Some brief comments on the Berkshire Hathaway (BRK.A) deal:

• Buffett is buying the rest of Burlington Northern (BNI) for $100 a share- approximately 60% in cash and 40% in stock. The stock component is subject to a collar where the value of a Berkshire Hathaway share received is fixed at $100 if the BRKA stock price at the closing is between $80,000 and $125,000.
• If BRKA closes outside this range, the number of shares of BRKA stock received will be fixed at either 0.001253489 per BNI share below the collar range, and 0.000802233 per BNI share for values above the collar range. A shareholder may receive class A shares or instead of fractional shares, the equivalent economic value of class B Berkshire shares.
• The BRK.B shares will be splitting 50 to 1. Buffett is doing this in order to allow smaller BNI shareholders to opt for a share exchange rather than a cash payment. By splitting the Berkshire “B” shares 50-for-1, they can accommodate even small holdings of BNI shares that elect a tax-free stock exchange.
• The 50-to-1 stock split of the BRKB shares means there is a high likelihood that Berkshire Hathaway will be added to the S&P 500 index within the next year. You will likely see many large cap mutual funds start to accumulate Berkshire stock over the next few months. Once it is actually added, there will be massive purchases by index funds.
• Buffett has sold out-of-the-money puts on Burlington Northern which has helped fund the acquisition.
• Buffett appears to be using my favorite strategy for the game of Monopoly- buy up all the railroads!
• By purchasing BNI, Buffett is diversifying out of insurance into railroads. I believe he sees inflation on the horizon. Burlington’s assets (rail cars, railroad tracks etc) are a good inflation hedge.
• Railroads have been upgrading to cleaner burning diesel engines, in some cases using grant money from the EPA. These engines reduce the amount of carbon dioxide emitted. Rail transportation is a “green technology” play since a diesel locomotive can move one ton of freight 431 miles on a gallon of diesel fuel. Trucks typically get six to eight miles per gallon. This gives railroads a major selling point, and they may capture a lot of the truck traffic and re-direct it to rail.

Full Disclosure: I own BRKA.

Central Securities Corporation (CET) is a closed-end fund that organized in 1929 and runs a concentrated portfolio mainly invested in US stocks. It is attractively priced and currently sells at a discount to NAV of 18.81%. Part of the reason for the large discount is that about 30% of the assets are invested in a single illiquid restricted investment with a very low tax basis, The Plymouth Rock Company. Plymouth Rock sells auto insurance and has performed very well for CET over the years.

When a fund values a portfolio, there are three kinds of “fair value” based on the observability of the market price.

I have previously posted about the Cornerstone Total Fund (CRF) which had maintained a very high premium over NAV for quite a long period, and was owned by the Renaissance Fund.

But there has been a sudden reversal in this fund, and it is actually a decent buy now. (Although I think there are even better values available today in the CEF market).

The recent market action reminds me of the nuclear cow joke:

What do you get when you drop a nuclear bomb on a herd of cows?
Udder destruction.

The financial media has been blaming the market drop on the credit crisis, but I believe the stock market drop is mainly being caused by forced hedge fund liquidations. Some areas affected the most are:

Nokia Corp (NOK) is a global leader in cell phones and mobile devices. The company is based in Finland. It’s selling near its 52-week low at less than eight times next years earnings.

Here are some reasons I like Nokia, along with some potential short term negatives:

There are some amazing values now in closed end funds. The discounts to NAV have widened dramatically across the board. It appears that one or more large institutions with extensive closed end fund holdings are being forced to liquidate them. I noticed that Wachovia (WB) is a big holder in many of the funds that have been getting hammered.

Typically, the sellers are in trouble because of something unrelated to what they sell. They can't sell the securities that got them in trouble (there is no market), so they sell whatever they can. This is a variation of Gresham’s Law (bad money drives out good money).

Many closed end funds are trading at above average discounts now. One of the best bargains for a vulture investor right now may be the RMK Advantage Income Fund (RMA). Last week I started buying into this fund at prices in the 1.10 range. RMA is not very liquid, so it may be best to use smaller limit orders when you buy it.

RMA invested in many complex mortgage backed securities. Its market price has been absolutely obliterated over the past year (down about 80%). On July 29, 2008, there was a change in fund management. Hyperion Brookfield Asset Management was appointed Investment Advisor replacing Morgan Asset Management, Inc. who is facing many lawsuits from irate investors.

Yesterday I purchased some shares of the Morgan Stanley Emerging Market Domestic Debt Fund (EDD) at 14.06. EDD is a closed end fund that primarily invests in emerging market domestic debt or debt obligations of issuers located in emerging market countries that issue debt in their local currency. Some of their top holdings are in Brazil, South Africa, Hungary, Egypt, Turkey and Mexico. This was the top 10 country breakdown as of June 30, 2008.

 

I recently purchased a starter position in the Nuveen Floating Rate Income Fund (JFR). The fund invests 65% of its assets in adjustable rate senior loans secured by specific collateral and at least 80% in secured and unsecured adjustable rate senior loans. The top three industries it owns are media, hotels/leisure and health care.

Here are some of the reasons I like JFR at the $10.00 price level.

