Buffetts says every time stock market capitalization moves up to almost twice of a country GDP - you are playing with fire. But when it moves to about 50-75% total market capitalization/GDP or GNP, it is a relatively safe bet.
When Buffett speaks, he meant what he said. He is really putting money where the mouth is. When he says he don't care about short term results, he mean it. He is putting money where he thinks they will give him long term results with big fat margin of safety. Swiss Re is bleeding but he is putting money into it and well compensated with 12% (convertible notes) return as long as Swiss Re does not go out of business. He also put money into Harley Davidson and collecting nice 15% return. I am keep adding Berkshire Hathaway B position to my pesonal International Portfolio as I don't think a small guy like me will get favorable terms like this. This is one of the best places to pool resources - this is a strategy what I called - riding on Giant not behind the Giant.
By the way before I sign off, it appears that bull is leading at the moment during the last two days fight despite of dismay hints of weak employment data. I will buy some Coke and potato chips for tonight "show down movie". Have a nice day.
Feb. 5 (Bloomberg) -- Swiss Reinsurance Co., the world’s second-biggest reinsurer, turned to Warren Buffett’s Berkshire Hathaway Inc. for 3 billion Swiss francs ($2.6 billion) to shore up capital depleted by record losses.
Swiss Re fell as much as 18 percent after posting a 2008 loss of about 1 billion francs and announcing plans to cut the dividend. The Zurich-based company also will disband its financial-markets unit and may seek more capital. Berkshire’s investment may give it a stake of more than 20 percent as Swiss Re struggles to keep its credit rating.
“Both the magnitude of the additional writedowns and the resulting need to raise capital are outside of our expectations,” Standard & Poor’s Ratings Services said today in a statement following Swiss Re’s announcement. The ratings company said it may lower Swiss Re’s long-term credit ratings from AA-. “We currently do not expect to lower the ratings by more than one notch.”
Chief Executive Officer Jacques Aigrain is abandoning his attempt to increase profit by trading securities such as credit- default swaps. The foray led to writedowns of 6 billion francs last year, depleted shareholder equity and took two-thirds off the insurer’s market value in 2008. Swiss Re became the world’s biggest reinsurer after buying GE Insurance Solutions in 2005 and now has only one third the market value of Munich Re.
While the 2008 results are disappointing, Buffett’s decision to increase his investment in Swiss Re “is a testament to the strength of our franchise,” Aigrain said. “The contacts were extremely recent, and the solutions were developed in an extremely short time-frame, leading to a signing of our agreement during the night,” Aigrain told reporters today.
Worst Performer
Swiss Re fell 15 percent to 25.76 francs at 12:40 p.m. in Zurich, valuing the company at 9.1 billion francs. The stock has plunged 49 percent in 2009, making it the worst performer in the 35-member Bloomberg Europe 500 Insurance Index as investors anticipated the writedowns.
While Swiss Re said it has more capital than regulators require, it needed at least 1.5 billion francs on Dec. 31 to keep its credit rating. The company plans to get approval to sell as much as 2 billion francs of additional stock, it said.
Swiss Re’s shareholder equity was less than 20 billion francs as of Dec. 31, down from almost 32 billion francs at the end of 2007, it said. Still, the company said it doesn’t expect to need government assistance, Aigrain said.
“We have never been contacted, nor contacted the national bank or government,” he told reporters.
‘Perpetual’ Payments
Berkshire Hathaway’s latest investment comes in the form of convertible notes paying a 12 percent coupon, Swiss Re said. Berkshire can convert them to Swiss Re shares after three years at a price of 25 francs apiece or continue to receive “perpetual” payments of 12 percent a year.
“The terms of the Berkshire capital raising indicate a cautious view on the potential for other risks in the balance sheet,” said Tim Dawson, an analyst at Helvea in Geneva who has a “neutral” rating on the company. “Clearly there were market concerns.”
Buffett bought 3 percent of Swiss Re in January 2008, ceding 20 percent of its property and casualty business to Berkshire Hathaway over five years to free up capital.
“I’m very impressed by Jacques Aigrain and his management team,” Buffett, 78, said in the statement.
General Electric Co. and Goldman Sachs Group Inc. were among the companies that went to Buffett in the last year after the global credit crunch cut off their access to funding.
‘Derisking’
Buffett’s investment vehicle bought $5 billion of preferred stock in Goldman Sachs in September. It pays a 10 percent divided and can be converted to common stock at any time at a 10 percent premium. The Omaha, Nebraska-based company also received warrants to buy $5 billion of common stock at any time until 2013.
The Swiss company has been plagued by losses on contracts sold to protect clients against declines in fixed-income securities after the worst U.S. housing market since the Great Depression sparked a global credit crunch.
The company is now disbanding its financial markets unit as part of the “derisking” strategy, Swiss Re said. Remaining assets will be split between the asset-management division and a new “legacy” unit to hold the company’s credit-default swaps, which provide guarantees against corporate bond defaults.
Aigrain ramped up Swiss Re’s sales and trading of securities in 2006 and 2007, when the reinsurance business was trying to cope with stagnant premiums. While the strategy boosted profit in 2006, the credit crunch and rising bond defaults forced record writedowns in 2008. About a third of Swiss Re’s mark downs last year were tied to credit default swaps, it said.
‘Only Reinsurance’
“Our business is reinsurance risk in all and any form, but only reinsurance risk,” Aigrain said on the conference call. “All activities not strictly related to that are in runoff.”
The financial-markets unit cut 40 jobs worldwide between the end of 2007 and Oct. 31, 2008, Swiss Re said. It also eliminated 80 technology jobs.
