Warren Buffett appeared live on CNBC's Squawk Box this morning, March 2, 2011.
This is Part One of a transcript of his comments.
Announcer: This is a special presentation of SQUAWK BOX, a three-hour conversation with the "Oracle of Omaha," Warren Buffett, the wit and wisdom of an investing legend.
BECKY QUICK: Good morning, everybody. Welcome to SQUAWK BOX here in CNBC. I'm Becky Quick in Omaha. Joe Kernen and Carl Quintanilla are back at headquarters at CNBC.
Warren Buffett tells CNBC that when it comes to possible acquisitions, there aren't many "elephants" out there and not all of them want to be in the Berkshire Hathaway "zoo."
Appearing live from Omaha on CNBC's Squawk Box this morning, Buffett tells Becky Quick he doesn't have any "high probability" deals in the works now. While he's not necessarily scared away by higher stock prices, they do make it harder to find a deal now than two years ago.
Buffett says that of the 50 or so large companies that qualify as "elephants," he would not want to pay a 20 percent premium for most of them. He also points out it's easier to buy private companies.
He doesn't rule out an international acquisition, but says a purchase in the United States is more likely.
Buffett does reveal to Becky that Berkshire had an "iron in the fire" within the last few days, but lost out to another buyer. Was it an "elephant" on the scale of Burlington Northern Santa Fe? No, says Buffett, more like a "zebra."
AMERICAN ECONOMIC DOMINANCE DIMINISHING
In a discussion about the U.S. dollar, Buffett said that over time it will become "less important" as America's "dominance" of the world's economic system "diminishes."
"That doesn't mean we aren't going to be the leading player 25 years from now, we will be. But this overwhelming dominance that we, post World War Two, that we exhibited around the world, other countries have caught on to some degree... We should be glad they've caught on. Their people are going to live better because they've caught on. The people in China are not smarter than they were 50 years ago, they are not working harder, they've learned how to unleash their potential. It's a marvelous thing. But the United States is the example for the world."
While he concedes the U.S. economy will not be able to grow as quickly as China's, he notes that country is starting at a "far, far lower base."
UNEVEN U.S. ECONOMIC RECOVERY
Buffett says he thinks the U.S. economy is "coming back" and in the long-run "you can't stop" the United States, but most of Berkshire Hathaway's businesses are closer to "inching along" than "chugging along."
The Securities and Exchange Commission's charges against ex-Goldman Sachs board member Rajat Gupta on insider trading in connection with Raj Rajaratnam and the Galleon Fund case is yet another blow to investor confidence, Matthew Halbower, CEO and chief investment officer of hedge fund Pentwater Capital Management, told CNBC Tuesday.
“When the complaints were filed in the Galleon case, it was a very hot topic, because everyone wanted to know what your compliance is like,” said Halblower, whose firm specializes in special situations and event-driven investing. His hedge fund has an annualized return of nearly 13 percent.
“It still is, and it’s a question that is raised in nearly every investor meeting that we have.”
The SEC accused Gupta Tuesday of illegally disclosing information about quarterly earnings at Goldman and Procter & Gamble , where he had also been a director.
The SEC is accusing a former board member at Goldman Sachs with illegally giving Galleon hedge fund founder Raj Rajaratnam advance notice of Berkshire Hathaway's $5 billion dollar investment in Goldman at the height of the credit crisis.
The SEC says Rajaratnam bought 175,000 Goldman shares after getting a call from Rajat Gupta about the deal, before it was announced late in the day on September 23, 2008.
Gupta, says the SEC, had just gotten off a conference call in which the Goldman board had discussed and approved the cash infusion from Warren Buffett's company.
The next day, Goldman shares gained on the announcement that Buffett was casting a vote of confidence in the firm.
Rajaratnam, according to the SEC, sold his Goldman shares, generating an "illicit" profit of over $900,000.
Here's how the SEC's news release describes the alleged scheme:
In the order that institutes administrative and cease-and-desist proceedings against Gupta, the SEC’s Division of Enforcement alleges that, while a member of Goldman’s Board of Directors, Gupta tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was publicly announced on Sept. 23, 2008. Gupta called Rajaratnam immediately after a special telephonic meeting at which Goldman’s Board considered and approved Berkshire’s investment in Goldman Sachs and the public equity offering. Within a minute after the Gupta-Rajaratnam call and just minutes before the close of the markets, Rajaratnam arranged for Galleon funds to purchase more than 175,000 Goldman shares. Rajaratnam later informed another participant in the scheme that he received the tip on which he traded only minutes before the market close. Rajaratnam caused the Galleon funds to liquidate their Goldman holdings the following day after the information became public, making illicit profits of more than $900,000.
