Saturday, January 31, 2009

Dr. Marc Faber Comments On Barron's Roundtable

Blogged yesterday: To Buy Or To Sell Gold Now?

Now on Barron's Roundtable, buried in the middle, there are some interesting comments from Dr. Marc Faber.

  • Faber: One day the price of gold will be higher than the Dow Jones. The CRB, a broad index of commodities, fell for 20 years in nominal terms, from 1980 to 1999. It is now up 12% and is still inexpensive. The Dow and the S&P are up substantially from the 1980s or early 1990s. Everyone thinks fiscal and monetary measures will work to fix the financial system. I don't. They will be disastrous and fuel inflation. But the supply of oil, gas and copper is relatively limited compared to paper money you can print.

    Recently I bought some U.S. stocks for the first time in a long time. If you buy Intel , Cisco , Yahoo! , Oracle and Microsoft , you will do much better in the next 10 years than you would with Treasuries. These stocks will double and even triple -- before going to zero.


Friday, January 30, 2009

Roach: Asia Decouple? Don't Kid Yourself!

Read the following on Dow Jones Newswire.

  • DAVOS, Switzerland (Dow Jones)--The once-popular assumption that Asian economies can "decouple" themselves from any slowdown in their Western counterparts has proven "completely wrong" amid the current financial crisis, said Stephen Roach, chairman of Asia at Morgan Stanley, on Friday.

    "This time a year ago at this place there was consensus that we were embracing the so-called Asian Century and no matter what happens in the developed economies, Asia would decouple from it," Roach said at the World Economic Forum.

    "There's no decoupling in a globalized world. Don't kid yourself," he said, adding that the global slowdown has shown that "no region is more externally dependent than Asia."

    While China and India are suffering from a sharp weakening in economic growth, Japan is in a "horrific" recession, Roach said.

    The crisis is a "wake-up call" for those subscribing to illusory optimism and poses a big challenge for Asia to shift its growth model to a less export-dependent one, he said.

    "While the world trade boom has already gone bust, it won't be easy for Asia to boost private consumption," Roach said.

    At the same time, Roach said free trade remains the way forward for global economic growth and the long-stalled Doha Round of trade talks needs to be revived as soon as possible.

    He added that there tends to be "cyclical economic nationalism" during an economic crisis and political leaders around the world should prevent such harmful sentiments from getting out of control.

To Buy Or To Sell Gold Now?

FinancialSense has a new market commentator, Danielle Park, and on her market wrap editorial, she writes Feelings aside: Is gold more likely a buy or a sell here?

  • Since 2001 and for 7 long years as the US dollar fell, the price of gold had an exceptionally good run of more than 300%.
    But as the US dollar broke out last January gold broke down. Since then as the great reckoning broke loose in the global economy, we have seen gold make lower highs, and lower lows.

    I don’t profess to know the future. But with all the carnage that has hit the world this past year, shouldn’t gold have made a fresh high by now? If the economic world does come to an end any time soon, then gold may well break higher still. But the alternate scenario should also be considered. Maybe-- just maybe the worst of this market crisis is now passing by.

    Yes the US has a lot of problems. But the rest of the world is in tatters too, and relatively speaking most are worse off. Incredible to suggest I know, but what if the US stock market manages the now largely unexpected and begins to buck up?

  • The most bullish argument I hear for gold is that retail investors, now sacred out-of-their-wits by the global downturn, mistrusting governments and paper money, will continue to feverishly snatch up gold bars, coins, wafers and gold ETF's. Maybe they will; but for how much longer? They can’t eat or drink it. They can’t use it for shelter; it won’t pay them an income. Even gold-obsessed East Indians generally stop buying gold to collect when its price passes $750 an ounce. East Indian demand collapsed last year, with India’s gold imports plunging 81% in December.

    Maybe with the on-going implosion of hedge funds that were recklessly speculating in this and other commodities over the past 7 years, dumb money is gone for a while, and gold prices will continue to fall. Maybe the world won’t end and the US dollar won’t lose its benchmark status- at least just yet. Maybe the beleaguered stock market will start to recover this year and gold will continue to contract from its multi-year high. Based on history at least, it would seem that gold’s inevitable reversion to the mean is now overdue.

Do read the rest of her views here: Feelings aside: Is gold more likely a buy or a sell here?

Donald Keough On Warren Buffett

Great short video on Donald Keough on why he didn't invest in Warren's partnership.

Them Insane And Mad CEO Bonuses Just Has To End!

Posted on NewYorkTimes: What Red Ink? Wall Street Paid Hefty Bonuses

    Published: January 28, 2009
    By almost any measure, 2008 was a complete disaster for Wall Street — except, that is, when the bonuses arrived

    Despite crippling losses, multibillion-dollar bailouts and the passing of some of the most prominent names in the business, employees at financial companies in New York,
    the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year.

    That was the sixth-largest haul on record, according to a report released Wednesday by the New York State comptroller.

    While the payouts paled next to the riches of recent years, Wall Street workers still took home about as much as they did in 2004, when the Dow Jones industrial average was flying above 10,000, on its way to a record high.

    Some bankers took home millions last year even as their employers lost billions.

    The comptroller’s estimate, a closely watched guidepost of the annual December-January bonus season, is based largely on personal income tax collections. It excludes stock option awards that could push the figures even higher.

    The state comptroller, Thomas P. DiNapoli, said it was unclear if banks had used taxpayer money for the bonuses, a possibility that strikes corporate governance experts, and indeed many ordinary Americans, as outrageous. He urged the Obama administration to examine the issue closely.

    “The issue of transparency is a significant one, and there needs to be an accounting about whether there was any taxpayer money used to pay bonuses or to pay for corporate jets or dividends or anything else,” Mr. DiNapoli said in an interview.

    Granted, New York’s bankers and brokers are far poorer than they were in 2006, when record deals, and the record profits they generated, ushered in an era of Wall Street hyperwealth.
    All told, bonuses fell 44 percent last year, from $32.9 billion in 2007, the largest decline in dollar terms on record.

    But the size of that downturn partly reflected the lofty heights to which bonuses had soared during the bull market. At many banks, those payouts were based on profits that turned out to be ephemeral. Throughout the financial industry, years of earnings have vanished in the flames of the credit crisis.

    According to Mr. DiNapoli, the brokerage units of New York financial companies lost more than $35 billion in 2008, triple their losses in 2007. The pain is unlikely to end there, and Wall Street is betting that the Obama administration will move swiftly to buy some of banks’ troubled assets to encourage reluctant banks to make loans.

    Many corporate governance experts, investors and lawmakers question why financial companies that have accepted taxpayer money paid any bonuses at all. Financial industry executives argue that they need to pay their best workers well in order to keep them, but with many banks cutting jobs, job options are dwindling, even for stars.

    Lucian A. Bebchuk, a professor at Harvard Law School and expert on executive compensation, called the 2008 bonus figure “disconcerting.” Bonuses, he said, are meant to reward good performance and retain employees. But Wall Street disbursed billions despite staggering losses and a shrinking job market.

    “This was neither the sixth-best year in terms of aggregate profits, nor was it the sixth-most-difficult year in terms of retaining employees,” Professor Bebchuk said.

    Echoing Mr. DiNapoli, Professor Bebchuk said he was concerned that banks might be using taxpayer money to subsidize bonuses or dividends to stockholders. “What the government has been trying to do is shore up capital, and any diversion of capital out of banks, whether in the form of dividends or large payments to employees, really undermines what we are trying to do,” he said.

