maz

Has Buffett Lost His Mind?

Duude,

Cap & Trade would benefit BNI far more than its likely loss of coal traffic - which in any case would not be disastrous - you can't switch electricity generating coal power plants overnight and they are around 50% of total.

OTOH cap & trade puts rail at enormous advantages over trucks so bring it on I say

Long term this looks good but I reckon Greenwald is right in the next 5 or even 10 years - BNI will not improve Berkshire's results much (except you could say that earning a pittance on billions in cash is a poor alternative) & you'd have to adjust Berkshire's valuation downward if that's all you considered. But this is still a long term triple play imo

1. Oil prices go up long term because of excess demand over supply - regardless of currency
2. Oil prices go up as the US$ devalues because they are quoted in US$.
3. Rail stands to benefit from any cap & trade or other climate change legislation.

#3 might end up being the biggest benefit. In Europe rail is used on much shorter distances than in the US because of much higher (2x) gas prices, congestion and a much stronger environmental lobby & we can expect these trends to eventually hit the US imo

So I'd agree short term he's outta his mind but long term he's got it right & the trouble is that investors don't want to look one year ahead never mind 10 :-)

Healthcare Reform: Is It Worthwhile? Can We Afford It?

I agree with one major point

National healthcare will cost all taxpayiong Americans about 10% more of their annual income - doesn't matter whether that comes from direct taxes, value added taxes on goods & services, taxes on "rich", taxes or penalties on employers or rising insurance premiums (which must happen even to a federal option if you widening insurance to those who currently can't afford it).

Take a look at income tax bands in Canada & compare that to the US -

The highest federal rate is 29% above C$126,264. It's 26% above $81,452.

Each Province has different tax bands & rates. For example British Columbia charges 14.7% above C$99,588 & is in the middle of the pack. In addition we have a value added tax (both a federal & provincial one) that currently is set at a combined 12% although some items are exempted from one or both taxes.

A Slightly Sweetened Deal Should Be Good for Cadbury

Hi Veronique,

I follow Cadbury closely and think that absent a second bidder you have hit the nail on the head. In my opinion the current bid will not succeed for two reasons; the most important is that at 717p per share it is simply too low; the second is the proportion of Kraft shares at nearly 60% of the bid. Warren Buffett may be correct that it is a full value because Kraft shares are undervalued but Cadbury investors don't want stodgy old Kraft shares. Trouble for Kraft is they don't have enough cash or can't raise more debt on reasonable terms after the Danone deal.

Even 800p and 50/50 cash/shares may not get it done in a hostile bid but at least that's $53.50 per ADS and may get some to nibble. Media reports of top Cadbury investors wanting 900p ($60 per ADS) "before they get their calculators out" are probably just beating the bushes to drum up higher bids. I also think the reported Sanford Bernstein estimate of 860p ($57 per ADS) and 1020p ($68 per ADS) based on the Mars/Wrigley deal numbers are too optimistic for the reasons you state - the market has changed and Cadbury is not Wrigley!

On the topic of another bidder it could be that one will emerge now that Kraft has finally made a formal offer. I base this on the idea that potential suitors did not have to rush in before Kraft made their bid formal. Even now I think that we are only in the early stages of a long process.

It will be interesting following along.

Discl; I do not own Kraft or Cadbury shares

Why is the Market Ignoring American Express's Bad Report?

Rohan & Ramani,

How are your $24.50 short positions doing today :-)

Discover Financial: Quite Solid Results, All Things Considered

To make sense of the loan loss provisions when comparing to the 8.39% net charge-off rate you need to use the loan loss provisions on total managed loans as the charge-off rate is calculated on that basis

$381m is the loan loss provision for owned loans for the quarter. Including managed loans the figure is $924.4m for the quarter.