Gupta is also accused of providing Rajaratnam with inside information on upcoming earnings reports by Goldman, as well as Procter & Gamble, where Gupta also served as a director.
Wall Street appears to like Warren Buffett's "itchy trigger finger" for a major acquisition and his economic optimism, two of the major themes in his new annual letter to shareholders , released on Saturday.
Amid a lot of speculation about possible targets for Buffett's reloaded "elephant gun," shares of Berkshire Hathaway rallied by almost three percent today, bringing both share classes to fresh 2-1/2 year closing highs.
Berkshire B closed up 2.8 percent at $87.20, its highest close since October 6, 2008.
The Baby Berkshires, adjusted for last year's split, went all the way down to a close of 46 on March 9, 2009.
From that low point just under two years ago, they are up almost 90 percent.
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The carbon story fits well too . Moving goods by rail rather than truck reduces greenhouse omissions, especially as the industry embraces lighter, high-tech materials and parts.
Warren Buffett's itchy trigger fingers gets most of the attention in the day-after headlines about his latest annual letter to shareholders , but his long-term optimism about the United States' economic future also gets some mentions.
Here's a sampling:
In his annual letter to Berkshire Hathaway shareholders released this morning, Warren Buffett says more "major" acquisitions are needed to maintain growth in the company's non-insurance businesses at a "decent rate."
Buffett writes: "We will need both good performance from our current businesses and more major acquisitions. We're prepared. Our elephant gun has been reloaded, and my trigger finger is itchy."
At the end of 2010, Berkshire had a lot of ammunition for that elephant gun: $38 billion in cash.
In the letter, Buffett also updates the derivatives contracts written by Berkshire that have caused concern among some investors.
He compares them to selling insurance, as Berkshire gets "premiums for assuming risk that others wish to shed" with no counterparty risk.
One category involves mostly 5-year contracts written between 2004 and 2008 that guaranteed against bond defaults by companies "included in certain high-yield indicies." Premiums totaled $3.4 billion for that 'insurance,' while the financial crisis required Berkshire to pay out $2.5 billion. That gave Berkshire "the use of an interest free float that averaged $2 billion over the life of the contracts." Buffett also reports that "our exposure is largely behind us because most of our higher-risk contracts have expired."
As a result, "It appears almost certain that we will earn an underwriting profit as we originally intended."
Berkshire has also written contracts protecting the buyers from long-term losses in several global equity indexes. Buffett says that late last year, at the request of the buyer, eight contracts were unwound, with a net gain for Berkshire of $222 million.
That left 39 equity put options remaining at the end of 2010, for which Berkshire received $4.2 billion in premiums, another source of money to help fuel acquisitions.
Buffett says the "highlight" of 2010 was Berkshire's acquisition of the Burlington Northern Santa Fe railroad , "a purchase that's working out even better than I expected."
He's expecting that owning the railroad will increase Berkshire's "normal" earnings power by almost 40 percent pre-tax and "well over" 30 percent after-tax. He also writes that Berkshire "quickly replenished" the $22 billion in cash used to buy BNSF, so "the economics of this transaction have turned out very well."
LAGGING THE S&P
For the year, however, Berkshire's corporate performance lagged behind the S&P 500, as measured by per-share book value, a metric that Buffett calls an "understated proxy" for intrinsic value, which is hard to pin down.
Berkshire's per-share book value increased by 13.0 percent last year, 2.1 percent points behind the S&P's 15.1 percent gain, including dividends.
Berkshire's compounded annual gain from 1965 through 2010 of 20.2 percent is more than double the S&P's 9.4 percent advance. (Buffett started running things at Berkshire in 1965.)
'MEANINGLESS' NET INCOME
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Set your alarm clocks. No sleeping late this Saturday.
Warren Buffett's Berkshire Hathaway will post its 2010 Annual Report and Q4 earnings on www.berkshirehathaway.com tomorrow morning "at approximately " 8 AM ET.
Along with extensive information on Berkshire's financials, the Annual Report also includes Buffett's very popular and widely-read annual letter to shareholders.
With some assistance from Fortune's Carol Loomis as editor, the letter is a straight-forward, folksy and funny, review of Berkshire's wins and losses over the previous year.
Buffett also uses the letter to discuss his investment strategies and to explain, and sometimes criticize, trends in the financial world and the economy.
This time around, some investors will be looking for "insights on who will run the company after the 80-year-old billionaire is gone ."