    Jesse M. Brill, a lawyer and expert on executive compensation, said government bailout programs like the Troubled Asset Relief Program, or TARP, should be made more transparent.

    “We are all flying in the dark,” Mr. Brill said.
    “Companies can simply say they are trying to do their best to comply with compensation limits without providing any of the details that the public is entitled to.”

    Bonuses paid by one troubled Wall Street firm, Merrill Lynch, have come under particular scrutiny during the last week.

    Andrew M. Cuomo, the New York attorney general, has issued subpoenas to John A. Thain, Merrill’s former chief executive, and to an executive at Bank of America, which recently acquired Merrill, asking for information about Merrill’s decision to pay $4 billion to $5 billion in bonuses despite new, gaping losses that forced Bank of America to seek a second financial lifeline from Washington.

    A Treasury department official said that in the coming weeks, the department would take action to further ensure taxpayer money is not used to pay bonuses.

    Even though Wall Street spent billions on bonuses, New York firms squeezed rank-and-file executives harder than many companies in other fields. Outside the financial industry, many corporate executives received fatter bonuses in 2008, even as the economy lost 2.6 million jobs. According to data from Equilar, a compensation research firm, the average performance-based bonuses for top executives, other than the chief executive, at 132 companies with revenues of more than $1 billion increased by 14 percent, to $265,594, in the 2008 fiscal year.

    For New York State and New York City, however, the leaner times on Wall Street will hurt, Mr. DiNapoli said.

    Mr. DiNapoli said the average Wall Street bonus declined 36.7 percent, to $112,000. That is smaller than the overall 44 percent decline because the money was spread among a smaller pool following thousands of job losses.

    The comptroller said the reduction in bonuses would cost New York State nearly $1 billion in income tax revenue and cost New York City $275 million.
And on cnbc: Obama: Wall Street Bonuses 'Outrageous'

  • Obama said, "That is the height of irresponsibility. It is shameful. It's outrageous."

    The president said he and new Treasury Secretary Timothy Geithner will have direct conversations with corporate leaders to make the point.

    Obama said there is a time for corporate leaders to make profits and get paid bonuses but now is "not that time." "You're never going to get any support for the continued tough decisions we have to make if this kind of behavior continues.
I am simply over the moon that the insane CEO bonus is now an issue.

It was total madness that CEOs are paid such amount!

The CEO bonus bubble must be pop and it has to end NOW!!!

Blogged last year: CEOs Booted With Insane Bonus And Severance Packages!

Goldman Sachs Says Bank Bailouts Could Cost 4 Trillion!

Posted on cnbc. Bank Bailout Could Cost Up to $4 Trillion

  • The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.

    The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.

    Goldman Sachs economists said ideally the public sector would step in to remove the hardest-to-value assets, which would alleviate nagging worries about future losses and hopefully help get lending going again.

    "Unfortunately, with an unprecedented meltdown in mortgage credit and a deep recession in the broader economy, there is a great deal of uncertainty about the value of almost every asset," they wrote in a note to clients.

    Obama and his economic advisers are expected to lay out their policy plan as early as next week. One idea that seems to be gaining traction is setting up an entity to buy troubled assets and hold them until they mature or resell them.

    The hope is that once banks get rid of those bad loans, they can attract private investors, get back to the business of lending, and help revive the economy.

    Vice President Joe Biden said Thursday that Treasury Secretary Timothy Geithner was considering all options to restart normal lending, but that no decisions had been made.

    Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.

    New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets,
    an estimate that a Senate aide said was based on informal conversations with people in the industry.

    The Wall Street Journal said government officials had discussed spending $1 trillion to $2 trillion to help restore banks to health, citing people familiar with the matter.

    At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand.

    Depending on how the plan is structured, the government may not have to put up the full amount, and since the majority of people are still paying their mortgages and credit card bills, there is a reasonable expectation that taxpayers would recoup a substantial portion of the cost.

    However, the potential loss is huge, and if more public money is needed to boost capital even after the bad assets are removed, the total would undoubtedly climb.

    The International Monetary Fund said Wednesday that worldwide losses on U.S.-originated loans may hit $2.2 trillion, well above its October estimate of $1.4 trillion.
    It said banks in the United States, Europe and elsewhere probably needed to raise $500 billion to cover losses coming this year and next.

    Cutting Out a Zero

    For U.S. lawmakers who are already taking grief from voters over a $700 billion bailout approved last fall, passing another big spending measure carries significant political risk.

    At the same time, Obama's team wants to take action that is bold enough to fix the problem once and for all, hoping to avoid the sort of ad hoc approach that has been criticized for adding to investor uncertainty.

    Time is not on Obama's side. The more the economy weakens, the longer the list of potentially dodgy debt grows. That is why he faces enormous pressure from Wall Street to act fast.

    The government would not necessarily have to spend the full $4 trillion to buy the assets. If it follows the model used in a Federal Reserve program to support consumer and small business loans, the government could potentially put up just 10 percent of the total.

    Spending $400 billion would certainly be more palatable to Congress than $4 trillion. It may not even require that much additional funding. Economists estimate that perhaps $250 billion of what remains in the $700 billion bailout fund could be devoted to the "bad bank."

    That money could buy bad assets, which would then be repackaged and sold to investors to raise more money which could then by recycled to buy more assets.

    Stephen Stanley, chief economist at RBS Greenwich Capital, said although that sounds similar to the sort of financial engineering that spawned the credit crisis in the first place, it would be structured so that the central bank or whichever agency oversees the program is last in line to take losses.

    "If things turn out so bad that the Fed ends up on the hook for $1 trillion in losses, then the financial sector, the economy, and everything else will be dead anyway," he said.

Wednesday, January 28, 2009

Citi Broke But Still Insist On A $50 Million Jet

Absolutely ludicrous!

  • NEW YORK/WASHINGTON: Citigroup Inc, which has received US$45 billion (US$1 = RM3.62) of capital from the US government, is going through with plans to buy a US$50 million jet, but a US senator called the deal absurd and wants the Obama administration to block it.

    The bank signed a contract several years ago to buy a Dassault Falcon 7X and plans to accept delivery later this year, according to a person familiar with the matter.

    Citigroup said in a statement that refusing delivery now would result in millions of dollars of penalties. The bank also said it is selling existing aircraft, the proceeds of which will more than pay for the new plane.

    The New York Post, which was first to report the bank was still buying the new plane, said earlier on Monday that Citigroup was selling two jets estimated to be worth US$27 million each.

    In Washington, the White House frowned on the purchase with a spokesman saying President Barack Obama does not believe "that's the best use of money" by companies that are receiving taxpayer assistance.

    Citigroup said it is not using funds it received from the government's Troubled Asset Relief Programme to pay for the jet and it will continue to comply with all TARP requirements.

    The new jet will be more fuel-efficient and will lower Citigroup's operating expenses, the bank said.

    Seator Carl Levin, a Michigan Democrat, wants the Treasury Department to block the sale.
    "To permit Citigroup to purchase a plush plane - foreign-built no less - while domestic auto companies are being required to sell off their jets is a ridiculous double standard," Levin said. - Reuters

Source: here

Tuesday, January 27, 2009

Retailers Forecast 2009: It's Gonna Be Even Scarier!!