“You can never rule out job cuts,” Chief Financial Officer George Quinn said on the conference call. “The firm has significant scope to improve its cost base.”
Swiss Re is reviewing its target of 14 percent return on equity, Quinn said. The revisions will “take account of improvements in reinsurance and expected lower returns on capital,” he said.
The Swiss Exchange said yesterday it is probing what Swiss Re told analysts, investors and the press about its risks. Chairman Peter Forstmoser said in July 2008 he didn’t expect additional writedowns at Swiss Re, according to Handelszeitung.
Feb. 4 (Bloomberg) -- Warren Buffett, the billionaire who’s poured cash into some of the biggest U.S. brands including Coca- Cola Co. and Mars Inc., agreed to buy $300 million of debt issued by motorcycle-maker Harley-Davidson Inc.
Berkshire Hathaway Inc., the insurer run by Buffett based in Omaha, Nebraska, will add Harley-Davidson’s senior unsecured notes -- and their 15 percent annual interest payment -- to his collection of at least $85 billion in corporate debt and stock. The deal, announced by Milwaukee-based Harley-Davidson today in a statement, is one of a half-dozen since the start of 2008 in which Buffett has made a new investment in a U.S. business icon.
Buffett, 78, has said he prefers investing in firms with a powerful competitive advantage such as a well-known brand. With the global credit crunch cutting off other sources of cash, Berkshire can demand interest rates of 10 percent or more. His company committed $6.5 billion in April to help Mars buy chewing gum maker Wm. Wrigley Jr. Co., and $8 billion for preferred shares of General Electric Co. and Goldman Sachs Group Inc.
“It’s a classic Buffett move,” said Justin Fuller, a partner at Midway Capital Research & Management who runs the buffettologist.com Web site. “He’s getting a very attractive yield from a great business that, in this environment, probably would have a very hard time finding financing anywhere else. He’s like an oasis in the desert for them.”
Neither Harley Chief Executive Officer Jim Ziemer or Tom Bergmann, the company’s chief financial officer, were immediately available to discuss Berkshire’s investment, which may be used to help customers finance their purchases.
Stock Jumps
“To our knowledge, this is Berkshire’s first significant involvement with the company,” Harley spokesman Bob Klein said in an interview.
The stock -- traded under the ticker HOG after the nickname used by riders -- rose 16 percent in New York Stock Exchange composite trading, mirroring the movement of companies including General Electric and Kraft Foods Inc. that jumped after winning Buffett’s endorsement.
Harley gained $1.87 to $13.73 at 4:15 p.m. and rose as much as 23 percent during the session, its biggest advance since October, 1987. The motorcycle maker has lost about two-thirds of its market value in the past year. Berkshire, the most expensive stock on the Big Board, added 1.2 percent to $90,500.
The company is the world’s largest seller of cruisers, or motorcycles designed for leisure riding, that come equipped with chrome exhaust pipes and 1950s styling. The power of its brand also allows it to sell T-shirts and memorabilia, and a chain of restaurants carries the Harley-Davidson name.
Harley’s Moat
“Possessing a powerful worldwide brand is essential for sustained success” in some lines of business, Buffett wrote in his annual letter to shareholders last year, explaining his preference for companies with a “moat” protecting them from competitors. “Long-term competitive advantage in a stable industry is what we seek.”
Ziemer has said the motorcycle maker, founded in 1903 by William Harley and brothers Arthur, Walter and William Davidson, is “fiercely protective” of its brand. In the 1990s Harley unsuccessfully tried to trademark the sound of its V-Twin engines, described in an application as a “syncopated rumbling exhaust” that sounded like “potato” repeated quickly.
Davis Selected Advisers LP, the largest holder of Harley- Davidson stock, also committed to buy $300 million of debt. The firm’s Chris Davis declined to comment. Buffett, who is Berkshire’s chairman and chief executive officer, didn’t respond to a request left with assistant Carrie Kizer.
Corporate Debt
Buffett is adding holdings of fixed-income securities to help deploy more than $30 billion in Berkshire’s cash. The firm held about $9.7 billion in corporate debt and redeemable preferred stock at its insurance units as of Sept. 30, an increase of 61 percent from a year earlier. In November, Buffett agreed to buy $300 million in debt from USG Corp., North America’s largest maker of gypsum wallboard.
“He’s got cash coming in faster than most people would have a ready place to put it.” said Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares. “This economy is certainly providing him with opportunities,”
Average yields on corporate bonds with BBB ratings jumped to 9 percent yesterday from 6.1 percent a year ago, according to Merrill Lynch & Co.’s U.S. Corporates, BBB Rated index. They reached a 17-year high of 10.2 percent on Oct. 31 as a global credit crisis made buyers of corporate debt scarce.
Harley said Jan. 23 fourth-quarter profit fell 58 percent due to weaker demand for its motorcycles. The net income of $77.8 million, or 34 cents a share, was the lowest quarterly profit in nine years.
Fat Boy
Sales for the maker of Fat Boy and other cruisers fell in 2008 as the U.S. economy slowed and access to consumer credit tightened. List prices for Harleys range from $6,999 to $35,499.
Harley is working to cut 1,100 jobs and close three plants to save at least $60 million a year. About 70 percent of the firings will take place this year and the rest in 2010, the company said.
“Buffett looks beyond the quarterly earnings report,” Fuller said. “When he invests in a company, it’s a way for shareholders to know that they’ll make it through. It’s a real pat on the back for Harley-Davidson, and a sign that he thinks they’ll be around for another 100 years.”
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