Everytime I see one of those silly computations from the so called financial planning experts that use 8% to 10% average stock market gains routinely, it makes me feel very stupid. My wealth never seems to appreciate anything close to it! I wonder how much fees and taxes are sucking out...
and that will be many many times larger in 92 years.
Why? Most likely, we'll have a lot less people on earth in 2100. Economics and demographics go hand in hand, but not everyone realizes this until it's too late.
Buffet's comment seems rather strange. Why would the absolute level in 2100 indicate the ridiculousness of the claim? That's just what the math says, given that many years.
Better to argue that we can't expect 10% real returns based on long-term performance.
In 92 years the global economy, if such a thing still exists, will be fueled by dwindling supplies of wood and animal dung. And for the most part, the vast majority of any surviving humans will be living a 10th century life style.
Buffet's comment seems rather strange. Why would the absolute level in 2100 indicate the ridiculousness of the claim? That's just what the math says, given that many years.
Because stock market earnings can't grow faster than the worlds economy over the long term. Otherwise, the total profits of the public markets would be greater than worlds GDP at some point in the future.
And if long term valuations aren't related to earnings growth stocks are just a speculative vehicle.
I wonder when boomers are going to wake up and realize that 8% real returns "over the long haul" are fiction and a product of a one-time demographic dividend.
Fees are particuarly painful during periods of low or negative returns. For instance, a 1.5% fee is 15% of a a ten percent gain and 33% of a 4.5% gain.
Reading down further in his report, I loved the 'Bushwhacked' reference from Molly Ivins, "If his I.Q. was any lower, you would have to water him twice a day"...
3/4 of the country will be Hispanic.
And the Hispanics will not want to be laborers any more.
If Hispanics stop "wanting to be laborers" before they make 3/4 of the country, they will never grow to be 3/4 of the country. Reproduction rates fall when incomes rise, that's one of the few reliable trends.
I suppose you could try doing it the other way and see what the dow should have been in 1900.
Heh, ballparking it as 12000*0.92^100:
2.87
In fact it was about 50, indicating a return of about 5.5%... with no fees and I think it gets a bit of magic selection bias as things enter and exit the index, doesn't it?
No idea how valid that is, but I think it supports Buffet's point.
his math wrong is becuase he's a major player in the deriviaives market...
those guys always play fanatasy math.
I've heard Harvard and MIT give PHD's for proving 1+1=3
Because stock market earnings can't grow faster than the worlds economy over the long term. Otherwise, the total profits of the public markets would be greater than worlds GDP at some point in the future.
True, but profit margins can increase while revenues as a share of GDP are stagnant, and higher profits (rather than just revenues) lead to higher capital investment, increasing the growth rate.
Heck, maybe in a few years we'll be discovered by some good-natured extra-terrestrials. Then we can be the galaxy's cheap labor source and grow at 11% until the end of the century, provided we recycle incoming cash into planet-backed securities. But then, it's not just New York and Florida that could go underwater - so could be the Rockies!
This is interesting. Wonder who bought the puts against the indices, and what are the foreign indices?
Last year I told you that Berkshire had 62 derivative contracts that I manage. (We also have a few
left in the General Re runoff book.) Today, we have 94 of these, and they fall into two categories.
First, we have written 54 contracts that require us to make payments if certain bonds that are
included in various high-yield indices default. These contracts expire at various times from 2009 to 2013.
At yearend we had received $3.2 billion in premiums on these contracts; had paid $472 million in losses;
and in the worst case (though it is extremely unlikely to occur) could be required to pay an additional $4.7
billion.
We are certain to make many more payments. But I believe that on premium revenues alone,
these contracts will prove profitable, leaving aside what we can earn on the large sums we hold. Our
yearend liability for this exposure was recorded at $1.8 billion and is included in Derivative Contract
Liabilities on our balance sheet.
