Refiners Find New Investors in Buffett and Icahn

11 August 2012 –

Gasoline refiners, shunned by investors because of falling demand and rising regulation, now count Warren Buffett’s Berkshire Hathaway Inc. and billionaire Carl Icahn among shareholders as lower oil prices promise wider returns for fuel makers.

Buffett’s Bet

Buffett, Berkshire’s chairman and chief executive officer, said last month in an interview on Bloomberg Television that one of his deputies had invested in Phillips 66, which became the largest independent refiner in the U.S. after the Houston-based company was spun off from ConocoPhillips.

Icahn didn’t respond to a request for comment. Buffett didn’t respond to a request for comment sent to his assistant, Carrie Sova.

New drilling and production techniques used to crack shale rock brought a flood of new gas, deflating prices to a 10-year intraday low of $1.902 per million British thermal unit in April. The same methods now are being used to harvest oil, spurring three straight years of surging output in the U.S., the first time that’s happened since 1985, according to data compiled by Bloomberg.

The renaissance has caused U.S. crude prices to fall below other varieties of oil traded globally, giving refiners with operations near new U.S. oil production the advantage of paying less for each barrel they purchase. Refiners with access to growing supplies from North Dakota’s Bakken shale formation and other northwest oilfields, were the first to benefit.

Warren Buffett Remains Optimistic On Housing And How To Benefit From It

10 August 2012-

Warren Buffett’s Berkshire Hathaway (BRK.A) saw its recent profits fall 9% on losses from its derivatives portfolio. However, these derivative losses are unrealized (i.e. he has not sold the position) and are long term positions in equity indexes in US, Europe and Japan with a maturity date of 2018 and later. Buffett, outspoken on the problem with financial derivatives, has stated he will not likely be increasing additional derivative positions due to changes in financial accounting for derivatives.

While Buffett may not be purchasing more derivatives, these positions do represent a traditional view of this value-orientated investor; Buffett expects US, Europe, and Japan indices to see growth in the upcoming years. A simple strategy to mimic these expectations would be to purchase index ETFs, which is nothing new, or we can take a look into two sectors below that Buffett expects to benefit greatly from an increase in economic growth.

Housing: Last month, Buffett expressed increasing optimism toward the US Housing market in general. Granted, there are still weaknesses, but it’s clear that Buffett expects this sector to rebound in the next couple of years (remember, this value-orientated investor rarely likes to make 3 month speculations). Real-estate indices including the S&P/Case-Shiller 20-City have shown consecutive month to month growth after a prolonged trough. Berkshire Hathaway’s positions also include that of Clayton Homes, which builds, sells, finances and insures manufactured homes. Continued housing growth would help drive overall economic growth in the United States.

Buffett was recently quoted saying Europe’s financial issues are having a negative impact on United States and that weak residential housing is holding back growth. However, Buffett’s recent bid to purchase large amounts of distressed housing loans from ResCap’s bankruptcy offering show another story. Should he win the bidding, this would offer Buffett a large portfolio of loans (approximately 4 billion) that could see considerable upside if the housing market recovers. It appears that Buffett does think housing will recover and feels now that is a great time for purchase cheap assets.

Positions that would benefit from an increase in housing include Caterpillar (CAT) and Wells Fargo (WFC). Wells Fargo is the largest US Home Lender and Buffett’s 2nd largest position.

Transportation/Railroads: Another sector that would benefit heavily from US Economic growth is transportation. Buffett made headlines for his 2009 bet to buy-out BNSF (Burlington Northern Sante Fe Corp). This bet, the largest bet that Buffett has made, is making a prediction that when (and not if) economic growth comes roaring back, it will take the railroad and freight movement with it. Because the United States produces so many economic goods that must be transported, railroads can be more efficient than trucking in moving large quantities of goods across long distances. Buffett’s 2011 purchase of Lubrizol (engine and machinery lubricant) for $9 billion showed that Buffett expected engine and machines usage to increase (often a proxy for economic growth). Lubrizol also provides goods to emerging markets which are likely to see increased demand.

The transportation industry has recently seen a change in commodities it services. The recent use of cheaper natural gas has resulted in lower coal demand. Coal, which is largely transported by railroads, have thus impacted revenues of BNSF and its competitor Union Pacific Corp (UNP).