On MSNBC: Forecasters see historic drop in retail sales

  • NEW YORK - The nation’s retailers had a rough 2008, but this year will likely be even scarier, according to a sales forecast released Tuesday from the world’s largest retail trade organization.

    Retailers are expected to record a 0.5 percent drop in revenue in 2009, the first annual decline in three decades and perhaps much longer, according to a National Retail Federation forecast released Tuesday.

    That’s well below the modest 1.4 percent gain they recorded for 2008.

    Massive layoffs, slumping home prices and tight credit are keeping shoppers tightfisted.

    The NRF estimated that retail sales for the first half of 2009 will fall 2.5 percent. Then, they’ll show a 1.1 percent decline in the third quarter and rebound to a 3.6 percent increase in the fourth quarter, aided by an anticipated government economic stimulus.

    Another factor that should help sales figures for late 2009 is that sales were so dismal in the fourth quarter of 2008 — declining 1.7 percent, according to Rosalind Wells, NRF’s chief economist.

    For November and December combined, sales fell 2.8 percent, well below the association’s forecast of a 2.2 percent gain.

    “Most of the consumer behavior we saw in 2008 will continue well into this year,” said Wells

    She said she’s never seen an annual decline in the 30-plus years she has tracked retail sales. She started with NRF in 1995 but had previously worked as J.C. Penney’s chief economist from 1978 to 1988.

    NRF’s retail sales figures exclude business from automobile sales, gas stations and restaurants.

    One of the key challenges for the retail industry is the massive layoffs across all sectors that appear to be accelerating, Wells said.

    “Employment is one of the foremost criteria we look for, which in turns means income,” Wells said. “Without a good employment trend, it is very hard to have confident shoppers to go out and spend. Right now, employment numbers have been terrible, and more layoffs are to come.”

    Several big names in corporate America announced layoffs Monday.

    Pharmaceutical giant Pfizer Inc., which is buying rival drug maker Wyeth in a $68 billion deal, and Sprint Nextel Corp., the country’s third-largest wireless provider, each plan to slash 8,000 jobs. Home Depot Inc., the biggest home improvement retailer in the U.S., is shedding 7,000 jobs, and General Motors Corp. said it will cut 2,000 jobs at plants in Michigan and Ohio due to weak sales.

    Caterpillar Inc., the world’s largest maker of mining and construction equipment, announced 5,000 new layoffs on top of several earlier actions.

    Wells said she felt somewhat encouraged by data released Monday by the National Association of Realtors showing an unexpected increase in sales of existing homes helped by booming sales of bargain-basement foreclosures in California and Florida. But she said housing must improve substantially before the economy can start to pick up.

    The NRF predictions are being released on the same day the New York-based private research group The Conference Board is slated to announce its January index on consumer sentiment, which economists expect will remain near all-time lows.

    The reading is expected to be up slightly, at 39, from 38 in December, which marked the lowest point since at least 1967, when the index began.

    In January a year ago, consumer confidence was at 87.3.

    The index is compiled from a survey of 5,000 U.S. households and will be released at 10 a.m. EST.

Warren's Unhappy New Year

Posted Barron's: Warren's Unhappy New Year

Amazing how quick these critics are!


Warren Buffett's affinity for a group of financial stocks probably is dragging down Berkshire Hathaway's vaunted equity portfolio this year.

EVEN GREAT INVESTORS MAKE MISTAKES. Warren Buffett's affinity for a group of financial stocks, including American Express (ticker: AXP), Wells Fargo (WFC) and U.S. Bancorp (USB), is likely hurting his equity returns in 2009.

Buffett's Berkshire Hathaway has sizable holdings in that trio, and the sizable declines in their share prices this year are dragging down Berkshire's (BRKA) vaunted equity portfolio, which totaled $76 billion at the end of the third quarter, the latest reporting period.

We estimate Berkshire's equity portfolio could have dropped 14% in 2009 through Thursday, against an 8% decline in the S&P 500.

Our estimate is based on the change in value of Berkshire's 16 largest equity holdings. These holdings historically have accounted for over 85% of Berkshire's portfolio. The tough 2009 follows a good showing in 2008, when Berkshire's equity positions declined -- by our estimate -- about 25%, 13 percentage points better than the S&P 500. Our calculations for 2009 are based on Berkshire's reported holdings on Sept. 30. There admittedly may have been some changes since.

Wells Fargo is Berkshire's biggest loser in 2009, as shares of the California bank were down nearly 50% through Thursday to about 16. Buffett couldn't be reached for comment, but his view on the financial sector has been to buy quality. At Berkshire's annual meeting last May, Buffett said: "We like the culture at Wells Fargo, M&T and U.S. Bancorp. In all three cases, I understand the DNA of management. That doesn't mean they won't have problems," according to a meeting attendee. (Berkshire owns a stake in Buffalo's M&T Bank [MTB].)

Our guess is that if any of these companies needs an equity investor, Berkshire stands ready to help. And the stocks are so volatile they could turn higher at any time.

The paper losses on Berkshire's equity portfolio this year, plus losses on its short position in some $37 billion of equity puts, have depressed Berkshire class A shares, which finished Friday at $86,250, down 10% in 2009. Barron's wrote bearishly on Berkshire in late 2007 when the stock traded at $144,000 and we turned bullish in late November with the shares just above current levels.

When it reported third-quarter results in November, Berkshire said shareholder equity fell by $9 billion, or nearly $6,000 a share, through the end of October given weak markets. We estimate book value probably ended 2008 around $70,000 a share. Current book value may have dropped close to $67,000 a share. If we're right, Berkshire trades for a still-reasonable 1.3 times book value and 14 times projected 2009 earnings of around $6,000 a share.

After a flurry of high-profile investments in early October, including $5 billion in Goldman Sachs preferred carrying a 10% dividend, and a similar $3 billion deal involving General Electric , Berkshire hasn't unveiled any big new investments. Why? Our guess is that its once-enormous cash hoard has been depleted.

Berkshire's insurance cash holdings, which stood at $27 billion on Sept. 30, likely fell to $13 billion after the Goldman (GS) and GE (GE) deals, as well as a $6.5 billion investment in junk bonds and preferred stock of Wrigley, which was bought by Mars. Berkshire also is on the hook for a $3 billion convertible preferred-stock investment in Dow Chemical (DOW) if it completes its purchase of Rohm & Haas (ROH). Some investors say Berkshire likes to keep $10 billion of cash to deal with unexpected insurance claims arising from an earthquake or hurricane. This wouldn't leave Berkshire much cash for a big investment unless it sells something or takes on debt.

Our guess is that if Berkshire did make more fourth-quarter investments, they were focused on the battered junk-bond market. Berkshire will disclose more on investments in its annual report, due around March 1.

Now There Is Profit!

Blogged last Wednesday, 21st January 2009: Prince Alwaleed's Kingdom Holding Suffer Massive Losses In Q4

Let me reproduce what was posted then.

  • Saudi prince's firm loses $8.3B in 4Q

    DUBAI, United Arab Emirates

    The Saudi investment company that bet big on now-ailing Citigroup and other major global companies said Tuesday
    it lost more than $8 billion in the last three months of 2008.

    Prince Alwaleed bin Talal's Kingdom Holding Co. attributed the drop to losses stemming from the company's investments in capital markets, according to a statement posted on the Saudi Tadawul exchange's Web site.

