month is the sole factor. Rather, it would seem that seasonal adjustments are based on combined data for all the days an entire season comprises (i.e., resulting in aggregate numbers for summer, fall, winter and spring) - not the deviation from norms based on precipitation or temperatures in a single month.

The point is that it's still too soon to say. Moreover, this "too soon to say" theme echoes loudly today as we see that the situation with Greece is still not settled. That so much hangs on such a small country has to be a warning that despite a slew of positive market indicators right now, we still cannot assume this admittedly very strong start in the market so far in 2012 will presage additional gains in the months ahead.

Yes, the news, to be sure, is looking up. And at least for us, market action above and beyond the actual gains is strongly suggestive of further gains to come. But the prospect of potential turbulence still puts an emphasis on the kinds of all-weather stocks that you know are going to be with us come what may with the weather, and come what may concerning Greece.

When we think of all-weather stocks, one of the first that always comes to mind is Berkshire Hathaway (NYSE:BRK.B). Warren Buffett virtually coined the notion that you could translate a so-called franchise (think New York Giants, especially today) into public companies.

Franchises are companies that have control over their markets, or at least are close to exercising a lot of control. And to be good franchises they have to be situated in strong and growing markets.

Probably Buffett's two biggest purchases in history (or at least, among public companies) were Coca-Cola (NYSE:KO) and Burlington Northern Santa Fe, the latter being a company he took entirely for himself. He has also invested a huge sum in another company he wholly controls, MidAmerican Energy.

Both of the wholly owned companies, Burlington and MidAmerican, certainly satisfy the definition of a franchise. And each is in an industry that's highly leveraged to a burgeoning sector: growing demand in trade and commodities (Burlington) and the growing need for alternative energies (MidAmerican).

In addition to these private holdings, Buffett's biggest earning center is a bevy of insurance companies, including GEICO, General Re and others. Insurance may be a peculiar business in which to suspect a franchise can exist, but in Buffett's case, it is probably his strongest franchise.

The edge that he has in insurance is very simply the amount of money that Berkshire Hathaway has. Berkshire's insurance companies maintain capital strength at exceptionally high levels compared to all their competitors. More money means a greater ability to write additional insurance policies. It means that in a world torn by periodic economic losses from earthquakes, hurricanes, tsunamis, etc. - losses that are likely, in fits and starts, to continue to grow because of the trend toward increasing urbanization - Buffett's insurance assets remain in the catbird's seat. As I've commented before, were California to fall into the sea, theoretically Buffett would be the only one to benefit. That may no longer be so true, now that one of his major holdings, Wells Fargo (NYSE:WFC), would certainly be hurt. Even so, Buffett would likely still be left standing.

So when you think "uncertainty," think franchises. These are companies, by and large, some of which we have mentioned in conjunction with Berkshire Hathaway, that have the ability to gain market share when the economic going gets bad (i.e., deflationary) ... to raise prices when the economic going gets good ... and to raise prices even more when the economic going gets inflationary.

Clearly, we still think that investors should continue to hedge with precious metals and zero coupon bonds. But also don't forget to bet a little bit of money with probably the greatest investor in the history of capitalism, Warren Buffett.