However, while usage of coal has dropped for these transportation stocks, the amount of business from shale, crude oil, and petroleum related shipments has increased dramatically. Demand for coal still remains as a crucial transportation driver, but increased demand for shale-related products is expected to see double-digit growth in the upcoming years. Whether the increase in demand for shale will off-set the diminished demand for coal remains to be seen, the transportation industry will likely see strong growth if US economic growth picks up.

Positions that would benefit stronger economic growth and increased demand for shale include mid-west Union Pacific Corp who are trying to capitalize on shale demand. Other railroad companies may warrant a look, but be aware that not all railroad companies have access to nearby cheap coal to transport. The continued drop in demand for coal would impact railroad companies that transport expensive coal first. Buffett’s 2009 buyout of BNSF deserves much praise; BNSF’s access to cheap and clean coal from the Powder River Basin and proximity to numerous shale fields is looking to be another profitable Buffett investment.

A Look At Yearly Returns Of Berkshire Top Holdings

10 Aug – 2012-

Performance Review Of Berkshire Hathaway Top Holdings.

1. Coca-Cola (KO)

  • Holding Value: $15.95 billion
  • Shares: 200,000,000
  • Stake: 8.4%

The stock returned 26% over the past 1-year period. Operating and profit margins are 23% and 18%, respectively. There was no fizz in last quarter’s numbers — revenue growth was 2.7%, while earnings were flat. P/E (forward) is 18.3. It has a solid 26% return-on-equity (ROE), a 0.53 beta (stock price is only 53% as volatile as the overall market), and a dividend yield of 2.6%.

2. Wells Fargo (WFC)

  • Holding Value: $13.39 billion
  • Shares: 394,334,928
  • Stake: 7.44%
  • Increased holdings by 10.63 million shares (+3%) since the previous reporting period.

Wells Fargo provides banking service primarily in the US.

The stock returned 50% over the past 1-year period. Operating and profit margins are 38% and 22%, respectively. Last quarter’s revenue increased 5%, while earnings grew 17% — a nice widening of margins. P/E (forward) is 9.2. It has a beta of 1.3 (stock price is 30% more volatile than market) and a dividend yield of 2.6%

3. IBM (IBM)

  • Holding Value: $12.87 billion
  • Shares: 64,395,700
  • Stake: 5.36%
  • Increased holdings by 489,769 shares (+1%) since the previous reporting period.

Big Blue provides information technology (IT) products and services worldwide.

The stock returned 22% over the past 1-year period. Operating and profit margins are 21% and 15%, respectively. Last quarter’s revenue decreased 3%, while earnings grew 6% — so margins widened, a positive. P/E (forward) is 12. It has a fat 74% ROE (though debt load increases a company’s ROE, so IBM’s fairly sizable debt load makes this number better than it would otherwise be), a beta of 0.67 and a dividend yield of 1.7%.

This stock looks potentially appealing, despite its recent flat revenue growth. It has some solid financial stats and promising future prospects (in artificial intelligence involving its “HAL” robot and data analytics). Apparently Buffett thinks so, too — he only began buying this stock in 2011.

4. American Express (AXP)

  • Holding Value: $8.74 billion
  • Shares: 151,610,700
  • Stake: 13.02%

American Express provides banking and credit card products, as well as travel-related services worldwide.

The stock returned 36% over the past 1-year period. Operating and profit margins are 24% and 17%, respectively. Last quarter’s revenue grew 3%, while earnings were flat. P/E (forward) is 12.3. It has a beta of 1.8 and a dividend yield of 1.4%.

5. Procter & Gamble (PG)

  • Holding Value: $4.85 billion
  • Shares: 73,254,136
  • Stake: 2.71%
  • Decreased holdings by 3.5 million shares (-5%) since the previous reporting period.

P&G is a global consumer products company.

The stock returned 15% over the past 1-year period. Operating and profit margins are 18% and 13%, respectively. Last quarter’s revenue decreased 3% while earnings grew 45% — so margins widened, a positive. P/E (forward) is 16. It has a beta of 0.44 and a dividend yield of 3.4%.

6. Kraft Foods (KFT)

  • Holding Value: $3.19 billion
  • Shares: 78,017,165
  • Stake: 4.33%
  • Decreased holdings by 9.02 million shares (-10%) since the previous reporting period.

Kraft Foods manufactures and sells packaged food products worldwide.

