Berkshire Adds Corporate Debt as Stock Purchases Drop (Update1)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aUnoIoackZTk

By Erik Holm

Aug. 10 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. is buying corporate debt and securities issued by governments outside the U.S. as the billionaire investor’s spending on stocks falls to the lowest in more than five years.

Berkshire held about $11.1 billion in foreign government bonds in its insurance units as of June 30, compared with $9.6 billion three months earlier, the company said in a regulatory filing Aug. 7 announcing second-quarter results. Buffett, 78, spent $2.6 billion in fixed-maturity securities in the three months ended June 30 compared with $350 million on stocks.

Buffett is increasing fixed-income investments after results slumped at operating units including NetJets Inc., the money-losing plane-rental business, and companies in Berkshire’s equity portfolio including Wells Fargo & Co. slashed dividends. Omaha, Nebraska-based Berkshire posted its first profit gain since 2007 as payments from securities issued by Goldman Sachs Group Inc. and General Electric Co. boosted investment income.

“Some of the normal places he’s gotten the cash to invest are just getting killed in the recession,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington. “So he’s locking in these guaranteed returns, moving from the volatility of stocks to a steady stream of income that, in some cases, is almost at the return you normally get from the stock market.”

Iceberg’s Tip

The $8 billion in investments in preferred shares of Goldman Sachs and GE are paying Berkshire 10 percent annual interest. Combined with the purchase of similar securities sold by Swiss Reinsurance Co., and Berkshire’s investment in debt in companies including candy manufacturer Mars Inc. and Vulcan Materials Co., the firm’s announced fixed-income deals since September pay interest of more than $1.8 billion annually.

“That’s just the visible part of the iceberg, and it’s pretty massive,” said Mohnish Pabrai, founder of Irvine, California- based Pabrai Investment Funds, which owns Berkshire shares. “There’s lots of investments we don’t see and may never know about, especially on the debt side.”

The latest investments included the purchase of non- investment grade corporate debt. The amortized cost of the insurance operation’s high-yield corporate holdings rose 13 percent to $6.02 billion in the three-month period. Junk-rated debt returned 23 percent in the second quarter, as investors speculated the worst of the recession was over, according to Merrill Lynch & Co.’s High Yield Master II index.

Government Debt

The amortized cost of the insurance operation’s foreign government holdings rose 16 percent. The filing doesn’t list the nations that issued the debt or the companies in which Berkshire invested. Buffett is Berkshire’s chief executive officer, chairman and head of investing.

“It may be that Buffett thinks that inflation in the U.S. will be worse than elsewhere in the world,” said Martin, who has studied Berkshire’s investing history. The value of the company’s holdings in U.S. Treasuries and so-called government sponsored enterprises slipped 5.3 percent in the three months ended June 30 to about $2.5 billion.

The shift toward fixed-income boosted investment income 9 percent from the year-earlier period to $1.87 billion at its insurance and finance operations, even as dividend revenue declined from some of Berkshire’s top stock holdings. Wells Fargo cut its quarterly payout to shareholders by 85 percent in March, and U.S. Bancorpslashed its payment 88 percent. Berkshire is the largest shareholder in Wells Fargo.

The Goldman Sachs and GE investments also give Buffett the option to buy stock at prices set when the deals were consummated. The Swiss Re securities are among those that may convert to stock later.

‘Major Mistake’

The $350 million that Berkshire spent on equities in the second quarter is the least since at least 2005, according to regulatory filings. It broke the mark set in the first quarter, when the firm spent $624 million on equities including Wells Fargo.

The firm sold more common stock that it bought this year, after Buffett confessed to a “major mistake” of purchasing shares of oil-producer ConocoPhillips with prices of the commodity near a peak. A writedown on the stake contributed to a first-quarter loss, Berkshire’s first unprofitable quarter since 2001. Buffett is expected to list U.S. stock holdings as of June 30 in a separate filing this month.