Owens-Illinois (OI) looks attractive now, either as a direct purchase or part of a covered call strategy. Covered call writing works well with companies that have relatively low downside risk and moderate (but not explosive) upside potential.

Owens-Illinois is the world’s largest supplier of glass containers. It operates in 22 countries and has acquired 17 glass container companies since 1990. About 70% of its sales are outside North America.

Adams Express (ADX) is a closed end fund that can be used a good substitute for an S&P 500 Index fund. It seems very attractive at $12 or less. Here are some good features of ADX:

1. Low expense ratio: The annual expense ratio of 0.44% is one of the lowest for a closed end fund.
2. Low turnover: The ADX management does very little trading (low turnover ratio) which means that the "hidden" trading costs are also very low.
3. Good long term performance: Since inception in 1979, the fund has averaged about 12% per year.
4. High discount to NAV: ADX has been trading at a 14% discount to NAV which is at the higher end of its discount range. About 8% of the ADX portfolio is invested in PEO, which is another low expense closed end fund that trades at a discount of 12%. So on the PEO holding you actually get to buy it at a "double discount".
5. Solid portfolio holdings: Its top stock holdings are: Schlumberger (SLB), General Electric (GE), Microsoft (MSFT), Conoco Phillips (COP) and Oracle (ORCL).

Full Disclosure: I am long shares of ADX.

I recently purchased a longer term position in the Swiss Helvetia Fund (SWZ). SWZ is a non-diversified, closed-end fund that invests in equity and equity-linked securities of Swiss companies. Here are some reasons I like SWZ:

1) Discount to NAV yesterday was 12.9%. The annual expense ratio is 1.10%. A discount/expense ratio of 10 times or more is generally attractive.

I recently purchased a position in Nuveen Multi-Strategy Income and Growth Fund (JQC). This is a closed-end fund that invests in preferred securities, convertible securities and related instruments, common stocks, and debt instruments, including high yield debt and senior loans. The fund uses leverage currently at 39%. I own JQC in an IRA account because of the high distribution rate.

Here are some things I like about JQC:

In recent weeks, there seems to be a trend away from energy/commodity stocks towards health care stocks. Within the health care industry, home health care companies have been performing well in a tough market. I recently posted on AFAM and thought I’d post on another company in this sector today.

Last week I bought some shares of American CareSource Holdings (XSI). XSI is an ancillary benefits management company that provides patients access to its network of ancillary service providers for the benefit of healthcare payors. The company manages a comprehensive network of 2,500 ancillary service providers at over 25,000 sites. It also provides customer service support and claims management services. It assists health benefits plan sponsors in expanding the range of provider choices available to their payors while reducing overall ancillary benefits costs.

I sometimes use the VIX as a gauge of fear/volatility in the marketplace. Generally a high VIX value greater than 30 or a value significantly higher to where it had been trading in the recent past, can help signal a market bottom. The VIX measures implied volatility on S&P500 index options.

But in recent months, it seems that there is much greater volatility diversity within the S&P500 index. There have been many days where the S&P500 was relatively flat, but financials were down big and energy stocks up big (or vice versa).

Today is shaping up to be a down market, and it may be a good day to start scaling into Leucadia National Corp. (LUK). Leucadia is an eclectic investment company that is somewhat similar to Berkshire Hathaway (BRK.A), which I posted on a few weeks ago.

LUK was founded in 1854. It engages in manufacturing, telecommunications, property management and services, gaming entertainment, real estate activities, medical product development, and winery operations. It is run by two very talented managers - Ian Cumming and Joseph Steinberg, who have received praise from Warren Buffet.

Last week I bought a starter position in Almost Family (AFAM) and plan to add to my holding on price dips. Almost Family provides home health care services in the United States. It operates in two divisions, Visiting Nurse [VN] and Personal Care [PC].

The VN division provides Medicare-certified home health nursing services to patients in need of recuperative care. The PC segment provides in-home patient care on an as-needed, hourly, or live-in basis. As of December 31, 2007, AFAM operated 33 Medicare-certified home health agencies with 51 locations and 22 personal care locations.

I've been a long term owner of Berkshire Hathaway (BRK.A) since March 2000. I bought one A share for $52,500 in a taxable account.

Here are some things I like about it:

I picked up a small starter position yesterday in First Industrial Realty (FR) and plan to accumulate more on further price dips. First Industrial develops and operates warehouses and light industrial buildings in the top industrial markets in the US and select industrial real estate markets in Canada, Belgium and the Netherlands. FR trades below its net asset value per share and yields a whopping 10.4% with more than enough cash flow to maintain the dividend.

FR has an interesting connection with Warren Buffett. On December 3, 1999, Buffett auctioned off his 20 year old wallet with a secret stock tip inside to benefit charity. John Morgan was the winner and paid $210,000 for the wallet. Some time later, Mr. Morgan announced that the stock Buffett had recommended was First Industrial Realty. At the time, REITs were very depressed. FR was trading a little below $25 and yielding around 10%. After this year's drop in financials, FR is trading around $27 which is close to the 1999 price level, and it is again yielding over 10%.

According to the bettors at Intrade, Barack Obama has about a 65% chance of being the next president. I have started to look into different investment areas that could benefit.

Two conservative investments that look interesting now are REITs and municipal bonds. Of course, I also will look into closed end funds that invest in these areas.