The stock returned a tasty 25% over the past 1-year period. Operating and profit margins are 14% and 7%, respectively. Last quarter’s revenue decreased 4%, while earnings grew 5%. P/E (forward) is 15. It has a beta of 0.53 and a dividend yield of 2.8%.

7. Wal-Mart (WMT)

  • Holding Value: $3.46 billion
  • Shares: 46,708,142
  • Stake: 1.14%
  • Increased holdings by 7.67 million shares (+20)) since the previous reporting period.

Wal-Mart operates discount stores under the Wal-Mart name and warehouse club stores under the Sam’s Clubs name. It’s been making further headway into the financial services arena in recent years.

The stock returned 55% over the past 1-year period. Operating and profit margins are 6% and 3.5%, respectively. Last quarter’s revenue grew 8.5%, while earnings grew 10%. P/E (forward) is 14. It has a beta of 0.41 and a dividend yield of 2.2%.

8. US Bancorp (USB)

  • Holding Value: $2.28 billion
  • Shares: 69,039
  • Stake: 3.61%

U.S. Bancorp provides banking and financial services in the US.

The stock returned 57% over the past 1-year period. Operating and profit margins are 43% and 30%, respectively. Last quarter’s revenue grew 9%, while earnings grew 18% — so margins widened, a positive. P/E (forward) is 11. It has a beta of 1.0 and a dividend yield of 2.4%.

9. Johnson & Johnson (JNJ)

  • Holding Value: $1.98 billion
  • Shares: 29,018,127
  • Stake: 1.06%

Johnson & Johnson is a global health care products company.

The stock returned 16% over the past 1-year period. Operating and profit margins are 25% and 13%, respectively. Last quarter’s revenue decreased 1%, while earnings dropped 50% — so margins narrowed, a negative. P/E (forward) is 12.5. It has a beta of 0.55 and a dividend yield of 0.6%.

A red-flag on this one is the good number of quality control issues over the recent couple years.

10. ConocoPhillips (COP)

  • Holding Value: $1.64 billion
  • Shares: 29,100,937
  • Stake: 2.25%

ConocoPhillips is involved in the exploration, production and transportation of crude oil, natural gas, natural gas liquids, liquefied natural gas and bitumen throughout the world.

The stock returned 25% over the past 1-year period. Operating and profit margins are 9% and 5%, respectively. Last quarter’s revenue decreased 17%, while earnings dropped 33%. P/E (forward) is 10. It has a beta of 1.1 and a dividend yield of 4.7%.

I’d stay away from this one. It has a 5-year PEG of -5, meaning analysts expect negative earnings growth over the next five years.

And here’s a bonus…

11. DirectTV (DTV)

  • Holding Value: $1.14 billion
  • Shares: 22.999,600
  • Stake: 3.51%
  • Increased holdings by 2.65 million shares (+13%) since the previous reporting period

DirectTV provides digital TV primarily via satellite in the US and Latin America.

The stock returned 18% over the past 1-year period. Operating and profit margins are 17% and 9%, respectively. Last quarter’s revenue growth was 10%, while earnings grew 1% — so margins narrowed, a negative. P/E (forward) is 9.5. It has a beta of 0.96.

Decoding Buffetts Ejection From Consumer good Stocks

8 August 2012-

In 2009 Buffett had predicted that the economy was at its rock bottom and the only thing left was the market to go up. And its also true that since then the Dow has jumped 36 %. Recently, Buffett has complained of disappointing performance at some of the more consumer-oriented holdings of his Berkshire Hathaway (BRK-A) (BRK-B) investment vehicle — stocks such as Johnson & Johnson (JNJ), Procter & Gamble (PG), and Kraft (KFT). Now, in a regulatory filing dated Aug. 3, Berkshire is reporting about a 21% reduction in the amount of consumer products stocks it holds, even as it ups its exposure to banking, insurance, and industrial stocks.

Crunching the numbers earlier this week, Bloomberg concluded that Buffett appears to be reducing his “bets on consumer-products stocks.” If that’s what he is in fact doing, then this might bode poorly for an economy that depends on consumer spending for 70% of its growth.

Appearances Can Deceive

But the operative word here is “if”: If Buffett thinks a double-dip recession is imminent, and if he’s selling consumer stocks to avoid taking a hit, that would be bad news for our economy.

