(Bloomberg) -- Berkshire Hathaway Inc. shareholders have a chance this year to do something that’s rare among the Sage of Omaha’s followers: count their losses.
Despite Berkshire’s reputation as a bear market bulwark, its stock has been walloped. The Class A shares are down 31 percent since September, to $90,000 as of yesterday, exceeding the 26 percent drop in the Standard & Poor’s 500 Index.
One reason: Chief Executive Officer Warren Buffett’s increasing use of derivatives -- contracts whose value is based on the performance of stocks or bonds or the outcome of a specific event. That Buffett once called derivatives “time bombs” doesn’t calm investors.
Berkshire held contracts with a combined notional value of $67.3 billion at year-end. While this figure is used mostly for reporting purposes and isn’t indicative of potential losses, it dwarfs the company’s $25.5 billion in cash.
Buffett himself has warned of an increasing possibility he might have a loss from one type of contract on Berkshire’s books. Fitch Ratings and Moody’s Investors Service have lowered their credit ratings on Berkshire, partly because of the derivatives.
“People have become uncomfortable with financial investments that they don’t understand, especially anything related to derivatives,” says Charles Bobrinskoy, a manager at Ariel Investments LLC in Chicago.
Equity Index Puts
Berkshire’s derivatives fall into four categories. Because they carry the greatest notional value, at $37.1 billion, most attention is on put options that Buffett sold on stock indexes in the U.S., U.K., euro zone and Japan that expire from September 2019 to January 2028. Berkshire has to pay at expiration if any of the indexes are lower than they were when the puts were written.
While analysis of these bets shows big losses are unlikely, Buffett, 78, hasn’t provided sufficient information on the derivatives to keep some investors from hitting the sell button. Bobrinskoy says he hasn’t been scared away: Of the $250 million he co-manages at Ariel, 5.6 percent was invested in Berkshire as of March 31.
To lose the full $37.1 billion on the equity puts, the indexes would have to fall to zero -- an unlikely event. Berkshire received $4.9 billion in premiums, which together with what the company earns on it, may offset any eventual payments.
Market Scenarios
Citigroup Inc. analyst Joshua Shanker in a March 16 report examined several scenarios to gauge the likelihood of Buffett’s losing money on the puts. Using the S&P 500 as a proxy for all the indexes and assuming a 5 percent annualized return on the premium, the market would have to suffer a cumulative decline of at least 32 percent across the 15- to 20-year life of the contracts for the seller to lose money. In the U.S. market back to 1800, the only way to do that would be to start the bet just prior to the 1929 crash.
Some economists compare today with the Great Depression, and some of the puts may have been written near the U.S. market’s all-time high in late 2007, according to information Buffett has disclosed. The S&P 500 in March was down 57 percent from its peak.
With that in mind, Shanker looked at scenarios that begin with a 50 percent drop in the S&P 500. From that nadir, if the index rose 6 percent annualized over 14 years, Buffett still would not owe any money when the puts expire -- even without consideration of the $4.9 billion in premiums.
Read more here
Tuesday, April 28, 2009
Monday, April 27, 2009
Anchors 'away'
(MarketWatch) -- As the Federal Open Market Committee gathers this week to discuss monetary policy and the economy, it will have to include in its discussions an exit strategy for draining some of the gobs of liquidity it has pumped into the economy, since inflation expectations can no longer be said to be "well anchored."
I say this because of several recent developments.
Last week, the government's sale of new five-year Treasury Inflation Protected Securities (TIPS) was a smashing success. The yield on these notes fell to 1.278%, much lower than the 1.375% rate on their when-issued counterpart just before the auction.
The auction also produced an unusually high bid-to-cover ratio of 2.66, indicating extremely strong demand for a security that yields much less than its plain vanilla counterpart.
At the turn of the year, the spread between the 10-year version of these two instruments was zero. The markets were more focused on the falling economy and the threat of deflation than anything else, so they bought the regular Treasury in such large quantities that its yield fell to the same level as the TIPS.
But the jump in the spread between the 10-year Treasury note yield and the yield on the 10-year TIPS since then is indicative of the markets' growing preference for a government security that provides inflation protection as well as some yield.
By favoring the TIPS over the regular note, the markets have pushed up its price, thus depressing its yield far below that of its non-indexed counterpart.
This sudden shift in the markets' thinking reflects a feeling that the fourth quarter represented the worst of the recession, and that things have begun to moderate since then.
