Definitely In A Bubble

[RuleNumberOne]

Brooklyn Investor (BI) contradicts himself.

 

BI says market is not in a bubble. Yet Buffett has piled up $128 billion in cash.

 

Then BI says Berkshire beats the market over the long term - he/she says it does 1.5 times as well as the stock market.

 

So which is it BI? Buffett piled up $128 billion because the market is not in a bubble or because Buffett beats the market over the long term?

[Gregmal]

Brooklyn Investor (BI) contradicts himself.

 

BI says market is not in a bubble. Yet Buffett has piled up $128 billion in cash.

 

Then BI says Berkshire beats the market over the long term - he/she says it does 1.5 times as well as the stock market.

 

So which is it BI? Buffett piled up $128 billion because the market is not in a bubble or because Buffett beats the market over the long term?

 

I think there’s been more than enough evidence presented to conclude that perhaps Buffett has lost it. Which is independent of the market being in a bubble or not in a bubble.

[wabuffo]

Buffett piled up $128 billion because the market is not in a bubble

 

or maybe the cash and short-term bills is nothing unusual when placed in proper context. 

 

One needs to equate the cash as a percent of shareholders' equity in order to judge its size.  In fact, there are times when BRK has had a greater percentage of its net worth in cash and s-t-bills.  The cash is nominally bigger because the balance sheet is bigger.  The actual amount tells you nothing about any positioning or market stance because it is not unusual at all.

 

wabuffo

[scorpioncapital]

It is not prudent to assume the correctness of his claims. There are many types of bubbles. If interest rate on bonds goes to 10% in an accident waiting to happen, 128 billion at 10% is a mighty good return. Those companies operating with debt will be paying 10%...those tech companies with 50x earnings will be worth 10x. Berkshire is 60/30 investments to cash. That's prudent. As Buffett said once, ANYTHING can happen in markets. I mean ANYTHING. He even said in an interview the markets could shut down. So who is being imprudent and gambler saying markets don't 'seem high'?

 

 

[Castanza]

Buffett piled up $128 billion because the market is not in a bubble

 

or maybe the cash and short-term bills is nothing unusual when placed in proper context. 

 

One needs to equate the cash as a percent of shareholders' equity in order to judge its size.  In fact, there are times when BRK has had a greater percentage of its net worth in cash and s-t-bills.  The cash is nominally bigger because the balance sheet is bigger.  The actual amount tells you nothing about any positioning or market stance because it is not unusual at all.

 

wabuffo

 

Thanks for that simple yet insightful perspective.

[RuleNumberOne]

Buffett stopped reporting book value per share in his annual letters because he says it is no longer relevant.

 

Cash and bonds in its insurance unit was $65 billion in Q3 2007 10-Q.

Cash and bonds in its insurance unit is $143 billion in Q3 2019 10-Q.

In November 2007,  BRKB stock price was at $91

In November 2019, BRKB stock price is at $215.

 

Buffett could increase the intrinsic value/earnings power per share if he deployed that cash at say a 12% return instead of 1.75%. What is he afraid of?

 

 

[RuleNumberOne]

And the cash and bonds in Q3 2007 was earning a higher return than the current T-bill rate. More incentive to deploy now and increase Berkshire's earnings power.

 

 

Buffett stopped reporting book value per share in his annual letters because he says it is no longer relevant.

 

Cash and bonds in its insurance unit was $65 billion in Q3 2007 10-Q.

Cash and bonds in its insurance unit is $143 billion in Q3 2019 10-Q.

In November 2007,  BRKB stock price was at $91

In November 2019, BRKB stock price is at $215.

 

Buffett could increase the intrinsic value/earnings power per share if he deployed that cash at say a 12% return instead of 1.75%. What is he afraid of?

[maxthetrade]

 

Buffett could increase the intrinsic value/earnings power per share if he deployed that cash at say a 12% return instead of 1.75%. What is he afraid of?

 

Please let us and Mr. Buffett know where we/he can make a 12% return with minimal risk of permanent capital loss. I have trouble finding investments that meet these criteria where I can put a couple of millions at work…

 

[Gregmal]

 

Buffett could increase the intrinsic value/earnings power per share if he deployed that cash at say a 12% return instead of 1.75%. What is he afraid of?

 

Please let us and Mr. Buffett know where we/he can make a 12% return with minimal risk of permanent capital loss. I have trouble finding investments that meet these criteria where I can put a couple of millions at work…

 

 

If there isn’t 12% involved in BRK equity then what’s the point in owning it? If there is, then why isn’t he buying it back? Old man has lost it, and he knows it.

[RuleNumberOne]

Come to think of it, there is a "risk of permanent capital loss" everywhere if Trump has a stroke and Elizabeth becomes President.

 

Elizabeth could decide the two transcontinental railroads have increased prices too much (Berkshire owns one of the two).

 

She might decide her voters would like the latest iPhone at a 50% discount (Buffett's largest holding). The possibilities are endless...

 

As it is she has proposed a special tax on just financial firms of $900 billion over 10 years. That is half of Buffett's portfolio.

 

 

Buffett could increase the intrinsic value/earnings power per share if he deployed that cash at say a 12% return instead of 1.75%. What is he afraid of?

 

Please let us and Mr. Buffett know where we/he can make a 12% return with minimal risk of permanent capital loss. I have trouble finding investments that meet these criteria where I can put a couple of millions at work…

 

[Cardboard]

If he still has half a brain he won't endorse that Warren scumbag!

[Cigarbutt]

Buffett piled up $128 billion because the market is not in a bubble

 

or maybe the cash and short-term bills is nothing unusual when placed in proper context. 