But what if Buffett has a different reason for selling his stocks? Some folks think that’s a more likely explanation.

Buffett biographer Andrew Kilpatrick, for one, thinks Buffett may be preparing to “fire at an elephant” — a euphemism referring to the megadeals Buffett has favored when spending Berkshire’s cash of late. At the Berkshire shareholder meeting in May, Buffett let slip that he’d been eyeing one big potential acquisition valued at roughly $22 billion. That deal ultimately didn’t happen — but maybe Buffett just needed a bigger gun.

Is he getting the big guns ready

It is quite possible that Buffett might be selling to build up for a massive cash reserve in order to go for some real big game hunting. Recent estimates put Berkshire cash reserves at around 40 Billion $, an increase of 2.8 Billion $ over the previous quarter.

But what could he be looking at?.

Run for the border: One thing’s for sure about Buffett: He’s no fitness fanatic. To the contrary, his fondness for cheeseburgers and Cherry Coke is legendary. Now that he has a little extra spending money jingling in his pocket, he might decide to take a look at YUM! Brands (YUM), owner of Taco Bell and KFC.

Buffett’s unlikely to balk at health guerillas’ objections to fast food. To the contrary, he’d more likely cheer the success Taco Bell has had serving less-than-organic Doritos-flavored taco shells. Still, the stock’s at the upper range of his spending limit with a market capitalization of just more than $30 billion.

• Trainspotting for bargains: But I think we can spot a better bargain. We all know how Mr. Buffett loves trains. (What growing boy doesn’t?) His purchase of Burlington Northern Santa Fe in 2009 made Berkshire one of the nation’s leading railroad operators. Today, for the low price of just $24 billion, he can expand his train set with the acquisition of either Norfolk Southern (NSC) or CSX (CSX). Plus, both stocks sell for P/E ratios of less than 13 — considerably cheaper than what Buffett paid for BNSF three years ago.

• An insure thing: Still, as much as he loves his trains, Buffett’s first love has always been insurance. For this reason, he may be particularly interested in insurer AFLAC (AFL), a relative bargain at just eight times earnings and even more affordable than the railroads — just $21.4 billion. As an added bonus, AFLAC would fit in nicely with Berkshire’s GEICO business.

• A deal that just might fly: Similarly, Buffett could find synergies with a purchase of defense contractor General Dynamics (GD). While suffering from a downturn in demand for armored fighting vehicles, America’s biggest tank maker has been sold down to bargain-basement levels — just nine times earnings. Buffett loves a bargain as much as anyone else. Plus, General Dynamics also makes Gulfstream business jets — the kind that fly so well for Berkshire’s “NetJets” airplane-sharing company.

A $30 billion-plus bank account opens many possibilities for Buffett. Will he spend it all in one place — perhaps even one of these places? Stay tuned.


Warren Buffett’s OP-ED on Taxes

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched.

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.

These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species. It’s nice to have friends in high places.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.

To understand why, you need to examine the sources of government revenue. Last year about 80 percent of these revenues came from personal income taxes and payroll taxes. The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot.

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.

The taxes I refer to here include only federal income tax, but you can be sure that any payroll tax for the 400 was inconsequential compared to income. In fact, 88 of the 400 in 2008 reported no wages at all, though every one of them reported capital gains. Some of my brethren may shun work but they all like to invest. (I can relate to that.)

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

Twelve members of Congress will soon take on the crucial job of rearranging our country’s finances. They’ve been instructed to devise a plan that reduces the 10-year deficit by at least $1.5 trillion. It’s vital, however, that they achieve far more than that. Americans are rapidly losing faith in the ability of Congress to deal with our country’s fiscal problems. Only action that is immediate, real and very substantial will prevent that doubt from morphing into hopelessness. That feeling can create its own reality.

Job one for the 12 is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. The 12 should then turn to the issue of revenues. I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice.

Warren Buffett in Ney York Times

Warren Buffett Likes Bank Stocks

25 July 2012
Warren Buffett likes bank stocks, just not investment banks. And for good reason.

By avoiding common stock bets on investment banks like JPMorgan Chase, Goldman Sachs, Citigroup, and Morgan Stanley the “Oracle of Omaha’s” financial sector share investments have greatly outperformed most other investors.