    Kingdom Holding said it lost 30.98 billion riyals ($8.26 billion) in the fourth quarter of 2008. That compares with a gain of 255.6 million riyals ($68.2 million) in the same period a year earlier.

    "It's significant," said John Sfakianakis, chief economist at SABB, the HSBC Holdings PLC affiliate formerly known as Saudi British Bank. "
    I don't think that we have seen such a loss in the recent corporate history of Saudi Arabia."

    Kingdom Holding was established in 1980 and initially focused on construction projects before evolving into one of the largest investment companies in the United States and elsewhere.

    The firm invests in a number of well-known companies, such as Apple Inc. and News Corp.

    A nephew of Saudi Arabia's king, Alwaleed, 52, is ranked as the world's 13th-richest person by Forbes magazine. He has recently taken a big hit in his holdings, however.

    Dubai-based magazine Arabian Business reported last month that Alwaleed's net worth fell to $17.08 billion from $21 billion in 2007. The magazine, at the time, said he remained the world's richest Arab.

    In November, Alwaleed announced he would raise his stake in Citigroup Inc. to 5 percent, from less than 4 percent -- a move that came as the banking giant was facing a possible collapse.

    Citigroup last week posted a loss of $8.29 billion, its fifth straight quarterly deficit, and laid out plans to reorganize itself. The company's shares have lost more than 80 percent of their value in the past year.

    Sfakianakis said that although Kingdom Holding's loss was substantial, it doesn't come as a complete surprise given the declines in markets around the world.

    "I wouldn't downplay it, but at the same time ... you can fairly say that the top 50 businessmen throughout the world have seen similar, significant losses taking place throughout 2008," he said.

    Kingdom Holding said its 2008 losses totaled 29.91 billion riyals ($7.98 billion). That compares with a profit of 1.21 billion ($322.7 million) for the prior year.
Three days later, on 24th January 2008, Kingdom Holdings posted the following.
  • RIYADH (Reuters) - Kingdom Holding Co (4280.SE), owned by Saudi billionaire Prince Alwaleed bin Talal, said on Saturday that it had revised its fourth-quarter earnings to show a small overall profit after initially reporting a net loss close to $8.3 billion.

    The revision followed the completion of an examination by Kingdom Holding of its preliminary financial earnings for 2008 and a "re-categorization of some items of its income statement," according to a statement posted on Saudi bourse website.

    Based on this "re-categorization," the company said, Kingdom Holding showed an "overall" profit of 276 million riyals ($73.6 million).

    The company reported on January 20 a Q4 net loss of 30.97 billion riyals ($8.26 billion) after a dive in the value of its assets, which include a substantial stake in Citigroup (NYSE:C - News).

    Kingdom's spokeswoman Heba Fatani declined to immediately comment on the official stock market disclosure. ( source:
    here )

Saturday, January 24, 2009

Alice Shroeder Talks At University Of Virginia

Here is an excellent video of Alice Schroeder speech at a University of Virginia value investing conference. ( Skip the long introductory - fast forward to 06.00)

Friday, January 23, 2009

Nice Work John Thain!

It was just on January 15th 2009 that John Thain made the following remark on a New York Times article.

Cleaning up the balance sheet?

Repairing the damage that was done over the last few years?

Guess what good old Charlie has literrally found under John Thain's rug! (yeah, pun intended. What do you expect when you read his $87,000 rug!!! )

In a Daily Beast/CNBC exclusive, Charlie Gasparino reveals how Merrill Lynch’s CEO spent over $1 million and hired the Obamas' decorator to redecorate his office last year—even as the firm faced a financial crisis.

John Thain’s $87,000 Rug by Charlie Gasparino

Below, The Daily Beast presents Thain’s top 16 outrages.

1) $2,700 for six wall sconces.
2) $5,000 for a mirror in his private dining room.
3) $11,000 for fabric for a "Roman Shade.”
4) $13,000 for a chandelier in the private dining room.
5) $15,000 for a sofa.
6) $16,000 for a "custom coffee table.”
7) $18,000 for a “George IV Desk.”
8) $25,000 for a "mahogany pedestal table.”
9) $28,000 for four pairs of curtains.
10) $35,000 for something called a "commode on legs.”
11) $37,000 for six chairs in his private dining room.
12) $68,000 for a "19th Century Credenza" in his office.
13) $87,000 for a pair of guest chairs.
14) $87,000 for an area rug in Thain's conference room and another area rug for $44,000.
15) $230,000 to his driver for one year’s work.
16) $800,000 to hire celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.

And that's not all!!

On the
Naked Capitalism, Yvess Smith wrote the following: Merrill Execs Pay Selves Bonuses Ahead of Schedule (and Before BofA Closing)

  • Playing fast and loose seems to be the theme of the evening. First we have the credulity-stretching China fourth quarter GDP release, and now we have the eleventh hour stealing of the silver by Merrill's top executives as one of the firm's final acts.

    Let us remember the fact set: Merrill managed to get Bank of America to agree to buy it in September, elbowing aside Lehman. The deal is subject to shareholder approval, however. BofA, realizing it has acquired a garbage barge, threatens to scuttle the deal unless Uncle Sam lends a helping hand. Negotiations proceed behind closed doors (and neither Merrill nor BofA shareholders are told prior to the shareholder vote that BofA has agreed to do the deal subject to some form of government support).

    Now we learn that after it was evident that the US taxpayer was going to subsidize the Merrill acquisition, the Merrill compensation committee accelerated bonus payments by a month to make sure they were paid out before the BofA deal closed.

    Efforts are being made to minimize the amount involved (it is claimed to be only $3-$4 billion, but the fact is amounts were reserved in prior quarters that are excessive in light of full year performance. So the fact that some of the amounts were allowed for in previous quarters is misleading).

    Were Merrill bankrupt, the bonus payments could be deemed fraudulent conveyance and clawed back. But we don't do either financial firm bankruptcies or clawbacks in this country.

    From the
    Financial Times:

    Merrill Lynch took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of its sale to Bank of America.

    The timing is notable because the money was paid as Merrill’s losses were mounting and Ken Lewis, BofA’s chief executive, was seeking additional funds from the government’s troubled asset recovery programme to help close the deal.

    Merrill and BofA shareholders voted to approve the takeover on December 5. Three days later, Merrill’s compensation committee approved the bonuses, which were paid on December 29.
    In past years, Merrill had paid bonuses later – usually late January or early February, according to company officials.

    Within days of the compensation committee meeting, BofA officials said they became aware that Merrill’s fourth-quarter losses would be greater than expected and began talks with the US Treasury on securing additional Tarp money...

    Despite the magnitude of the losses, Merrill had set aside $15bn for 2008 compensation, a sum that was only 6 per cent lower than the total in 2007, when the investment bank’s losses were smaller.

    The bulk of $15bn in compensation was paid out as salary and benefits throughout the course of the year. A person familiar with the matter estimated that about $3bn to $4bn was paid out in bonuses in December.

    Nancy Bush, an analyst with NAB Research, described the size of the 2008 Merrill bonus payments as “ridiculous”

And yes, John Thain has been sacked!

Nice work John Thain!

Transcript Of Warren Buffett's Interview On PBS

Transcript of Warren Buffett's interview on PBS


    SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?

    WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well, I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th, that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had, have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.

