Omaha and me

     On Friday, my daily New York Times op ed page contained an article by Warren Buffett, the so-called Oracle of Omaha. I think he is more Omaha than Oracle. He wrote:

      "I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities. Why?

       "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

      "Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher." Here ends my quotation from Mr. Buffett.

       Mr. Buffett seems to ignore something regularly written about on the Times' op ed page: the world is flat (to quote Tom Friedman, who wrote the book on.) Global economies are interrelated. Troubles spread across borders unchecked (as Mr. Buffett himself wrote). So why can't recovery from troubles spread across borders also?

       Mr. Buffett, one of the world's best and most admired investors, is showing that he is extremely insular in making this case for investing in stocks. Because he insists that only U.S. equities will attract him.

      What of the rest of the world, Mr. Buffett? Your Berkshire Hathaway has invested in Israel, in South Korea. Why don't you invest your own money the same way?

       Berkshire has taken preferred stock and option stakes in world-scale companies like GE and Goldman Sachs. If the rebound in shares is confined to the U.S.A., you will have made a bad move in buying into these global companies.

       If most major companies achieve record profits in the next 5 to 20 years, this will not be confined to companies incorporated in the U.S.A. Business does not stop at the water's edge.

       As has become abundantly clear as governments around the globe attempt to counter the crisis: "if we don't hang together we will all hang separately". That is a quote, not from Buffett's guru Ben Graham, but from Ben Franklin.

       A purely single-country nationalist focus to resolving the crisis will fail.

       And it will open the door to the very populist protectionism that extended and deepened the post-1929 economic recession. Job creation in America does not depend on U.S. companies, nor should it. We do not need to "beggar our neighbors" to achieve a rebound. We do not need to stop imports with a revived Smoot Hawley tariff system to get the U.S. back on track.

       Currently, the main reason foreign stocks appear to have performed worse than U.S. shares is the impact of the rush into dollars. This is a technical result of the shortage of liquidity as foreign banks and other players lose credibility (from which they get credit).

       This is a more temporary trend than the low prices of U.S. stocks. It is not resulting in huge and scary increases in volatility such as we have seen with the Dow. Currency trends are just taking their time to get better. The dollar is only slowly losing its temporary edge over the Euro and other moneys.

       The dollar's rise also reflects concerns about the continuation of demand for raw materials; countries producing commodities have had the biggest currency haircuts. I think this is mistaken, as I explain below. Even growing only 8% a year, China and India are not going to stop importing raw materials they cannot produce at home.

       The currency impact of the crisis has been huge. It am indebted to Geoffrey Bell for the following table showing exchange rate movements against the dollar between the dates July 15 to October 17 (as of 9 a.m) His table follows:

       Euro             -15.7%

       Yen               +3.7

       Pound sterling   -13.5

       Canadian $       -19.0

       Swiss franc      -11.9

       Australian $     -30.6

       Chinese yuan      -0.3

       Indian rupee     -13.4

       Brazilian real   -34.6

       Mexican peso     -24.6

       So. African rand -33.5 

       *An example for Mr. Buffett to ponder is Schlumberger Ltd. which is run from Houston by a Scotsman, and is incorporated in Curacao (Netherlands Antilles) with a French family the largest shareholder bloc. SLB trades on the NYSE. Would Mr. Buffett not invest in SLB which sells technical services to oil drillers around the globe because it is not as red, white, and blue American as some of the companies that buy its technology services to drill for oil in remote parts of the globe? Is Exxon really more of an American pick than SLB?

        I failed to realize on Friday that SLB would suffer despite meeting analysts' forecasts and then some for Q3. SLB reported earnings of $1.25/sh vs $1.09 in 2007. (As a company in the oil services business, it operates and reports in dollars, not in euros.) But for the hurricanes in the U.S. Gulf, it would have earned even more, $1.29. Then Andrew Gould (the Scots-born CEO of this Dutch company) warned that sales might be off next year if the credit crunch continues. This cut SLB's stock price by 6%. Yet in the panic, people failed to listen to the rest of Gould's remarks, pointing out that falling oil supplies would boost demand regardless of money shortages.

       Unlike some oilfield services firms focussed on the Home of the Brave, SLB does about 80% of its business booked from Houston in countries other than the U.S.A. So in fact it is a better bet now for investors than other firms in the oilfield services sector reporting this week. (SLB by tradition is the bellwether.)

       *Here is another example. Teva the Israeli generic drug firm taking over Barr, raised money by selling its Israeli veterinary drug unit to NJ's Phibro Animal Health Co. for $47 mn. Phibro once belonged to Solomon Bros. in which Mr. Buffett invested. The Tel Aviv Stock Exchange rose 11.1% on Sunday, which is an indicator that Wall St. may also go up Monday. It may have more impact on the NYSE than Mr. Buffett's article. TEVA.Q

      *Mr. Buffett invested Berkshire Hathaway into Posco, the Korean steel giant. Last Friday it announced a huge investment, with Japanese partners, in a CSN iron ore mine in Brazil. As we forecast, that impacted the prices of other makers of iron ore pellets, like Companhia Rio do Vale Doce, Vale (NYSE-RIO). There is no market in iron ore pellets for speculators to play; but there is an interconnected world of suppliers and consumers.

       *Another. Having been defeated in its plans to have EdF buy Constellation Energy of MD, by Berkshire Hathaway, the French are still working to advance U.S. nuclear power plant technology. Our Areva is in a joint venture with Bechtel employing 500 engineers (200 of them newly hired) to design the specifications for generation 3-plus nuclear reactors. This is going on even before the plants have won approval. The potential buyers include Unistar Nuclear Energy, Amerin UE, and PPL (formerly Pennsylvania Power & Light). The eventual 1600 mW-plus pressurized water plants, built based on technology developed in France and being installed there and in Finland, will be built in Maryland, New York, Missouri, and Pennsylvania. I am not sure where the new-hire engineers are located, but I suspect it is right in the U.S. of A., M. Buffett!

      Apologies to ARVCF.PK for implying last week that the Berkshire victory over Constellation would endanger its Unistar nuclear ambitions. It won't.  

      *GlaxoSmithKline rose 3.5% Friday because analysts figured out that a higher dollar would vastly boost its earnings (in sterling.) The figure of GBP 1.1539 per London share was bandied about. We also consider GSK defensive because of its business (drugs and vaccines, which will be consumed even in a depression) and because of its decent yield.

       *More apologies, first to Dan Mc Cabe for calling him a visiting analyst. He can get into trouble with the SEC if he calls himself an analyst. He was just a visitor with an idea.

       *I cannot always read my own handwriting, and gave the wrong co-author for the Bloomberg article highlighting how Putin might just let the crisis run for a while in Russia to get rid of the headily-indebted oligarchs he inherited with the job. He was Henry Meyer not Henry Dennis.  

       *This blog is being filed Sunday so that I can go to a Financial Times conference on Electronic markets Monday morning. On Wall Street not in The City of London.