Maybe Warren Buffett isn't as dumb as everyone wants to believe these days... Berkshire Hathaway shares have fallen dramatically from a high of nearly $150,000 to a recent low of just $70,000. The market is worried about the 251 derivative contracts Berkshire has, which could cost the company almost $70 billion (but only under the most unlikely of scenarios, like the S&P 500, the FTSE 100, and the Nikkei all going to zero). The fear is so overblown the credit default swap market views Berkshire's debt as riskier than that of Vietnam.
But as the market recovers, some of Buffett's large bets are panning out... Last October, Berkshire Hathaway paid $5 billion to Goldman Sachs for 50,000 cumulative perpetual preferred shares that pay 10% a year. Buffett also negotiated for warrants giving Berkshire the right to buy 43.5 million shares of Goldman common stock. The warrants expire in 2013 and can be exercised for a total cost of $5 billion, or $115 a share.
Soon after Buffett's investment, Goldman shares plunged to less than $50, making his warrants worthless. But the stock has since rallied to $115... putting his warrants "in the money."
If Goldman's stock rallies to $150, Buffett could exercise his warrants (buying shares at $115), then sell the stock and pocket the $35 difference. That scenario would make Buffett more than $1.5 billion... a 30% return on investment in five months.
I wonder if Buffett knows he's the honorary chairman of International Realty Corp. If you go to the company's website, that's exactly what it says. The company is a fraud run by a prison guard, who collects money from unsuspecting investors and deposits it in a Philippine bank account. The SEC has shut it down and filed a complaint, but the website is still up. Thanks to Michelle Leder at footnoted.org for pointing this one out.
China is starting to feel the same way we do about the U.S. dollar... In an essay posted on its website, the head of China's central bank wrote, "The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system."
The letter never mentions the U.S. dollar by name, but it does discuss the desirability of an international reserve currency, which would remove "the inherent deficiencies caused by using credit-based national currencies." China holds $2 trillion in dollar reserves. When your biggest customer loses interest in your brand, you have a problem.
Tech billionaire Mark Cuban argued on his blog, Blog Maverick, that retention bonuses - those highly disputed bonuses paid at AIG - are worthless. If top performers are unhappy, they'll just take the bonus and leave. Cuban wrote:
They want the ability to be good at their job. Are there any stellar revenue producers worth a damn that are going to stay at AIG? Hell no. Can you imagine the opening line of an employee from any of the AIG insurance lines... "Hi, Im from AIG and I'm here to help." Yeah, that will help close a deal. Every salesperson worth a damn over there knows they don't have the capital to take risks, which is what they need to do deals and make money. They also know that all the easy money has already been made and if you work at AIG you are going to be under a microscope with everything you do.
Cuban says the best way to get top talent right now is to load them with stock options. These guys are smart, and they realize stock prices will rebound. So if a company offers a pile of stock options to prospective hires, it's saving cash and doling out cheap options... And the potential returns for the option owner are enormous... Of course, it dilutes current shareholders.
Mr. Obama becomes more power-mad with each passing day. Now he wants to give the Treasury more power to seize nonbank financial institutions deemed "too big to fail." "Too big to fail" ranks right up there with "think of the children" as an excuse to replace self-reliance and market discipline with nanny state socialism.
Last night, Tim Geithner, Treasury secretary and public speaker extraordinaire, croaked out a lame rationale for increasing the Treasury's powers:
We're very late in doing this, but we've got to move quickly to try and do this because, again, it's a necessary thing for any government to have a broader range of tools for dealing with these kinds of things, so you can protect the economy from the kind of risks posed by institutions that get to the point where they're systemic.
Mind you, this is the voice of America's best and brightest. Geithner went to Dartmouth and Johns Hopkins.
Notice the urgency – "We're very late in doing this, but we've got to move quickly... " I think it was Edmund Burke who warned us hundreds of years ago about losing our liberty "for expedients, and by parts."
Notice the blatant lie – "so [the government] can protect the economy." It's just like on The Sopranos. We protect you, or we break your kneecaps. Either way, now we own you and everything you thought you owned, and you're screwed. Geithner has it backward. Americans desperately need protection from their government. Sounds like a job for Remington, Smith & Wesson, and Sturm, Ruger.
Notice, too, Geithner's mention of risks from large financial institutions "that get to the point where they're systemic." This, too, is exactly backward. Before the Federal Reserve, there were a number of panics and crashes. As many as a few dozen banks went bust each time. After the Fed was created in 1913, a massive inflationary bubble ran the market up, which subsequently crashed and almost half the country's banks ceased to exist. The Fed is the progenitor of most systemic risk. Other frauds, like the FDIC, generate their share of systemic risk, too.
