Buffett cash won’t solve Bank of America’s problems
By Keith Mullin, Editor at Large, International Financing Review The views expressed are his own.
Warren Buffett’s $5 billion injection will not stop the rot at Bank of America.
If anything, it proves that the bank’s naysayers were right to be wary.
In the aftermath of the news, dealers aggressively marked BofA’s CDS levels tighter, and the stock leapt from $6.99 at Wednesday’s close to an intra-day high of $8.80 Thursday. But the stock slid all the way back down to close at $7.65. Even at that momentary intra-day high, it was still down 38 percent YTD and 81.5 percent off the long-term high of October 2007. Hardly inspiring.
Frankly I expected a bit more enthusiasm, but then again given the extent of the bank’s longer-term issues, perhaps my expectations were overdone. CEO Brian Moynihan still has a lot of work to do to avoid the slow grind to ignominy. I think the Buffett episode actually undermines Moynihan and makes him look a bit, well if not a bit of a fool, then certainly desperate.
This is, after all, the man who said publicly that the bank didn’t need to access capital markets, and that he would get the bank up to higher capital adequacy levels and stabilise the ship via a combination of retained earnings (tough in a potentially recessionary environment), disposal of risk-weighted assets ($150 billion or so), lay-offs, and the sale of non-core businesses.
Not only has Moynihan been forced to take in new capital, he clearly gave the impression that his only option was to go cap in hand to Buffett and accept a very expensive deal: cumulative prefs with a 6 percent dividend plus a ton of discounted warrants. And he can only get out on payment of a chunky exit premium that’ll cost him $250 million. I reckon that’s pretty embarrassing. I can’t imagine that existing shareholders are happy that an interloper has come in through the back door and got the better of them on price.
Why does Warren Buffett hate oenophiles?
By David White The opinions expressed are his own.
Warren Buffett’s Berkshire Hathaway recently purchased Tennessee’s largest alcoholic beverage distributor. This move comes just months after Berkshire Hathaway also acquired liquor distributors in Georgia and North Carolina.
This is a bad sign for consumers. It’s yet more proof that America’s anachronistic system of alcohol distribution is here to stay. This system — which exists only because of government regulations — stifles consumer choice and keeps prices artificially high.
The laws that keep consumers away from alcohol date back to prohibition. When the “Noble Experiment” was repealed in 1933, states were given the power to regulate alcohol within their borders. Some chose to take over the sale and distribution of alcohol. But just about every other state created a “wholesale tier” to sit between producers and consumers.
In part, this was at the urging of temperance activists and retailers. Prohibitionists blamed producers for all the ills associated with drunkenness. Restaurants and liquor stores didn’t like the power that producers could wield. By creating a middle tier, lawmakers hoped to weaken the influence of brewers and distillers. Instead, they simply made wholesalers incredibly powerful.
Southern Wine and Spirits, America’s largest liquor distributor — and one of the nation’s largest private companies — had revenues of nearly $8.5 billion in 2008.
I can only speak for tennessee but there are many more choices for consumers than in the big box and chain stores.Our prices are very competitive. Consumers here can still order the hard to find wines across the world. By the way there are plenty of wines that wholesalers would love to carry but the wineries want only to sell direct. Have you ever checked out the winery price on line and then go to a local store. The price is about the same and that is without shipping cost which is usually about 2 to 3 dollars per bottle. So I am not sure why the wineries are not selling it for a whole lot less.In Tenn.there are more wholesalers than in most big states.That brings competition.
Buffett uses BNSF to bet on coal
(John Kemp is a Reuters columnist. The views expressed are his own)
Warren Buffett’s acquisition of the remaining 77.4 percent of Burlington Northern Santa Fe (BNSF) railroad his Berkshire Hathaway does not already own looks like a strategic bet that America’s future energy needs will be met, in large part, through a massive expansion in coal-fired power generation coupled with carbon capture and storage (CCS).
Coal is the most important item moved on BNSF’s railroads. It accounted for almost half the tonnage moved by BNSF in the first nine months of the 2009 (214 billion revenue ton miles out of a total of 444 billion) and a quarter of the company’s revenues ($2.7 billion out of a total of $10.4 billion).
