From this Fox Business Network article:
Buffett to FBN: S&P Downgrade "Doesn't Make Sense"
...Buffett reaffirmed his belief in the quality of the United States' credit telling FBN, "In Omaha, the U.S. is still triple A. In fact, if there were a quadruple-A rating, I'd give the U.S. that."
Buffett also added the following...
"The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you're talking about inflation, that's a different question."
Now, contrast what Buffett had to say with this:
Jim Rogers on CNBC: "Don't See How U.S. Can Ever Pay Off Its Debts"
The U.S. doesn't deserve a AA-plus credit rating, much less triple-A, commodity bull and noted investor Jim Rogers told CNBC on Monday.
Rogers also said...
"It seems to me it's physically, humanly impossible for the U.S. to ever pay off its debt ," Rogers said. "They can roll it over and continue to play the charade, but the U.S. is bankrupt."
So Buffett says U.S. is quadruple-A and Rogers says U.S. is bankrupt.
Two informed participants with polar opposite views.
I'm guessing both views resonate with individuals who mostly think the other is crazy. No matter who you agree with it's worth knowing how and why others come to completely different conclusions with what seem like the same set of facts.
From this Bloomberg article:
Buffett Says Cutting U.S. Rating Was a Mistake, Sees No Recession
"Financial markets create their own dynamics, but I don't think we're facing a double dip recession," said Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A) "Clearly what stock markets do have is an effect on confidence, and this selloff can create a lack of confidence."
Who knows how this plays out. The nature of financial markets, especially the modern iteration, create tough to predict feedback loops that take on a life of their own.
In many ways, a monster of our own making that I'm not convinced serves its primary purpose all that well.
We could easily make it simpler, smaller in scale, less hyperactive, less expensive, and more stable if we wanted it that way. Yet, considering the interests involved, that's not going to happen anytime soon.
Some relevant quotes:
"...the 3% of GDP that was made up of financial services in 1965 was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century. We should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that went to pay for financial services by 2007, as the financial services share of GDP expanded to a remarkable 7.5%. This extra 4.5% would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5% a year its ability to save and invest, both of which did slow down." - Jeremy Grantham in Finance Goes Rogue
"In the '20s, a tiny class of people were financial promoters and a tiny class of people were buying securities. Today, it's deep in the whole culture, and it is way more extreme. If sin and folly get punished appropriately, we're in for a bad time." - Charlie Munger in the Stanford Lawyer
"When they wanted to make the securities market function better as a gambling casino with vast profits for the people who were croupiers—there was a big constituency in favor of dumb change....these changes repealed longtime control of margin credit by the Federal Reserve System." - Charlie Munger in the Stanford Lawyer*
"...just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well." - Charlie Munger in the Stanford Lawyer
What we have then is a system that is much larger than what it has been historically. An example of where that additional size comes from is the making of fast-paced bets using various options, derivatives, and high-speed trading strategies.**
Now, I've no doubt those activities serve the participants involved quite well. Whether modern financial markets come even close to effectively serving their broader purpose or not an afterthought it seems.
"I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive "earnings" (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham." - Warren Buffett in the 2002 Berkshire Hathaway Shareholder Letter
The current large, overly complex, and often less stable iteration of the financial markets is the one we have to live with for now.
It will continue to impact the remaining real economy from time to time in not easy to foresee ways.
Adam
* Munger's point is that we're not controlling financial leverage if we have option exchanges. He also said: "Unlimited leverage comes automatically with an option exchange. Then, next, derivative trading made the option exchange look like a benign event."
**Here's what Charlie Munger said about high frequency trading at the last Wesco Financial Annual Meeting according to these notes: "Fancy computers are engaging in legalized front-running. The profits are clearly coming from the rest of us -- our college endowments and our pensions. Why is this legal? What the hell is the government thinking? It's like letting rats into a restaurant."
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, August 9, 2011
Monday, August 8, 2011
Attention, Shoppers. It's Time to Buy
This Barron's article points out that many tech stocks have strong balance sheets and low P/Es.
The article also calls Berkshire Hathaway (BRKA) a "financial Fort Knox" and says the stock looks inexpensive.
Attention Shoppers, It's Time to Buy
Charlie Munger said the following about Berkshire at the final Wesco Financial annual meeting:
Berkshire's stock is at a point Buffett and I never anticipated it would go to.
Investors owning Berkshire at current prices will do quite all right just sitting on their rear ends.
When Munger said that, the stock was roughly 10% higher than it is now. The Berkshire Hathaway class B shares (BRKb) are currently selling at just over $ 70/share as I write this.
As far as the other stocks go it should continue to be a rough ride. I have no idea whether these stocks will be higher or lower in 3 months or even 3 years for that matter. Anyone who doesn't like looking at paper losses for potentially an extended period probably should not be buying.
On the other hand, the price that some of these businesses are now selling at compared to what they will likely be worth in ten years or so is attractive.
The article also mentions stocks from several other sectors (financials, pharma, defense, and even a gold miner) worth considering that, for the most part, are of little interest to me.
