Berkshire Hathaway (BRK.A) released the proxy statement for the previously announced special meeting and set the date for January 20 at 9:30 a.m. in Omaha. As the company announced in November when the Burlington Northern Santa Fe (BNI) acquisition was announced, a shareholder vote is not required to approve the acquisition itself. However, the 50-for-1 stock split does require shareholder approval.

Shareholders will be asked to vote on the following questions:

Prem Watsa, Chairman and CEO of Fairfax Financial Holdings (FFH), has often been referred to as “Canada’s Warren Buffett” due to his successful insurance and investing track record. However, in a recent interview with canada.com, Mr. Watsa expressed very different views regarding inflation compared to Warren Buffett’s recent statements on the subject. A few excerpts from the interview appear below.

Inflation Expectations

The Bureau of Labor Statistics (BLS) released its November report on employment Friday morning which shows that unemployment dropped to 10.0% from 10.2% in October. While any drop in the “headline” unemployment rate is likely to be greeted with celebration (or at least relief), Friday’s report actually highlights several negative trends:

• Non-farm payroll employment fell by 11,000 jobs in November which is an improvement compared to the average of 135,000 job losses over the prior three month period. However, this seemingly modest number of net jobs lost obscures the fact that job losses were concentrated in construction, manufacturing, and information technology while temporary employment accounted for much of the gain (in addition to a smaller gain in health care employment). Apparently, many permanent jobs were lost while temporary jobs partially replaced them – not a trend likely to add to consumer confidence.
• The civilian labor force shrunk by 98,000 in November. The “not in the labor force” group rose by 291,000 in November. To the extent that not all of these individuals voluntarily left the labor force during the month, it is obvious that a large number of “discouraged workers” are included in this statistic. Of the total number of people not in the labor force, the BLS estimates that approximately 5.6 million want a job but are not included in the official unemployment statistic because they have not actively seeking a job.
• Broader measures of unemployment, such as U-6 continue to show very high levels of labor force under-utilization. U-6, which includes marginally attached workers as well as those employed part time due to difficulty finding full time employment, fell to a seasonally adjusted 17.2% in November from 17.5% in October.

Due to natural growth in the labor force associated with a rising population, the United States economy must add a significant number of new jobs each month simply to keep the long term unemployment rate constant. President Obama has stated that the United States needs to create 150,000 jobs per month just to keep pace with population growth and keep the unemployment rate constant:

More details are emerging regarding the management transition at NetJets earlier this year when David Sokol was named Chairman and CEO after Richard Santulli’s unexpected resignation. Last month, Mr. Sokol granted an interview with The Columbus Dispatch regarding his turnaround plans for NetJets and predicted at least break even results for 2010. In a New York Times article published Friday, some interesting details are provided regarding the management transition, Mr. Sokol’s cost cutting plans, and his overall management style. A few brief excerpts appear below.

Santulli Unhappy With Oversight from Berkshire

Morningstar has announced the launch of its corporate credit ratings initiative which will initially cover 100 companies with plans for expansion to 1,000 companies as additional credit analysts are hired in the coming months. As we have discussed in recent months, the economic moats of the established credit rating firms such as Moody’s and Standard & Poor’s has continued to shrink in light of multiple high profile ratings failures during the financial crisis.

According to a Wall Street Journal article, Morningstar is leveraging its equity research analysts to conduct the credit research work. The company has hired two credit analysts and plans to hire ten more in the coming months which will expand coverage to the 1,000 company target. Morningstar plans to stick with corporate credit ratings and will not rate individual bond issues or complex structured products.

The Royal Gazette, a Bermuda based newspaper, reports that reinsurers have posted a second straight quarterly increase in policyholders’ surplus as a result of firmer pricing and the absence of large catastrophes during the 2009 hurricane season:

The combined surplus of 19 reinsurers climbed 12 percent in the three months ended September 30 to $74.1 billion, the Reinsurance Association of America said today in a report. The surplus, a measure of assets minus liabilities, has improved for two quarters after shrinking in the previous six.