BNSF’s track and rights of way are perfectly positioned to benefit from a massive expansion of the country’s coal-fired output in the next 20 years, coupled with CCS technology to curb the carbon-dioxide emissions.
BNSF controls the crucial rails linking the massive domestic reserves of the Powder River Basin, the Northern Great Plains, the Western Interior Basin and the Illinois Basin east to the main industrial centres of the Midwest and west to the major electricity demand centres in southern California.
* http://pubs.usgs.gov/of/1996/of96-092/Comp/main.gif * http://www.eia.doe.gov/cneaf/coal/reserves/chapter1.html#fig1 * http://www.bnsf.com/tools/reference/division_maps/?menu=5&submenu=0 * http://graphics.thomsonreuters.com/109/US_ENRGY1009.gif
When Warren was talking about the collapse of the market we all should have been buying, however I’m going to have to say that history will say that this purchase should have been an interim sell indicator.
Warren, despite his historic success, has become emotional about the market. He is becoming less of a student of the market and more of a teacher and anyone who thinks they can ‘teach the market’ is about to learn a lesson. No matter how you are, the market is bigger.
Warren’s ‘All in’ on the recovery is a bad bet.
The macro trade has been to fade Warren.
I think his recent purchase by Berkshire is a good indicator that the market is overbought and investors should raise cash.
In short, Sell.
from Rolfe Winkler:
Buffett’s imaginary economy
Warren Buffett is back as the nation's financial conscience, publishing an op-ed in yesterday's NYT lamenting the dangers of too much monetary and fiscal stimulus. As regular readers of this blog are aware, that's a message with which I wholeheartedly agree. My problem with Buffett's piece is that he makes a good argument and then totally undercuts it in his conclusion:
Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.
This have-your-cake-and-eat-it-too approach is typically what we get from Paul Krugman: Yeah, debt is a problem and has to be dealt with long-term, but in the meantime we should jack up deficit spending in order to boost growth. To paraphrase St. Augustine, make us fiscally and monetarily prudent, just not yet. Ben Bernanke said something of that sort in a speech. He was trying to be funny.
The problem, it seems to me, is that rising GDP and employment---i.e. "recovery"---is not compatible with de-leveraging, which is what Buffett is talking about.
When consumers try to cut debt and boost savings, the economy goes into a deflationary spiral that Keynesians argue must be counteracted with fiscal and monetary stimulus.*
Consumers de-lever, government re-levers.
Private consumption and government spending now drive something like 80% of GDP. It can't keep rising unless consumers, the government or both continue borrowing huge sums.
But Giles, the “growth” you’re talking about is financed with more debt!
All of you Keynesians are in love with the Paradox of Thrift, but you’ve never considered the Paradox of Gluttony. To wit:
“Keynes worked out that the escape route from the “paradox of thrift” was to get some agent (the government) to spend more money, thereby boosting profits, encouraging more borrowing, generating more profits, leading to a virtuous cycle of economic expansion. Keynes was concerned with finding a policy to help economies escape the Great Depression leading him to emphasise the “paradox of thrift” element of the story. Minsky, however, took Keynes’ theory to the logical conclusion, arguing that borrowing can lead to a self-reinforcing positive spiral. This positive spiral could be though of as a “paradox of gluttony” whereby higher borrowing producers higher profits, thereby ratifying the decision to borrow and spend more.
The paradox of thrift and gluttony are important because they are linked to the same credit creation process that drives asset market instability…The additional borrowing associated with an asset price boom will likely flow back into additional asset purchases, but part will also be converted into higher levels of debt-financed spending…”
Every time we hit a recession, Keynesians argue to borrow and print more. Credit never stops expanding. That is, until the bond market makes it stop.
DeLong pretends the bond market doesn’t exist, or, Krugman-like, he dismisses it as a concern since we should have no trouble borrowing more.
But at some point we CAN’T borrow more.
DeLong thinks he’s really clever because he’s got a cute theory. But it doesn’t trump common sense — we can’t borrow forever.
from Rolfe Winkler:
Buffett’s Betrayal
When I was 14, Warren Buffett wrote me a letter.
It was a response to one I'd sent him, pitching an investment idea. For a kid interested in learning stocks, Buffett was a great role model. His investing style -- diligent security analysis, finding competent management, patience -- was immediately appealing.
Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company's annual meeting. I was hooked. Today, Buffett remains famous for investing The Right Way. He even has a television cartoon in the works, which will groom the next generation of acolytes.
But it turns out much of the story is fiction. A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company's stock holdings would have been wiped out.
Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.
To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. (Click chart to enlarge in new window)
Just another example of Buffett’s hypocrisy (he advocates that companies pay dividends–but his own doesn’t. He rails against insider Boards, but look at his own packed with kids and cronies. He advocates corporate disclosure, but his own reporting is of the “trust me” variety.) Maybe at one time this guy could invest under the radar and buy undervalued companies and be a portfolio genius, but now he simply has too much money to make it worth his while to make money off doing good deals with private owners–the only entity left is the biggest sucker of them all–Uncle Sam, courtesy of Professor Ben and Easy Al.
As to the people who suggest that his only duty is to his shareholders–if it is, then he should stick to that and not give advice to the rest of us. Perhaps he could preface his well-publicized remarks that he is solely motivated by doing what is best for Berkshire Hathaway–somehow I doubt he would want that. But you can’t have it both ways.
Buffett’s big bet
– Jonathan Ford is a Reuters columnist. The views expressed are his own –
The credit crunch has exposed many one-time financial heroes as having feet of clay. Even the great Sage of Omaha, Warren Buffett has fallen from grace.
The shift in mood has been brutal. The price of shares in the Sage’s investment company, Berkshire Hathaway, has more than halved since last September. Meanwhile, his one-time iron-clad balance sheet now looks rather frail. The credit default swap market is saying that the company’s vaunted AAA rating is so much baloney. Berkshire’s bonds are trading close to junk levels.
The pain is largely self-inflicted. It stems from Buffett’s decision to raise $4.9 billion by writing put options that insured buyers against falls in the value of several large global stock indices, including the S&P 500 and the FTSE 100. These he sold to a range of unknown counterparties between 2006 and the end of last year. The indices in question have slumped putting the Sage potentially on the hook for an AIG-style payout. On a mark-to-market basis, the positions were $10 billion underwater at the end of 2008, giving a $5.1 billion loss after the premium is accounted for.
Why, one might ask, did Buffett make such a bet? This is, after all, the man who has railed in the past against over-the-counter derivatives, describing them as “financial weapons of mass destruction”.
In broad terms, the Sage says that it’s all OK because he, unlike others, knows what he is doing. The options were sold dearly so the chance of a big loss is, he thinks, acceptably low. Stocks tend to rise in line with nominal GDP, especially over the long run. In any case, any payouts only have to be settled when the options expire between 2019 and 2028, which is quite a way out in the future.
Tidings of a bear market rally
— James Saft is a Reuters columnist. The opinions expressed are his own –
By James Saft NEW YORK (Reuters) – Some time before the end of the year it is a good bet that stock markets will throw off their gloom and begin a powerful rally of as much as 15 or 20 percent.
Some time one to three months after that it is a good bet that the prospect of a deep global recession and shockingly bad earnings will send them right back down again to make new lows. Rallies in the midst of bear markets can be sustained, powerful and feel very much like the ones that often mark the beginning of a real recovery.
So, why should we believe that we could get an early, if transient, Christmas present from the stock market?
Global markets are more scared, tired and depressed than at any time in my reasonably long memory, excellent breeding conditions for a rally. Given that most people are now on the same side of the debate, it would not take terribly much by way of money being committed to developed market stocks to send them higher. There may even be some momentum investors left who will pile on if a rally can get just a little traction.
The Vix index of stock market volatility hit a record high of 89.53 last week while the ratio of bulls to bears is at a several year low. And stocks have absolutely cratered — the S&P 500 index is down more than 40 percent this year and was heading lower at the time of writing.
Secondly, in historical terms valuations are as good as they have been in quite a while and increasing numbers of stocks are appealing to even the most hard-bitten value managers.
James is right.Market is oversold in the Short Term and a rally is coming – a dead cat bounce to trap the last of the hopefuls.Well we are back to square one.Greenspans 1% Interest rates fueled speculation and Fed wants to use the same trick again.
Good Luck !