Of course, Buffett made preferred share investments in Goldman and Bank of America during the height of the crisis, but these were essentially super-safe loans that guaranteed a return and did not reflect his common stock plays.

In fact, as Buffett continued to hold banks stocks as a key part of a U.S. economic recovery investment, the value investing guru has kept his chips smartly behind Wells Fargo — which is projected to end 2012 as America’s most profitable bank — even if the battered share prices, titanic balance sheets, and boom and bust earnings of money center giants lure some of the sectors smartest investors into sub-par investments.

Although Buffett’s likely to have about the same insight as the “Average Joe” when it comes to a multibillion-dollar “London Whale” trading loss at JPMorgan, investment bank ratings downgrades, and a market manipulation probe that may start with Barclays and spread across Wall Street, his continued investment in the stability of traditional lenders like Wells Fargo, US Bancorp, and M&T Bank, and an investment in credit-card giants American Express, Visa, and MasterCard have greatly outperformed mega-bank stocks.

Since the 2008 Wall Street crash pummeled most bank stocks and a March 2009 stock bottom led to a tripling of the shares of megabanks like Citigroup and Bank of America, and a doubling of JPMorgan and Goldman Sachs within a span of just over a month, many financial sector investors and analysts forecast that those gains could be replicated.

nstead, the nation’s largest investment banks have underperformed, even as their shares gyrated upwards on misplaced optimism of a durable trading or deal making surge.

From March 2009 to May 2009, the largest investment banks were among the financial sector’s top performers, driving many investors including hedge fund titans John Paulson and David Tepper of Appaloosa Management strongly into the stocks of Citi and Bank of America. Since then, Morgan Stanley, Bank of America, Goldman Sachs, and Citigroup shares have all lost over 15 percent — and are among 10 S&P 500 bank stocks out of 85 in total that have lost double digits since May 2009, according to Bloomberg data.

While JPMorgan has gained over 17 percent since then, the Bloomberg data shows that Buffett financial sector picks like Wells Fargo, US Bancorp, M&T, American Express, Visa, and MasterCard have dramatically outperformed those returns. Wells Fargo is up over 30 percent since May 2009, US Bancorp and M&T have posted over 50 percent share gains, and American Express has doubled. Recent new Buffett financial sector picks like Visa and MasterCard are among the financial sector’s best performers in the past 12 months, posting 40 percent-plus gains to go against the Financial Select Sector SPDR’s [XLF  14.27    0.055  (+0.39%)   ] 2 percent share loss.

The data should tell investors that in spite of the press given to capital markets players with volatile earnings and recently battered share prices, they may be better off following Buffett into less glamorous banks stocks that are exposed to consumer and mortgage lending growth, and credit card names that may track rebounding consumer spending.

Fundamental investors may also have reason to follow Buffett, even if it’s less obvious whether superregional banks are a value investment. Following the results of the U.S. Federal Reserve [cnbc explains] stress tests in March, it was many of Buffett’s investments like Wells Fargo, U.S. Bancorp, and American Express, which led the way on share buyback plans and dividend boosts. Wells Fargo boosted its dividend 83 percent and indicated accelerated buybacks to a program launched in 2011. American Express unveiled a $5 billion buyback program of $5 billion and upped its quarterly dividend. Meanwhile U.S. Bancorp boosted its dividend by 56 percent and targeted $3.3 billion in buybacks.

In buying back stock, banks will lower total outstanding shares, thus boosting the proportion of earnings attributable to remaining shares. Using International Business Machines [IBM  191.08    0.74  (+0.39%)   ] as an example, Buffett explained in his annual letter in February how share buybacks can be a hedge to the prospect that a company’s shares underperform.

“When Berkshire buys stock in a company that is repurchasing shares, we hope for two events,” Buffett explained. “First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time, as well.” As a result, Buffett has a fundamental reason not to be concerned if the stock performance of IBM and Wells Fargo — both among his largest holdings with buyback plans — underperform in the near term.

As of March 31, Wells Fargo was Buffett’s second-largest stock investment at $13.2 billion or 7.42 percent of the company’s shares, while he held 13 percent of American Express shares worth over $8.8 billion, and $2.2 billion worth of U.S. Bancorp shares, or 3.6 percent of the company’s float.