As investors, most of us rely heavily on professional journalists who are paid to uncover breaking stories on the economy and individual companies. In addition to reading direct sources of information on companies, access to quality journalism can often influence investment decisions. From a broader standpoint, high quality journalism is also necessary for maintenance of a free society.

The question of when “news syndication” becomes outright theft will be a defining issue of the next decade and will determine whether a viable economic model exists for professional journalism.

Historians writing about events that have faded into a distant memory are challenged by the need to accurately portray these events and to provide analysis and commentary that sheds light on what happened and why. In contrast, writers covering current events where the end of a story is not yet known face a much more difficult task. Their interpretation of events may prove to be inaccurate or embarrassing in the not-so-distant future particularly when dealing with a subject related to technology.

Ken Auletta is apparently a brave author given his willingness to write about a story where the ending is still very much unfinished in Googled: The End of the World as We Know It. Mr. Auletta provides a great deal of insight regarding Larry Page and Sergey Brin, Google’s (GOOG) founders, along with a good description of Google’s meteoric rise over the past decade. However, the more interesting aspect of the narrative involves the forward looking insights provided by Mr. Auletta and many technology leaders who are quoted extensively throughout the book.

Warren Buffett met with students from Rice University’s graduate school of business Friday. Each year, Mr. Buffett meets with several groups of business students and provides advice on business and investing topics. According to an article in the Houston Chronicle, Mr. Buffett made some comments regarding peak oil and the prospects for electric cars:

Goetgeluk [President of Rice University's finance club] asked what Buffett thought of the peak oil theory — that oil production has peaked and will only decline in the future — and what he believed would replace carbon fuel. Buffett told him that in 20 years, he believes all the cars on the road will be electric. He’s already invested in a Chinese company working on the technology to make it happen.

In the CNBC video recorded Tuesday and shown below, American Express (AXP) CEO Ken Chenault comments on credit conditions at American Express as well as broader issues associated with consumer spending. As we have noted in the past, economic recovery will ultimately depend on the extent to which consumers are willing and able to spend.

At a time when unemployment appears to be headed for a sustained period above 10 percent, will the American consumer be able to hold up the 70 percent of GDP accounted for by consumption? As we reported Monday, Warren Buffett significantly increased Berkshire Hathaway’s (BRK.A) investment in Wal-Mart (WMT), a company that has seen flat stock price performance for an extended period. While we do not know the rationale for the purchase, it is entirely possible that Mr. Buffett may view the shift of consumers to low priced retailers to be a long term trend.

Berkshire Hathaway (BRK.A) has released a new 13-F filing Monday which reveals the composition of the company’s equity portfolio as of September 30, 2009. In addition, the company released an amended 13-F filing for Q2 which shows a position in Exxon Mobil (XOM) as of June 30, 2009. This was previously not disclosed due to Berkshire’s request for confidential treatment of the position.

Highlights

Over the past several months, there has been a lively debate between those who see rampant inflation ahead and others who believe that deflation is more likely. While inflation expectations implied by the bond market are still relatively tame, the market price for gold, oil, and other commodities has been increasing while the dollar has been in decline.

Warren Buffett has commented on massive “greenback emissions” and the tendency of politicians to favor monetizing debt rather than imposing more obvious choices such as tax increases or spending cuts. Gary Shilling, President of A. Gary Shilling & Co., has taken the other side of the debate in a recent interview with Steve Forbes. Mr. Shilling has a long track record of prescient macroeconomic forecasts and was one of the few economists to predict the disinflation of the 1980s.

The drama associated with Kraft’s (KFT) hostile takeover bid for Cadbury (CBY) has been widely reported in recent weeks. With Kraft’s decision earlier this week to make a formal bid that did not sweeten the terms of the original offer, it appears that we are in for several months of high-stakes wrangling before Cadbury shareholders make a final decision.

Insurance underwriters spend most of their time estimating risks and setting premium rates at a level that will result in acceptable underwriting profitability. One of the fascinating aspects of insurance is that premium rates may not always account for “black swan” events. Black Swan events refers to scenarios that are considered to be extreme outliers.