The second category of contracts involves various put options we have sold on four stock indices
(the S&P 500 plus three foreign indices). These puts had original terms of either 15 or 20 years and were
struck at the market. We have received premiums of $4.5 billion, and we recorded a liability at yearend of
$4.6 billion. The puts in these contracts are exercisable only at their expiration dates, which occur between
2019 and 2027, and Berkshire will then need to make a payment only if the index in question is quoted at a
level below that existing on the day that the put was written. Again, I believe these contracts, in aggregate,
will be profitable and that we will, in addition, receive substantial income from our investment of the
premiums we hold during the 15- or 20-year period.
"Heck, maybe in a few years we'll be discovered by some good-natured extra-terrestrials. Then we can be the galaxy's cheap labor source and grow at 11% until the end of the century, provided we recycle incoming cash into planet-backed securities."
"An alien race comes to earth, promising peace and sharing technology. A linguist and his team set out to translate the alien's language, using a book whose title they deduce is "To Serve Man". . . ."
Not much different from the current capitalists, really.
CR writes, "The actual number sounds huge, but much depends on the size of the economy - and that will be many many times larger in 92 years."
Absurd. The future of the US and the world depends on how gracefully we can redesign our cities and towns to survive in a world of limited energy.
Check out theoildrum.com ... they have some interesting graphs projecting energy supplies 100 years out. Oil and natural gas will be almost gone, and even coal will be in severe decline.
Take a look back about 100 years. That's the future. You don't have to be a doomer to understand that.. check out the books, 'Guns, Germs, Steel,' and 'Collapse' if you don't get it.
OT: CNBC douches literally congratulated Joe Lents (he of the $1.5 million mortgage in FCL with WAMU/DLJ and subject of recent Tanta blog) on his ability to screw the system. He got a Pop on their Pop/Drop segement.
Goodwill and other intangibles............... 14,201
Total current assets................................. 12,831
Thus, our derivative positions will sometimes cause large swings in reported earnings, even
though Charlie and I might believe the intrinsic value of these positions has changed little. He and I will
not be bothered by these swings even though they could easily amount to $1 billion or more in a quarter
and we hope you wont be either.
Moody's said last month thy had $33 Billion in Goodwill?
I recently received a note from Charles Schwab advising having 25x pre-retirement income saved upon retirement. I can imagine how this was calculated; someone figured if you want to sustain your present income in retirement, and might live for another 30 years, this is likely to suffice. But this is a ridiculously high target, and I think this kind of advice leads first to unrealistic expectations, potentially followed by unreasonable risk-taking, or simply giving up.
lly we can redesign our cities and towns to survive in a world of limited energy.
Yossarian | 02.29.08 - 5:55 p
The fact that you think energy is limited, thereby cornering yourself in the conservation realm of thinking shows your myopia.
There is plenty of available energy ready to be harvested, whether old (fossil fuels) or new technology. I suggest you build an earth ship in New Mexico. Tell us how it's working out for you 20 years. I know prices at the mean will be lower and my quality of life better.
The Malthusian Prophecy is just that...bullsh*t...
Fitch views BRK's use of financial leverage as moderate and the company's cash position and liquidity as extremely strong. At Sept. 30, 2007 the company's consolidated debt to total capital ratio was 22% including approximately 14 percentage points from debt issued by BRK subsidiaries that is not guaranteed by BRK.
The company's ratio of debt-to-capital excluding its $33 billion goodwill asset was moderately higher at 28%. However, Fitch believes that BRK's excellent acquisition track record largely offsets concerns about tangible capital quality. Fitch also notes that BRK had $39 billion of cash and equivalents at Sept. 30, 2007 and that the company's cash and equivalents averaged $36 billion between year-end 2002 and year-end 2006.
Ifn I had a pig that was a silk purse, thisd be it: The company's ratio of debt-to-capital excluding its $33 billion goodwill asset was moderately higher at 28%. However, Fitch believes that BRK's excellent acquisition track record largely offsets concerns about tangible capital quality.
