CaptainJJack

Berkshire Hathaway Stock Portfolio: At Risk of Resembling an Index Fund?

I own BNI, and I disagree with Berkowitz and the critics of Buffet's deal.

Yes, he paid a lot. But, in my opinion, you get a lot when you become an insider.

But, by far, the overriding dynamic is that railroads are now clear monopolies in most of the areas they operate. Just look at a railroad map of the US, and you find little overlap.

The main competition is trucking, and if you look at the economics of that business, you find it turns on finding and holding on to truck drivers.

Their key constraint is capital: They have to find a way to fund the initial costs of a trucker getting into the business. I haven't seen much on this lately, but I am guessing that banks are reluctant to loan person enough money to buy a rig and finance their first years in operation.

So, I think the railroads will be very profitable in the future, and I am willing to bet rates will rise even if other prices are falling.

Large Caps Could Lead the Market Much Higher

We have had a HUGE run-up of P/E multiples since March. In fact, I could argue that the ONLY thing that has really changed since March are the P/E multiples.

Anybody who has been in this market over the last year knows how notoriously bad the forward earnings numbers are -- just take a look at forward estimates at the start of this year for THIS year.

While there is a lot of manufacturing leverage now that companies have cut so much payroll, the current fixed infrastructure is currently being supported by large government (both US and Abroad) stimulus.

The key question is: What happens when the stimulus is withdrawn?

The key metric is the top line, not the bottom line: Those forward earnings are only as good as the sales projections.

As an aside, there has been a significant tax cut which, if I remember the numbers right, amounted to 2/3 of the tax stimulus proposed by some Republicans ( there never was a unified Republican stimulus alternative, but the number $400 billion was often used as the tax cut required --- and the only stimulus needed).

We should have seen the top line numbers rising by now if the tax cuts were as powerful as they were being promoted, and I for one, do not see it.

As far as I can see, the $250 Billion tax cuts have had almost zero effect, and this is similar to the tax rebates of last year--coming into effect in at the end of the 2nd quarter, after the recession was 2 quarters old, and just before the economy tanked.

GE: Buy on Valuation

I like GE, too, but at 13 times or less, not 17 times. I like the industrial businesses, but I have never liked the NBC or finance businesses.

I think the earnings history is not very useful. Although I am clearly speculating, I believe that Welch used to "manage" earnings through the finance arm (especially when they owned Genworth), and they often made their numbers by selling things, especially the real estate investments.

Immelt does not have those options, and he is at least making an effort to rein in the cowboys at GE finance. Still, with consensus at around $1/share next year, the stock seems fully valued.

Then, too, the dividend has been cut by two thirds.

So, I like GE long term, but given the business GE is in, I think that the stock price will face a lot of hills and valleys, and I can wait

A Windy Credit Market Overview

I used to own Boeing, but I sold it when Mulally left, and I still own GE, although I recently sold at $14.15, after getting in at over $20 last year.

I made a lot of money on Boeing, but I lost on GE (obviously).

I followed the WTC dispute, and I expected this result. You would have to be brain dead not to see what the Europeans were doing, and if it continues, it will eventually kill Boeing.

But, Boeing is not going to do much to pursue this further. Their whole business is selling to countries that have protectionist policies (including the US), and they are not going not start stirring up a trade war.

The whole bet on Boeing right now is the 787, and if it were not so far behind, I would be interested in the stock. The key is NOT whether they will get it done, but rather how much will it end up costing them.

I've heard numbers in the $20 billion area, and if that is even remotely accurate, Boeing's profit prospects are poor even if they sell a ton of these planes.

GE, as you point out, is a play on GECC, and with the stock at almost 1.5 times book, there is at much downside as upside even if GECC works out.

Don't get me wrong, GE, especially ex GECC and Universal, is a GREAT company, and a pretty good long, long term bet.

But, I cannot get enthusiastic about the stock at prices above $14, even though Goldman and Morgan Stanley both seem to feel there is strong short term upside.

While I cannot take issue with their seeing a short term rise to $18 (Goldman), I cannot see any reason why it isn't equally likely to fall to $10 if new problems emerge in GECC's commercial portfolio, as seems a better than even chance.

Why I'm Long General Electric

I bought GE because it is levered to the US economy; i.e. if the US economy does well, GE will do VERY well.

Unfortunately, I bought GE at $21 - $23, also thinking that the dividend was sacrosanct.

But that same leverage (and the drastic reduction in dividend) worked against me; i.e. if the US economy does poorly, GE will do VERY poorly.

I still hold GE in the belief that it is even more levered to the US economy now, and I am hoping that this overcomes the dilution and the lower dividend.

But, I am a buy and hold investor. I believe that GE will fix itself, return to a high ROE, and over time the increasing book value will show up in the stock.

While it is not unreasonable to see this stock rise to the mid teens in the short run, I do not consider it a slam dunk, and it is just as likely to bounce around the bottom until the US economy recovers, especially because the dividend is now much lower than before.