Adam
Long positions in MSFT, INTC, HPQ, AAPL, and BRKb
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
The article also calls Berkshire Hathaway (BRKA) a "financial Fort Knox" and says the stock looks inexpensive.
Attention Shoppers, It's Time to Buy
Charlie Munger said the following about Berkshire at the final Wesco Financial annual meeting:
Berkshire's stock is at a point Buffett and I never anticipated it would go to.
Investors owning Berkshire at current prices will do quite all right just sitting on their rear ends.
When Munger said that, the stock was roughly 10% higher than it is now. The Berkshire Hathaway class B shares (BRKb) are currently selling at just over $ 70/share as I write this.
As far as the other stocks go it should continue to be a rough ride. I have no idea whether these stocks will be higher or lower in 3 months or even 3 years for that matter. Anyone who doesn't like looking at paper losses for potentially an extended period probably should not be buying.
On the other hand, the price that some of these businesses are now selling at compared to what they will likely be worth in ten years or so is attractive.
The article also mentions stocks from several other sectors (financials, pharma, defense, and even a gold miner) worth considering that, for the most part, are of little interest to me.
Adam
Long positions in MSFT, INTC, HPQ, AAPL, and BRKb
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, August 5, 2011
Buffett on Kraft: "I Have Oreos for Breakfast"
This Fox Business News article provides some insight into Buffett's reaction to the split of Kraft (KFT):
Buffett to FBN: Kraft is Already Good Business, Now it Will Be Two Good Businesses
Kraft's CEO was heading to Omaha to tell Buffett that she wanted to split Kraft into two businesses. He apparently supports the split.
"I'm fine with it. Irene is a good manager and she does a good job..."
Buffett wasn't a big fan of how much Kraft paid for Cadbury. In fact, he was a very vocal critic. He said this to CNBC about the deal at the time:
Buffett on Kraft-Cadbury Deal
"...I think Irene has done a good job in operations. I like Irene. I mean, she's been straightforward with me. We just disagree. She thinks it's a good deal. I think it's a bad deal."
More from the FBN article:
"I'm sure she would have preferred I was supportive of the Cadbury deal but there's no edge or anything between us."
When asked if he'd hold onto the shares that Berkshire Hathaway (BRKa) owns...
"Listen, I have Oreos for breakfast so I'm in the stock with both feet." He added, "It's a good business and it'll be two good businesses."
Kraft is currently Berkshire Hathaway's 5th largest holding in its equity portfolio behind Coca Cola (KO), Wells Fargo (WFC) American Express (AXP) and Procter & Gamble (PG).
Adam
Long positions in all stocks mentioned
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Buffett to FBN: Kraft is Already Good Business, Now it Will Be Two Good Businesses
Kraft's CEO was heading to Omaha to tell Buffett that she wanted to split Kraft into two businesses. He apparently supports the split.
"I'm fine with it. Irene is a good manager and she does a good job..."
Buffett wasn't a big fan of how much Kraft paid for Cadbury. In fact, he was a very vocal critic. He said this to CNBC about the deal at the time:
Buffett on Kraft-Cadbury Deal
"...I think Irene has done a good job in operations. I like Irene. I mean, she's been straightforward with me. We just disagree. She thinks it's a good deal. I think it's a bad deal."
More from the FBN article:
"I'm sure she would have preferred I was supportive of the Cadbury deal but there's no edge or anything between us."
When asked if he'd hold onto the shares that Berkshire Hathaway (BRKa) owns...
"Listen, I have Oreos for breakfast so I'm in the stock with both feet." He added, "It's a good business and it'll be two good businesses."
Kraft is currently Berkshire Hathaway's 5th largest holding in its equity portfolio behind Coca Cola (KO), Wells Fargo (WFC) American Express (AXP) and Procter & Gamble (PG).
Adam
Long positions in all stocks mentioned
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Thursday, August 4, 2011
Kraft to Split Into Two Companies
News broke this morning that Kraft (KFT) will become two separate companies splitting its global snacks business from the North American grocery business.
Some excerpts from this Wall Street Journal article.
Global Snacks Includes:
...Kraft's European business and developing markets units, as well as snacks and confectionery businesses in North America. With about $32 billion in estimated revenue, it will house the likes of Oreo cookies, Cadbury chocolates and Trident gum, all which have greater prospects for growth in emerging markets and to sell more to consumers on the go.
North America Grocery Business Includes:
...Kraft cheeses, Maxwell House coffee and Jell-O snacks, lacks the growth potential but comes with stronger margins and more reliable sales.
Kraft will separate the two businesses by spinning off its North American grocery business to shareholders. The process is expected to be complete by the end of 2012.
Nelson Peltz, who owns over 12 million Kraft shares, apparently likes the split and said the following to CNBC:
...it is in the "best interest of shareholders to create a unique consumer products business with very high-growth prospects, huge emerging-market exposure and one that separates itself from the slow-growth commodity-related meat and cheese business."