How in the Sam Hill can this company have $33 billion in goodwill accounting and no one give a rats behind and on top of that, the goodwill numbers are growing and then people look away and focus on his sweet candy touting and con job! I hope when I get to be 90 that people let me off the hook for crimes like this!
Heck, maybe in a few years we'll be discovered by some good-natured extra-terrestrials. Then we can be the galaxy's cheap labor source and grow at 11% until the end of the century, provided we recycle incoming cash into planet-backed securities. But then, it's not just New York and Florida that could go underwater - so could be the Rockies!
Allow me to be your accountant. I figure I can't be any worse than the current crop, right?
I'll prove that your $6 Trillion is actually EQUAL (not slightly different, but truly EQUAL) to $100 Trillion worth of gold. And I'll even give you a AAA and a pony just for giggles.
rich, too funny! But haven't you heard the hispanics are moving to Canada. You know, NAFTA and all. With the good skiing and an a strong dollar (C$ not US peso).
"I remember when I proved that 1.99999(repeating) is EQUAL to 2. It seems like it's just a weeee bit less than two, but nope it's exactly equal to two.
Jesus Christ, what is the deal with the anti-Buffett goodwill rants? Every company has goodwill! If you pay over book for any entity, you record goodwill - read FAS 142. How the hell is Buffett's a fraud?
Go look at accounting related to goodwill and the abuse of this type of entry; as you may recall, in the dotcom burst, companies like Cisco had to eventually come to terms with the reality of allowing for too much goodwill and restate earnings. I just think warren gets away with murder for some unknown reason and his investment in ratings companys helps to substantiate this type of accounting -- which is very Enron-like IMHO! Very much the attitude that we see here: When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling replied "Well, thank you very much, we appreciate that . . . asshole." Though the comment was met with dismay and astonishment by press and public, it became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling's lack of tact.
Where's all of this cheap, abundant energy you allude to?
Start with about 250 years worth of coal. Of course, nobody's going to invest in it with looming carbon taxes. Coal can be turned into gasoline, btw.
Then there is natural gas, better C02 profile but the biggest problem is that the biggest supply is a long way away from the biggest demand. Lots of companies already building LNG terminals, etc.
Conventional nuclear has a lot of kick. The amount of fuel needed for a family for 30 years can fit in a shoe-box. Use breeder reactors and reprocessing and it would be the size of a pea.
Of course, the US doesn't reprocess because of proliferation.
France generates 80% of it's electricity from nuclear power and all the fuel it's used in the last 30-40 years fits in an area the size of two tennis courts.
Of course, try to get a nuclear plant built in the US in the last 30 years?
Beyond burning uranium (which can be isolated from seawater) new reactors can burn thorium (which is much more plentiful).
Geothermal is a possibility if you can drill deep enough with enough accuracy (and have enough water to not worry about leaks). Iceland is gambling its future on it.
Of course, none of these energy sources are sexy and generate the same consumer warm-fuzzies as energy from wind, tidal, solar, iPhones or butterfly burps has. But, even though consumers love the idea of "green" energy they don't want to pay for it at this point. I doubt they could afford it.
You might be interested in reading an interview with Warren Buffett from two weeks ago. He really is a great storyteller, and obviously a brilliant investor. Some interesting bits on moral hazard, taxation and the fed, but mostly just him telling his story.
In a stunning reversal of course, Bill Ackman announces the purchase of MBIA calls with all of his excess capital. When asked why, Ackman answers: I had to do something that would grab even more attention.
So you think his investment in Moody's impacts Fitch and S&P exactly how?
Are all the other companies with goodwill on their balance sheet frauds as well?
If you don't like goodwill accounting, that is a valid position. Singling out Buffet is not.
Buffett's investments have historically worked out, completely justifying the price he paid for them. Under current accounting, that means goodwill is not impaired.