But, I hold the stock now because I am incredibly poor at timing the market. Like Warren Buffet suggests, when the robins start singing, spring is already here.

Is Hydrogen the Best of the Green Fuels?

We are living in a hydrogen economy RIGHT NOW. The issue is what do we use as the transport mechanism.

One of best transport mechanism for hydrogen is natural gas with 4 hydrogen molecules attached to one carbon -- pretty efficient.

Gasoline and other oil derivatives aren't bad, either. The hydrogen packed in one milliliter of gasoline is much more than than same amount of TNT.

So, there are efficient ways of transporting the hydrogen, but there are also problems, the biggest of which are the by products, primarily CO2.

That leads to pure hydrogen where the by product is water.

Enthusiasts anticipate the obvious issue that while hydrogen itself is pure, most of the ways of generating pure hydrogen have environmental cost. The counter is usually electrolysis driven by wind or solar --- how can anyone argue with that.

Sure the costs are high, now, they continue, but investing in "green technology" will drive down the costs, and hopefully soon, hydrogen will become feasible.

Transporting pure hydrogen will always be problematic. At ambient temperature and at normal pressure, a car tank worth of hydrogen will take you about 4 feet. Compression and liquefying are technical answers, but at what cost?

ALL of the transport alternatives for pure hydrogen transport are poor, right now. SIGNIFICANT new infrastructure investment is required, and the physics of pure hydrogen are daunting: the atoms are so small, they invade any container material making it brittle over time.

For my money, the two best hydrogen transport mechanisms I've found are methanol (essentially methanol with an oxygen atom stuck in that the Germans used as a fuel alternative in WWI and WWII) and, hopefully, the new algae technologies that Exxon is investing in.

The new fuel cell technologies may also be promising, although it is impossible to separate the hype from the truth, especially when it comes to how long they last and how much it really costs to own and run one.

Pure hydrogen is a long, long,long,long long ,long way off, in my opinion.

Obama's Donut Economics

You can add tax policy to the list of ineffective job creation ideas.

The tax cuts under Bush helped low wage workers buy more Chinese goods at WalMart and high wage workers buy more BMWs from Germany.

You factor out the purchases financed by home equity loans, and the US GDP did not grow at all under Bush lower taxes.

Obama's tax cuts are no better and are about as effective as the tax cuts last year. What people didn't save, they bought from China.

What Shorts Were Doing Ahead of GE's Announcement

I bought GE at 22 and watched the stock price drop then rebound.

I still own it.

To me, the key question is how much cash the industrial side will generate. If the industrial side can carry them, the stock should rebound, but if not, we are looking at MUCH more dilution, soon, and I will get out.

Berkshire Hathaway's (Warren Buffett) Portfolio Update: Q4 2008

As someone who owns BRK, my biggest concern had been that BRK's ROE was falling, and it was getting to a level, at around 12%, that as an investment, even Warren Buffet would not want to own it.

The problem had been the enormous cash balance; often it was $50 billion or more, and it was earning much less than 5%, after tax. Worse businesses in BRK tend to generate a lot of cash -- so the problem seemed to be getting worse.

Even though BRK has not performed well, recently, I believe that the moves he is making well set up BRK VERY well in the future.

As for the sales of PG and JNJ, it would not surprise me to find out later, he looked at his ability to get such great deals in the bond/preferred space caused him to lighten up on stocks -- especially stocks that have similar risk characteristics to his new bonds; that is, lower downside risk but lower upside.

Of course, I am speculating like everyone else, but I see NOTHING in these latest moves to cause me to think, like Kass Berkowiz (sp?) and Cramer, that Buffet is losing his touch.

Finally, I have to believe that a company with a balance sheet like BRK is a great stock to own over the next few years, especially if things do not improve soon, as I fear.

On Buffett-Back Riding

I have owned BRK for years, and while I did not follow Buffet into GE and GS, I would have done the deals, and I still think they will work.

What I look for is high ROE with low P/E's; i.e. good stocks at cheap prices.

I believe the ROE is the single biggest test of competitive advantage, and if the ROE is consistently high for long periods of time, there is a reason for it. I think GE and GS would fit that bill today, as would GE.

However, there are three things that are SIGNIFICANTLY different from the eras where Buffet made great picks:

1. The credit system is not functioning, and even strong companies can get killed if they cannot get financing. This is a system that may be permanently damaged, and it threatens GE, GS, WFC, USB, and AMEX.

2. The crisis is global, and it is occurring across all asset classes. It is the most serious crisis in my lifetime, and it will last for as long as it takes to get in the financial system leverage down.

3. The role of government has gone from a passive, referee to an active investor with objectives that include a lot more than getting a good return.

We are in uncharted waters, and Buffet is basically making the bet that things will work out. He has the staying power to make that bet work, but it is certainly not without significant risk.