Why Capitalism Works If I were writing a story about Minsky’s theory, my slant would be a little different. The title of the essay would be “Why Capitalism Works”, for it is my belief that the business cycle, and the hard lessons that trail in the wake of the economy that has gone off a cliff, are what make capitalism work. A crash provides a nice ego haircut for those egos most in need of a trim, and also provides a reliable antidote to the terminal arrogance that is a part of the human condition at the top of the market.
January Whitney Tilson estimates that Index funds will purchase $38 billion of Berkshire’s stock when it enters the index. This is much larger than Buffett’s estimate of $9 billion, and S&P’s estimate of $12-$14 billion (see the enclosed article) obviously the stocks entry into average could have a big impact on the stock price. How much of that impact has already been incorporated into the stock’s price is hard to estimate, but in any event February 12th could be an interesting day.
USG Based on recent earnings reports, USG could be classified a “dead man walking”. In 2008 the Company reported a loss of $4.67 per share. Then for 2009 they followed with a loss of $7.93 per share, and the casual observer might be justified in their belief that USG had so much fun in bankruptcy that they have decided to try it againt. However the negative earnings were mostly the result of non cash restricting charges and a look at the Company’s balance sheet gives us a somewhat different picture.
Leucadia and Berkadia " “At the end of 2009, we became a 50% owner of Berkadia Commercial Mortgage (formerly known as Capmark), the country’s third-largest servicer of commercial mortgages. In addition to servicing a $235 billion portfolio, the company is an important originator of mortgages, having 25 offices spread around the country. Though commercial real estate will face major problems in the next few years, long-term opportunities for Berkadia are significant."
Gooldman Sachs Lewis thinks that Goldman should be broken up and that it’s high risk businesses sold to hedge funds. Lewis thinks that compensation plans for traders need to reflect the risks the traders are taking. He says that high-risk trades belong in a partnership because then the people taking the risk have all of their own skin in the game. We do not know if this is realistic but have to admit it sounds like a good idea. It would be similar to Buffett’s idea that CEOs of busted banks should end up broke. But Lewis’s solution would be more effective because this way all of the big players — not just the CEOs — would end up broke.
Long Term Greedy As long as there are markets, there will be bubbles; and all bubbles end with a crash. Economics is the study of human behavior and markets are a product of that behavior. So, Markets are not efficient and often not very rational. In October of 2007, the Dow and the S&P were making all time highs at a point when disaster was inevitable.
Berkshire In view of the fact that the recent rally is not based only on earnings improvement, and that the hurricane season has not generally been a strong period for the stock, it is likely this rally will be temporary. We reduced our overweight position in Berkshire for two reasons. First, the recent correction in the overall stock market has left us with a lot of good quality stocks that are currently selling at attractive prices, and second, the prospect of a bad hurricane season, and/or a lot of petroleum sloshing around in the Gulf of Mexico may provide us with an attractive re-entry price for Berkshire.
Berkshire' 2nd Quarter I decided to update my version of the;Two Column Valuation” table. This is a method of valuation that Buffett has used to find an intrinsic value for Berkshire. While this method is helpful, it is not perfect, as it tends to understate Berkshire’s value during periods of market weakness (2008- 2010). Now, the market has rallied off 2009 lows, and Operating earnings have become a larger factor in valuation with the Burlington Northern merger so I thought it would be interesting to take a look at an update of this table. Figures for 2010 are estimated based on including Burlington’s figures for the full year and estimating the other operating companies based on their results for the first half.
The Current Market There are two elements that govern the market price of any common stock or other security at any given time. One is mathematical (earnings, revenues, assets and liabilities) the other is emotional (greed, fear, etc.). The relative importance of either of these components varies. The emotional component of security prices is always present, but seldom as strongly felt as it is currently.
Berkshires 3rd Quarter The biggest question mark in this estimate is probably in the area of investment gains. In the second quarter, investment gains were $383 million. In the first quarter, gains amounted to $1.318 billion, so I guess my estimate should read $4.2 to $4.3 billion plus or minus a billion. In any event, the comparison to the last quarter and last year will look pretty good— plus 120% from this year’s second quarter or plus 27% from last year’s third quarter.
The Current Market Here is an interesting chart that compares the value of the US market to that of emerging markets as measured by PE ratios. It shows that The US market has been getting cheaper since 2002, and that the emerging markets now have about the same PE as our market. There are some who will say that this is justified because of the emerging market countries’ greater growth potential. This argument ignores the higher relative risk inherent in emerging markets and the current hyping of their equities by the financial media, both of which are symptomatic of bubble behavior
"Fault Lines" Instead of marching out the usual suspects of greedy bankers and Wall Street Traders, Professor Rajan looks beyond these miscreants and finds a lot of political maneuvering-- some well-intentioned and some just foolish.