Smart investors also look through goodwill to tangible equity in evaluating companies. Without goodwill, however, companies have to record a loss every time they make an acquisition over book, for the most part.
will be profitable and that we will, in addition, receive substantial income from our investment of the
premiums we hold during the 15- or 20-year period.
MarkS
nice catch mark ,
now, do you suppose he has to MTM the current value of the contract, especially when the market is off 10%?
In The Year 2100
In The Year 2100...
...
Warren Buffett re-emerges on earth to take advantage of a 300bps spread between GSE MegaJumbo paper and WorldCurrenty(tm) treasuries. When asked to comment about GSE paper, Buffett responds: "we do not comment on speculation".
Let's not forget the old joke:
A man wakes up from suspended animation after 100 years. The first thing he does is call up his broker. "How much am I worth?" "600 million" comes the reply. "Woo-hoo, I'm rich!" he exclaims . "Please deposit 6 million for the next 3 minutes", the operator says.
Perhaps we can chuckle at the exaggerated premise of this joke, but there is some kernel of truth to it. No, not the inflation rate, the idea that pay phones will still exist in the future.
In regard to commodities being pumped into the next speculative bubble which will result in hyper inflation and the destruction of global economies...
What if we end up with companies like BRK or CSCO using commodities like wheat as hedges to help them grow EPS, and thus what if they depend on speculation from these food-based commodities to maintain growth. These corporations could invest money into investments that would fuel hyper-inflation and cause food prices to rocket. Therefore, what if this is the case with oil, which is goosed to produce greater profit, greater volatility which fuels and feeds the mechanism of future growth, while increasing costs for the little guys not in the fun games?
What will it be like if wheat goes up 200% and soy beans go up 80% and oil goes up, just because commodities are being manipulated as the last chance hedge for corporations that can only grow by using synthetic derivatives?
It makes me fear the future to know this could happen and perhaps even within a few weeks, i.e, inflation could virtually explode like a housing bubble as too many people jump into commodities and force a bag of flour to $10 by the end of March, and then why not $20 by years end?
In The Year 2100
In The Year 2100...
...
Jim Rogers predicts that the price of cotton will rise by another 500-fold. When asked about the underlying supply-demand imbalances, the former Soros sidekick says: "Now that the bow-tie wearing is punishable by the death penalty in China, I need to buy me 365 cotton ties - one for each day of the year."
"The actual number sounds huge, but much depends on the size of the economy - and that will be many many times larger in 92 years."
Let's see, we're obviously really good at accounting for the horrendous externalities of "growth" and "production." We're so good at this, that, heck, we now can even have people write books like "Gaia's Revenge" about planetary homeostasis gone haywire, and that is so banal!!!! Thank you Alfred Marshall!!!!!!!!!!!
When Buffett purchased Sees candies back in the 70's he paid 25 million for it and the purchase price over tangible assets was recorded as goodwill and written off gradually.
The current value of See's of course is much higher than any residual goodwill carried on the balance sheet. For recent acquisitions the goodwill will not have been written down yet and for some purchases the fair market value is probably much higher than the goodwill on the books and for some (Gen Re) it may be less than what is stated but on the whole it is probably if anything slightly understated not overstated.
CR
If he said 'this century' then he would have logically selected price on 1/3/2000, the first trading day of the century, on which the DOW closed at 11,357. In this case
1.08^100 x 11,357 = 24,982,688. Maybe he didn't want to exaggerate by rounding up...
"In addition, Ambac is in the process of evaluating several options related to its capitalization which are focused on maintaining Ambac Assurance's triple-A financial strength rating from the major rating agencies. These options may include a plan to raise additional capital. In the event that we do not maintain our current ratings, we believe that we can execute a significantly reduced business plan to operate with double-A ratings that will include Structured finance, International and reinsurance across a variety of bond types. In that circumstance, we expect to accumulate capital and position ourselves to regain our triple-A ratings. Ambac will continue to work closely with the regulators and the rating agencies to design and implement a strategy to address the credit issues within its portfolio and to preserve and grow the business franchise."