For the last twelve months owned loan provisions are around $2.6 to $2.7 billion so the lower figure for this month might indicate conservative reserving in prior quarters. Managed basis loan loss provisions are around $4.5 billion over the last 12 months

That figures to be about right. Managed loans are $51 billion and relatively unchanged throughout the period. $4.5b/$51b works out to around 8.82% - a tad higher than the 8.39% charge-off rate. Of course the two are not entirely comparable because of timing but it's a reasonable indicator that the company is adequately reserved if they are expecting charge-offs to rise to 8.5 to 9.0% in the next quarter.

The press release said the quarter's loan loss provisions were UP $873 from last year and down $154 million from the previous. Provisions for the quarter alone were $924 million and the balance sheet had

Cadbury Is Confident Beyond 2011

What a useless commentary after all the recent news article on Kraft's bid for Cadbury. I really expect much more from Zack's

Automatic Data Processing: Better Suited to Survive This Downturn than Its Competitors

Paychex is the better opportunity. You are correct on the dividend payout ratio but you pay dividends from cash not earnings - the cash payout ratio is still high but at 70% is better than the earnings payout ratio.

A big key for Paychex & ADP is the inflation/deflation debate. Right now they are both earning very little off customer float and their own cash because interest rates are so low & a deliberate policy to preserve capital & maintain liquidity. Paychex interest income is less than half long term average on $4 billion cash (float + own cash). If you believe we're in for Japan like deflation this will continue for many years. If you believe that at some time - may be 2, 3 or 4 years - inflation will really take hold then these guys will get a big boost

Bed Bath to Go Above and Beyond - Barron's

How can you back out $4 a share in cash to lower the P/E?

It doesn't make sense - cash is a balance sheet item and earnings - the 'E' in P/E - are an accrual item on the income statement.

What you are saying is that the $4 per share in cash and zero debt has no effect on the share price. Don't know about you but zero debt cash rich companies are worth a premium to me.

Why is the Market Ignoring American Express's Bad Report?

Looking at charge-off trends is somewhat misleading - it works reasonably well in a slowly increasing or decreasing managed loan portfolio but when the portfolio is rapidly increasing or decreasing the charge-off percentage is either under or over stated.

Right now Amex has a rapidly declining managed portfolio (owned + securitized loans) partly due to an intentional credit tightening by AXP and also due to a large reduction in spending - both of which are good in the short term imo as they will lead to first a stabilizing & then a reduction in charge-offs as underwriting is improved.

The reduction in total loans outstanding obviously affect the net interest income adversely but we also need to plug in the interest margin (which increased) and the charge-offs. Achieving a balance is important for the long term. But overall net interest income is usually no more than one-third of Amex business.

Of course transaction volume affects fee income but the discount % remains pretty steady. Fees for other banks issuing Amex cards are still increasing & of course here they don't take the credit risk.

The shares may not be worth what many thought they were last year but I would be far more concerned if the company's liquidity position were challenged than a few quarters of extremely high charge-offs. I don't think the liquidity position is in danger & in the current low short term interest environment both AXP & DFS are raking in low cost (to the companies) deposits which should further improve interest margins. Talk of paying back the government shows pretty much what AXP thinks of their liquidity position.

You certainly may be right that the share price could fall back -may be into the teens - and therefore you could make money shorting in the short term but this is no Citi or BAC and I think you are focusing too narrowly on the charge-off rates

Why Is Pepsico Buying Its Bottlers?

I agree with much of what is said in the article but I also think that this is a defensive move because bottlers thin margins can easily be erased in a recession. Having them in house avoids public spats or embarassing cash infusions from Pepsico as the parent company is unlikely to reduce the cost of syrups & concentrates to bottlers. I predict that margins will decline & the bottlers will be a drain on free cash flow long term. Corporations always spin an acquisition to be a positive and gloss over the negatives which include paying a premium for the shares.

Still whether accretive (I think it will be marginally accretive but will not give a good ROI) or defensive it would appear to be a reasonable move by the company.

