Jimmy Lathrop

Even the 'Oracle of Omaha' Makes Mistakes

After reading the WB biography, the thing that struck me the most was his constant reiterating of the broken state of his insurance purchases. He kept referring to how he always had to pull the tow truck up to the ditch. Yet most of the cash from BRK.A comes from his insurance float from premiums. That set off an alarm in my head.

He was also very candid about fumbling around as an investor in Salomon Brothers and how it was out of his comfort zone. Most of the phantom profits in the 2002-2005 period came from the Housing Bubble that the financial institutions profited from. If his insurance companies wrote swaps on the S&P, those earning are not coming back.

The lower value of corporate bonds are also hurting the insurance companies book value. He has a lot of headwinds. The other companies require consumer consumption, like See's Candies and things that make stuff.

Sometimes in life its better to be lucky than right. And sometimes your luck runs out.

Give Buffett Credit: He Tells It Straight

Sorry about that line about Dave Merkel owning shares in BRK, I had cut and pasted that line from a comment written under an earlier article written by Toro, I hope DM isn't caught in the web.

Give Buffett Credit: He Tells It Straight

If you checked the CDS market last week, it was cheaper to insure $1,000,000 of debt issued by the Republic of Vietnam than insuring the same amount of money from BRK.

The fundamental engine of the company is the insurance "float" or premiums they've received from other people's policies, be they cars (GEICO) reinsurance (General Re) or a regular insurer that Berkshire Hathaway controls - it's 58 billion dollars. BRK shrank by 11.8 billion dollars. I feel bad the author bought shares in BRK now that they are at $70,000 but they have farther to fall. The insurer units are made up with corporate bonds and as asset prices have fallen, so do the bonds. If you thought and imagined how much money the Berkshire Hathway insurers lost on the Big 3 automakers, or bank bonds, you name it, it lost value and defaults are up, The float dries up and the boat sinks. You think See's Candies or that 20% in Moody's is worth anything? All the non-insurance related companies provide a mere fraction of the insurance companies and they didn't do great either. I

That's what I take from his annual letter - not just that he is owning up to bad bets and laying out the losses on the books - rather, BRK is not positioned well for any sustained downturn,

Market participants take notice when your total net asset value of securities equals your total net asset cost of securities.

Saying that derivatives are weapons of mass destruction and getting involved in European style contracts is hypocritical, and foolish. He took those premiums and bought COP at 85. Whatever gains from that transaction have been squandered and all there is left is downside, hoping things turn right by the end of the contract. The only reason he entered into the contract is that there is a 100% chance that he will not be alive when they expire and therefore he won't have to acknowledge the depth of miscalculation.

Berkshire Hathaway: Proof That the CDS Market Is Irrational

Sether, I am not arguing that CDS contracts are a bet that someone else's house will catch fire and until they are pinned to an underlying asset, they are just gambling but the silence on how the CDS market affects strong companies speaks volumes as to the argument. Guns don't kill people, people kill people. A heavy volume of CDS bets against a company doesn't drive the share price down, poor performance of a company drives a stock down. Don't start crying about how CDS killed the mega-banks, we all know they are actually insolvent and it is only through accounting sleigh of hand and politicians needs for jobs post-office that keep them lurching forward.

Berkshire Hathaway: Proof That the CDS Market Is Irrational

Mr. Gnill

Technically, you are correct in saying that hedge funds are not holding the underlying bonds and are merely speculating in their purchase.

Technically, Ned Flanders of The Simpsons was correct in saying that he did not believe in insurance because it was a form of gambling.

I assume you have insurance on your house and that you are not above protecting your assets. In fact, if you own a car, chances are your state requires you hold these gambling contracts to prevent against losses, also known as accidents.

But you still have not answered how these alleged hedge funds are using CDS to drive down the prices of companies who have lots of cash and little debt.

But Berkshire has cash! you exclaim. Not really. They have float, which is to say, premiums which are supposed to pay off future claims, a gamble in themselves. Essentially, Berkshire Hathaway takes other people's premium and hopes to invest them in a way that would realize a profit over and above their risk models for possible claim payouts. This is different than ExxonMobil's or Pfizer's money which was made selling actual profits. Yes, that big furniture warehouse in Omaha is impressive but its not representative of the company - in fact, that and the other wonderful quirky little companies that Buffett collects like Beanie Babies are profitable but not enough to justify that share price.

