Buffett Update: Downgrade from Oracle to Seer?

A day or so after he was on CNBC, Warren Buffett went on Bloomberg Television and told them that he’ll continue to sell derivatives contracts. He’s getting deeper into investments that he has called “financial weapons of mass destruction.” Apparently he’s betting that there will not be a crash (which would require a payout) in corporate junk bonds, muni bonds or stock markets in the UK, Europe and Japan. Here’s the punch line: his stock is up 17.2% since he started talking!

Berkshire Hathaway shares peaked last year at $147,000 each when Buffett was buying energy companies. The price is so very high because they have a policy of never paying dividends. Therefore, all the company’s earnings are put back into investments. If you tried to use a standard finance model to determine the appropriate price for these shares, the answer would be “infinity” because you can’t divide by $0 dividends. Anyway, two months after the peak, the shares were in the tank – relatively speaking – at $77,500 per share. By the end of the week before his TV appearances, the shares were even lower, at $72,400. The day of the CNBC interview: Berkshire Hathaway shares closed at $84,844 – a cool 17.2% gain. Remember, this is the man who said he is fearful when people are greedy and greedy when people are fearful.

On March 12, Berkshire Hathaway lost its triple-A credit rating from Fitch Ratings because of potential losses from those derivatives. Not that we should believe everything Fitch says – Fitch is among the credit rating agencies that gave triple-A ratings to subprime mortgage bonds, and look what happened to those investments! For what it’s worth, Fitch gives Berkshire a “negative” outlook, meaning another cut is possible within a couple of years. The two other big ratings agencies, Moody's Investors Service and Standard & Poor's, still rate Berkshire triple-A.