It began to percolate slowly through the fixed-income markets early in the year and now appears to be the view of most economists.
Read more here
I say this because of several recent developments.
Last week, the government's sale of new five-year Treasury Inflation Protected Securities (TIPS) was a smashing success. The yield on these notes fell to 1.278%, much lower than the 1.375% rate on their when-issued counterpart just before the auction.
The auction also produced an unusually high bid-to-cover ratio of 2.66, indicating extremely strong demand for a security that yields much less than its plain vanilla counterpart.
At the turn of the year, the spread between the 10-year version of these two instruments was zero. The markets were more focused on the falling economy and the threat of deflation than anything else, so they bought the regular Treasury in such large quantities that its yield fell to the same level as the TIPS.
But the jump in the spread between the 10-year Treasury note yield and the yield on the 10-year TIPS since then is indicative of the markets' growing preference for a government security that provides inflation protection as well as some yield.
By favoring the TIPS over the regular note, the markets have pushed up its price, thus depressing its yield far below that of its non-indexed counterpart.
This sudden shift in the markets' thinking reflects a feeling that the fourth quarter represented the worst of the recession, and that things have begun to moderate since then.
It began to percolate slowly through the fixed-income markets early in the year and now appears to be the view of most economists.
Read more here
Thursday, April 23, 2009
Geithner: Global economy on the mend
(Reuters) -- The global economic downturn has shown signs of easing in recent weeks, although significant risks remain, Treasury Secretary Timothy Geithner wrote in the Financial Times on Friday.
The decline in world trade may be abating and conditions in some financial markets have improved, Geithner wrote in an opinion piece ahead of a meeting of G20 finance officials in Washington on Friday.
Read more here
The decline in world trade may be abating and conditions in some financial markets have improved, Geithner wrote in an opinion piece ahead of a meeting of G20 finance officials in Washington on Friday.
Read more here
Wednesday, April 22, 2009
MySpace co-founders stepping aside as growth slows
(MarketWatch) -- News Corp. said Wednesday that MySpace co-founders Chris DeWolfe and Tom Anderson are stepping aside, as the online social networking service they helped build into a phenomenon has begun to suffer in comparison to rival Facebook Inc.
DeWolfe is resigning his role as chief executive, while Anderson is shifting from president to an unspecified "new role," according to a company statement.
DeWolfe will continue serving on the board of MySpace China and as an advisor to the company, according to the statement.
Anderson, meanwhile, is in discussions with News Corp. Chief Digital Officer Jonathan Miller about "assuming a new role in the organization."
"Chris and Tom are true pioneers, and we greatly value the tremendous job they've done in growing MySpace into what it is today," Miller said in the statement.
MySpace is a dominant online social-networking service, built in its early days on a foundation of participating musicians and their fans.
News Corp acquired MySpace parent company Intermix Media for roughly $580 million in 2005.
Read more here
DeWolfe is resigning his role as chief executive, while Anderson is shifting from president to an unspecified "new role," according to a company statement.
DeWolfe will continue serving on the board of MySpace China and as an advisor to the company, according to the statement.
Anderson, meanwhile, is in discussions with News Corp. Chief Digital Officer Jonathan Miller about "assuming a new role in the organization."
"Chris and Tom are true pioneers, and we greatly value the tremendous job they've done in growing MySpace into what it is today," Miller said in the statement.
MySpace is a dominant online social-networking service, built in its early days on a foundation of participating musicians and their fans.
News Corp acquired MySpace parent company Intermix Media for roughly $580 million in 2005.
Read more here
Monday, April 20, 2009
Stevens Says Australia, in Recession, Is Well Placed
(Bloomberg) -- Australia is well placed to rebound from its first recession since 1991 because the financial system is strong, government finances are sound and companies will benefit from a pickup in China, Reserve Bank Governor Glenn Stevens said.
“There remain good grounds to think that we will continue to weather the storm better than most,” Stevens said in a speech in Adelaide today. The job of policy makers is to “foster, rather than erode, confidence. Over the past six months, that has involved the rapid deployment of both fiscal and monetary measures, to support demand.”
The Reserve Bank of Australia has cut its benchmark interest rate by a record 4.25 percentage points since early September to a 49-year low of 3 percent and the government has pledged almost A$90 billion ($63 billion) in grants, spending and bond-market assistance to boost an economy that contracted in the fourth quarter for the first time since 2000.
