Buffett Told Us So; Alvarion's Japanese Connection

 |  Includes: ALVR, BRK.A, BRK.B, KDDIF, NTT, ORCT
by: Shlomi Cohen

I claim that Warren Buffett is the only person who predicted what is happening on the markets at present. The current upheaval was not sparked by economic processes, such as the US real estate crisis, which is neither that country's first crisis nor its last, although everyone finds it a very convenient peg to hang all the current troubles on.

What is happening now is a financial air pocket which evolves during the course of healthy global economic processes, and Buffett predicted this bubble two years ago. I heard him talk about it, during the fanfare surrounding Berkshire Hathaway Inc.'s (NYSE:BRK.A), (NYSE:BRK.B) acquisition of the Wertheimer family's Iscar Ltd. two years ago.

Buffett explained to anyone interested in listening that the derivatives market was a ticking bomb and that it was just a matter of time before it all blew up in our faces. When I looked up Berkshire Hathaway's reports I found out that Buffett said the very same thing in a letter, black-on-white, to investors in 2003, when the company unveiled its results for 2002. "Charlie [Munger] and I are of one mind in how we feel about derivatives and the trading activities that go with them. We view them as time bombs, both for the parties that deal in them and the economic system," he wrote.

Even former Federal Reserve Chairman Alan Greenspan conceded, several days ago, that the sub-prime crisis was not caused by the granting of mortgages to home buyers without adequate credit scores, but rather, the massive derivatives market that was built on sub-prime mortgages like those. The banks had a huge incentive to give more and more dodgy mortgages, because of the phenomenal demand for the highly profitable derivatives they spawned.

"It will be a disaster, both for traders and the economic system," Buffett predicted with amazing prescience five years ago, and who knows how long it will take the banking system to dig itself out of the crisis it created, if at all. Nor can it be assumed that anything will change as a result. One thing we can be sure of is that speculators such as Soros, and his former partner Jim Rogers, all of whom issue dire predictions every Monday and Thursday, will continue to move billions of dollars in an investment playing field which is off limits for Buffett.

During the festive season of recent weeks, CNBC television aired several reruns of a film following Buffett during his trip to the East a few weeks ago. He was shown, among things, accompanying Eithan Wertheimer on a tour of Iscar's existing and new plants in China and Korea. While there, he once again explained how, in contrast to the aforementioned speculators, he invests in simple, but highly profitable business, rather than hot air. A brief fax from Wertheimer containing the company's sales and profit figures, prompted Buffett to invite him to Omaha, and it was short road from there to the signing of the acquisition deal.

Wertheimer recalled how he begged Buffett to come to Israel to see what he was spending so much money on, but the latter replied, "I don't travel outside of the US much, but first let's sign, and then I'll set a date for a visit." Wertheimer told CNBC how he tried to spell it out for Buffett picturesquely. "Even a housewife feels a tomato when she's buying it, and you've got quite a tomato in Israel."

As is known, Buffett eventually agreed to visit together with his partner Charlie once the acquisition agreement was signed, and both men took great pleasure in what they saw here. Buffett has been continually praising the Iscar management ever since, and when asked in the film about its potential in the East, especially China and Korea, he basically said it was "incredible", or words to that effect.

Alvarion's connection to the East

Last Friday, Japan's second largest telephony services company, KDDI Corp (OTC:KDDIF),(TYO:9433),published its results, and after studying the accompanying preliminary business plan for the coming year, I feel there is a good chance that Alvarion (NASDAQ:ALVR) could become its second Israeli supplier, alongside Orckit Communications (NASDAQ:ORCT).

KDDI is part of a consortium including companies such as Intel Corporation (NASDAQ:INTC), which recently won a government tender for the Japanese market's first WiMAX frequencies. Among the other companies bidding for the tender were KDDI's larger rival NTT (NYSE:NTT).

KDDI also announced on Friday a series of preliminary trials of the new wireless system, beginning in February 2009, and I imagine that its previous relationship with Alvarion, coupled with the close collaboration between Alvarion and Intel on all aspects of WiMAX, will greatly increase Alvarion's chances of participating in this project. Its first equipment orders are due to be issued to the various suppliers in the coming months.

Generally speaking, an increase in network infrastructure investment of the size announced by KDDI last Friday is a very positive sign for Orckit, although just how big an opportunity it will be is difficult to gauge. For the time being, it will be limited to the integration with the planned WiMAX system.

KDDI also announced the acquisition of a small company (Chubu Telecommunications Co Inc.), which will add yet more fiber-to-the-home [FTTH] subscribers. This too, is a positive sign for Orckit, which is waiting for the next batch of orders from KDDI, due at the start of the new financial year in April. That said, KDDI has failed to ramp up its FTTH subscriber base without acquiring companies, so the extent of the new orders from Orckit remains unclear.

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.