A Few Thoughts Before Buffettpalooza Begins Next Week
So far a lot of the attention, well, okay, nearly all the media attention, has focused on the Sokol Debacle (I hate the term, Sokol-gate). There will be some other things going on. Just a few thoughts.
> Historically Buffett makes some favorable announcements right before, or the day of, the meeting. These often include acquisitions but can be as simple as the deal just announced to reinsure part of AIG's asbestos liabilities. This year the incentive to put out some good news is pretty strong, so you should be anticipating that if there is something favorable to announce, even if it has to be dug up from under the mattress, you will hear about it.
> If Buffett holds true to form there also will be a slide showing Q1 results, which are likely to impress. The economy has picked up quite a bit since January, which will help the cyclical businesses. BNSF traffic should be good. If Progressive's results are any indication, GEICO will have a nice first quarter. Other insurance companies, however, had a rough start to the year. Berkshire's National Indemnity and General Re are probably going to report above-average catastrophe losses.
> With equities roaring, book value is likely to post a solid gain unless catastrophe losses are so high they offset other earnings and realized gains from security sales (which is doubtful).
> Payback of Goldman $5B of preferred stock did not take place until April 18, so the nice bump from the 10% premium will be a second quarter item and will offset lower investment income from that quarter. This may be discussed, along with the expiration and runoff of sweetened earnings from other similar financial crisis deals.
> Although it has not gotten much attention, MidAmerican Energy is trying to get a controversial proposal approved to build a nuclear plant in Iowa. I would not be surprised if Buffett has some (favorable) comments on nuclear energy in the context of Japan.
> Buffett the populist and Buffett the capitalist come into conflict when labor issues arise. He hates labor unions and historically has shut down businesses and outsourced work when the economics dictated it. This year, his "all-in bet on America" comment may lead to questions about how this jibes with outsourcing Marmon employees and the recent rash of labor organizing among formerly non-unionized employees at NetJets. I would not be surprised if his answer to the question of persistent high unemployment, outsourcing, and stagnant real personal incomes is along the lines that corporate taxes are businesses' contribution to the social safety net, and we need to put a stop to corporate tax evasion.
> Will Buffett or won't he put the Salomon "lose a shred of reputation" video in the movie? Lot of speculation about this one. This question falls into the class of entertaining minutia that will overshadow this meeting in many respects. Have fun speculating, but pay attention to the big issues as well.
> Lastly this isn't meant to be a comprehensive list, just some thoughts. Add your own below.
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The Snowball
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To my Good Friend (pronounced Gutfreund), Warren Buffett.
Warren,
I am a fan in the sense that you like to think of those of us who read the annual letter like a monk would read a new tablet found in the holy land. I quote Buffettisms to my friends and family like people breath air, its just that natural.
So, I am a bit stunned in the way that someone would be to see that their hero can bleed.
I listen to the Snowball on my break weekly. The chapters containing the details of the of the Solomon episode I have heard in my head a 100 times and probably read them as many times in the book Buffett by Lowenstein. That's why when the Sokol event first broke, I wasn't phased - Warren will explain, and it will be a simple answer and clear the air.
The press release came out and I figured there would be more to come. The release sounded a little conservative, guarded and - quite frankly - too 'lawyerly' to be the last word we would hear.
Where is the Warren Buffett who said, "I'll attempt to answer questions in the manner of a fellow who has never met a lawyer...We'll stay as long as you wish"? The press release you issued was more akin to the Great Oz, "Pay no attention to that man behind the curtain!"
Not only did the press release sound like it was written by a man who had met a lawyer, it sounded like it was in fact written by a lawyer and, I should know, I am a lawyer.
What does John Gutfreund think I wonder?
Lest anyone forget, John G. was a CEO (of the venerable investment bank - Solomon Brothers). A person under his leadership made a financial misjudgment which turned out to be criminal. John G. tried to handle it in house. Buffett stepped in, dismissed John G. and told everyone who remained at Solomon, "Lose money for the firm - I will be forgiving. Lose a shred of reputation for the firm, and I will be ruthless!"
Today, Warren is the CEO. A person under his leadership made a financial misjudgment which, may yet turn out to be criminal. Warren told us his version of the facts and told us it was handled in house. Warren then told us basically not to bring it up any more.
The contrast is stark. The Oracle of Omaha who has invited Becky Quick to everything but his family reunion and who courts CNBC when HE wants to speak hasn't been seen. His PR byte was all we have and such a terse phrase, basically 'Forrest Gumping' us with - 'And that's all I have to say about that'.
Really?
So, now we wait for the big day - the capo di tutti capi of shareholder meetings. I won't be there, like so many, I will be at home reading up on the internet to see what he does say...and what he doesn't say too.
I bet someone else will be too - like maybe, John G.
Trey
Outsourcing America
If Mr. Buffett were to speak in generalities and blame it on corporate tax evasion, that would be a duck with pun intended so quack on WEB!