In the financial markets, many observers believe that the normal distribution does not accurately represent events as they are observed in the real world. For example, Benoit Mandelbrot’s book, The Misbehavior of Markets, goes into great detail regarding the failure of the financial markets to adhere to the normal distribution which forms the foundation of assumptions made in the efficient market hypothesis.

During the worst of the financial crisis, investors were eager to obtain assets that promised total safety even if that meant giving up any prospect of positive after tax real returns. In an environment where many were talking about a second Great Depression, inflation was the last risk many investors were thinking about. This behavior caused inflation expectations, as measured by the difference between the ten year Treasury Note and ten year Treasury Inflation Protected Securities (TIPS), to approach zero. For some additional background on inflation expectations and TIPS, please click on this link for a previous article covering the topic.

As the Financial Times reported Monday, inflation expectations in the United States and the UK have been reaching levels not seen since late last year. In the case of the United States, implied inflation expectations appear to be pushing past 2%. We have prepared the following chart which plots the ten year yield for regular Treasury Notes and TIPS as well as the implied inflation expectation based on the difference between the two yields:

Berkshire Hathaway (BRK.A) reported results for the third quarter following the close of trading Friday. Operating earnings per share were nearly flat at $1,325 per A share, down slightly from $1,335 in the third quarter of 2008. Operating earnings per share for the first nine months of 2009 declined 11.8% to $3,572 per A share, down from $4,048 per share for the first nine months of 2008.

Net income per share for the third quarter more was $2,087 per A share, more than triple the net income recorded in the third quarter of 2008. However, because net income includes the effects of investment and derivative gains and losses, it is more meaningful to focus on operating earnings per share rather than net income per share.

Wesco Financial Corporation (WSC) reported results for the third quarter Friday. The company issued a press release and filed the 10-Q report with the SEC. Wesco Financial is a publicly traded, 80% owned subsidiary of Berkshire Hathaway (BRK.A). Berkshire Hathaway also released third quarter earnings Friday.

Wesco reported net income per share of $1.39 for the third quarter and $6.01 for the first nine months of 2009 compared to $2.27 for the third quarter of 2008 and $8.21 for the first nine months of 2008. The company’s results continue to be impacted by weakness in the CORT furniture rental business and Precision Steel’s industrial businesses. In addition, investment income in 2009 has been negatively impacted by lower short term interest rates as well as reduced dividends from Wells Fargo and U.S. Bancorp. These negative developments were partially offset by improvements in underwriting results at the insurance subsidiaries.

Fortune Magazine has named Apple (AAPL) CEO Steve Jobs as “CEO of the Decade”. There is no denying the fact that Apple has delivered for shareholders over the past decade. As the Fortune article states, Apple’s market capitalization has risen from $5 billion in 2000 to approximately $170 billion today. This has been due to Jobs’ ability to create a culture of innovation at Apple that has resulted in groundbreaking new technologies such as the iPod and iPhone, not to mention the company’s widely acclaimed personal computers.

Many Berkshire Hathaway (BRK.A) shareholders and other observers have been speculating that plans to split the company’s Class B shares 50-for-1 may result in Standard & Poor’s adding Berkshire to the S&P 500. Standard & Poor’s maintains criteria related to trading volume that may have disqualified Berkshire in the past. This raises the question of whether inclusion in the index makes any real difference for long term shareholders.

Glaring Omission

As reported earlier today, Berkshire Hathaway (BRK.A) has entered into a definitive agreement with Burlington Northern Santa Fe (BNI) to acquire for $100 per share in cash and stock the remaining 77.4 percent of outstanding BNSF shares not currently owned by Berkshire. In addition, Berkshire Hathaway will split its B shares 50-for-1 in order to accommodate a share exchange for smaller owners of BNSF shares.

This transaction, which will bring Berkshire’s investment in BNSF to $44 billion including shares already owned, is the largest acquisition in Berkshire Hathaway history. What does this acquisition mean for Berkshire Hathaway shareholders?