 

One needs to equate the cash as a percent of shareholders' equity in order to judge its size.  In fact, there are times when BRK has had a greater percentage of its net worth in cash and s-t-bills.  The cash is nominally bigger because the balance sheet is bigger.  The actual amount tells you nothing about any positioning or market stance because it is not unusual at all.

 

wabuffo

This seems to be a recurrent discussion. I would say your conclusion is approximately correct but wonder if including more specific inputs would allow the conclusions to be more nuanced (and meaningful?).  8)

 

I got some old notes and updated for the last 2 years. Here are the %s of cash, equivalents and ST bills in Insurance and Other over SE. There is cash held for what seem to be working capital purposes of other operations but numbers are relatively small and do not materially impact the potential insights (numbers not audited!).

 

1995    16%        2000      9%          2005      44%            2010      21%            2015      26%

  96      6%            01        9%            06        35%              11      20%              16        25%

  97      3%            02        16%          07        31%              12        22%            17        32%

  98      24%          03        40%          08        22%              13        19%            18        31%

  99      7%            04        47%          09        21%              14        24%          Q319      31%

 

I would submit that the proper context needs to be defined for potential limitations. 1- A remarkable trend has been related to the decrease over time (relative to equity, float etc and even absolute!) of the longer-term fixed income exposure (that's another story) so an argument could be made that the increased cash position over time is partly linked to the decrease in long-term fixed income exposure but this explanation is incomplete. 2- I know you like float and this also needs to be looked at. The period in the early 2000's where cash to equity was high also corresponds to an unusual period in the sense that the exposure to float (versus equity) was +/- double what it was in the years before and what it has been more recently up to now, so an argument could be made that the higher relative float nature of the business required higher liquidity, at least to some degree.

 

In order perhaps to remove some noise involves an exercise that Brooklyn Investor did a while back:

http://brooklyninvestor.blogspot.com/2017/11/is-buffett-bearish.html

Updated numbers about coverage:

2017:      112%

2018:      101%

Q3 2019: 107%

 

The author of the blog comes to his own conclusions. I would add that (assuming that the Master has not lost it which is where I stand now) it's unlikely that Mr. Buffett licks his finger and puts it up in the air to feel the wind in order to decide if risk-on needs to be reversed to risk-off or vice-versa. IMO, the pattern of the float coverage reveals that Mr. Buffett looks at things bottom-up and will not hesitate to buy opportunities if internal hurdles are met, whatever the macro circumstances, like he did in 2018 when, from memory, he loaded up financial equity (coverage ratio down) and suggests that the coverage ratio (as an indirect consequence) will tend to go up when markets are elevated. The 2019 BRK cash situation, even accounting for a relatively minuscule long-term fixed income position and noting the relatively low float to equity ratio, would imply the possibility that markets are indeed elevated, the same way that one could conclude that markets carry a more favorable outlook when the coverage ratio goes to or below 90%.

 

 

[John Hjorth]

Great posts by wabuffo and Cigarbutt here,

 

-A good start for me on a louzy, dark & rainy Monday morning to read that! One could also take it to the next level, and think about the Berkshire cash as look-through cash on overall portfolio level. [similar to the line of thinking behind Dynamic's spreadsheet about the Berkshire stock portfolio.] Thinking about it that way it becomes a kind of restricted cash, because you can't decide what to do with it, but at least it's cash - and even the currency of the cash could bug you, if your functional currency isn't USD.

 

Personally, I understand Greg's and others stance on the Berkshire cash, and I've also been very frustrated about it earlier - not so much any more. CoBF member ValueHalla has taught me to think about the Berkshire cash the look-through way.

 

When one invest in a conglomerate with a controlling shareholder, there are always "frickles", laggards and such where the individual investor has a different opinion about capital allocation.

[wescobrk]

Any opinions on what strike price to start considering for S&P 500 puts? Maybe Nasdaq Q's as well?

Instead of railway car loadings maybe a more important (obviously not most important one) is looking at consumer confidence and higher end spending once it starts to decline.

Obviously, the distortions and false positives are the difficult part.

[Castanza]

Any opinions on what strike price to start considering for S&P 500 puts? Maybe Nasdaq Q's as well?

Instead of railway car loadings maybe a more important (obviously not most important one) is looking at consumer confidence and higher end spending once it starts to decline.

Obviously, the distortions and false positives are the difficult part.

 

Subprime auto loan "sector" is somewhat interesting. Possibly a play on Santander Consumer USA? Apparently they are only verifying like 8% of income for their auto loans. You have to think the auto sector would take a massive hit in a slowdown. Used car market is already quite saturated. Add in thousands of delinquencies and banks are stuck with newish vehicles (now used) at artificially high prices.

 

I'm not an auto bug as some on here so maybe someone else who has followed this can shed more light on the topic.

[LC]

All banks forecast PD LGD EAD for their auto portfolio.

 

PD and EAD are usually quite accurate but the problem is LGD (Severity). As you say banks must dispose of a quickly depreciating asset. These severity models are the least accurate particularly because many times there is lack of transparency into deal-level data. They are quite aware of this problem as is the FRB, usually accompanied by higher capital levels.

[Castanza]

All banks forecast PD LGD EAD for their auto portfolio.

 

PD and EAD are usually quite accurate but the problem is LGD (Severity). As you say banks must dispose of a quickly depreciating asset. These severity models are the least accurate particularly because many times there is lack of transparency into deal-level data. They are quite aware of this problem as is the FRB, usually accompanied by higher capital levels.

 

CACC Earnings missed. Share price down 8% today and 2020 earnings projections are estimated to be down 30-60%.