    GHARIB: Mr. Buffett, I know that you’re close to President Obama. What are you advising him?

    BUFFETT: Well, I’m not advising him really, but if I were I wouldn’t be able to talk about it. I am available any time. But he’s got all kinds of talent right back there with him in Washington. Plus he’s a talent himself so if I never contributed anything for him, fine.

    GHARIB: But I know that during the election that you were one of his economic advisors, what were you telling him?

    BUFFETT: I was telling him business was going to be awful during the election, period, and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America’s best days are ahead and that we’ve got a great economic machine, it's sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.

    GHARIB: How often do you talk to him?

    BUFFETT: Not often, not often, no, no, and it will be less often now that he’s in the office. He’s got a lot of talent around him.

    GHARIB: What’s the most important thing you think he needs to fix?

    BUFFETT: Well the most important thing to fix right now is the economy. We have a business slowdown, particularly after October 1st, it was sort of on a glide path downward up til roughly October 1st, and then it went into a real nosedive. In fact, in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job. Now his number one job always is to keep America safe. That goes without saying.

    GHARIB: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?

    BUFFETT: Well, we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed, and they have to, and that isn’t necessarily going to produce anything dramatic in the short-term at all. Over time, the American economy is going to work fine.

    GHARIB: There is considerable debate, as you know, about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again. Where do you stand on that debate?

    BUFFETT: Well, I don’t think the worry right now should be about the next one. The worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really, the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and it's not going to be soon, but it's going to get done.

    GHARIB: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

    BUFFETT: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective, in the short-run, we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

    GHARIB: But are we creating new problems?

    BUFFETT: Always.

    GHARIB: How worried are you about these multi-trillion dollar deficits?

    BUFFETT: You can’t just do one thing in economics. Anytime somebody says 'I'm going to do this', you have to say, 'And then what?' And there is no free lunch, so if you pour money at this problem, you do have aftereffects. You create certain problems. I mean you are giving a medicine dosage to the patient on a scale that we haven’t seen in this country. And there will be aftereffects and they can’t be predicted exactly. But certainly the potential is there for inflationary consequences that would be significant.

    GHARIB: We all know that in the long-run everything is going to work out, but as you analyze President Obama’s economic plan, what do you think are the trade-offs? What are the consequences?

    BUFFETT: Well, the trade-off, the trade-off basically is that you risk setting in motion forces that will be very hard to stop in terms of inflation down the road and you are creating an imbalance between revenues and expenses in the government that is a lot easier to create than it will be to correct later on. But those are problems worth taking on, but you don’t get a free lunch.

    GHARIB: What about the regulatory system? Is it a matter of making new rules or simply doing a better job at enforcing the rules we already have?

    BUFFETT: Well, there are probably some new rules needed, but the regulatory system, I don’t think, could have stopped this. Once you get the bubble going, once the American public, the U.S. Congress, all the commentators, the media, everybody else, started thinking house prices could go nothing but up, you were creating a bubble that would have huge consequences because the asset class was so big. I mean, you had 22 trillion dollars, probably, worth of homes. It was the biggest asset of most American families and you let them borrow 100% of, in many cases, of the price of those and you let them refi up to where they kept taking out more and more and treating it as an ATM machine. The bubble was going to happen.

    GHARIB: But everybody is talking about, OK, we need more rules, we have to enforce them, we need to go after every institution, every financial market. Do you think that new rules will do the trick or do we have enough rules, we just have to police better?

    BUFFETT: Well, you can have a rule, for example, to prevent another real estate bubble. You just require that anybody bought a house to put 20% down and make sure that the payments were not more than a third of their income. Now we would not have a big bust ever in real estate again, but we also would have people screaming that you’re denying home ownership to all these people, that you got a home yourself and now you’re saying a guy with a 5% down payment shouldn’t get one. So I think it’s very tough to put rules out. I mean, I can design rules that will prevent it but it will have other consequences. It’s like I say, in economics you can’t just do one thing. And where the balance is struck on that, will be a political question. My guess is that it won’t be struck particularly well, but that’s just the nature of politics.

    GHARIB: You’ve said that we’re in an economic Pearl Harbor, so how bad are things really?

    BUFFETT: They’re bad, they’re bad. The credit situation is getting a little better now. Things have loosened up from a month ago in the corporate debt market. But the rate of business descent is at a pretty alarming pace. I mean, there is no question things have really slowed down. Peoples’ buying habits have changed. Fear has taken over and fear is a tough thing to fight because you can’t go on television and say don’t be afraid, that doesn’t work. People will get over it. They got greedy and they got over being greedy. But it took a while to get over being greedy and now the pendulum has swung way over to the fear side. They’ll get over that and we just hope that they don’t go too far back to the greed side.

    GHARIB: What’s your view on the recession? How much longer is it going to last?

    BUFFETT: I don’t know. I don’t know. I don’t know the answer to these things. The only thing is I know that I don’t know. Maybe other people think they know, but I have no idea.

    GHARIB: The last time we talked, you said back in the spring, you said the recession is not going to be a short-haul thing. What is your feel for it right now?

    BUFFETT: It isn’t going to be short, but I just don’t know, Susie. If I knew that. There’s no way of knowing.

    GHARIB: Berkshire Hathaway is in a lot of businesses that are economically sensitive, like furniture, paint, bricks. Do you see any signs of a pick-up?

    BUFFETT: No. No. The businesses that are either construction or housing-related, or that are just plain consumer businesses, they’re doing very, very poorly. The American consumer has stepped back, big time, and it’s contagious and there’s a feedback mechanism because once you hear about this then you get fearful and then don’t do things at all. And that will end at a point, but it hasn’t ended at this point. Now fortunately our two biggest businesses are not really tied that way - in insurance and in our utility business we don’t feel that, of course, those are different things. But everything that’s consumer related feels it big time.

    GHARIB: My question to you is, do you think that the psyche of the American consumer has changed, becoming more savers than spenders?

    BUFFETT: Well, it certainly has at this point and my guess is that continues for quite a while. What it will be five years from now, I have no idea. I mean the American consumer when they’re confident they spend and they’re not confident now, and they’ve cut it back. But who knows whether.. I doubt that that’s a permanent reset of behavior, but I think it’s more than a one-day or one-week or one-month wonder in that case.

    GHARIB: Is that a bad thing?

    BUFFETT: Well, it just depends who the consumer is. I mean, consumer debt within reason makes sense. It makes sense to take out a mortgage and own a home, particularly if you aren’t buying during a bubble. You are normally going to see house price appreciation if you don’t buy during a time when people are all excited about it. So I don’t have any moral feelings about debt as to how people should.. I think people should only take on what they can handle though and that gets to their income level.

    GHARIB: Let me ask it this way, Americans saving more may be good for consumers, but is that bad for business?

    BUFFETT: Well, it’s certainly bad for business in the short-term. Now whether it’s better for business over a 10 or 20 year period... If the American public gets itself in better shape financially that presumably is good for business down the road, but while they’re getting themselves in better shape, it isn't much fun for the merchant on Main Street.

    GHARIB: One thing that Americans aren’t buying these days are stocks. Should they be buying?

    BUFFETT: Well, just as many people buy a stock everyday as sell one so there are people buying stocks everyday and we’re buying stocks as we go along. If they’re buying into a business they understand at a sensible price they should be buying them. That’s true at any time. There are a lot more things selling at sensible prices now than there were two years ago. So clearly it’s a better time to buying stocks than a couple of years ago. Is it better than tomorrow? I have no idea.