But even without Buffett’s buyback math, the expected earnings prospects of traditional mortgage and credit card lenders may trump capital markets-oriented players. In March, we noted that because of Wells Fargo’s near 30 percent annual earnings growth trajectory, Buffett may end 2012 as the largest investor in America’s most profitable bank.

After JPMorgan unveiled a derivatives-related trading loss in May that may exceed $2 billion, Wall Street analyst now project that Wells Fargo will end 2012 as the most profitable U.S. bank, earning $17.7 billion for the year, according to Bloomberg compilations of forecasts. That contrasts to the $17.2 billion in adjusted net income that JPMorgan is expected to earn this year. Wells Fargo will earn the lion’s share of its profit and revenue from mortgage, business and credit-card lending, while JPMorgan’s earnings will be a mix of those businesses and its global investment banking operations.

It’s the distinction between Wells Fargo’s quick earnings ascendance relative to JPMorgan — the longtime profit leader throughout the financial sector — that may best exemplify the simplicity of Buffett’s investing plan relative to the elusive allure of investment banking profits.

JPMorgan, like Goldman Sachs, is undoubtedly a leader in investment banking, with a top three position in most key merger advisory and debt and equity underwriting markets. Still, a near 30 percent year-over-year lull in those businesses means that even top brands aren’t expected to post strong earnings. In fact, it’s the counterintuitive accounting gains that investment banks may post on the falling value of their debt after Moody’s slashed sector ratings that may be among the biggest positive surprises in second-quarter earnings.

Although many, like JPMorgan Chief Executive Jamie Dimon, expect that investment banking revenues will have a big comeback as companies enter a cycle of mergers and initial public offerings [cnbc explains] that was postponed by the European debt crisis and political gridlock in Washington, some think the industry’s woes may be lasting.

“[We] think the slowdown in capital markets revenues is more structural than cyclical,” wrote Standard & Poor’s credit analyst Richard Barnes in a July 2 note that outlined why the ratings agency sees new regulations, high expense and lasting macroeconomic risks as reason to question whether investment banks will even be able to out return their cost of capital in coming quarters and years.

The prospect of trading losses like those booked by JPMorgan and added political and regulatory pressures on the heels of a $450 million fine that Barclays paid to U.S. and U.K. regulators for its manipulation of short-term interest rates, and which cost CEO Bob Diamond his job, augur as added risks. Meanwhile, S&P’s outlook for investment banks is similar to what drove Moody’s to ratings cuts in June.

As it turns out, its Buffett plays like Wells Fargo and U.S. Bancorp remain a source of financial sector strength headed into second-quarter earnings, which are likely to be relatively disappointing. On Thursday, Credit Suisse analyst Moshe Orenbuch cut his earnings estimates for JPMorgan, Citigroup, and Bank of America because of their sensitivity to the weakness of capital markets. Among large-cap [cnbc explains] banks, Orenbuch left his earnings estimates for Wells and U.S Bancorp unchanged, while noting that throughout the industry, weaker capital markets revenue may be offset by loan growth and cost cuts.

Expectations of a housing construction rebound and mortgage demand have even given some reason to expect that Wells Fargo may surprise on the upside for the remainder of 2012. Amid continued uncertainty about the global economy, JPMorgan analyst Vivek Juneka said Wells Fargo was his best large-cap bank investing idea, in a June 2 sector outlook that cited the bank’s mortgage origination and loans businesses as standing apart from peers. Among mid-cap and small-cap banks, JPMorgan analysts highlighted First Horizon National as a top pick.

For those who are ready to throw in the towel on large-cap bank stocks like JPMorgan, Bank of America, and Citigroup, following Warren Buffett’s focus on capital returns, stable business models, and faster-than-industry average growth may be a simpler and more effective strategy.

Source –

Warren Buffett On Euro

25 July 2012

Warren Buffett says he’s worried about the fate of the euro zone, however despite signs of recent weakness, he remains optimistic about the US economy.

­Speaking about Europe, the 81-year old legendary investor and billionaire referenced Abraham Lincoln, saying a house divided cannot stand as he addressed the Economic Club of Washington.

“They can’t have a common currency, but not common fiscal policy or culture,” Buffett said. “It can’t be half slave and half free.” “European leaders need to resolve some of the union’s weaknesses.”

Buffet’s comments come as finance ministers and central bank governors from the Group of Seven economies agreed on Tuesday to coordinate responses to the crisis which threatens to destroy the region’s 17-nation currency union as Greece considers leaving the euro.