Stock Surge

Berkshire’s own shares passed $100,000 in New York Stock Exchange composite trading last week for the first time since January, recovering from a six-year low in March. The stock, which closed at $108,100 before results were released on Aug. 7, is now up 12 percent this year.

Berkshire’s second-quarter net income rose 14 percent from a year earlier to $3.3 billion, as Buffett’s bet on derivatives tied to world equity markets gained in value.

Operating profit, which excludes some investment results, fell 22 percent to $1.78 billion as NetJets posted a $253 million pretax loss.

The NetJets loss was caused in part by “asset writedowns and other downsizing costs of $192 million,” Berkshire said in the filing. The company said it “owns more planes than is required for its present level of operations and further downsizing will be required unless demand rebounds.”

Revenue was pressured at Berkshire businesses that sell jewelry and furniture, and make products used in home building.

“He’s gotten himself into many small businesses that are not going well,” said Charles Ortel, managing director of New York-based Newport Value Partners, who advises clients to bet against Berkshire shares. “You are seeing revenue contracting and profits shrinking at alarming rates.”

Manufacturing subsidiaries have “taken actions to reduce costs, slow production and reduce or delay capital spending until the economy improves,” Berkshire said.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.
Last Updated: August 10, 2009 07:58 EDT

Berkshire Logs Profit as Markets Pick Up
http://online.wsj.com/article/SB124965002450914327.html?mod=googlenews_wsj
By SCOTT PATTERSON

Berkshire Hathaway Inc.'s earnings picked up sharply in the second quarter, reversing a first-quarter loss as the company rode a wave of gains in its vast stock portfolio.

The Omaha, Neb., conglomerate run by Warren Buffett posted net income of $3.3 billion, or $2,123 per Class A share in the quarter, compared with $2.9 billion, or $1,859 per share a year earlier and rebounding from a $1.5 billion first-quarter loss.

Berkshire, like many companies with big financial operations, has itself been boosted by the strong stock and bond markets. Berkshire's substantial financial holdings soared during the quarter, with Bank of America gaining nearly 100% and American Express and Wells Fargo each rising more than 70%.

Separately, Mr. Buffett recently expressed interest in buying Citigroup Inc.'s Phibro energy-trading unit, but the bank viewed his informal offer as being too low and turned it down, according to people familiar with the situation. It wasn't immediately known how much Mr. Buffett offered for Phibro.

Mr. Buffett approached Citigroup after receiving a personal appeal from Andrew J. Hall, the head of Phibro, whose 2009 pay package could total $100 million, these people said. There haven't been discussions since the initial conversation, said one person familiar with the matter. The bank is continuing to consider options for Phibro.

Book value for Berkshire rose 11.4% from the previous quarter to $73,806 per Class A share. In 2008, Berkshire's book value per share fell 9.6%, the biggest one-year drop since Mr. Buffett took over the company in 1965. The company has $21.4 billion in cash.

As the quarter started, Berkshire was on its heels. Its stock had lost about one-third of its value in a year's time. In April, Moody's Investment Services cut Berkshire's long-term issuer rating to Aa2 from its top Aaa rating, a blow to a company that relies on a sterling rating to get top rates for its insurance products.
[Berkshire Hathaway]

But as the market rallied, investors' outlook for Berkshire also turned up. Shares have gained more than 40% since their March low. Berkshire's bonds also have rallied, outpacing a Moody's gauge of AAA bonds since the ratings downgrade, according to Morningstar.

While Berkshire benefited from the market rally, its diverse holdings, from insurance and energy providers to furniture retailers, continue to struggle, Mr. Buffett has said. He has repeatedly expressed concerns about the shape of the economy this year, based in part on the soft performance of Berkshire companies.

Berkshire's "operating subsidiaries were a drag in the second quarter," said Morningstar analyst Bill Bergman. "If that starts turning, that will give them a pop on the other side of the year if an economic recovery is in fact getting started."