Investors, Peltz said, "now have a choice between investing in this business, which will be a low dividend payer, and the North American food business that will probably be a high dividend payer."
According to CNBC, Warren Buffett also supports the split. Berkshire Hathaway (BRKa) is Kraft's largest shareholder.
Kraft's stock is up more than 3% on the news in what is otherwise a huge stock market sell-off.
Adam
Long position in KFT established at much lower than recent market prices
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Some excerpts from this Wall Street Journal article.
Global Snacks Includes:
...Kraft's European business and developing markets units, as well as snacks and confectionery businesses in North America. With about $32 billion in estimated revenue, it will house the likes of Oreo cookies, Cadbury chocolates and Trident gum, all which have greater prospects for growth in emerging markets and to sell more to consumers on the go.
North America Grocery Business Includes:
...Kraft cheeses, Maxwell House coffee and Jell-O snacks, lacks the growth potential but comes with stronger margins and more reliable sales.
Kraft will separate the two businesses by spinning off its North American grocery business to shareholders. The process is expected to be complete by the end of 2012.
Nelson Peltz, who owns over 12 million Kraft shares, apparently likes the split and said the following to CNBC:
...it is in the "best interest of shareholders to create a unique consumer products business with very high-growth prospects, huge emerging-market exposure and one that separates itself from the slow-growth commodity-related meat and cheese business."
Investors, Peltz said, "now have a choice between investing in this business, which will be a low dividend payer, and the North American food business that will probably be a high dividend payer."
According to CNBC, Warren Buffett also supports the split. Berkshire Hathaway (BRKa) is Kraft's largest shareholder.
Kraft's stock is up more than 3% on the news in what is otherwise a huge stock market sell-off.
Adam
Long position in KFT established at much lower than recent market prices
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, August 3, 2011
Buffett on Derivatives: The 'Chain Reaction' Threat
"Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system." - Warren Buffett in the 2002 Berkshire Hathaway Shareholder Letter
When Berkshire Hathaway (BRKa) purchased Gen Re, along with it came with General Re Securities, a derivatives dealer that Warren Buffett and Charlie Munger did not want.
They viewed the derivatives operation as dangerous and wanted to be rid of it but couldn't sell.
So they decided to terminate it. Ten months into winding down the operation still had 14,384 contracts outstanding involving 672 counterparties around the world.
That's someone who wanted out of the derivatives business. Imagine the complexity of those institutions who are perfectly happy to engage extensively in this type of activity to this day.
Buffett explained why he thinks derivatives are dangerous in the 2002 Berkshire Hathaway letter.
Back then, Buffett couldn't have guessed the specific events that would trigger the paralyzing systemic instability and resulting economic damage we all witnessed in 2008.
Yet, I think the following pretty well describes what was at the root of the financial meltdown that happened six years later. From the 2002 letter:
"In banking, the recognition of a 'linkage' problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a 'chain reaction' threat exists within an industry, it pays to minimize links of any kind. That's how we conduct our reinsurance business, and it's one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can't bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others."
Unfortunately, the linkage problem and chain reaction threat still remains a serious risk. We have not done enough post-crisis to reduce it.
The analysis of any financial institution, even if you read every last footnote in a companies annual report, ends up being a giant leap of faith.
There is no practical way to get a clear picture of the risks that an individual institution is running when it comes to their derivatives activities. So it certainly is not possible to gauge the risks to the system as a whole at any point in time.
We'd be wise to change this. Somehow neither Long-Term Capital Management in 1998 or the financial crisis of 2008 was enough of a lesson.
It brings to mind a scene from the movie Citizen Kane. In the scene, a stubborn self-obsessed Charles Foster Kane facing a scandal forsakes good sense and reason. Seeing this lack of good sense, Kane's political opponent Boss Jim Gettys says the following:
Adam
Long position in BRKb
Related posts:
Munger on Derivatives
Buffett on Derivatives
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
When Berkshire Hathaway (BRKa) purchased Gen Re, along with it came with General Re Securities, a derivatives dealer that Warren Buffett and Charlie Munger did not want.
They viewed the derivatives operation as dangerous and wanted to be rid of it but couldn't sell.
So they decided to terminate it. Ten months into winding down the operation still had 14,384 contracts outstanding involving 672 counterparties around the world.
That's someone who wanted out of the derivatives business. Imagine the complexity of those institutions who are perfectly happy to engage extensively in this type of activity to this day.
Buffett explained why he thinks derivatives are dangerous in the 2002 Berkshire Hathaway letter.
Back then, Buffett couldn't have guessed the specific events that would trigger the paralyzing systemic instability and resulting economic damage we all witnessed in 2008.
Yet, I think the following pretty well describes what was at the root of the financial meltdown that happened six years later. From the 2002 letter:
"In banking, the recognition of a 'linkage' problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a 'chain reaction' threat exists within an industry, it pays to minimize links of any kind. That's how we conduct our reinsurance business, and it's one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can't bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others."
Unfortunately, the linkage problem and chain reaction threat still remains a serious risk. We have not done enough post-crisis to reduce it.
