Dec 312016
 

In 2016, Berkshire Hathaway class A shares rose 23.4% vs. a 9.8% increase in the S&P 500 (with dividends included.)  Over the 51 year period from 1965 – 2015, Berkshire’s compounded annual gain equaled 20.8% vs 9.7% for the S&P 500 (with dividends included.)  From 2012-2016, the most recent five year period, Berkshire’s compounded annual gain equaled 16.3% vs. 14.7% for the S&P 500 (with dividends included).

Berkshire’s closing share price of $244,121 on December 30, 2016, represents a price to book value ratio of 1.5, based on a book value of $163,783 on September 30, 2016.  Its price to book value ratio has averaged 1.6 over the past 30 years.  Warren Buffett has previously stated that he would buy back shares when Berkshire’s price to book value is below 1.20.

(Investing.com and ValueWalk published this blog post.)

 Posted by at 5:53 pm
Dec 282016
 

I am quoted in a Washington Post article (“Can the stock market ride its post-election surge into the new year?”) – December 28.

“I’m bullish,” said David Kass, a professor of finance at the University of Maryland. “The market will do well in 2017 as a result of the fiscal stimulus that’s being proposed by president-elect Trump, in terms of tax cuts in both the corporate sector and individual sector. Proposed deregulation is another positive impact on many industries. I would put a rough estimate of stocks increasing another 10 percent above current levels.”

Kass said he is not without concerns. He worries that Trump’s threats about raising tariffs on imports could hurt trade, slow the U.S. and world economies and derail the surge in the financial markets.

Kass expects the Federal Reserve to continue gradually raising interest rates by a quarter point several times, which could provide competition for the stock market among fixed income securities such as corporate and municipal bonds and U.S. Treasuries.

“Fixed income securities will gradually become more attractive as interest rates rise, but interest rates are, and likely to remain, at historically low levels even after likely rate increases next year,” Kass said.

The low interest rates could combine with infrastructure and defense spending increases to bolster economic growth.

“Gross domestic product should grow faster, corporate profits should be higher, and therefore I would expect equities to do well during 2017,” he said. “It’s still a very favorable environment.”

 Posted by at 5:25 pm
Dec 242016
 

Wells Fargo (NYSE:WFC), recently failed a “living will” test, required by Dodd-Frank, for the second time.    I was interviewed on Bloomberg Radio on December 15 to discuss this issue.  In an article posted by Smith Brain Trust (University of Maryland, Robert H. Smith School of Business):

Wells Fargo’s recent “living will” stumble is just that, says finance professor David Kass at the University of Maryland’s Robert H. Smith School of Business. He says he expects the San Francisco-based bank to submit a satisfactory financial crisis contingency plan to regulators the next time around.

Wells Fargo failed to meet Federal Reserve and FDIC standards for a living will – a key requirement under Dodd-Frank, as a big bank’s plan for unwinding in a financial crisis minus taxpayer-funded bailouts. “I found [the failure] extremely surprising given that Wells Fargo has been one of the best managed banks in the country along with JPMorgan Chase,” Kass recently told Bloomberg Radio. “And I think it will be relatively easy and doable for Wells to meet this requirement at the next deadline – at the end of March 2017.”

Wells Fargo is one of Berkshire Hathaway’s largest common stock investments. This holding is currently valued at $28 billion and represents a 10% stake in the company.  Warren Buffett recently applied to seek regulatory approval to increase Berkshire Hathaway’s stake beyond 10%.  Berskshire Hathaway has invested in Wells Fargo since 1989.

 Posted by at 2:03 pm
Dec 152016
 

After the market closed today, Dow Chemical announced that it will convert the $3 billion of its 8 1/2% preferred stock held by Berkshire Hathaway on December 30 into its common stock currently yielding about 3.2%.  Warren Buffett received this convertible preferred stock in 2009 in return for providing capital to Dow Chemical to assist it in its acquisition of specialty chemical company Rohm & Haas.  Previously, Warren Buffett, on CNBC, had said that it was unlikely that he would hold on to the common shares of Dow upon the conversion of its preferred stock.

Berkshire’s $3 billion preferred stake will be converted into 72.6 million shares of Dow common stock at $41.32 per share.  At today’s closing price of $58.35 for Dow Chemical common stock, Berkshire’s investment is valued at approximately $4.25 billion.  Berkshire’s current capital gain of $1.25 billion, along with almost $2 billion it has received in dividends from Dow’s convertible preferred, represents more than a 100% return on Berkshire’s investment.

I am quoted in a Wall Street Journal article on this topic:

“Berkshire was in effect, on the corporate side, the lender of last resort in 08-09,” said David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business and a Berkshire shareholder. “It certainly worked out well for Berkshire.”

 Posted by at 11:37 pm