Berkshire stock has lost half its value since last December’s record high
Reuters 22 November 2008
NEW YORK: Investors are wondering if Mr Warren Buffett has lost his touch.
They are bailing out of Berkshire Hathaway stock and have lost some confidence that the insurance and investment company, run by one of the world’s most admired investors since 1965, can pay its debts.
Berkshire stock has lost close to half of its value since hitting a record high last December, as the company struggles with lower returns at its insurance businesses, the declining value of its stock holdings as well as paper losses on derivative contracts.
Meanwhile, the cost of protecting Berkshire’s ‘triple-A’ rated debt has soared to a level more befitting a ‘triple-B’ or even a junk-rated company.
Nebraska-based Berkshire has nearly 80 businesses - from car insurance to food and manufactured housing - and owns tens of billions of dollars of stock.
Mr Buffett’s empire is diversified enough so that at any given moment many parts are unlikely to run on all cylinders.
‘Everything you’re seeing that affects other companies is eventually going to catch up with Berkshire,’ said Mr Vahan Janjigian, the author of Even Buffett Isn’t Perfect. ‘I’m not saying Berkshire is not well-run, but even well-run companies will be hit in a severe recession.’
Mr Buffett, 78, was not available for comment.
Berkshire Class A shares fell as low as US$74,100 a share on Thursday, their lowest since August 2003. That is down 51 per cent from their record US$151,650 set last Dec 11.
It is also down 34 per cent since Berkshire said on Nov 7 that lower insurance returns and investment losses led to a 77 per cent drop in third-quarter profit, the fourth straight quarterly decline.
Berkshire ended September with US$33.4 billion (S$51 billion) in cash.
‘We’re buying Berkshire like crazy. It was our largest position, and we have made it much larger in the last two weeks,’ said Mr Whitney Tilson, managing partner at hedge fund T2 Partners.
‘Investors are looking at the derivative exposure, seeing Berkshire marking losses, and it reminds them of AIG and other companies whose derivative exposures got them into trouble,’ he added.
‘They are coming to the insane conclusion that Berkshire faces similar risks.’
He was referring to American International Group, which received a US$152 billion government bailout.
‘We’re in an unusual time,’ said the editor of Schiff’s Insurance Observer, Mr Peter Schiff. ‘It’s like comparing a person having trouble making mortgage payments with a billionaire. The financial crisis affects them, but not in the same way.’
Berkshire could have to pay as much as US$37 billion between 2019 and 2027 under some derivative contracts if the Standard & Poor’s 500 index and three other stock indexes are lower than when Berkshire entered the contracts. It obtained about US$4.9 billion of premiums upfront.
At Sept 30, Berkshire had written down US$6.7 billion on the contracts. Losses have almost certainly mounted since then.
Mr Buffett has said he expects the contracts to be profitable, distinguishing them from the ‘financial weapons of mass destruction’ that he called other derivatives.
Berkshire also ended September with US$10.8 billion in potential liabilities tied to various credit events, such as junk bond defaults, up from US$4.7 billion at the end of last year.
It ended September with US$76 billion in stock investments, including multibillion dollar stakes in American Express, Coca-Cola and Wells Fargo. Shares in all have fallen this quarter.
And investors have shrugged off Berkshire’s investment of US$8 billion in General Electric and Goldman Sachs preferred shares, with their 10 per cent dividend yields. Shares of both have fallen, rendering Mr Buffett’s warrants to buy common shares worthless for the time being.
Mr Buffett has been out of step with the markets before, having missed the late 1990s tech bubble.
‘Earnings of Berkshire’s operating businesses will undoubtedly decline given the worldwide economic downturn,’ Mr Tilson said. ‘However, these businesses remain enormously profitable, and will almost certainly continue to be.’
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Investors Lose Hunger for Buffett
Berkshire stock has lost half its value since last December’s record high
Reuters
22 November 2008
NEW YORK: Investors are wondering if Mr Warren Buffett has lost his touch.
They are bailing out of Berkshire Hathaway stock and have lost some confidence that the insurance and investment company, run by one of the world’s most admired investors since 1965, can pay its debts.
Berkshire stock has lost close to half of its value since hitting a record high last December, as the company struggles with lower returns at its insurance businesses, the declining value of its stock holdings as well as paper losses on derivative contracts.
Meanwhile, the cost of protecting Berkshire’s ‘triple-A’ rated debt has soared to a level more befitting a ‘triple-B’ or even a junk-rated company.
Nebraska-based Berkshire has nearly 80 businesses - from car insurance to food and manufactured housing - and owns tens of billions of dollars of stock.
Mr Buffett’s empire is diversified enough so that at any given moment many parts are unlikely to run on all cylinders.
‘Everything you’re seeing that affects other companies is eventually going to catch up with Berkshire,’ said Mr Vahan Janjigian, the author of Even Buffett Isn’t Perfect. ‘I’m not saying Berkshire is not well-run, but even well-run companies will be hit in a severe recession.’
Mr Buffett, 78, was not available for comment.
Berkshire Class A shares fell as low as US$74,100 a share on Thursday, their lowest since August 2003. That is down 51 per cent from their record US$151,650 set last Dec 11.
It is also down 34 per cent since Berkshire said on Nov 7 that lower insurance returns and investment losses led to a 77 per cent drop in third-quarter profit, the fourth straight quarterly decline.
Berkshire ended September with US$33.4 billion (S$51 billion) in cash.
‘We’re buying Berkshire like crazy. It was our largest position, and we have made it much larger in the last two weeks,’ said Mr Whitney Tilson, managing partner at hedge fund T2 Partners.
‘Investors are looking at the derivative exposure, seeing Berkshire marking losses, and it reminds them of AIG and other companies whose derivative exposures got them into trouble,’ he added.
‘They are coming to the insane conclusion that Berkshire faces similar risks.’
He was referring to American International Group, which received a US$152 billion government bailout.
‘We’re in an unusual time,’ said the editor of Schiff’s Insurance Observer, Mr Peter Schiff. ‘It’s like comparing a person having trouble making mortgage payments with a billionaire. The financial crisis affects them, but not in the same way.’
Berkshire could have to pay as much as US$37 billion between 2019 and 2027 under some derivative contracts if the Standard & Poor’s 500 index and three other stock indexes are lower than when Berkshire entered the contracts. It obtained about US$4.9 billion of premiums upfront.
At Sept 30, Berkshire had written down US$6.7 billion on the contracts. Losses have almost certainly mounted since then.
Mr Buffett has said he expects the contracts to be profitable, distinguishing them from the ‘financial weapons of mass destruction’ that he called other derivatives.
Berkshire also ended September with US$10.8 billion in potential liabilities tied to various credit events, such as junk bond defaults, up from US$4.7 billion at the end of last year.
It ended September with US$76 billion in stock investments, including multibillion dollar stakes in American Express, Coca-Cola and Wells Fargo. Shares in all have fallen this quarter.
And investors have shrugged off Berkshire’s investment of US$8 billion in General Electric and Goldman Sachs preferred shares, with their 10 per cent dividend yields. Shares of both have fallen, rendering Mr Buffett’s warrants to buy common shares worthless for the time being.
Mr Buffett has been out of step with the markets before, having missed the late 1990s tech bubble.
‘Earnings of Berkshire’s operating businesses will undoubtedly decline given the worldwide economic downturn,’ Mr Tilson said. ‘However, these businesses remain enormously profitable, and will almost certainly continue to be.’
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