Friday, May 29, 2009

“No Green Shoots Here”...A Message from Warren Buffett’s (Likely) Successor.


We break from our ongoing assessment of the most interesting questions—and Warren Buffett's answers, or non-answers—from the Berkshire Hathaway shareholders meeting to bring you
an important message from Buffett’s likely successor….


About the most direct comment on the state of the economy Warren Buffett would make during the recent annual shareholder meeting (comments that are currently occupying the virtual pages of NotMakingThisUp) was that things were not good, and not likely to get much better any time soon…but that they would get better.

Asked how Buffett was feeling about things more than six months after his famous (or infamous, depending on your point of view) “Buy America, I Am” op-ed for the New York Times during the height of the melt-down, Buffett began by stating the obvious.

Thanks to the meltdown, the earnings power of Berkshire’s non-insurance businesses “was below normal last year, and will be below normal this year,” Buffett said. “People began acting differently. It was almost like a bell. It hurt our jewelry, NetJets, American Express…”

Happily, he noted, the sudden distress had an upside for Berkshire Hathaway and its shareholders:

“People changed their behavior. And all of a sudden the phones started ringing at GEICO,”
Berkshire’s low-cost auto insurance business. “All of a sudden saving $100 became more important,” he said.

Asked later about the real estate market—something Buffett is uniquely qualified to discuss, for many reasons, not the least of which is that Berkshire’s energy company, Mid-American Holdings, happens to own the nation’s second-largest real estate brokerage firm—he said:

“What I’m seeing, and I do see a lot of data…in the last few months you’ve seen a real pickup in activity, although at much lower prices, but I think you've seen something, you’ve seen a real pickup in activity…”

Calling up the numbers, as Buffett tends to do, he said, “We create about 1.3 million households a year” and noted “we’re building 500,000 units a year,” so “We’re gonna eat up the inventory…it will get done. You’ll have a stabilization in pricing…and then our insulation business and our brick business and our carpet business will get better.”

Finally, late in the day, when asked about his views on gold as an alternative to currencies in a crumbling world, Buffett said flatly,


“There are always a lot of things wrong with world, but it’s the only world we’ve got. The only thing I know is over time things will look better and better.”


If Buffett shaded his comments at the annual meeting towards the positive, his likely successor and CEO of MidAmerican Holdings Company, David Sokol, shaded things towards the negative in a presentation yesterday at the Ira W. Sohn Investment Research Conference in New York, as reported by Michael McKee via our trusty Bloomberg:

“We’re not seeing the green shoots,” said Sokol, head of MidAmerican Energy Holdings Co., which owns HomeServices of America Inc. “We don’t see improvement.”

Homes in the process of foreclosure are creating a “shadow backlog” of unsold properties that will continue to hang over the market….

While official statistics show a 10- to 12-month supply of unsold homes, “we believe the backlog of homes for sale is twice that.”

Many people who want or need to sell their homes haven’t put them on the market yet because the outlook for sales has been poor, he said. “It will be mid-2011 before we see the market in balance,” with no more than a six-month backlog, he said.

—Michael McKee, Bloomberg, May 28, 2009


Even more interesting than Sokol’s commentary on the specifics of a housing recovery timetable was his criticism of the Congress and the administration’s stimulus actions—a criticism his boss, who helped Obama get elected, no doubt shares:

Sokol suggested government efforts to ease the crisis are actually drawing out the recovery. “We really need to let the economics work through the system,” he said.

It is still difficult and costly for businesses to borrow, Sokol said, creating “headwinds” for recovery. He predicted the U.S. unemployment rate would rise above 10 percent from
April’s 8.9 percent.

—Michael McKee, Bloomberg, May 28, 2009


We’ll resume our series on the Berkshire “Woodstock for Capitalists” with more questions answered—and avoided—by Sokol’s boss, Monday morning.




Jeff Matthews
I Am Not Making This Up


© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

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