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Buffett’s $14B Bet on Equities MoneyNews
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Billionaire investor Warren Buffett bet $14 billion that global equities markets would rise over the next 15 to 20 years. Berkshire Hathaway, the holding company Buffett runs, sold a type of insurance designed to hedge against a long-term decline in "four major equity indices," according to a filing uncovered by Bloomberg News. The filing did not disclose the indices, saying only that three are outside of the U.S. and one is an American index. The "insurance" is "long-duration equity index put contracts" that the company issued to buyers who are worried about a decline in domestic and foreign stocks.
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Basically, Berkshire receives a premium for this insurance in exchange for a guarantee that the company will buy the securities if the markets fall. The filing also did not reveal how far the indices will need to plunge in order for the buyers to receive a payout. The filing stated that a 30% decline in each of the indices in 2005 would have resulted in a $900 million loss. The "maximum exposure" for Berkshire was $14 billion at the end of last year. In other words, if all four indices had fallen to zero, Berkshire could have lost $14 billion. But that's unlikely, says Bloomberg, since the S&P 500 "has generated a positive return over any 25-year period since 1925," citing a 2002 study by Ned Davis Research. However, Japan's Nikkei is an exception. The Nikkei 225 "dropped in eight of the 12 years from 1990 to 2001, for a total decline of 73%," says Bloomberg. But for the 25-year period ending in 2001, the Nikkei was still positive. Bloomberg cites Michael Morrissey, CEO of insurance-stock specialist Firemark Advisers, who says that the buyer was likely a pension fund or insurer that holds stocks for long periods. "Holding the puts would limit a pension fund's risk of losses in a stock-market crash, allowing it to invest more in equities, which tend to outperform bonds over time," he said. Berkshire is a unique company in that it is continually looking for undervalued businesses to invest in or acquire and its time horizon is extremely long. For example, the company has invested in Coca-Cola, Wells Fargo and American Express and has held those stocks for years. But the company is running out of undiscovered value plays - and it is searching for other investments to boost its returns. Buffett has made similar moves on the dollar, oil and silver - picking up $2 billion in profits from his bet on the dollar. And his silver wager is clearly coming to fruition, as the metal hit 22-year highs today. Editor's Note:
2. Euro Strengthens, Dollar Weakens On Tuesday, the euro was trading at 1.2276 - its highest level against the dollar in two months - after rumors that the European Central Bank is set to accelerate interest rate hikes while the Federal Reserve is expected to cease raising rates in the near future. The European currency soared by 2.3% last quarter - as experts anticipated ECB rate raises - and it hit 143.90 against the Japanese yen (a record high) Tuesday after several central banks announced they were considering purchasing euros with some of their reserves. The world's central bankers "are clearly not very comfortable holding so much of their wealth in dollars, and reserve diversification is important, is a story and it is helping the euro," Marios Maratheftis, currency strategist at Standard Chartered, told Reuters. In the near future, we are likely to see more ECB tightening than Fed movement, according to David Durrant, an investment strategist at New York's Julius Baer, which manages almost $40 billion. And it looks more and more probable that the ECB will raise rates in May, according to various central-bank sources. "That should give the euro some support," says Durrant. "With the calming down of interest-rate hikes in the U.S., and rates rising slowly but surely in Europe, I personally fancy the euro gaining to $1.40 this year," Peter Frischeisen, head of foreign exchange spot trading at HVB Group in Munich, told Bloomberg. But as the euro seems to be flourishing, news on the dollar is less enticing. According to a Hong Kong newspaper, a Chinese central bank official announced that China was looking to diversify its foreign-exchange reserves. He reportedly said that China could cease purchasing dollar-denominated bonds and eventually reduce its U.S. bond holdings. The official word from the Chinese government, however, was that the official was speaking independently and not declaring actual policy decisions. Meanwhile, the United Arab Emirates and Qatar announced they might be preparing to use their combined $30 billion in currency reserves to buy more euros, as they anticipate euro appreciation. According to Bloomberg: " 'We sold euros last year when the currency was high, and could buy again,' Qatar's Central Bank Governor Sheikh Abdullah bin Khaled al-Attiyah said. The emirate's policy is to hold as much as 40% of its reserves in euros, and as much as 90% in dollars, he said." Editor's Note:
3. Construction Spending up in February It's a strange contradiction, but even as new-home sales are off by 10% in February, construction spending set an all-time record for the month. The U.S. Commerce Department reports that overall construction spending soared to a seasonally adjusted annual rate of $1.185 trillion in February. That's up 0.8% from January, Commerce says. The February spike was stronger than the 0.5% growth that Wall Street analysts had anticipated. "Today's report on construction spending shows the industry is hitting on all cylinders with strong, balanced growth," Ken Simonson, chief economist for the Associated General Contractors of America, told the Associated Press. However, if the signs of a cooling housing market are true, "strong, balanced growth" could be wishful thinking. Construction spending is still strong because there is a lag between new-home sales and construction. Most developers don't begin construction until after most homes are sold. Therefore, it's still too soon to tell if the slowing housing market will bring construction spending down.
The AP is also reporting that a "key manufacturing number" came in weaker than expected in March but remains at "a level indicating that factories would continue expanding production in the months ahead." The Institute for Supply Management reports this morning that its manufacturing index dropped to 55.2 in March, compared to 56.7 in February. Any numbers above 50 suggest manufacturing expansion, the Institute says. Editor's Note:
4. Mobius Bullish on Emerging Markets Mark Mobius sees no reason to stop investing in emerging markets. In an interview with Bloomberg, the high-profile money manager who oversees $22 billion in assets for Templeton Asset Management says emerging-market stocks are on the way up and should stay that way through 2006. Specifically, Mobius sees Asian stocks outperforming those of Latin America due to rapid growth in China and South Korea. Mobius also said that government policies are to blame for Latin America's slower growth in comparison to Asia. However, Mobius still recommends some Brazilian companies - particularly Brazilian banks like Banco Bradesco SA. Natural-resource companies such as Compania Vale do Rio Doce are also at the top of his list, Mobius adds. Mobius will manage Franklin Templeton's new BRIC fund - investing in Brazil, Russia, India and China, according to a Wall Street Journal report. The fund was recently filed with the SEC. Mobius already manages a BRIC fund for European investors. It had $177.5 million in assets as of January 2006. In addition, Mobius oversees the Templeton Emerging Markets Fund, which is weighted heavily in South Korea, Taiwan and Brazil. Editor's Note:
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