The analysis of any financial institution, even if you read every last footnote in a companies annual report, ends up being a giant leap of faith.
There is no practical way to get a clear picture of the risks that an individual institution is running when it comes to their derivatives activities. So it certainly is not possible to gauge the risks to the system as a whole at any point in time.
We'd be wise to change this. Somehow neither Long-Term Capital Management in 1998 or the financial crisis of 2008 was enough of a lesson.
It brings to mind a scene from the movie Citizen Kane. In the scene, a stubborn self-obsessed Charles Foster Kane facing a scandal forsakes good sense and reason. Seeing this lack of good sense, Kane's political opponent Boss Jim Gettys says the following:
"You're the greatest fool I've ever known, Kane. If it was anybody else, I'd say what's going to happen to you would be a lesson to you. Only you're going to need more than one lesson. And you're going to get more than one lesson."
So Kane strikes Boss Gettys as a fellow who'll NOT learn a lot of hard lessons and, of course, he goes on to do just that.
Either we reduce the risks to the system caused by this garbage or future events will force us to in more painful ways.
"When the regulators put in the option exchanges, there was just one letter in opposition saying 'you shouldn't do this,' and Warren Buffett wrote it.
Then, next, derivative trading made the option exchange look like a benign event. So just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well." - Charlie Munger in the Stanford Lawyer
I'd rather us not wait for the next "lesson" to do what makes sense.
"When the regulators put in the option exchanges, there was just one letter in opposition saying 'you shouldn't do this,' and Warren Buffett wrote it.
Then, next, derivative trading made the option exchange look like a benign event. So just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well." - Charlie Munger in the Stanford Lawyer
I'd rather us not wait for the next "lesson" to do what makes sense.
Adam
Long position in BRKb
Related posts:
Munger on Derivatives
Buffett on Derivatives
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Tuesday, August 2, 2011
Yacktman Funds 2Q 2011 Portfolio Update
Donald Yacktman and his team have a very solid long-term track record.
Over the past ten years the cumulative return of the S&P 500 is a bit over 30%.
By comparison, both the Yacktman Funds, YAFFX and YACKX, are up more than 242% and 212% over the same time frame respectively.*
A summary of the additions to the portfolio:
Additions that had greater than 1 percent impact on the portfolio
Cisco (CSCO)
News Corp (NWSA)
Procter & Gamble (PG)
Microsoft (MSFT)
Additions that had between .2 percent and 1 percent impact on the porfolio
Research in Motion (RIMM, new position)
Hewlett-Packard (HPQ)
U.S. Bancorp (USB)
Exxon Mobil (XOM)
Wal-Mart (WMT)
Johnson & Johnson (JNJ)
Sysco (SYY),
C.R. Bard (BCR)
Apollo (APOL)
Pepsi (PEP)
Coca-Cola (KO)
Bank of New York Mellon (BK)
Additions that had less than .2 percent impact on the portfolio
Viacom (VIA-B)
ConocoPhillips (COP)
Pfizer (PFE)
Becton Dickinson (BDX)
Comcast (CMCSK)
Berkshire Hathaway (BRKb)
The biggest addition in terms of percentage impact on the portfolio was Cisco at just over 3%.
Yacktman also reduced exposure to Leucadia (LUK) and sold all shares in Dell (DELL) and SLM Corporation Preferred (SLM-PA).
As a major holding and with News Corp experiencing some rather high profile difficulties they had this to say in their 2nd Quarter 2011 Letter:
After the end of the second quarter, News Corp became a major news story as new information about an old phone hacking scandal at its newspaper, News of The World, was released. Management has taken swift action to deal with the issues, including closing the News of The World, withdrawing a bid for BSkyB, authorizing an increase to the share repurchase, and changing management. We continue to monitor the situation closely and think News Corp is taking the right steps to address the issues and move forward.
Some other comments from the letter:
Consumer Staples
PepsiCo, Procter & Gamble, Coca-Cola, and Sysco are four of our top ten positions in each fund, and all appreciated during the second quarter, with PepsiCo and Sysco rising more than 10% each. We like the steady nature of these consumer staples businesses and think that the valuations are compelling.
"Old Tech"
Cisco Systems declined nearly 10% during the quarter and we increased our exposure, making it the 5 th largest holding in each fund. The company has a stellar balance sheet with significant excess cash, and we think management is objectively facing the challenges in the business.
Microsoft appreciated during the quarter but disappointed us by offering $8.5 billion to acquire Skype. We think Microsoft is paying a high price for this business, and the company has had a poor record of integrating and managing acquisitions. Fortunately, the amount of money on the proposed deal is not especially significant to Microsoft and represents only about 5 months of free cash flow. While companies disappoint us from time to time, we think it is important to objectively evaluate information in context of the entire investment thesis. In Microsoft’s case, we think the valuation is so compelling that we are able to look beyond a deal of this modest size that we do not especially like.