So we have a company who took policyholder's premiums and invested them in ConocoPhillips when it was trading at 85 dollars a share among other trigger-happy decsions which wiped out all the unrealized gains of careful investing. The CDS prices realize that and instead of speaking about the fundamentals of the company, you just rail against speculating and short selling, just like Cramer cries about SKF every night, telegraphing to the nation that his holdings in his Fortress Banks are going to zero.

We would all be better off if instead of railing against an invisible entity, you just sell. I bought a share of BRK.B at 4950 and when it fell to 3600 that was enough *value* for me thank you very much. A ridiculous share price for a stock that doesn't even give a dividend, and now you know why they don't give a dividend, because he'd rather spend the money on European style derivative contracts which can't be cancelled until the due date. This is coming from Mr. Derivatives Are Weapons Of Mass Destruction Unless I Use Them And Then Its Okay.

Finally, if you take the time to read The Snowball, like I did last month, you'd notice the similarities between Buffett's investing mystique - the inside information, the canny timing and the opaque methods - as Bernard Madoff. I am not saying Mr. Buffett is running a Ponzi scheme but investors are tired of the folksy wisdom on the one hand and the murky accounting on the other.

Berkshire Hathaway: Proof That the CDS Market Is Irrational

Again with the pointless CDS ranting. They are insurance contracts used to hedge debt defaults. If you are an insurer and the majority of your holdings are corporate debt, it is irresponsible NOT to insure them with a credit default swap. The alternative is to hold these bonds naked and there is nothing wrong with being prudent. However, when you and I purchase a life insurance policy, we can look to A.M. Best or another insurance rating agency to see if these insurance companies pay out on claims or as to their solvency and the worse case scenario would involve an insurer going bankrupt and the state insurance regulator taking over the entity. Credit Default Swaps are specific to whoever writes them. When you purchase one you are making a decision that the counterparty will pay out. If there is high counterparty risk from the players underwriting these instruments it will be reflected in the price. Instead of being distortive, they are actually the true measure of the market's perception of the risk of the underlying asset. The people groaning about CDS are the ones who have thousands of shares of Bank of America and are upset that they are no longer receiving dividend income. As soon as the TARP funds are paid off, these companies will resume the dividend payment and then they will find a new way to blow themselves up and you will forget about CDS and find a new boogieman to blame.

Berkshire Hathaway: Proof That the CDS Market Is Irrational

I have been reading a lot of these uninformed rantings about CDS and short sellers and all I have to say is explain to me why the Sith Lords have not taken down ExxonMobil, Pfizer and the other companies who don't have issues on their balance sheets. Feel free to post more conspiracy theories, they are highly amusing but have no relevance at all to the way our markets function.

Berkshire Hathaway: Proof That the CDS Market Is Irrational

It was cheaper to insure $1,000,000 of debt issued by the Republic of Vietnam than insuring the same amount of money from BH. The article misses the fact that the fundamental engine of the company is the insurance "float" or premiums they've received from other people's policies, be they cars (GEICO) reinsurance (General Re) or a regular insurer that Berkshire Hathaway controls - it's 58 billion dollars. BRK shrank by 11.8 billion dollars. I feel bad the author bought shares in BRK now that they are at $70,000 but they have farther to fall. The insurer units are made up with corporate bonds and as asset prices have fallen, so do the bonds. If you thought and imagined how much money the Berkshire Hathway insurers lost on the Big 3 automakers, or bank bonds, you name it, it lost value and defaults are up, The float dries up and the boat sinks. You think See's Candies or that 20% in Moody's is worth anything? All the non-insurance related companies provide a mere fraction of the insurance companies and they didn't do great either. It's all in the 2008 end of year statement - they are not positioned well for any sustained downturn, and this is coming from someone who has great respect for a man who built an impressive company but all plaudits aside, market participants take notice when your total net asset value of securities equals your total net asset cost of securities. They hoarded all that cash for years and jumped the gun and the spread is against them and the market is accurately pricing it.