    GHARIB: This financial crisis has been extraordinary in so many ways. How has it changed your approach to investing?

    BUFFETT: Doesn’t change my approach at all. My approach to investing I learned in 1949 or ‘50 from a book by Ben Graham and it’s never changed.

    GHARIB: So many people I have talked to this past year say this was unprecedented, the unthinkable happened. And that hasn’t at all impacted your philosophy on this?

    BUFFETT: No, and if I were buying a farm, I wouldn’t change my ideas about how to buy a farm or an apartment house or a business, and that’s all a stock is, it’s part of a business. So if I were going to buy stock in a private business here in Omaha, I’d look at it just like I would have looked at it two years ago and I’ll look at it the same way two years from now. I look at how much I am getting for my money, how good the management is, how the competitive position of that business compares to others, how durable it is and just fundamental questions. The stock market is, you can forget about that. Any stock I buy I will be happy owning it if they close the stock market for five years tomorrow. In other words I am buying a business. I’m not buying a stock. I’m buying a little piece of a business, just like I buy a farm. And that doesn’t change. And all the newspaper headlines of the world don’t change that. It doesn’t mean you can’t buy it cheaper tomorrow. It may turn out that way. But the real question is did I get my money’s worth when I bought it?

    GHARIB: One of your famous investing principles is, “Be fearful when others are greedy and greedy when others are fearful.” So is this the time to be greedy, right?

    BUFFETT: Yeah. My greed quotient has risen as stocks have gone down. There’s no question about that. The cheaper something gets that you’re going to buy, the happier you feel, right? You’re going to buy groceries the rest of your life; you want grocery prices to go up or down? You want them to go down. And if they go down you don’t think, gee, I got those groceries sitting in my cabinet at home and I’ve lost money on those. You think I am buying my groceries cheaper, I am going to keep buying groceries. Now if you’re a seller, net, obviously you like prices higher. But most people listening to this program, certainly I, myself, and Berkshire Hathaway, we’re going to be buying businesses over time. We like the idea of businesses getting cheaper.

    GHARIB: So where do you see the opportunities in the stock market right now?

    BUFFETT: That one I wouldn’t tell you about.

    GHARIB: Let me throw out some sectors and you just tell me quickly how you feel about these sectors.

    BUFFETT: Susie, I am not going to recommend anything.

    GHARIB: Even in general? For example, a lot of people now are looking at infrastructure companies. Is that a sector that you find attractive?

    BUFFETT: I wouldn’t have any comment. What they ought to do is look at businesses that they understand, they‘d be happy owning for years if there was never a quote on the stock. Just like they buy in privately into a business in their hometown, they ought to forget all about what somebody says is going to be hot next year or the year after, whatever. Because what’s going to be hot, you may be paying twice as much for as something that’s not going to be hot. You don’t want to think in terms of what’s going to be good next year, you want to think in terms of what’s a good business to be in and then buy it at an attractive price. And then you can’t lose.

    GHARIB: Do you see more opportunities in the U.S. compared to overseas?

    BUFFETT: Well, I am more familiar with the U.S. We have such a big market. I see lots of opportunities here and I see lots of opportunities around the world.

    GHARIB: Let me ask you a little bit about investor confidence. Investor confidence was so shattered last year. What do you think it's going to take to restore confidence?

    BUFFETT: If people were dependent on the stock market going up to be confident, they’re in the wrong business. They ought to be confident because they look at a business and they think, I got my money’s worth. They ought to be confident if they buy a farm, not on whether they get a quote the next day on the farm, but they ought to look at what the farm produces, how many bushels an acre do they get out of their corn or soybeans and what prices do they bring. So they ought to look to the business as to whether to be confident compared to the price that they paid and they ought to forget about what anybody is saying, including me on television, or what they’re reading in the paper. That’s got nothing to do with whether they made a good decision or not. What’s got to do with whether they made a good decision is what kind of business they bought and what they paid for it.

    GHARIB: People are reeling from this whole Bernie Madoff scandal. What would you say to people who have lost trust in the financial system?

    BUFFETT: They shouldn’t have lost, you don’t need to lose trust in the American system. If you decide to buy a farm and you pay the right price for it, you don’t need to lose faith in American agriculture, you know, because the prices of farms go down.

    GHARIB: But you know what I’m saying. This was on top of everything else. People lost money last year in companies that they thought were rock solid. As I said, the unthinkable happened, and then on top of it, this whole Bernie Madoff scandal. It has undermined people’s sense of well-being about our system. So what do you say to people who have lost trust?

    BUFFETT: Well, they may be better off not being in equities. If they’re really depending on somebody else and they don’t know anything about the somebody else, they’ve got a problem. They shouldn’t do that. I mean there are going to be crooks out there and this guy was a crook on a scale that we’ve never seen before. But you ought to know who you’re dealing with. But if you’re going to buy a stock in some business that’s been around for a 100 years and will be around for 100 more years and it’s not a leveraged company and it sells some important product and it’s got a strong competitive position and you buy it at a reasonable multiple of earnings, you don’t have to worry about crooks, you’re going to do fine.

    GHARIB: Is there any take away lessons from the Bernie Madoff story?

    BUFFETT: Well, he was a special case. I mean here is a guy who had a good reputation for 30 years or something, and the trust of a lot of people around him. So it’s very easy to draw assurances from the fact that if fifty other people that are prominent and intelligent trust the guy, that maybe you should trust him too. But I wouldn’t put my trust in a single individual like that. I would put my trust in a very good business. I would want a business that was so good that if a so-so guy was running it, it would still certainly do well and there are plenty of businesses that are like that.

    GHARIB: So, are you saying that investing has gotten so complicated that investors should stick to what they know? Is that the take-away lesson?

    BUFFETT: You should always stick to what you know. I say the 'know-nothing investor' and there’s nothing wrong with being a 'know-nothing investor.' I mean, I spend 60 hours a week thinking about investments, and most people have got jobs and other things to do. They can buy index funds. And they’re not going to do better than an index fund if they go around and trust some guy that's promising them very high returns. If you buy a cross section of American business and you don’t buy it during a period when everybody is all enthused about stock, you’re going to do fine over 10 or 20 years. If you buy something with the idea that you’re going to do fine over 10 months, you may or may not. I do not know what stock is going be up 10 months from now, and I never will.

    GHARIB: What about Berkshire Hathaway stock? Were you surprised that it took such a hit last year, given that Berkshire shareholders are such buy and hold investors?

    BUFFETT: Well, most of them are. But in the end, our price is figured relative to everything else. So the whole stock market goes down 50 percent, we ought to go down a lot because you can buy other things cheaper. I‘ve had three times in my lifetime, since I took over Berkshire, when Berkshire stock’s gone down 50 percent. In 1974, it went from $90 to $40. Did I feel badly? No, I loved it. I bought more stock. So, I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.

    GHARIB: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?

    BUFFETT: (Laughs.) I wouldn’t name a number. If I ever name a number, I’ll name it publicly. I mean, if we ever get to the point where we’re contemplating doing it, I would make a public announcement.

    GHARIB: But would you ever be interested, are you in favor of buying back shares?

    BUFFETT: I think if your stock is undervalued, significantly undervalued, that a management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock. They don't ever say it.