Hewlett-Packard declined a bit more than 10% during the quarter as business results continued to be challenging. The weak share price is due in part to business issues and in larger part to the general disfavor of "old tech" shares. We think Hewlett-Packard's stock could perform well from current levels even if its businesses continue to struggle.
I've said before that it's worth noting value-oriented managers like Yacktman, who wouldn't touch a tech stock a decade ago due to extreme overvaluation, are moving into stocks like Microsoft, Cisco, and Hewlett-Packard in a meaningful way.
Large media companies like News Corp and Viacom, even though they seem reasonably valued, are businesses that I've never become comfortable with as investments.
Adam
Long positions in PEP, KO, PG, MSFT, CSCO, HPQ, JNJ and COP. Technology stocks are generally smaller positions.
* From the letter: The performance data quoted for The Yacktman Fund and The Yacktman Focused Fund represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than their original cost. The current performance may be higher or lower than the performance data quoted.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Over the past ten years the cumulative return of the S&P 500 is a bit over 30%.
By comparison, both the Yacktman Funds, YAFFX and YACKX, are up more than 242% and 212% over the same time frame respectively.*
At the end of the most recent quarter, Yacktman continued to hold and build positions in large capitalization stocks that are household names. These are relatively concentrated portfolios with roughly 40% in the top 5 stocks.
Top 5 Holdings
1 News Corp (NWSA)
4 Microsoft (MSFT)
5 Cisco (CSCO)
Interestingly, Coca-Cola (KO) was displaced from the top 5. This came from Yacktman adding more Cisco not reducing Coca-Cola which is now the 6th largest holding (more shares on the soft drink maker were actually added during the quarter).
Yacktman Funds continue to have minimal exposure to financials with only 1 bank in the top 25 (U.S. Bancorp: USB).
Yacktman Funds continue to have minimal exposure to financials with only 1 bank in the top 25 (U.S. Bancorp: USB).
A summary of the additions to the portfolio:
Additions that had greater than 1 percent impact on the portfolio
Cisco (CSCO)
News Corp (NWSA)
Procter & Gamble (PG)
Microsoft (MSFT)
Additions that had between .2 percent and 1 percent impact on the porfolio
Research in Motion (RIMM, new position)
Hewlett-Packard (HPQ)
U.S. Bancorp (USB)
Exxon Mobil (XOM)
Wal-Mart (WMT)
Johnson & Johnson (JNJ)
Sysco (SYY),
C.R. Bard (BCR)
Apollo (APOL)
Pepsi (PEP)
Coca-Cola (KO)
Bank of New York Mellon (BK)
Additions that had less than .2 percent impact on the portfolio
Viacom (VIA-B)
ConocoPhillips (COP)
Pfizer (PFE)
Becton Dickinson (BDX)
Comcast (CMCSK)
Berkshire Hathaway (BRKb)
The biggest addition in terms of percentage impact on the portfolio was Cisco at just over 3%.
Yacktman also reduced exposure to Leucadia (LUK) and sold all shares in Dell (DELL) and SLM Corporation Preferred (SLM-PA).
As a major holding and with News Corp experiencing some rather high profile difficulties they had this to say in their 2nd Quarter 2011 Letter:
After the end of the second quarter, News Corp became a major news story as new information about an old phone hacking scandal at its newspaper, News of The World, was released. Management has taken swift action to deal with the issues, including closing the News of The World, withdrawing a bid for BSkyB, authorizing an increase to the share repurchase, and changing management. We continue to monitor the situation closely and think News Corp is taking the right steps to address the issues and move forward.
Some other comments from the letter:
Consumer Staples
PepsiCo, Procter & Gamble, Coca-Cola, and Sysco are four of our top ten positions in each fund, and all appreciated during the second quarter, with PepsiCo and Sysco rising more than 10% each. We like the steady nature of these consumer staples businesses and think that the valuations are compelling.
"Old Tech"
Cisco Systems declined nearly 10% during the quarter and we increased our exposure, making it the 5 th largest holding in each fund. The company has a stellar balance sheet with significant excess cash, and we think management is objectively facing the challenges in the business.
Microsoft appreciated during the quarter but disappointed us by offering $8.5 billion to acquire Skype. We think Microsoft is paying a high price for this business, and the company has had a poor record of integrating and managing acquisitions. Fortunately, the amount of money on the proposed deal is not especially significant to Microsoft and represents only about 5 months of free cash flow. While companies disappoint us from time to time, we think it is important to objectively evaluate information in context of the entire investment thesis. In Microsoft’s case, we think the valuation is so compelling that we are able to look beyond a deal of this modest size that we do not especially like.
Hewlett-Packard declined a bit more than 10% during the quarter as business results continued to be challenging. The weak share price is due in part to business issues and in larger part to the general disfavor of "old tech" shares. We think Hewlett-Packard's stock could perform well from current levels even if its businesses continue to struggle.
I've said before that it's worth noting value-oriented managers like Yacktman, who wouldn't touch a tech stock a decade ago due to extreme overvaluation, are moving into stocks like Microsoft, Cisco, and Hewlett-Packard in a meaningful way.