"BOSTON/NEW YORK, Feb 29 (Reuters) - Several U.S. lenders have taken control of failing hedge fund Peloton Partners' assets, one day after the fund said it was liquidating a portfolio, a person familiar with the situation said on Friday."
"NEW YORK (Reuters) - The number of companies at risk of being downgraded rose to a record 700 globally in February, seventy more than at the same time last year, Standard & Poor's said on Friday."
and lastly, the let us carry all assets at "par" cry-
"The massive write-downs that financial firms are posting have begun to spur a backlash among some investors and executives, who are blaming accounting rules for exaggerating the losses and are seeking new, more forgiving ways to value investments."
I'm with wheat engineer, a lot of the current price of oil is due to speculative trading rather than fundamental supply and demand issues. Ask the Saudis if you want confirmation; they've been telling this to anyone who'll listen.
risk capital,
Management always wants to blame the accountants when the financials look bad; on the other hand when the numbers are good it's due to management's "skill" and bonuses must be forthcoming.
When Buffett purchased Sees candies back in the 70's he paid 25 million for it and the purchase price over tangible assets was recorded as goodwill and written off gradually.
The rules changed in 2001. Goodwill no longer needs to be amortized. If management feels that the asset is "impaired" it can writedown the value of goodwill it carries on the books:
Of course, no CEO in his right mind is going to do that voluntarily. I remember hearing a story about one tech company that had an old computer running 24x7 with code that nobody used. It had to be kept running because it was the only bit of a long ago purchase and shutting in down would have required writing off the goodwill.
YamhillMan writes:
I'm with wheat engineer, a lot of the current price of oil is due to speculative trading rather than fundamental supply and demand issues. Ask the Saudis if you want confirmation; they've been telling this to anyone who'll listen.
YamhillMan
in the same vane, holding dollars is a speculative trade also, as it's value fluctuates daily in regards to it's purchasing power.
you can't really lament the OIL market, and not include all other consumable goods, especially when there ratios' against one another are maintained...
ie gold/oil
Everything you mention has an absolutely huge physical capital requirement, which would have to be executed on a societal scale - not impossible but expensive and disruptive - we aren't close to running out of energy, just the cheap energy.
Wheat, its not the total goodwill you should be looking at but the ratio of goodwill to equity. There are plenty of companies out there with a goodwill/equity ratio greater than berkshires.
wheat engineer: "Go look at accounting related to goodwill and the abuse of this type of entry; as you may recall, in the dotcom burst, companies like Cisco had to eventually come to terms with the reality of allowing for too much goodwill and restate earnings."
I don't really follow Berkshire closely but I don't see much of an issue with your goodwill argument. First of all, $33billion, although nothing to ignore, is not that large for a company of Berkshire's size. Many companies have larger goodwill on their books eg. GE ($88 billion), Citigroup ($41b), etc.
Goodwill can be abused but it depends on what someone is doing with it. The problem with some tech companies during the dot-com boom was that they were buying other companies at inflated values. Furthermore, most of the value of tech firms come from intellectual property so they have large uncertainty over the value. I doubt too many people, let alone the thousands of Berkshire shareholders, think that Buffett has bought overpriced companies. If anything, Buffett buys things for dirt cheap.
Everything you mention has an absolutely huge physical capital requirement, which would have to be executed on a societal scale - not impossible but expensive and disruptive - we aren't close to running out of energy, just the cheap energy.
The technology's been around since the 50's. Some of the ideas the new reactors are based on are almost as old. Most of the capital we're talking about is mostly of the human kind. The amount of cement and rebar needed is pretty small in the scheme of things.
Most of the cost of nuclear power isn't even in the fuel. Even with uranium going from $1 a pound to $100 the cost of fuel is only about 1% of the cost of running a nuclear plant.