As Buffett touched upon the US, he was more positive, saying there is little chance the nation will slip back into recession in the near term, warning however that a second recession is unlikely “unless events in Europe develop in some way that spills over in a big way.”

He said Washington must address an unsustainable fiscal situation, claiming that both political parties deserve blame for the federal government’s failure to reduce the deficit. Buffet said Democrats must give in on cutting some social programs while Republicans can’t continue to stand in the way of tax increases.

Buffett, who is the Chairman of the Berkshire Hathaway holding company, also reaffirmed his support for the so-called “Buffett Rule.” The White House’s website describes the rule that no household making more than $1 million should pay a smaller share of their income in taxes than middle-class families pay.

“The Buffett Rule would limit the degree to which the best-off can take advantage of loopholes and tax rates that allow them to pay less of their income in taxes than middle-class families.”

The plan would require wealthy Americans to pay a 30 percent tax rate – a levy that would surely hit the billionaire more than the average American. Currently, like many wealthy Americans, much of Buffett’s income comes in the form of capital gains and dividends, which are taxed at lower rates than incomes.

Buffett joined the tax debate last August as he said he paid a lower tax rate than his secretary, claiming this to be unfair.


Warren Buffett sounds on 2013 Recession

As concerns mount that the United States is headed for a recession, two famous minds offered opposing takes on what’s in store for the U.S. economy.

In one corner was the Oracle of Omaha, Warren Buffett; in the other, the 42nd President of the United States, Bill Clinton.

Speaking at the 25th anniversary dinner of the Economic Club of Washington, Buffett said that it is unlikely the U.S. economy will fall into another recession. He said the chances of that happening are “very low.”

Buffett, who blames both political sides for the budget deficit, once again called for raising taxes and cutting spending.

“The problem is the Democrats don’t want to talk about what expenditures they would cut and the Republicans don’t want to talk about raising revenues,” he said.

Buffett said “the big question” remains what’s ahead for the euro.

“We’ve got this system where they’re half in and half out,” said Buffett, who is currently auctioning off a lunch with himself this week on eBay for charity. “They have to reconcile these things.”

Reflecting on the Eurozone he said there is the possibility the U.S. will feel a “spill over” effect from Europe – which some would argue has already happened.

Recession 2013: Clinton’s Take
In a taped interview that aired Tuesday on CNBC’s “Closing Bell,” former President Clinton said he thought the U.S. economy was already in a recession.

Clinton called out Republican efforts to cut the deficit, saying they jeopardize the country’s chances to get out of the debt debacle.

“What I think we need to do is find some way to avoid the fiscal cliff, to avoid doing anything that would contract the economy now, and then deal with what’s necessary in the long term debt-reduction plans as soon as they can, which presumably would be after the election,” Clinton said.

“They will probably have to put everything off until early next year,” he added. “That’s probably the best thing to do right now.”

Clinton made the unexpected endorsement of extending the Bush tax cuts but added that he is not in support of extending them for the wealthiest. This echoes the fundamental idea behind the Buffett Rule.

Clinton was also quick to blame Europe – saying “this European thing that’s having a bigger impact than people know” – and politics for the current economic mess.

“The thing that cost jobs here has been the Congress’s policies,” said Clinton.

For the Democratic Party, Clinton has been worrisome of late. Twice now he has publicly opposed U.S. President Barack Obama, while many Democrats still look to the former president for party leadership.

After the interview a statement was issued by Clinton’s office to “better explain” his comments to the public.

More Weak Reports Fuel Recession Talk
Debating about whether or not we are technically in a recession could escalate fears arising from several weak economic reports recently issued.

The U.S. Labor Department issued an awfully disappointing U.S. jobs report last week. Only 69,000 new jobs were added in May, less than half of the expected 150,000 jobs.

Coupled with the jobs numbers, the unemployment rate unexpectedly rose from 8.1% to 8.2% as job seekers returned to the workforce, the Labor Department report revealed.

To make matters worse, adjustments to previous months showed the economy gained fewer jobs in March and April than originally believed. March’s employment numbers were reduced by 11,000 jobs to total 143,000, while April’s dropped by 38,000 to total an awful 77,000.

On Wednesday the Labor Department released its Q1 productivity numbers which were disappointing as well. After an initial report cited a 0.5% decline, the Labor Department revised its numbers saying productivity declined 0.9% the past quarter.