To eliminate the systemic problems, you must abolish the Fed, the FDIC, and all the other phony backstops.
Obama and his ilk should take a lesson from Sweden... A Swedish cabinet minister says ailing carmaker Saab is on its own, and "the Swedish state is not prepared to own car factories." Did you get that? Sweden is teaching us about capitalism, while the U.S. teaches the world how to become a Euro-style political hellhole.
Jeff sent an update to his Short Report subscribers today...
I'm looking to recommend call
options on a handful of stocks. But I can't justify chasing after a move like yesterday's. It seems more reasonable to wait for stocks to pull back a bit first.I'm tempted to recommend a trade from the short side (similar to last week's trade) in anticipation of a drop. But that feels a little like trying to swim upstream.
I'm more interested in buying calls once the market pulls back.
You'll want to tune in once the market pulls back... Jeff has had huge success buying calls this year. In just the past month, he banked 32% buying calls on ConocoPhillips, 64% buying calls on GLD, and 50% buying Disney calls. He's also made huge gains buying and selling puts. This latest round of recommendations will be no different. Jeff has consistently made huge gains during this choppy market. To learn more about the S&A Short Report and get in on Jeff's latest round of recommendations, click here...
We got tons of feedback on the government trying to overturn existing contracts and take bonuses from AIG employees. Most agreed the government shouldn't have that power. It appears things won't have to go that far (yet) because most of the AIG bonus recipients have given the money back. New York Attorney General Andrew Cuomo bullied 15 of the top 20 bonus recipients into returning their entire bonuses, accounting for $30 million. Employees agreed to return $50 million in all, and Cuomo believes it's possible to recoup $80 million, nearly half the $165 million total.
New highs: Sturm, Ruger (RGR).
The mail today is too fluffy and feel-goody. What about the politics? Don't you hate that? Shouldn't I stick to finance? E-mail us here: feedback@stansberryresearch.com.
"Never thought it necessary to have money somewhere else then in the US. Now that we have 'CHANGE,' I have to embrace your words in the Digest, but feel uninformed as to where to move money that will be safe and accessible. Any suggestions? Secondly, you have recommended buying and keeping gold, but what is the point if it will be taken away? I have done it, but now feel very uneasy. Hope you will address these concerns for all." – Paid-up subscriber Ron C.
Ferris comment: I don't have enough money to be concerned about where to move it, but I do own gold and would strongly urge you not to store it in a bank vault. Put it someplace only you know about. Be careful how you pick the spot, though. I recently heard a story about a guy who stored his gold coins in some old paint cans and forgot about it. When he cleaned out his garage, he had a friend take all the cans to a dumpster...
The best way to pick a hiding place, according to a book called Why We Make Mistakes by Joe Hallinan, is to choose it quickly. The more you ponder over it, the more you're likely to forget it.
"Just wanted to confirm to readers of The S&A Digest that Porter did an excellent job at the Casey Conference in Las Vegas last weekend. Casey Research had an all-star lineup of speakers and, in my opinion, Porter was as well received as any and better received than most... The investors seated at my table reacted favorably to his speech on day 1 as well as his panel participation on day 2. Shakers and movers appreciate a straight forward presentation and Porter certainly provided that to the audience.
"Some speakers like to hear themselves talk and they tend to tirelessly go on and on while other speakers are more interested in presenting the meaty facts in an efficient fashion. Porter falls into the later group and when one is sitting through 18 hours of presentations his concise manner is much appreciated... While Porter left many in attendance bewildered by his near-term price projections for natural gas, he really got people's attention with his viewpoints about Continental Airlines, SL Green, Bronco Drilling and Chimera. Too bad the conference wasn't held a few months earlier. If so, given the location of the conference, I'm sure his recommendation to short MGM Mirage would have rocked the house." – Paid-up subscriber Brent Ballinger
Ferris comment: Even if the MGM comment didn't "rock the house," Porter is still timely on this subject. Yesterday, Dubai World, the company's partner in the $8.6 billion CityCenter project, sued MGM for breach of contract. It asked the court to allow it to halt future payments toward the project, including a $100 million payment due this Friday. "The current path of the project is simply unsustainable given our partner's financial troubles," Dubai World said in a statement. If Dubai World pulls out of the project, there's no way MGM could handle its $13 billion in debt. Porter has been dead-on with his short recommendations so far. To learn more about PSIA, click here.
Regards,
Dan Ferris
Medford, Oregon
March 24, 2009