    GHARIB: In your case, with Berkshire. I mean, it's down a lot. It was up to 147-thousand last year. Would you ever be opposed to buying back stock?

    BUFFETT: I’m not opposed to buying back stock.

    GHARIB: OK, I'm going to move on. Everyone wants to know your plans. What you’re going to do with all of Berkshire Hathaway’s cash, some 30 billion dollars? Is this now the right time to do a big acquisition?

    BUFFETT: Well, we’ve spent a lot of money in the last four months. We spent five billion on Goldman Sachs, three billion on GE, 6.6 billion on Wrigley, we’ve got three billion committed on Dow. We’ve spent a lot of money. We’ve got money left, but I love spending money. Cash makes me very unhappy. I like to always have enough and never way more than enough, but I always want to have enough. So we would never go below $10 billion of cash at Berkshire. We’re in the insurance business - we got a lot of things. We’re never going to depend on the kindness of strangers. But anything excess in that, I love the idea of buying things and the cheaper they get, the better I like it.

    GHARIB: You’ve been talking about doing a big acquisition for a while now. What are you waiting for?

    BUFFETT: Well, we’ve spent 20 billion dollars. (Laughs.) That might not be ..

    GHARIB: I mean in terms of a company, buying …

    BUFFETT: Well, we’ll wait for the right deal. We had a deal to buy Constellation for roughly five billion and then events with the French coming in meant that we didn’t do it. But I was delighted to commit for that five billion dollars for Constellation Energy. And it could happen tomorrow. That one happened on a Tuesday afternoon. I mean, it happened like that. Constellation was in big trouble and we flew back that day, the people at (Berkshire Hathaway subsidiary) MidAmerican, met on Tuesday and made them an offer that night.

    GHARIB: It seems that you’re pretty optimistic about the long-term future of the American economy and stock market, but a little pessimistic about the short term. Is that a fair assessment of where your head is right now?

    BUFFETT: I am unquestionably optimistic about the long-term. I’m more than a little pessimistic about the short-term, but that doesn’t mean I am pessimistic about the stock market. We bought stocks today. If you tell me the economy is going to be terrible for 12 months, pick a number, and then if I find something that is attractive today, I am going to buy it today. I am not going to wait and hope that it sells cheaper six months from now. Because who knows when stocks will hit a low or a high? Nobody knows that. All you know is whether you’re getting enough for your money or not.

    GHARIB: All right, I want to move on to our 30th anniversary and wrap-up some of your reflections and thoughts on that. As you know, it’s the 30th anniversary of Nightly Business Report. As you look back on the past three decades, what would you say is the most important lesson that you’ve learned about investing?

    BUFFETT: Well, I’ve learned my lessons before that. I read a book, what is it, almost 60 years ago, roughly, called The Intelligent Investor, and I really learned all I needed to know about investing from that book, and particularly chapters 8 and 20. So I haven’t changed anything since. I see different ..

    GHARIB: Graham and Dodd?

    BUFFETT: Well, that was Ben Graham’s book The Intelligent Investor. Graham and Dodd goes back even before that, which was important, very important. But, you know, you don’t change your philosophy, assuming you think have a sound one. And I picked up, I didn’t figure it out myself, I learned it from Ben Graham. But I got a framework for investing which I put in place back in 1950, roughly, and that framework is the framework I use now. I see different ways to apply it from time to time, but that is the framework.

    GHARIB: Can you describe what it is? I mean, what is your most important investment lesson?

    BUFFETT: The most important investment lesson is to look at a stock as a piece of a business, not as some little thing that jiggles up and down, or that people recommend, or people talk about earnings being up next quarter, something like that. But to look at it as a business and evaluate it as a business. If you don’t know enough to evaluate it as a business, you don’t know enough to buy it. And if you do know enough to evaluate it as a business and it's selling cheap, you buy it and you don’t worry about what it does next week, next month, or next year.

    GHARIB: So if we asked for your investment advice back in 1979, back when Nightly Business Report first got started, would it be any different than what you would say today?

    BUFFETT: Not at all. If you’d ask the same questions, you’d have gotten the same answers.

    GHARIB: Thank you so much Mr. Buffett. Thank you so much, always a pleasure talking to you.

    BUFFETT: Thank you, been a real pleasure.

Banking System Is Effectively Insolvent

Posted on Bloomberg news.

  • Jan. 20 (Bloomberg) -- U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

    “I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today.
    “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

    Losses and writedowns at financial companies worldwide have risen to more than $1 trillion since the U.S. subprime mortgage market collapsed in 2007, according to data compiled by Bloomberg.

    President Barack Obama will have to use as much as $1 trillion of public funds to shore up the capitalization of the banking sector, following the $350 billion injection by the Bush administration, Roubini told Bloomberg News. Congress last year approved a $700 billion rescue fund, of which half remains to be disbursed.

    Bank of America Corp., the largest U.S. bank by assets, posted a quarterly loss of $1.79 billion last week, its first since 1991, and received $138 billion in emergency government funds. Citigroup Inc. posted an $8.29 billion fourth-quarter loss, completing its worst year, and plans to split in two under Chief Executive Officer Vikram Pandit’s plan to rebuild a capital base eroded by the credit crisis.

    “The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”


Baltic Dry Index Makes Impressive Rebound

The Baltic Dry Index surged another 5% to close at 945. (Do remember that the recent low was around 600+ a month ago!)

And if you look at the recent three month charts of the BDI, the rise has been impressive.

However, many are still not impressed at all.

Published last week: Baltic Dry Index rebounds; shipowners not enthused

  • Bangalore: Indian shipowners are laying up more vessels that carry dry bulk commodities such as coal, iron ore, steel and grains, and even cancelling orders for new ships despite a rebound in the London-based Baltic Dry Index (BDI), a key measure of the health of global trade.

    Last week, Great Eastern Shipping Co. Ltd, India’s biggest private ocean carrier, cancelled orders for two new mid-sized dry bulk carriers it had placed with China’s Cosco Shipyard Group.

    State-run Shipping Corp. of India Ltd (SCI), India’s biggest shipping firm, has most recently laid up one more of its dry bulk carriers—the 12-year-old Maharashtra—that was due for dry docking and special survey. In December, SCI had laid up the 23-year-old dry bulk ship Lok Maheshwari, which was also due for dry docking and special survey.

    Lay-up is a shipping term that means temporary cessation of trading of a vessel by the shipowner.

    Apart from routine annual maintenance,
    a ship has to undergo dry-docking twice in five years and a special survey every four years to be allowed to operate under global maritime regulations.

    Firms that until a few months ago ran their old dry bulk carriers after undertaking dry docking, surveys and renewals are now reconsidering investing Rs5-6 crore for such an exercise because falling rentals no longer can cover operating expenses.
    The latest lay-ups and order cancellations come in spite of the BDI bouncing back.

    On Wednesday, the index climbed 9 points to 920 points from 911 points on Tuesday.

    The index, which measures costs for shipping dry bulk commodities such as coal, iron ore, steel and grains, had plunged to to 663 points in December from a record level on 20 May, pushed down by a credit squeeze and waning demand for global trade.

    Frozen credit lines have paralyzed the shipping trade since mid-September, drastically reducing shipments and, in turn, the use of dry bulk carriers.

    A lack of access to letters of credit, in which banks guarantee payment for merchandise, added to the problem.