“The effects of those measures will still be coming through for some time yet,” Stevens told company directors in his speech entitled “The Road to Recovery.”
The Australian dollar fell to 70.12 U.S. cents at 1:38 p.m. in Sydney from 70.19 cents just before the speech was released. The two-year government bond yield fell 1 basis point to 3.18 percent. A basis point is 0.01 percentage point.
Australian Recession
Policy makers cut borrowing costs two weeks ago because rising unemployment and weaker-than-expected domestic demand increases the likelihood inflation will slow, according to minutes of the bank’s April 7 meeting released today in Sydney.
“I think the reasonable person, looking at all the information available now, would come to the conclusion that the Australian economy, too, is in recession,” Stevens said.
Stevens’ comments echo those of Prime Minister Kevin Rudd, who for the first time yesterday said that a recession in Australia is inevitable amid a slump in global growth.
“The challenge for the government is to cushion the impact of the recession on business and jobs,” Rudd said.
Australia’s unemployment rate rose by the most in 18 years in March, climbing to 5.7 percent from 5.2 percent in February. The number of people employed dropped 34,700. Miners Rio Tinto Group, BHP Billiton Ltd. and Iluka Resources Ltd. are among companies firing workers as the global recession saps demand for raw materials.
Global Comparisons
“The Australian economy has been contracting, though on the best information we have, not at the pace seen in a number of other countries,” Stevens said. Consumer confidence is “much more resilient to date than comparable results in major countries,” he added.
Australia’s gross domestic product declined 0.5 percent in Australia from the previous three months, a report showed on March 4. By contrast, the U.S. and U.K. economies both shrank 1.6 percent. Japan contracted 3.2 percent.
In Australia, “public finances remain in very sound shape, with modest debt levels and a medium-term path for the budget back towards balance,” Stevens said. “Without the massive obligations arising from bank rescues that will inevitably narrow the options available to governments in other countries, the financial regulatory system is strong and tested.”
Treasurer Wayne Swan will release the annual budget on May 12 and has said it will be in deficit for the first time in seven years.
Read more here
“There remain good grounds to think that we will continue to weather the storm better than most,” Stevens said in a speech in Adelaide today. The job of policy makers is to “foster, rather than erode, confidence. Over the past six months, that has involved the rapid deployment of both fiscal and monetary measures, to support demand.”
The Reserve Bank of Australia has cut its benchmark interest rate by a record 4.25 percentage points since early September to a 49-year low of 3 percent and the government has pledged almost A$90 billion ($63 billion) in grants, spending and bond-market assistance to boost an economy that contracted in the fourth quarter for the first time since 2000.
“The effects of those measures will still be coming through for some time yet,” Stevens told company directors in his speech entitled “The Road to Recovery.”
The Australian dollar fell to 70.12 U.S. cents at 1:38 p.m. in Sydney from 70.19 cents just before the speech was released. The two-year government bond yield fell 1 basis point to 3.18 percent. A basis point is 0.01 percentage point.
Australian Recession
Policy makers cut borrowing costs two weeks ago because rising unemployment and weaker-than-expected domestic demand increases the likelihood inflation will slow, according to minutes of the bank’s April 7 meeting released today in Sydney.
“I think the reasonable person, looking at all the information available now, would come to the conclusion that the Australian economy, too, is in recession,” Stevens said.
Stevens’ comments echo those of Prime Minister Kevin Rudd, who for the first time yesterday said that a recession in Australia is inevitable amid a slump in global growth.
“The challenge for the government is to cushion the impact of the recession on business and jobs,” Rudd said.
Australia’s unemployment rate rose by the most in 18 years in March, climbing to 5.7 percent from 5.2 percent in February. The number of people employed dropped 34,700. Miners Rio Tinto Group, BHP Billiton Ltd. and Iluka Resources Ltd. are among companies firing workers as the global recession saps demand for raw materials.
Global Comparisons
“The Australian economy has been contracting, though on the best information we have, not at the pace seen in a number of other countries,” Stevens said. Consumer confidence is “much more resilient to date than comparable results in major countries,” he added.
Australia’s gross domestic product declined 0.5 percent in Australia from the previous three months, a report showed on March 4. By contrast, the U.S. and U.K. economies both shrank 1.6 percent. Japan contracted 3.2 percent.
In Australia, “public finances remain in very sound shape, with modest debt levels and a medium-term path for the budget back towards balance,” Stevens said. “Without the massive obligations arising from bank rescues that will inevitably narrow the options available to governments in other countries, the financial regulatory system is strong and tested.”
