UncleLongHair

Berkshire + Burlington = Hypocrisy, Expediency and Full Dose of Ego?

> Just a few short months ago Buffet was all doom and gloom
> saying our economy was in financial chaos and we were on the
> road to ruin.

He wrote an op-ed piece in October 2008 telling everyone to buy American stocks, and he put his money where his mouth was. This turned out to be a mistake as he bought just before the worst of the disaster.

There are no quotes from Buffett about "doom and gloom and financial chaos". You are making that up.

Berkshire + Burlington = Hypocrisy, Expediency and Full Dose of Ego?

I agree that the deal is out of character. Buffett broke his 3 cardinal rules: don't issue stock, don't issue debt, and don't split the stock. He broke all 3 rules in the same deal.

He obviously stretched into the acquisition, and paid a pretty price as well. This is a big departure from his previous deals in almost every way.

However, I don't think this is simply hubris or some unfulfilled childish infatuation with trains. Berkshire has for a long time needed major operating businesses to go with the insurance and investments, for numerous reasons. One is simply to maximize the earnings potential of the company, but I think this deal goes beyond that.

I think that succession and hence Berkshire's long-term health factored into this deal in a few ways. I have long been of the opinion that it would be a big mistake for Buffett to leave Berkshire to his successor with billions of cash requiring investment. A single bad investment made by his successor could undo decades of careful building. He also does not want to give his successor a bunch of hard problems to address such as betting the company on whether or not to provide hurricane reinsurance. Finally, he probably has quite a short list of possible successors, and knows their skill sets.

I think the Burlington deal addresses all of these questions. It transforms Berkshire into a huge operating company full of businesses that are generally easy to run. It provides an enormous sponge to absorb Berkshire's cash -- Burlington requires billions of cap ex every year for maintenance and growth. Burlington is also related to Bekrshire's energy businesses, and I suspect that Buffett's successor will come from there (i.e. David Sokol).

So with a single deal, Buffett has transformed Berkshire into a more secure, easier to run company, with indefatigable earnings power. The opportunity to do this during a market trough, I believe, explains Buffett's willingness to stretch into it.

U.S. Housing Has Bottomed

Well if you are defining a recovery as housing prices returning to the level they were during the worst housing bubble in 50+ years, then you may have to wait a long while indeed for a recovery.

The housing industry is a major driver of the economy, and the type of "recovery" that is required to start economic activity is a clearing of the housing inventory overhang and an increase in the number of transactions. These will allow lenders to lend, builders to build, etc. It isn't important that we see beachfront condos selling for $1M+ before we have an economic recovery.

Higher housing prices are probably in the cards over the mid term anyway due to inflation.

Why I Bought Abbott Laboratories Despite Health Care Reform

>>> It is no secret that our dear leader, a friend of the common worker, whose presidential campaign was paid for by unions, has been repaying his socialist backers <<<

At this point I stopped reading. Is this an investment idea or a political OpEd piece?

Brookfield Asset Management: Cashed Up and Ready to Buy

BAM netted $1.1 billion in profit from the sale of Falconbridge (after taxes) so I don't think it is fair to say they sold it cheap. This was sold in 2005 before the big manic run-up before the 2008 market crash but there was plenty of appreciation. These proceeds funded some of the hydro deals which ended up being very profitable as well.

The recent sale of hydro assets was just a partial sale, a 50% interest in certain assets. They still own a majority of them. This just seems like an example of "selling high to buy low". Obviously, there are numerous opportunities today for that money. I think it will be interesting to see what they do.

A Reasonable Look at Steak N' Shake CEO's Raise

What do California IOU's have to do with overpaying a CEO?

Biglari now makes about 10x what his hero Buffett does -- and that is only considering one of his many jobs. Introduces quite a gap between "talk the talk" and "walk the walk".

ACME United Corp. Singular Research's Annual "Best of the Uncovereds" Conference Presentation

Thanks for providing this transcript. I've been following Acme for years and think they are a great little company, high growth, high ROE, entrenched in their markets and constantly finding new ones. Yet the stock never seems to move...

Q2 Canadian REIT Earnings: More Downsides Than Upsides

BAM and BPO are not REITs. I don't know why they are often considered as such. Especially BAM, which owns assets including hydro power plants and timberlands. Neither of them pay out all of their earnings in a dividend like a REIT.

Fannie and Freddie: The Heat Is On

You have a bunch of hedge fund managers claiming that it is very likely that FNM and/or FRE get bailed out by the end of Q3. What significance does that date have? Oh yeah that is the date at which their portfolios are marked to market for their performance bonuses.

KHD Humboldt Wedag: An Undervalued Winner

Thanks for the write-up. I am also long on KHD.

The two concerns that seem to spook people are 1) KHD is in a cyclical business near the peak of its cycle, and 2) plants are being overbuilt in regions that don't have the economy to support them and demand will hit a wall (really just a variation on #1).

I don't accept this at face valuek, though I can't completely dismiss it because growth rates of 50-100%+ are not sustainable for any significant duration. The cement supply business (i.e. Cemex) is indeed cyclical, though it has never seen growth rates like this. The cement *engineering* business (i.e. KHD) may be different, but we don't really have enough data to know.

Anyay I wonder if you can comment on this.

On the flip side, the company has been making noises about acquisitions for several quarters now. Last quarter they said they almost closed something but it fell through at the last minute. This quarter they said they have hired an "experienced professional" tasked specifically with finding a deal and have initially earmarked $100m in US Dollars for investment purposes. Note that not all of the cash on their balance sheet is available for deals, since it is offset by deferred revenue liabilities.