Credit Card Issuers and Processors - How They're Faring in the Crisis

DFS & AXP access to TARP funds has less to do with debts piling up - managed loans outstanding at both companies has been roughly static over the last year & you can expect them to come down over the next year or so imo - certainly not "pile-up". The bigger problem for both companies has been liquidity as the ABS market for credit card loans virtually shut-down or became prohibitively expensive. DFS is doing a good job financing maturing ABS out of increased customer deposits but that has a big negative to earnings - first the IO strip associated with the ABS has to get written down and reserves have to be increased as the loans are now on the balance sheet. Combined with rising defaults we can see earnings depressed (negative) for the next year.

If FAS 140 eventually (2010) makes credit card companies take ABS on the balance sheet that will be a big event - $20 billion for DFS and $29b for AXP - the write-downs and additional reserving required will make both companies look poor and challenge Tier 1 capital adequacy - that's why you see lot's of cash on the books as both companies are in defensive mode & quite rightly so. If it doesn't happen then both companies will look really good on a Tier 1 capital basis - currently 17.1% for DFS. If the ABS were on the balance sheet that figure would be around 8.5 to 9%

Michael Hall: Natural Gas Is a Victim of Its Own Success

Gas Rig counts are now 810 (27 March) so almost down 50% from the high and going lower. It will not be long till this affects supply as depletion rates on new wells are so high - certainly not longer than 6 months imo although there could be an increase in LNG imports that could stretch things out a bit. Cimarex was forecasting dropping from 35 to mid-single digits in rig count!

Meet the Top 10 Low Carbon Footprint Vehicles of 2009

Good points about Diesel cars - particularly in Europe - 59 mpg (imperial)?? - which I must say sounds fantastical for any BMW on the roads you mention unless you have a sewing machine engine! -

Also a big key here is the the split of highway/city driving. Many living in urban areas doing the morning/afternoon commute in traffic everyday can have up to 80% city driving & in those circumstances the hybrid will kill any gas/diesel car on mpg.

Nearly all of the taxis Vancouver, Canada are switching to Prius for precisely this reason.

The 15 Most Cash Rich Companies

mkreisel,

You make the classic mistake of assuming that all debt is equal but it isn't. Debt on GM's balance sheet is completely different from that at a utility company (like Berkshire's Mid-American which holds 90% of Berkshire's debt. All utilities are funded with debt because of the royalty like stream of their revenues. This makes complete sense as debt funding is a heckuva lot cheaper than equity & the revenue streams are preductable way into the future. Contrast that with tech companies that have to re-invent themselves every 5 years or so or lose their revenue streams - they have to be very careful about using debt & need cash to invest in new ideas or acquire new ideas.

Also it is important to know interest coverage & leverage ratios - net debt in isolation is a pretty useless measurement


On Mar 13 02:35 PM mkreisel wrote:

> If we include debt, things look very differently:
>
> Ticker, debt, net cash
> XOM, 9425, 22582
> CSCO, 6848, 22683
> AAPL, 0, 25647
> BRKA, 36882, -11343
> PFE, 17283, 7272
> TM, 118626, -95745
> MSFT, 0, 20298
> GOOG, 0, 15846
> RDSA, 23269, -8081
> WYE, 11739, 2806
> IBM, 99925, -21018
> JNJ, 11825, 957
> INTC, 1988, 9855
> HPQ, 20458, -9203
> ORCL, 10238, 408
>
> Now things look quite different!
>
> In addition, many companies are burdened with massive pension obligations,
> the stuff that did GM and Bethlehem Steel in. For example, IBM has
> 19452 million on its balance sheet; XOM 20729 million.
>
> BRKA also has a maximum of 67 billion derivatives exposure, including
> 37 billion in equity index puts, 19 billion in CDS, and 18 billion
> in muni bond insurance.
>
> PFE has just squandered its cash horde on that panic deal with WYE.
> When the deal closes for good, PFE will have a monstrous debt load
> and very little cash left.
>
> So if you really like company with lots of cash, AAPL, CSCO, MSFT,
> GOOG, INTC, and XOM are your best choices.

Q4 Holdings of Bruce Berkowitz, Robert Rodriguez and Mohnish Pabrai

Sorry he holds Sears but didn't add - my mistake