Treasurer Wayne Swan will release the annual budget on May 12 and has said it will be in deficit for the first time in seven years.
Read more here
Thursday, April 16, 2009
The Gold Mine Facebook Refuses To Explore
(alleyinsider.com) -- Razorfish VP Shiv Singh tells us ad agencies like his pay brand monitoring firms like Motive Quest, Visible Technologies and Nielsen Buzzmetrics anywhere from $5,000 to $40,000 a year for insight into what consumers are saying about their clients online.
Shiv says these agencies would happily pay Facebook twice as much for a rival service.
"I think Facebook is sitting on a gold mine," he says.
Already Facebook has a free service called Lexicon, which, according to the company, "aggregates and analyzes millions of Facebook Wall posts every day to provide a searchable database of trends over time."
But Shiv tells us he and his fellow marketers want a "Lexicon on Steroids."
Read more here
Shiv says these agencies would happily pay Facebook twice as much for a rival service.
"I think Facebook is sitting on a gold mine," he says.
Already Facebook has a free service called Lexicon, which, according to the company, "aggregates and analyzes millions of Facebook Wall posts every day to provide a searchable database of trends over time."
But Shiv tells us he and his fellow marketers want a "Lexicon on Steroids."
Read more here
Cathay Pacific Cuts Capacity, Offers Unpaid Leave
(Bloomberg) -- Cathay Pacific Airways Ltd., Hong Kong’s largest carrier, will cut capacity and ask staff to take unpaid leave as it battles plunging travel demand.
The airline will reduce the planned passenger capacity at its main unit by 8 percent from May and by 13 percent at its Hong Kong Dragon Airlines Ltd. arm, it said today in a Hong Kong stock exchange statement. The unpaid leave will be on offer over the next 12 months, the airline added.
The company’s first-quarter sales from passenger and cargo flights tumbled 22 percent as it slashed fares and carried fewer travelers because of the global recession. Qantas Airways Ltd. said earlier this week that it will fire about 5 percent of its workforce and delay planes as demand weakens.
“This slowdown will be deeper and longer” than previous recessions, said Winson Fong, who helps manage $2 billion at SG Asset Management H.K. Ltd. in Hong Kong. “The bad news will continue to come.”
Cathay Pacific rose 1.2 percent to HK$9.69 at 10:39 a.m. in Hong Kong trading. The carrier has gained 11 percent this year, outperforming the benchmark Hang Seng Index’s 10 percent rise.
Staff Leave
The airline will cut its overall cargo capacity by 11 percent from May, it said. The company didn’t say how much unpaid leave it wanted staff to take in the statement. The leave isn’t mandatory, Carolyn Leung, a spokeswoman, said by phone.
Chief Executive Officer Tony Tyler joins Singapore Airlines Ltd. and Qantas in cutting costs after traffic for Asia-Pacific carriers sank almost 13 percent in February, the steepest decline since June, according to the International Air Transport Association.
Read more here
The airline will reduce the planned passenger capacity at its main unit by 8 percent from May and by 13 percent at its Hong Kong Dragon Airlines Ltd. arm, it said today in a Hong Kong stock exchange statement. The unpaid leave will be on offer over the next 12 months, the airline added.
The company’s first-quarter sales from passenger and cargo flights tumbled 22 percent as it slashed fares and carried fewer travelers because of the global recession. Qantas Airways Ltd. said earlier this week that it will fire about 5 percent of its workforce and delay planes as demand weakens.
“This slowdown will be deeper and longer” than previous recessions, said Winson Fong, who helps manage $2 billion at SG Asset Management H.K. Ltd. in Hong Kong. “The bad news will continue to come.”
Cathay Pacific rose 1.2 percent to HK$9.69 at 10:39 a.m. in Hong Kong trading. The carrier has gained 11 percent this year, outperforming the benchmark Hang Seng Index’s 10 percent rise.
Staff Leave
The airline will cut its overall cargo capacity by 11 percent from May, it said. The company didn’t say how much unpaid leave it wanted staff to take in the statement. The leave isn’t mandatory, Carolyn Leung, a spokeswoman, said by phone.
Chief Executive Officer Tony Tyler joins Singapore Airlines Ltd. and Qantas in cutting costs after traffic for Asia-Pacific carriers sank almost 13 percent in February, the steepest decline since June, according to the International Air Transport Association.
Read more here
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