Large media companies like News Corp and Viacom, even though they seem reasonably valued, are businesses that I've never become comfortable with as investments.
Adam
Long positions in PEP, KO, PG, MSFT, CSCO, HPQ, JNJ and COP. Technology stocks are generally smaller positions.
* From the letter: The performance data quoted for The Yacktman Fund and The Yacktman Focused Fund represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that the investor's shares, when redeemed, may be worth more or less than their original cost. The current performance may be higher or lower than the performance data quoted.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, August 1, 2011
Lowe's and Home Depot
This Michael Santoli article in Barron's compares Home Depot (HD) to Lowe's (LOW) and points out the former has a premium valuation that doesn't seem justified.
As the two leading home improvement retailers, both companies have and are likely to at least maintain a respectable economic moat. The article points out that Lowe's should generate enough cash to be able to repurchase roughly half of its market capitalization in five years or so.
Very shareholder-friendly.
Something that I highlighted in this previous post:
Lowe's Shareholder-Friendly Buyback Plan
This article points out Lowe's plans to buy back $ 18 billion of its shares. That would more than half its shares outstanding near current prices.
At current prices and with a longer-term investing time horizon I'd expect solid returns from owning Lowe's shares. The buyback plan makes that even more likely. Their business has performed just fine in a very weak economic environment for U.S. housing. They are almost certain to do an awful lot better once the housing situation improves.
Yet, the current environment may persist for quite a while yet. How long is difficult to judge. With a U.S. housing market that is likely to be weak for an extended period, I wouldn't necessarily expect much from Lowe's stock in the short-to-intermediate run.
I'm not in the business of trying to time the turn in economic conditions. If the price of an asset seems right compared to likely future long-term prospects I don't wait to accumulate shares. That's a recipe for owning too few shares of something. Waiting makes little sense if you understand the business and you've judged long-term prospects reasonably well.
Of course, if the judgment on future prospects is off returns will suffer. So the focus, as always, is not on whether the shares will be "dead money" for one or even three years. It's on whether the competitive advantages of Lowe's allow the company to at least maintain or, even better, widen the economic moat that it has.
During the difficult times the leaders within an industry are often able to do just that.
Otherwise, the so-called dead money that some investors seem to fear so much is just a chance to accumulate more shares in a good business while it is cheap.
It's also an opportunity for the company to use its cash flow to do the same potentially enhancing returns for long-term holders.
Adam
Long position in Lowe's
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
As the two leading home improvement retailers, both companies have and are likely to at least maintain a respectable economic moat. The article points out that Lowe's should generate enough cash to be able to repurchase roughly half of its market capitalization in five years or so.
Very shareholder-friendly.
Something that I highlighted in this previous post:
Lowe's Shareholder-Friendly Buyback Plan
This article points out Lowe's plans to buy back $ 18 billion of its shares. That would more than half its shares outstanding near current prices.
At current prices and with a longer-term investing time horizon I'd expect solid returns from owning Lowe's shares. The buyback plan makes that even more likely. Their business has performed just fine in a very weak economic environment for U.S. housing. They are almost certain to do an awful lot better once the housing situation improves.
Yet, the current environment may persist for quite a while yet. How long is difficult to judge. With a U.S. housing market that is likely to be weak for an extended period, I wouldn't necessarily expect much from Lowe's stock in the short-to-intermediate run.
I'm not in the business of trying to time the turn in economic conditions. If the price of an asset seems right compared to likely future long-term prospects I don't wait to accumulate shares. That's a recipe for owning too few shares of something. Waiting makes little sense if you understand the business and you've judged long-term prospects reasonably well.
Of course, if the judgment on future prospects is off returns will suffer. So the focus, as always, is not on whether the shares will be "dead money" for one or even three years. It's on whether the competitive advantages of Lowe's allow the company to at least maintain or, even better, widen the economic moat that it has.
During the difficult times the leaders within an industry are often able to do just that.
Otherwise, the so-called dead money that some investors seem to fear so much is just a chance to accumulate more shares in a good business while it is cheap.
It's also an opportunity for the company to use its cash flow to do the same potentially enhancing returns for long-term holders.
Adam
Long position in Lowe's
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, July 29, 2011
Munger on Derivatives
Some excerpts from an interview with Charlie Munger in the spring 2009 edition of the Stanford Lawyer:
On Unlimited Leverage
"When the regulators put in the option exchanges, there was just one letter in opposition saying 'you shouldn't do this,' and Warren Buffett wrote it. When they wanted to make the securities market function better as a gambling casino with vast profits for the people who were croupiers—there was a big constituency in favor of dumb change. Buffett was like a man trying to stop an elephant with a pea shooter. We're not controlling financial leverage if we have option exchanges. So these changes repealed longtime control of margin credit by the Federal Reserve System."
"Unlimited leverage comes automatically with an option exchange. Then, next, derivative trading made the option exchange look like a benign event. So just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well."
"Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the 'repo' system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome."
