All anyone seems to want to talk about is Warren Buffett's new acquisition...
Buffett announced the largest acquisition in the history of his holding company, Berkshire Hathaway. The Oracle agreed to buy the remaining shares – he already owned more than 22% – of railroad Burlington Northern Santa Fe (BNI) for $34 billion. The deal values Burlington at $100 a share, or 31% above yesterday's close of $76.07. From the press release:
"Our country's future prosperity depends on its having an efficient and well-maintained rail system," said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer. "Conversely, America must grow and prosper for railroads to do well. Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry.
"Most important of all, however, it's an all-in wager on the economic future of the United States," said Mr. Buffett. "I love these bets."
The takeover announcement is great news for PSIA subscribers, who bought Burlington shares in April – just weeks after the bottom – and are currently sitting on a 50% gain. Porter recommended BNI shares for the same reasons Buffett finds them so attractive...
The company is entrenched as one of two dominant railroads in the western U.S., the replacement costs for its assets are enormous (meaning no new entrants could hope to compete), and the value of BNI's assets will soar with inflation. Porter wrote:
Burlington Northern Santa Fe Corp. (NYSE: BNI) is probably the best railroad in America for one main reason: Its track dominates the vast western United States. Nobody is going to duplicate these rail lines – and no one could.
If you want to move freight from anywhere on the West Coast to anywhere else in the United States, you've likely got to deal with BNI. And if you want to build anything in the United States (as OBAMA! clearly intends to do), you're probably going to use BNI's tracks.
Additionally, as inflation soars, the value of BNI's irreplaceable rail network will grow exponentially.
Porter's gotten it right time and time again. And his most recent PSIA recommendation is his favorite way to profit from the coming inflation – even more so than gold. He says this asset class is more attractive than it has been in "decades," and readers could make 600% once this asset reaches full valuation. To sign up for PSIA, and receive Porter's latest research, click here...
And for those still looking to buy Burlington Northern, you can get shares today for a nearly guaranteed 2.5% gain... Shares are trading for less than $98 each, well below Buffett's $100 offer. Considering both boards have already approved the transaction, and Buffett will have no problem coming up with the cash, it's an easy arbitrage play.
Buffett's bet on Burlington Northern and the recovery of the U.S. is a long-term one. As he's said on many occasions, he buys stocks he'd be happy owning if the stock market closed for 10 years. In Burlington's case, he'll happily collect the $4 billion a year the company earns, while waiting for an economic recovery.
I'll say one thing for Buffett: He sure has guts. Burlington Northern's freight revenues fell a stunning 27% last month. Few people are smart enough or brave enough to buy a business that's having its sales gobbled up by the worst economic crisis since the Great Depression.
Mr. Market sure thinks the world of Mr. Buffett. Most of the time, when a company announces a large acquisition, the arbitrageurs come out in force. They buy the target company's stock (BNI) and sell short the acquiring company (BRK-A), causing the acquirer's stock to fall.
Not this time. Today, shares of acquirer Berkshire Hathaway are up about 1.4%.
Meanwhile, Buffett continues to dump shares of credit-ratings agency Moody's... Berkshire sold 2.9% of its Moody's position last week for $28.7 million. The sale follows a previous reduction in July, when Berkshire reduced its position to 16.98% from 20.4%.
As Buffett planned his largest investment ever and dumped more Moody's shares, the biggest bank in the country has been quietly selling some of the option-ARM loans it bought when it acquired Countrywide Financial last year. American Banker reports some of the loans Bank of America has been dumping sell for as little as 40 cents on the dollar. The banking trade magazine says delinquency rates are 30%-40%.
At the moment, the resetting of subprime mortgages has abated, and the resetting of option-ARM loans hasn't yet kicked into high gear. At the Value Investing Congress a couple weeks ago in New York, co-host/investor Whitney Tilson put up the slide below, which tells you why mortgage resets aren't filling the headlines quite like they used to and why you can expect them to take the stage front and center over the next couple years...
The purple mountain on the left is the subprime crisis, which is behind us in 2007 and 2008. The mostly blue mountain on the right is the option-ARM crisis, a two- to three-year slog that lies just around the next bend and could continue through 2012.
Right now, we're sitting in the eye of this mortgage hurricane. When we hit the opposite wall early next year, the storm will become deadly all over again.
Maybe the gold market is getting a whiff of the trouble to come in mortgages and the banks that own them... Gold hit a new high today, at $1,081.70. Most credit the jump to the news that India's central bank had bought a little more than 7 million ounces of gold from the International Monetary Fund. Timothy Green, author of The Ages of Gold, says it's "the biggest single central-bank purchase we know about for at least 30 years in such a short period."
We're printing dollars, and India is buying gold.
In the mailbag... the basic things about being human. What else don't I get? Let us know here: feedback@stansberryresearch.com.
"Just like the 'irrational exuberance' of a toppy market, the slobbering rants of foaming-at-the-mouth envy-mongers like TP warm my cockles. Deep down he aches to be filthy rich." – Paid-up subscriber LAF
"What's wrong with 'Perfect Weather' a 'Golf Course' a 'Country Club' a 'Ski Hill' a 'Marina' and a 'Exotic Car' plus having the ability to earn and appreciate these items sounds like heaven and smells of success. Those goals are all within reach by motivated self-reliant 'Stansberry Research' subscriber. Your reader 'TP' (Toilet Paper) must be feeling left behind. I personally appreciate your quote 'the situation is hopeless but not serious'. Are you sure this person is a paid up subscriber?" – Paid-up subscriber LP
"'Ferris comment: You're never going to make any money with that attitude.'
"Mr. Ferris simply doesn't get it. 'It' being the basic things about being human. It's not about the money so much as it is about basic gratitude for being alive and realizing, a la Studs Terkel, that life is a crapshoot and human relationships are by far the greatest wealth that passes through this mortal life.
"So take your money and your misplaced values and inflict them on someone else. We will do quite nicely without people who have dollar signs where their hearts should be, and no desire to be accountable to anyone beyond themselves. May God have mercy on your miserable souls!" – Paid-up subscriber John D. Zeigler
Ferris comment: I agree that human relationships are of paramount importance. Maybe that's why having a sense of humor is so important, too.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
November 3, 2009