I also think that Michael Smith has assembled a great management team. When MFC Bancorp initially took over KHD, he assumed all the executive positions, but one by one handed them off to other people, and the team he has put together really impresses me.

If you want to read some very colorful history of Michael Smith, read about his background at Mercer International and his former business partner Jimmy Lee. Lee still runs Mercer and Smith has been making activist shareholder noises with letters to the board.

Steak n Shake: Watching and Waiting as Biglari Names Himself CEO

Biglari was not that far on margin with the FRN investment -- there was some margin for a short while, but cash from insurance proceeds were on the way so he effectively only borrowed against that.

I do however agree with most of the rest of User 71887's post. Aside from performance at the Lion Fund, Biglari's single most positive action was the investment in FRN, and it isn't clear what portion of that was luck vs. skill. Aside from that, all he has provided is coining a lot of phrases from Buffett and talking about a strategic plan. Now he's got two large resturant companies without operational management, and probably has his hands full.

Changing Tides at Steak n Shake

The CEO of Biglari's other restaurant company, Western Sizzlin', also just departed. So how he's got two restaurant companies without a CEO. I hope he's got a plan.

Did Fannie and Freddie Cause the Mortgage Crisis?

>>> Freddie and Fannie have untold billions of subprime loans on their balance sheet. BILLIONS AND BILLIONS. <<<

I've heard this hysterical statement uttered frequently in reference to FNM and FRE, which I think demonstrates the basic misunderstanding that many people have, both laypeople and professionals, about FNM and FRE.

First off, FNM/FRE's subprime exposure is not "untold". It's clearly reported in their investor presentations. Here's FRE's latest, from this month:

freddiemac.com/investo...

Page 42 shows their retained portfolio breakdown, and that about 13% of their retained portfolio, about $92B, is in sub-prime mortgages, and these have on average a 37% credit enhancement.

Second, many people hysterically scream "billions and billions" implying that the exposure is endless and fatal. Let's look at the numbers. A billion is a big number. A trillion is an even bigger number. FNM and FRE have guaranteed about $5.2 trillion of mortgages. One billion is 0.02% of that. FRE's $92 billion of retained subprime mortgages is 2% of that. The exposure is simply not enormous.

Subprime issuance has come almost to a complete halt, and subprime mortgages tend to prepay very rapidly, so within a year or two I expect FNM and FRE to have very little sub-prime mortgages in their portfolio.

Bill Ackman's Plan to Save Fannie and Freddie

Successfully shorting another company 5 years ago doesn't give him the moral high ground when trying to line his pockets again. He tries to wrap himself in the shroud of a do-gooder, but he's just out to make a buck.

The SEC just issued subpoenas to short sellers investigating market manipulation, I wonder if Ackman is on the list. I bet he is.

Did Fannie and Freddie Cause the Mortgage Crisis?

You raise some interesting questions, the answers to which I suspect are not cut and dry.

>>> For my part, I have two questions for those who take the position that the GSEs played no significant role in causing our current mortgage problems. <<<

That is not my position, but I've got an opinion on everything.

>>> First, what economic justification is there for the dramatic increase in the share of loans guaranteed or held by the GSEs between 1980 and 2003 that is seen in the first graph presented above? What sense did it make to increase the ratio of such loans to GDP by a factor of 12 over this period? <<<

I guess you're asking why the GSE's increased their market share during this period. I guess the obvious answer was because they could -- they're for-profit enterprises, and increased market share can lead to increased profits if that business is properly written (i.e. proper risk-adjusted returns). Perhaps I'm misunderstanding the question.

To me, FNM and FRE generally guarantee the most conservative and basic mortgage products that exist in the country, and seeing their market share increase is a source of comfort, rather than alarm, because it means that a greater portion of the country's mortgages are conservatively financed and underwritten properly.

In fact, I believe it was the decline in the GSE market share starting in 2003 that foretold the mess that we're in now, because other, more reckless and less stable companies took market share from the GSE's, leading to a higher proportion of risky mortgages in the system.

Another data point to consider is that the default experience on mortgages written from about 2000 to 2005 has been far less than those written in 2006 and 2007 (for a snapshot of these numbers, look at FRE's recent investor presentation which shows cumulative defaults by year). It's the 2006 and 2007 loans that are the major problem. The loans that were written when FNM and FRE were at their recent market share peak are performing well. I think this indicates that FNM and FRE are part of the solution, not part of the problem.

>>> Second, what forces caused the explosion of private participation in a much more reckless replication of the GSE game? A year ago, I suggested one possible answer-- private institutions reasoned that, because the GSEs had developed such a huge stake in real estate prices, and because they were surely too big to fail, the Federal Reserve would be forced to adopt a sufficiently inflationary policy so as to keep the GSEs solvent, which would ensure that the historical assumptions about real estate prices and default rates on which the models used to price these instruments were based would not prove to be too far off. <<<

Once again, it's a free market, and these companies thought they could make a lot of money playing the GSE's game. But they had a permanent disadvantage in funding costs that they had to make up elsewhere, and they tried to do this by inventing new mortgage products and laying off some of the risk to the bond market. This worked for a while, which is why GSE market share declined while the non-GSE profits boomed. But that chicken has come home to roost, and, as the Wells Fargo CEO recently said, things now look normal for the first time in a long while.

Uncle