Has Buffett Lost His Touch?
With shares of Berkshire Hathaway down almost 50% from December, are investors losing confidence in Warren Buffett?
Many factors are driving down Berkshire’s stock price including the lackluster economy, but the one currently getting a great deal of attention is Berkshire Hathaway’s derivative positions.
Berkshire as of Sept 30 had a $6.73 billion paper liability on derivative contracts tied to equities.
The Omaha, Nebraska-based company has said it has contracts whose values depend on where four stock indexes, including the Standard & Poor's 500 , trade between 2019 and 2027. Berkshire has said it could theoretically owe as much as $37.04 billion on the contracts.
That’s kind of confusing. Fortunately CNBC’s Alex Crippen explains the situation quite well on his blog. He writes, “Berkshire received almost $5 billion for writing put option contracts. They act as a form of insurance for buyers who want to limit their potential long-term losses on stocks.
Berkshire would have to pay money to the holders of the contracts if, on certain dates well in the future, four stock market indexes from around the world, including the S&P 500, are below where they were when the deals were made in the last few years.”
According to T2 Partners founder Whitney Tilson, investors appear to be panicked over Berkshire’s positions however, he feels the concern is unwarranted. He thinks Buffet is making a smart bet.
"If the market goes up 3 to 4 percent a year on average over the next 13 years Buffett doesn't pay out a single dollar. And he got paid $4.8 billion."
And in the event Buffett does have to make payments Tilson has great confidence in the firms ability to meet its obligations. “Berkshire's operating businesses are weathering the downturn well and remain enormously profitable.”
Sounds like Buffett hasn't lost his touch one bit. Quite the opposite, actually.
And if you’re looking for a trade, Tilson also tells us, “Berkshire's stock is the cheapest we have ever seen it.”
Let’s make that the bottom line.
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Trader disclosure: On Nov.25, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (MSFT), (WMT), (UUP); Macke Is Short (TM); Najarian Owns (CTX) Calls; Najarian Owns (ETFC); Najarian Owns (MOT) Calls; Najarian Owns (PHM) Put Spread; Najarian Owns (PRU) Calls; Najarian Owns (UYG) Calls; Finerman's Firm Owns (DNA) And (DNA) Calls; Finerman's Firm Owns (CSCO), (XLF), (MSFT); Finerman's Firm Is Short (USO), (IYR), (IJR), (MDY), (SPY), (IWM)
Tilson Owns Berkshire Hathaway Shares; Funds Tilson Manages Are Long Berkshire Hathaway; Tilson's Fund Has A Short Position In (AIG)
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