Category Archives: Buffet Articles

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.

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 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.

Source -rt.com