On Bringing Back the 'Bucket Shop'
"Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess—from something that was already gross and wrong. In the '20s we had the 'bucket shop.' The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn't buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the off-track betting system."
"Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance — including Alan Greenspan — argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There's another word for this: bonkers. It is not a credit to academic economics that Greenspan's view was so common."
The complete interview, from back in spring 2009, is definitely well worth reading. There are some excellent insights and, as always, Munger's manner of speaking is no-nonsense.
Munger's emphasis has always been on an interdisciplinary education and that becomes obvious the more you read and listen to him. He started as a student of math and physics before getting a law degree and starting his law firm Munger, Tolles, & Olson.
Then, of course, came his business career.
He's also self-taught on a whole range of subjects some that he can often explain better and in a whole lot more useful manner than what you'll find in academia.
Adam
Related post:
Buffett on Derivatives
On Unlimited Leverage
"When the regulators put in the option exchanges, there was just one letter in opposition saying 'you shouldn't do this,' and Warren Buffett wrote it. When they wanted to make the securities market function better as a gambling casino with vast profits for the people who were croupiers—there was a big constituency in favor of dumb change. Buffett was like a man trying to stop an elephant with a pea shooter. We're not controlling financial leverage if we have option exchanges. So these changes repealed longtime control of margin credit by the Federal Reserve System."
"Unlimited leverage comes automatically with an option exchange. Then, next, derivative trading made the option exchange look like a benign event. So just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well."
"Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the 'repo' system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome."
On Bringing Back the 'Bucket Shop'
"Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess—from something that was already gross and wrong. In the '20s we had the 'bucket shop.' The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn't buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the off-track betting system."
"Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance — including Alan Greenspan — argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There's another word for this: bonkers. It is not a credit to academic economics that Greenspan's view was so common."
The complete interview, from back in spring 2009, is definitely well worth reading. There are some excellent insights and, as always, Munger's manner of speaking is no-nonsense.
Munger's emphasis has always been on an interdisciplinary education and that becomes obvious the more you read and listen to him. He started as a student of math and physics before getting a law degree and starting his law firm Munger, Tolles, & Olson.
Then, of course, came his business career.
He's also self-taught on a whole range of subjects some that he can often explain better and in a whole lot more useful manner than what you'll find in academia.
Adam
Related post:
Buffett on Derivatives
Thursday, July 28, 2011
Groupon's Financial Gymnastics
Excerpts from this Wall Street Journal article on Groupon's practices leading up to its initial public offering:
Groupon's Accounting Lingo Gets Scrutiny
Newfangled Accounting Metric
Groupon Inc. has attracted scrutiny from regulators over a newfangled accounting metric...
Dot-Com Boom Redux?
The financial gymnastics harken back to Silicon Valley's late 1990s dot-com boom...
Adjusted CSOI
Groupon...has highlighted in regulatory filings something it calls "adjusted consolidated segment operating income," or adjusted CSOI. Investors and analysts said that draws attention away from marketing costs, which are causing the company to hemorrhage money.
Adjusted CSOI?
That's certainly bold and imaginative if nothing else. Not exactly a compliment when you are talking about accounting.
This company cannot be serious about selling that kind of metric to investors.
In the article, portfolio manager Ben Strubel said it best:
"In essence Groupon is asking investors to look at their profit before any expenses..."
I've said in previous posts it's best to own companies that foster a conservative accounting culture. I don't think Groupon is going to meet that criteria.
This reminds me of the late 1990s more than anything else I've seen lately but, even if there are some specific excesses, we seem a long way from a more generalized problem.
Well, at least so far that is.
Maybe not as enthusiastically at current prices, but I'll stick with the Google's (GOOG) and Apple's (AAPL) of the world. Both are also growing plenty fast and produce exceptional returns on capital.
Highly profitable, real businesses, with fortress balance sheets.
No accounting gimmicks required.
Adam
Related post:
Technology Stocks
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Groupon's Accounting Lingo Gets Scrutiny
Newfangled Accounting Metric
Groupon Inc. has attracted scrutiny from regulators over a newfangled accounting metric...
Dot-Com Boom Redux?
The financial gymnastics harken back to Silicon Valley's late 1990s dot-com boom...
Adjusted CSOI
Groupon...has highlighted in regulatory filings something it calls "adjusted consolidated segment operating income," or adjusted CSOI. Investors and analysts said that draws attention away from marketing costs, which are causing the company to hemorrhage money.
Adjusted CSOI?
That's certainly bold and imaginative if nothing else. Not exactly a compliment when you are talking about accounting.
This company cannot be serious about selling that kind of metric to investors.
In the article, portfolio manager Ben Strubel said it best:
"In essence Groupon is asking investors to look at their profit before any expenses..."
I've said in previous posts it's best to own companies that foster a conservative accounting culture. I don't think Groupon is going to meet that criteria.
This reminds me of the late 1990s more than anything else I've seen lately but, even if there are some specific excesses, we seem a long way from a more generalized problem.
Well, at least so far that is.