    As for the recent rally in the BDI, experts are hesitant to read it as an indicator that the market has turned.

    “It is not a sustained rally as of now,” said T.V. Shanbhag, group adviser to India’s biggest ship-broking firm, Mumbai-based Trans Ocean Agency Pvt. Ltd.
    “It is momentary. The problems with letters of credit persist.”

    He added that given the extent of the fall over the past few months, a minor improvement of even 5% or 10% will not make a difference.

    Others, however, suggest the sharp fall was inevitable because the index had been heavily oversold.

    “As a result, even some positive development could lead to some kind of a recovery in the sector,” K. Ramachandran, chief investment officer at Barclays Wealth, the wealth management business of Barclays Bank Plc., said by phone from Mumbai. “
    It could be a technical bounce-back.”

    Conditions should become clearer when China, the world’s biggest importer of iron ore, completes price negotiations with suppliers for its new annual contract beginning February, said Ramachandran.

On the very same day, this was posted on Bloomberg News. Half of Commodity Shippers May Breach Loans by April, RBS Says

  • By Alaric Nightingale

    Jan. 14 (Bloomberg) -- As many as half of publicly traded commodity shipping lines may breach their loan covenants by April after a record collapse in hire rates, according to Royal Bank of Scotland Group Plc, the third-largest lender to the industry.

    The cost of second-hand capesizes, the largest group of commodity carriers, plunged 70 percent last year, according to the Baltic Exchange in London. Fleet values are one of the key covenants used. Banks review loans as often as every quarter, Lambros Varnavides, the bank’s head of credit to the shipping industry, said in interviews in London on Jan. 12 and 13.

    “It’s hard to avoid a breach when asset values have fallen so significantly,” said Varnavides, who is global head of shipping. Assuming rates and values don’t rebound in the next several months, shippers in breach of covenants will likely have to renegotiate loans, he said.

    The Baltic Dry Index, a measure of shipping costs for commodities, slumped 92 percent last year, causing at least four shipowners to fail since October. Demand for raw materials plunged as Europe, Japan and the U.S. entered their first simultaneous recessions since World War II.

    The ratio of losses on RBS’s shipping loans has averaged about 0.03 percent in the last 15 years and that’s “not going to change much” in the “long run,” Varnavides said. The bank has lent $25 billion to shippers, of which $18 billion has actually been used. About 60 percent is financing oil and gas tankers.

    “We remain confident in the quality of our portfolio and there’s a benefit of loans being re-priced higher,” the managing director said.

    About a third of closely held coal, ore and grain shippers may also be close to breaching loan covenants, Varnavides said. Most banks will be more interested in maintaining their relationship with shippers than seeking the highest possible interest rates when renegotiating loans, Varnavides said.

    Shipping Loans

    “In many ways, it’s an old-fashioned business, it has old- fashioned virtues,” he said.

    Loans to shipowners are being made at 200 to 300 basis points over the London interbank offered rate, compared with less than 100 points about 18 months ago, Varnavides said. A basis point is 0.01 of a percentage point and Libor is the rate banks say they charge each other for loans.

    RBS is the third-largest lender to owners based on how many shipping loans it holds directly. HSH Nordbank AG and DnB NOR ASA are the biggest, Varnavides said.

Yes that was last week and perhaps those two articles were rather stale.

The following news was posted yesterday on Reuters on Dryships. Dryships suspends dividend, dumps expansion plans

  • By Arup Roychoudhury and Adveith Nair

    BANGALORE, Jan 22 (Reuters) -
    Greek bulk carrier Dryships Inc (DRYS.O) said it would suspend its dividend, cancel previous ship orders and sell some ships as it strives to preserve capital, sending its shares down as much as 20 percent.

    The company also forecast fourth-quarter earnings before special items to be below market estimates citing weakness in the drybulk market and charges associated with the actions announced today.

    Dryships said lower freight rates and a tighter credit market was forcing it to take the actions which are aimed at reducing capital expenditures by over $1.5 billion.

    The Baltic Exchange's chief sea freight index .BADI, which monitors prices to ship key dry commodities, has fallen more than 90 percent from the highs it touched in May 2008.

    Shares of the company, which have lost 88 percent of their value from the highs touched in May, were down more than 17 percent at $11.98 in afternoon trade on Nasdaq. They had earlier touched a low of $11.70.

    Jefferies & Co analyst Douglas Mavrinac said Dryships' biggest challenge was maintaining its balance sheet strength and the cancellation announced today will bolster its balance sheet quite dramatically.

    "When the market digests the positives out of this, they'll realise the news was actually quite good."

    "The big positive... is the fact that they are saving a billion and a half dollars going forward." he added.


    Dryships said it was cancelling the purchase of nine Capesize vessels, which are the largest type of ships that can haul dry bulk commodities like iron ore, coal and grains due to the "considerable decrease" in the asset values .

    An abrupt end to the recent boom for bulk shippers has left many laden with debt for ships they bought at the top of the market.
    They now owe more than their ships are worth.

    The company had agreed to buy these ships in October 2008 for $1.17 billion from clients of Cardiff Marine Inc, including affiliates of Dryships' Chief Executive George Economou, and some third parties.

    Cardiff Marine, which was founded by Economou, provides technical and commercial ship-management to Dryships.

    The consideration to cancel the transaction will consist of the issuance of 6.5 million shares, the company said.

    Dryships has also agreed to dispose three capesize newbuilds. The agreement will release it and its relevant subsidiaries from the purchase agreements for these vessels.
    This agreement will also lower the company's total obligations in the amount of $364 million in exchange for a total consideration of $116.4 million.

    The financial crisis that started last year and evolved into a global economic crisis has forced the dry bulk shippers to drastically cut down on their expansion plans.

    In December, Dryships also cancelled a $400 million purchase of four Panamax vessels, and a month earlier rival Genco Shipping & Trading Ltd (GNK.N) agreed to cancel a deal to buy six dry bulk vessels.


    Dryships said beginning with the fourth quarter it has suspended dividend payout of 20 cents a share.

    In the past month a slew of other dry bulk shippers, including Diana Shipping Inc (DSX.N) and Eagle Bulk Shipping Inc (EGLE.O) have suspended their dividends to preserve cash.

    Analyst Mavrinac said the dividend suspension was expected. "I don't see the company resuming dividend in the near future. It was a token dividend in the first place," he added.

    Analyst Gregory Lewis of Credit Suisse said Dryships was different from other drybulk players and was never considered a yield investment.


    For the fourth quarter, Dryships forecast a net loss of $380.6 million to $431.4 million, or $6.89 to $7.81 per share.

    Excluding items, the company expects a net income of $34.7 million to $39.3 million, or 63 cents to 71 cents per share.

    Analysts on average, were expecting a profit of $1.28 per share, on revenue of $225.3 million.

    Analyst Mavrinac said while the outlook was below expectations, it wasn't "overly surprising," seeing as how challenging the markets were in the fourth quarter.

    Credit Suisse's Lewis said the weakness in the dry bulk market would continue for the majority of 2009.

    "We are going to see demand actually pick up later in the first and the second quarters." The issue is a lot of new supply coming into the market, which keeps dayrate in a low to mid cycle level.

Not trusting these news?

Well here's a report that you could read. It's posted on and do note that it's not free: Global Dry Bulk Shipping Industry: An Analysis