Nov 062012

Berkshire Hathaway reported its third quarter earnings rose 72% versus the corresponding 2011 quarter, largely as a result of a reduction in losses in its derivatives.   Although operating earnings declined by 11%, this resulted from a one-time adjustment to reinsurance reserves in 2011.  Otherwise, operating earnings would have increased by 15%.  (Berkshire’s derivatives portfolio is largely comprised of put options sold by Berkshire on four major stock indexes.  These options cannot be exercised until maturity between 2018 and 2026.  The derivative losses reported are unrealized, but required by accounting standards.)

Berkshire also reported a very high cash position of $48 billion.  Since Warren Buffett has stated that he requires to have $20 billion on hand, he now has up to $28 billion to invest.  He prefers to make one large acquisition exceeding $20 billion.  In the recent past Buffett has said that his “elephant gun” is loaded and he is “salivating”.

I am quoted in a Bloomberg Businessweek article on Berkshire’s “Elephant Hunt”:

“The U.S. presidential election tomorrow and the so-called fiscal cliff of automatic tax increases and spending cuts at the start of next year may create an opportunity for Berkshire if stock prices fall, said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. Kass has accompanied students to meet Buffett in Omaha.

The S&P 500 may end the year little changed from its close on Nov. 2, according to the average estimate of Wall Street brokerages surveyed by Bloomberg. The most bearish prediction is for a 17 percent drop.

Fiscal Cliff

Goldman Sachs Group Inc.’s chief U.S. equity strategist David Kostin said stocks may end the year lower because lawmakers’ resolution of the fiscal cliff may be “messy.” The pressures from that risk begin this month and continue through January, he said at a conference in San Diego Sept. 10.

“To the extent that it looks like we’ve run into another deadlocked situation, equities could sell off” giving Buffett more favorable conditions for a buyout, said Kass.”

The entire article is available at:

I am also now on Twitter @DrDavidKass



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