Maybe the better question for Mr. Buffett might be, including one that might not be in his own self-interest if addressed properly, i.e., shrinking the US economy, is what labor or wage concessions across all walks of life in America (top/down), as a result of too many decades of waste, squalor, criminal behavior and greed, might work to make them competitive again vs. foreign wages one tenth of US? What adjustment in the form of write down is necessary in the macro business world?
What's the big pill in percentage terms from this Numbers Master to be swallowed, and do we have a K-12 education system in our nation sufficient to meet the challenge of preparing life long learners to succeed in what may often remain transient work, assuming we can't ever return to becoming a manufacturing hub again?
Once implemented, that would have a direct correlation to top line sales of corporate entities being reduced as well as stock valuations tied to multiples.
This would be hard for Mr. Buffett to handle because, I have heard certain disciples of his who have spoken to him over the years, indicate that he knows exactly what his market cap will be twenty years from now; a trillion dollar number, as a result of economic expansion in the form of "inflation," which is my summation and was not mentioned by the scribe who spoke with him.
At the same time, Mr. Buffett and Mr. Munger are very good at passing on what I have described to be, "fake inflation," inside many of their businesses because of what Alice describes above with respect to his disdain for "unions" in addition to their mastery of behavioral psychology sometimes in the form of inflicting guilt, i.e., Sees Candy.
As a capitalist in my core, I can't find fault with their goals to make profits when tying that concept to "labor costs," but I would expect this "Oracle" to tell the American People honestly according to the "numbers" what they're going to have to do and sacrifice in order to prevent certain Asian families, as Mr. Munger once described, from trumping the MUNGERS' on the wealth meter! His position at that time was and still is I'm sure, "so be it," if they may.
With respect to D&O insurance, and the lack thereof, I would be surprised if Mr. Buffett left his directors bare of "legal and defense" coverage, and directors were willing to accept those terms when joining him. That would be quite a leap of faith, but not impossible when considering his reputation.
On the other hand, if this became true, it would be like, "The Shoe Maker" whose children were walking around the neighborhood with bare feet!
REPLY (partial reply at least) You bet he knows (roughly) the range to which Berkshire will compound. What you are saying is correct; Berkshire is and always has been designed to be an inflation-arbitrage machine and it is notable how he has accelerated that aspect of its business mix in recent years. Partly preparation for the post-Buffett world (hardwiring) but also read the writing on the economic wall.
Paybacks....
"This may be discussed, along with the expiration and runoff of sweetened earnings from other similar financial crisis deals"
LZ earned $1 billion pre tax in 2010. The earnings are 70% non US, with biggest future growth predicted in Asia/Pacific.
So -- this is a shift in invested assets from US fixed income (GS, GE etc.) to global earnings with growth potential.
"I would recommend against buying long-term fixed-dollar investments,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc said in New Delhi."
A billion is $31 per second. A stupid metric but one that has been used for GS preferred.
Somehow I doubt that LZ is discussed as a big win at the meeting.
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjQ5ODZ8Q2hpb...
I have no idea if this influenced Buffett, but it is striking just how neatly the investments dovetail.
REPLY: Interesting. And you could argue most of his investments have some sort of implicit dollar hedge. Utillities, railroad.
More on Lubrizol
"Charles Cooley - Lubrizol Corp. - SVP, CFO
It's an understandable question, but it's one that we don't really think in those terms. The -- it goes back again to one of the slides that James was talking about, that we measure our performance primarily at the unit material margin level and let the percentage margins do what they may.
So if we do encounter another period of inflationary feedstock costs, then our goal would be to, as we've done in the past, to continue to recover those, which could have the effect of slowing down or retarding the percent margins, all the while hopefully meeting our goals to hit those unit material margins."
FWIW, LZ margin metrics are internally measured on a 'unit material margin' basis. These appear more sustainable than percentage margins if material (oil stock) prices rise. However, it also means that top line growth figures need to strip out the impact of material price increases and decreases.
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzI0MjMzMHxDa...
Alice, I read the lawsuit and
Alice,
I read the lawsuit and although Susan Decker was mentioned as a member of the Berkshire Board of Directors, she was not listed in the lawsuit as one of the "independent" members of the board. Given that she owns a very small amount of Berkshire stock and this omission, do you see this a just a mistake by the attorney's for the plaintiff?
Buffett's Junk Yard Dog
Alice,
Just stick with "Buffett's Junk Yard Dog."
It rings true and is very fitting.
Directors named in shareholder lawsuit
I noticed that members of the Board of Directors were named in Mason Kirby's lawsuit. Buffett generally notes that he doesn't buy Directors and Officers liability coverage for his board. I wonder whether that means they will have to pay for their own defense in this action? Or will Berkshire Hathaway pay for the legal defense for all parties?
REPLY: Berkshire, the *corporation,* will indemnify them and that has always been part of the deal. (Buffett has stated many times that there is no D&O insurance, and people have taken it to mean there is no protection, but that is not *precisely and literally* what he said.) In this situation, however, I don't know whether the corporate indemnification is legally permitted to include to defense costs for derivative suits. Great question.
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