Maybe not as enthusiastically at current prices, but I'll stick with the Google's (GOOG) and Apple's (AAPL) of the world. Both are also growing plenty fast and produce exceptional returns on capital.
Highly profitable, real businesses, with fortress balance sheets.
No accounting gimmicks required.
Adam
Related post:
Technology Stocks
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, July 27, 2011
Is Bank of America Undervalued? Bruce Berkowitz of Fairholme Thinks So.
Bruce Berkowitz of Fairholme Capital Management has been rather aggressive when it comes to financial stocks lately. In fact, Fairholme's portfolio has just under 75% exposure to financials. This is in stark contrast to Donald Yacktman, another capable equity mutual fund manager, who's funds have less than 5% exposure to financials.
In this speech back in June, Berkowitz first outlines the headwinds facing Bank of America (BAC) then goes on make his case for the bank.
The following are some excerpts from the speech:
"Bank of America generates before reserving for bad loans and before taxes, $45-50 billion a year. That's $4.50 to $5 a share for a company that's selling for $11 and change, before provisioning for bad loans, and before taxes. That's $3.50 to $4 per share before taxes. It's going to be a long time before they pay taxes, given that they have to blow through $80 billion roughly of past losses. Which means the next $80 billion that they make, they don't pay any taxes on. So, that's $3.50 to $4."
So is it cheap?
The bank is actually now selling for just under $ 10/share. To me, the bank's balance sheet and relative ability to absorb losses via earning power is not nearly as robust as stronger banks like Wells Fargo (WFC) or U.S. Bancorp. (USB).
The bank is actually now selling for just under $ 10/share. To me, the bank's balance sheet and relative ability to absorb losses via earning power is not nearly as robust as stronger banks like Wells Fargo (WFC) or U.S. Bancorp. (USB).
"...the period that we're in right now is very reminiscent of the early 90s. I remember having a gigantic position in Wells Fargo. Everyone thought they were going to go bust, because they had all of these empty commercial buildings in California and all over the place. They didn't go bust."
That was around the time that Warren Buffett first bought Wells Fargo.
Those who bought Wells Fargo in the early 1990s and held on saw their investment increase in value, including dividends, roughly 10x over the next decade or so. Buffett has, it's worth noting, added substantially to that position in recent years and often at higher than recent market prices.
More from Berkowitz:
"If I use the money just to buy back stock, and the stock for some reason stays where it is for 10 billion shares, it would take them six years. In six years, they'll buy the entire company back that started in 1794 and had hundreds of billions of dollars of acquisitions that probably touches one out of every two people in the United States. Given the fact that they're not going to pay taxes, they'll probably buy back all the stock in five years."
Those who bought Wells Fargo in the early 1990s and held on saw their investment increase in value, including dividends, roughly 10x over the next decade or so. Buffett has, it's worth noting, added substantially to that position in recent years and often at higher than recent market prices.
More from Berkowitz:
"If I use the money just to buy back stock, and the stock for some reason stays where it is for 10 billion shares, it would take them six years. In six years, they'll buy the entire company back that started in 1794 and had hundreds of billions of dollars of acquisitions that probably touches one out of every two people in the United States. Given the fact that they're not going to pay taxes, they'll probably buy back all the stock in five years."
One big risk (among others) is that a new crisis emerges in the financial sector before Bank of America can get most of its current headwinds behind it. I'm not willing to put a whole lot of capital at risk in a bank less able to withstand the financial stress. Still, if bought near recent prices and if they do get past their current problems, Bank of America will likely make investors a very nice return.
"This is how we do it. And usually it means buying something that's hated. And something where the newspaper everyday is going to tell you, 'You're wrong.' And your friends are going to tell you, 'You're wrong.' There's going to be something else that is hot and juicy, some new thing which you are going to want to get in on, and you usually feel pretty lousy about it. Because, when you're early, you look wrong. You make your most money when times are at their toughest. You just don't know it at the time."
A year ago the valuation gap between Wells Fargo, the significantly sturdier bank, and Bank of America was small. Bank of America might now be relatively cheaper but seems quite likely not built to withstand heavy losses in the way that Wells Fargo can if an unforeseen crisis emerges. I've referenced the following quote before but how cheaply a bank obtains its money is important to consider in this context:
"If you're a copper producer, and copper is selling for two dollars a pound, and you want to measure the stress of copper going to $1.30, for a guy whose production cost is $1.50, you know, he's got problems. If his cost is a dollar, he doesn't have problems. And Wells, in terms of its raw material costs, is better situated than any large bank, by some margin. So, it's built to sustain a lot." - Warren Buffett talking to CNBC on May 2, 2009
Bank of America has higher "raw material costs". That, all else equal, makes it the more vulnerable bank. So while under the right circumstances Fairholme's investment thesis is likely to work out just fine, I'll take Wells Fargo or U.S. Bancorp on a risk/reward basis over the long haul.
Adam
Established long positions in Wells Fargo and U.S. Bancorp at substantially lower than current market prices. Currently building a small long position in Bank of America.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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