Memo to Warren: AmEx Preferred at 15%, Warrants at $12

I think the long term perspective is that Amex has done some stupid things in the past (purchasing EF Hutton) and overcome them. Warren tends to see things in the industry from when he purchased Salomon Brothers. Both BRK and AMX got out of that situation when the opportunity presented itself and survived. AMX is like a financial cockroach and that's the kind of company that appeals to him. Its a long term play designed to shake out the weak hands and from the comments above, weak hands have been shaken out.

Schumer Is Way Off

Chuck Schumer is like the houseguest who comes over to dinner and starts hovering around you in the kitchen, making suggestions as to your ingredients and methods, getting in your way and then announcing at dinner that you are a terrible cook.

Buffett and Cramer Agree: It's Time to Buy Stocks

Attention hedge fund and money managers - keep selling! Your pain is my gain! Lo siento!!!!!

White Mountains Insurance Discusses Berkshire Transaction

This would be a good time to cue the theme from the Godfather and let WTM know that this is an offer they can't refuse or they will be sharing a bed with a horses' head. Doesn't anyone realize that the only people willing to lend cash are sovereign funds, but they won't make a move without Mr. Buffet's blessing?

SONNY, NEVER GO OUTSIDE THE FAMILY IN FRONT OF YOUR ENEMIES

What Does Warren Buffett See in General Electric?

If you are expecting a child, you begin to notice children and families more than you would have before.

Consequently, if, upon waking, you made a point to try and catalog every product that GE had an impact in your daily life, you'd see that it was no Yahoo! or Potash or Transocean or whatever dumb pick of the day people are touting all of the time. Light bulbs, heavy engine turbines, medical imaging equipment, GE's presence is everywhere. They have a 9 month, 180 billion dollar backlog. What else do you need to prove value today, a solid block of gold the size of the Chrysler building?

I've been as bearish as the next guy, but I never suggested we should abandon the car and take up the horse. When you hear people are shorting General Electric, that's when you know the market is really oversold. Its a Dow 30 component, many institutions held it for collateral, their brokers sent out margin calls, and forced redemptions sent GE shares out onto the marketplace at irrational prices. The market is not rational. People make fortunes at the inequalities of these irrational prices.

Listen, if I am standing in front of a grain elevator and I say to you, make a bet as to what happens if I open the door at the bottom, an unsophisticated investor will say, grain will fall so I should bet on falling grain. Anyone can bet on that. The trouble is, gravity and equilibrium will stop the falling grain. There is no force, like short selling, pulling the grain out, and if there is, it is like pushing on a string. The bet to make is that the grain will come out of the elevator and more than likely, some farmers are going to start loading up the grain elevator so the product doesn't spoil. That is what is called having a long term. The short term could seem like a long time, like a school day seems to a third grader. Seasoned professors know the semester flies by.

Buffett Buys GE, Goldman: Should You Follow?

Wallstreetoughguy.com

Lets imagine you were working out at the Wall Street New York Sports Club with a cut on the sole of your foot. You walk across the shower floor and later develop an antibiotic resistant strain of stapholoccus (MRSA). It gets worse and worse. You get really sick and you have to go to the hospital.

The doctor comes in and says: Listen tough guy, you're done. Eventually that MRSA is going to work its way up your leg and kill you. I could amputate your foot but why bother?

My guess is that you would argue to your doctor that you could enjoy another 40 years of your life without your foot and that given a rusty hacksaw, you would do the job yourself.

Now, if you were an enormous foot, that's a different story.

Buffett Buys GE, Goldman: Should You Follow?

Venividivici

You know what I care about? When I go into a hospital and see GE medical imaging machinery being used exclusively. Not mostly, exclusively. What I care about is buying GE lightbulbs not Philips. I can't light my house with commercial paper. I can't do an ultrasound with short term financing. Those are instruments. GE manufactures goods and has market share. Remember those words? Goods? Markets? You know, things that are sold to people as opposed to ficticious instruments negotiated between financial organizations which are similarly ficticious?

Forget it, its a long term thing, you wouldn't understand. Potash is due for a bounce, though. I'm sure you bought it already.