Write to Scott Patterson at scott.patterson@wsj.com
Printed in The Wall Street Journal, page B2

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Derivatives Fuel Berkshire Hathaway's 14% Q2 Earnings Rise
Forbes Staff, 08.07.09, 07:25 PM EDT
http://www.forbes.com/2009/08/07/buffett-berkshire-hathaway-markets-equities-q2-earnings.html

Stock markets were Warren Buffett's friend as his company posts first rise in earnings for six quarters.

Even Berkshire Hathaway Chairman and Chief Executive Warren Buffett has taken his lumps this recession, but Friday he announced his company's best quarterly results for nearly two years.

A rising stock market boosted the value of Berkshire's ( BRK - news - people ) equity investments and derivatives bets, more than offsetting the continuing recession-induced softness in many of the group's underlying businesses, notably the Geico auto insurance unit and some industrial units.

The company reported Friday a net income of $3.3 billion, or $2,123 a Class A share, for the three months to June 30, compared with $2.88 billion, or $1,859 a share, for the same period a year earlier. Earnings had previously fallen for six consecutive quarters. Earnings release.

Revenue fell 1.6% to $29.6 billion, with Berkshire's insurance businesses down 6.1% and utilities 13%. Finance and financial products businesses were up 72%.

Investment losses shrank to $30 million from $429 million. But gains on derivatives, of which Buffet has publicly spoken with scorn on occasion, rose to $2.4 billion from $689 million. Berkshire's are primarily long duration equity index put option contracts. The four underlying equity indexes rose during the quarter in a range of 8% to 23%.

After adjusting for taxes and non-controlling interests, investment losses and derivatives gains represent a net $1.5 billion gain, up from $610 million a year earlier.

Berkshire is the largest shareholder of American Express ( AXP - news - people ) and Wells Fargo ( WFC - news - people ). It also has holdings in Dow Chemical ( DOW - news - people ), General Electric ( GE - news - people ), Goldman Sachs ( GS - news - people ), Swiss Re and Wrigley ( WWY - news - people ).

With the reported earnings falling short of analyst's forecasts, Berkshire's Class B shares were down 1.1% at $3,500 in after hours trading, giving up its pre-earnings-announcement gains for the day. The company advised investors to take the weekend to read its 10-Q filing with the SEC, also posted on its Web site, before trading opens on Monday.

Berkshire Posts Profit After a Rare Loss
August 10, 2009, 7:08 am
http://dealbook.blogs.nytimes.com/2009/08/10/berkshire-posts-profit-after-a-rare-loss/
 

Berkshire Hathaway returned to profitability in the second quarter on gains in derivatives tied to world equity markets, Bloomberg News reported.

Net income of $3.3 billion, or $2,123 a share, compares with a profit of $2.88 billion, or $1,859, in the same period a year earlier, the company said Friday. In May, Berkshire reported a loss of $1.53 billion in the three months that ended March 31, its first unprofitable period since 2001.

Berkshire benefited as stock markets on three continents rebounded, while preferred shares and debt in firms including Goldman Sachs and General Electric increased investment income. Warren E. Buffett, the company’s chairman and chief executive, has said Berkshire’s energy business and the Geico car insurer are thriving amid the recession, though its jewelry, home building and airplane units have suffered.

Derivatives added $2.36 billion to earnings, compared with $689 million a year earlier.

Mr. Buffett has scaled back on the purchase of common stocks in the last year in favor of preferred shares in blue-chip firms like Goldman Sachs and G.E., municipal bonds and debt in companies including Tiffany and Harley-Davidson. The shift increased investment income 9 percent, to $1.87 billion, at its insurance and finance operations.

Berkshire is the largest shareholder in American Express, whose stock rose 71 percent in the quarter. It is also a big shareholder of Wells Fargo, which increased 70 percent, and Burlington Northern Santa Fe, which gained 22 percent.

The rise of such stocks helped increase book value to $118.8 billion, an 11 percent increase since March 31. Mr. Buffett typically highlights book value, the measure of assets minus liabilities, in his annual letter to shareholders.
The NetJets unit, which leases planes, posted a $253 million pretax loss.