Basically that means Americans are working more and producing less. And to top it off wage growth continues to trail inflation.

Adding up the recent jobs and productivity reports leave us with a pretty grim outlook for the state of the U.S. economy.

Munger Quatable Quotes

All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.

The best thing a human being can do is to help another human being know more.

Acquire worldly wisdom and adjust your behavior accordingly. If you are new, behavior gives you a little temporary unpopularity with your peer group then to hell with them.

In my whole life, I have known no wise people (over a broad subject matter area) who did not read all the time – none, zero.

Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. Then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available because of prudence and patience in the past.

I find it quite useful to think of a free-Market economy – or partly free Market economy – as sort of the equivalent of an ecosystem. Just as animals flourish in niches, people who specialize in some narrow niche can do very well.

The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than you are paying for. Move only when you have an advantage.

Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.

It is not given to human beings to have such talent that they can just know everything about everything all the time. However, it is given to human beings who work hard at it. Who look and sift the world for a mispriced bet – that they can occasionally find one.

In addition, the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time they don’t. It is just that simple.

Mimicking the herd invites regression to the mean.

Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.

Acknowledging what you do not know is the dawning of wisdom.

Above all, never fool yourself, and remember that you are the easiest person to fool.

Determine value apart from price; progress apart from activity; wealth apart from size.

Recognize reality even when you do not like it – especially when you don’t like it.

Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.

I think records of accomplishment are very important. If you start early trying to have a perfect one in some simple thing like honesty, you are well on your way to success in this world.

We try more to profit from always remembering the obvious than from grasping the esoteric.

Intelligent people make decisions based on opportunity costs.

If all you succeed in doing in life is getting rich by buying little pieces of paper, it is a failed life. Life is more than being shrewd in wealth accumulation.

Someone will always be getting richer faster than you. This is not a tragedy.

Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.

Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you are not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you will end up with one hell of a result.

You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. Nevertheless, there are also cases where you have to recognize that you have no wisdom to add – and that your best course is to trust some expert.

The safest way to try to get what you want is to try to deserve what you want. It is such a simple idea. It is the golden rule. You want to deliver to the world what you would buy if you were on the other end.

I am not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I have reached that state.

Thinking that what is good for you is good for the wider civilization, and rationalizing foolish or evil conduct, based on your subconscious tendency to serve yourself, is a terrible way to think.

If you do not allow for self-serving bias in the conduct of others, you are, again, a fool.

Avoid working directly under somebody you do not admire and don’t want to be like.

Intense interest in any subject is indispensable if you are really going to excel in it.

Never, ever, think about something else when you should be thinking about the power of incentives.

Fixable but unfixed bad performance is bad character and tends to create more of it, causing more damage to the excuse giver with each tolerated instance.

Everybody engaged in complex work needs colleagues. Just the discipline of having to put your thoughts in

Good businesses are ethical businesses. A business model that relies on trickery is doomed to fail.

In my whole life, I have known no wise people who did not read all the time-none, zero. You would be amazed at how much Warren reads-and at how much I read. My children laugh at me, they think I’m a book with a couple of legs sticking out

Munger Investment Principles

While carrying out any investment assessment, first calculate risk.

Make decisions at your own and be self-determining. After listing down risks, you make decisions based on involved risks. Whatever you decide, you owe that and be self-determining regarding your decisions and actions.

Plan to encompass a few imminent.

Being a humble and admitting, where you are deficient in is the birth of perception. Committing mistakes is human factor and admitting your mistakes is undoubtedly humbleness.

For errors and mistakes reduction,   investigate thoroughly. Accepting mistakes are good but nothing is as good as avoiding mistakes. Before making any investment, you must try your best to reduce inaccuracies and mistake by   investigating thoroughly.

Assigning capital intelligently is must. While making any investment capital is assigned, allocating capital and asset intelligently is must and while doing so you must take lots of care.

Oppose the normal individual prejudice to do something and have endurance.

In appropriate situation, be determined and confident.

Accept change. Change is a common phenomenon of any business and investment so recognize, accept, and acknowledge that as a part of investment business.

Pay attention. Pay concentration during investment. Pay concentration and be aware of your surroundings and your acts while investing. Where you lack attention and concentration, it is your first step towards failure.