Q3 2009 Earnings Call Transcript

November 5, 2009 5:00 pm ET

Q3 2009 Earnings Call Transcript

November 5, 2009 10:00 am ET

Q3 2009 Earnings Call

November 5, 2009 4:30 pm ET

Q3 2009 Earnings Call

November 6, 2009 01:00 pm ET

F2Q10 (Qtr End 09/26/09) Earnings Call

November 06, 2009 11:00 am ET

Riddle me this.

An industry gets into trouble due to chasing fads, loading up on debt and overpaying for property. Many participants in said industry flirt with insolvency due to difficulty meeting debt service and asset values that have dropped below liabilities. This industry has been gifted with a special tax provision that allows them to pay no corporate taxes as long as they pay out 90% of their income to their shareholders. By now I am sure you have guessed the industry, but let's move on .

There is no doubt after the third quarter's earnings reports that the agency-backed mortgage REIT sector is beginning to splinter into markedly different strategic approaches. FOMC minutes confirm the high demand for agency MBS, noting that:

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

Q3 2009 Earnings Call

November 4, 2009 10:00 am ET

I’ve just finished reading Too Big to Fail, by Andrew Ross Sorkin (Penguin, October 2009) and I really enjoyed it. It reads like a novel and takes you through the events, people and stories around the financial panic last year. It starts off with JP Morgan agreeing to buy Bear Sterns and ends after the government decides to inject billions of dollars in the top financial institutions last October.

As mentioned Friday morning, we added back to our Blackstone Group (BX) exposure as the stock jumped back over a key moving average on the back of a solid earnings report. After 7 sessions of purgatory, the stock is in a better position today (click chart to enlarge).

Unlike a "widget maker" type of company, I will give analysts a lot more leeway for a firm such as this with so many moving parts. However, the difference in revenue between what analysts estimated ($450 million) and actual ($603 million) is astonishing. As long as markets hold up, it should allow Blackstone to continue to unload its prospects onto a world full of newly minted US dollars and nowhere to put them. [Oct 12, 2009: Blackstone Group Surges on Potential Listing of 8 Portfolio Companies, and Selling of 5 Others] Full (and lengthy) report here.

• A managerial "wish list" will not be filled at shareholder expense. We will not diversify by purchasing entire businesses at control prices that ignore long-term economic consequences to our shareholders. We will only do with your money what we would do with our own, weighing fully the values you can obtain by diversifying your own portfolios through direct purchases in the stock market.
• We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of issuance, not only mergers or public stock offerings, but stock-for-debt swaps, stock options, and convertible securities as well. We will not sell small portions of your company and that is what the issuance of shares amounts to on a basis inconsistent with the value of the entire enterprise.

Obviously, the deal is not cheap by any financial metrics, but Buffett must believe that it will be beneficial to shareholders. Time will tell.

One item that has not been mentioned in the press is how the BNI deal fits into the Berkshire Hathaway model. As we all now by now, Buffett prefers owning entire companies as opposed to owning smaller positions. There are at least two major benefits from owning entire companies:

Q3 2009 Earnings Call Transcript

November 6, 2009 9:00 am ET

Q3 2009 Earnings Call

November 6, 2009 8:30 am ET

I have some commentary on the new Too Big To Fail resolution bill going through the Financial Services up here at The Nation, you should check it out.

A few things I didn’t get the chance to bring up.

If you are not familiar with what an option ARM mortgage is, read this piece [Aug 13, 2008: Option ARMs- Who Thought Up these Time Bombs?].

I too was unfamiliar with it, despite following markets closely, until I read a BusinessWeek article in October 2006. Interest only mortgages? Yep, I knew about those. Alt A mortgages? Yep. [March 19, 2008: Alt A Mortgages Beginning to Break Down] But option ARMs? Wow - eye opening.

Delphi Financial Group (DFG) third quarter operating income of $1.00 per share was ahead of the Zacks Consensus Estimate of 87 cents per share. Last year, the company had reported earnings of 26 cents per share. Growth in operating earnings was driven by improved investment performance and underwriting profit margins.

Net income was $20.8 million, which significantly improved from a net loss of $9.8 million in the prior year quarter. Premium and fee income declined slightly to $342.6 million from $345.0 million in the prior year quarter. We expect premium and fee income to remain under pressure because of the recessionary conditions.

By James Kwak

Via Yves Smith, John Hempton analyzes the quarterly results of Bank of America (so-so) and Fannie Mae (terrible). The underlying issue is that bank quarter-to-quarter results are largely driven by the amount of provisions they take against future loan losses. You can think of this as a very rough approximation to marking-to-market — instead of waiting for the loans to default, you estimate how many loans will default in the future (that estimate should change as the economic situation changes) and put that amount of money into reserves. Then when the defaults actually happen, you take the money out of reserves.