Portfolio manager’s Letter November 2006
Also helping to push Berkshire Hathaway’s stock north was the recent announcement of a $15 billion deal with Equitas a trust formed by Lloyds of London to handle their asbestos and environment liabilities. This is a huge deal that will provide $9 billion in new insurance float when the deal closes, and maybe as much as $7 billion more over the life of the contract. This float comes from asbestos claims that will eventually have to be paid. These are extremely long tail claims and some of them will not be paid for 35 to 45 years, in the meantime Berkshire Hathaway can invest the $16 billion.
Berkshire Hathaway gets $9 billion in assets (probably mostly bonds which can be reinvested when the opportunity presents) when the deal closes, and the additional $7 billion that will be amortized from pretax earnings over a number of years. This will add another $400 million a year or so, to float and also provide a tax deduction for whatever the amount of the amortization is. In any case, that means the transaction will have a noticeable effect, not only on balance sheet, but also on Berkshire Hathaway’s income statement, and it will provide Warren Buffett with considerable additional cash for acquisitions.
In case you haven’t noticed, Losch Management Company had a pretty good month. Normally I urge people to pretty much ignore the monthly gyrations of the stock market, but when you have a month like this it’s pretty hard to ignore. A composite of all of Losch Management Company’s managed accounts, was up 6.5% compared to a 3.3% gain for the S&P 500. The hero leading this charge was of course Berkshire Hathaway. Berkshire Hathaway “A” shares started the month at $95,800 and finished at $105,475. The fact that the stock was the first to ever close above $100,000 on the NYSE attracted a lot of media attention, and that may have helped push the gain a little.
But the main catalyst for the gain, in my opinion, is Berkshire Hathaway’s third-quarter earnings report, which is due out Friday November 3, and should be very strong, particularly when compared to last year’s third quarter when Berkshire Hathaway saw a $3 billion loss from hurricane damage claims. This year there are no hurricane losses in the third quarter. There have also been a couple of significant acquisitions so the earnings of the non insurance subsidiaries should be strong.
In spite of Losch Management Company’s recent success you might assume from the size of your cash positions that I am not currently a raging bull, and this assumption you would be correct. It is nice to be able to beat the market while holding a large amount of cash. Losch Management Company is now using a very defensive approach to the market, one that is designed mostly to out perform when the market is going down; so to be able to out perform in a an up market is a pleasant surprise.
So far the Market has been able to ignore the possibility of unpleasant consequences from the pop of the housing bubble. This apparently based on the assumption that the “goldilocks economy” is back and that the Fed will pull off another soft landing.
Being somewhat beyond my fairytale stage I remain unconvinced. For one thing I am not at all sure that the FED is still driving our monetary truck. The central banks in Japan, China and some of the other usual suspects are determined to keep expanding the World’s money supply, and the liquidity they generate keeps leaking into the United States. So in this country the long bond (and mortgage rates) no longer dance to the music of the FED.
In this country, since the end of World War II, we are used to watching our economic cycles end with a tightening by the Federal Reserve Board. Now with much of the world’s money supply beyond the control of the FED, I wonder if we should expect to see our current world wide economic expansion will end the old fashion way, with a train wreck.