The cost of synthetic gasoline, nuclear energy, etc are going to be higher than energy prices of 2002/2003 but they are probably lower than what we are paying now. Coal liquification was profitable at $60 dollars a barrel last time I looked (not sure what it is now).
The problem is more one of national will. We no longer see ourselves as masters of the universe, bending nature to our will like we used to. The percentage of people who actually build things is so small that few of us actually believe that projects that large actually can be built.
There is also an apathy that I can't put my finger on. It's like American's believe that the solutions will just arrive with no effort or cost on anyones part.
Shores of Panama, a major resort condominium project on the gulf beachfront, has filed for protection under Chapter 11 of the federal bankruptcy code.
Occupying a 7-acre site at the corner of South Thomas Drive and Front Beach Road, Shores of Panama opened last September with 709 luxury condominium units in a curving, C-shaped structure that climbs 22 stories above ground. It also has a multi-story parking garage for its owners and guests."
RISK CAPITAL:"...lastly, the let us carry all assets at "par" cry-
"The massive write-downs that financial firms are posting have begun to spur a backlash among some investors and executives, who are blaming accounting rules for exaggerating the losses and are seeking new, more forgiving ways to value investments." "
When it's all said and done, the mark-to-market requirement is going to be one of the worst things accountants have done this decade. Market prices are often irrational during stressful times and trying to pick a market price may be misleading. It exacerbates volatility and causes all sorts of misleading signals. Credit instruments held to maturity should not be marked to market yet the accounting profession seems to insist on it.
The cost of synthetic gasoline, nuclear energy, etc are going to be higher than energy prices of 2002/2003 but they are probably lower than what we are paying now.
Sorry, the number was closer to $30 dollars a barrel when I last looked. Sasol is a big producer of synthetic gasoline and there are more plants in China and Mongolia in the planning stages. Looks like Sasol is also planning a natural-gas to gasoline plant:
In terms of the crap we buy and sell to each other, it seems to me that technological improvements are becoming more and more trivial. How many all-in-one telephone/music/video/GPS devices do we need, anyway? We now have refrigerators with LCD TVs in the doors; is this what people were really dreaming of?
When you look at the software or webapps that it seems every young guy under 25 is working on, when you look past the flashy Web 2.0 promotional websites and breathless explanations of how "revolutionary" and "transformative" each new application is... eventually you realize that these products do very, very little that is new. It's all just TWEAKS. Tweaks with a lot of hyperbole attached. I realized this a couple years ago when I was looking for plugins for my blog software and realized that 90% of the stuff out there, didn't actually do anything terribly useful (except in the mind of its creator, some teenage hacker who thought it was the greatest thing since sliced bread...)
It seems to me that 90% of our consumer technology is mostly hype and rearrangements of existing pieces, perhaps with flashy new GUI's attached.
So, too, it seems, our booming economy has turned out to be.
Hype built on puffery. Innovation built on mere tweaks. Wealth built on nothing.
Too bad more financiers are not clones of Buffett. I suspect lots of his good sense comes from being born in Omaha, Nebraska and staying put. (PS I was also born in Nebraska but not in Omaha.)
wheat engineer writes:
"Go find a company out there with $33 billion in goodwill, then we can chat!"
I think you misunderstand understand goodwill accounting and Berkshire.
Buffett has bought a lot of companies over the years and they have tended to be highly profitable companies that are very efficiently run. These companies tend to have a high return on their tangible assets.
When Buffett pays a fair EBITDA multiple for the company his purchase price will likely be large relative to the tangible assets of the company he's buying. He's paying for the future profits, not necessarily the tangible assets.
Goodwill will grow as he acquires additional profitable & efficiently run businesses, and so will profits. Get used to it.
It seems to me that 90% of our consumer technology is mostly hype and rearrangements of existing pieces, perhaps with flashy new GUI's attached.
Welcome to middle age.
That "Internet" thing is just a bunch of over-hyped hoo-haa. Bunch of people sitting around hunched over a type-writer sending messages to each other over tubes. Nothing more than a letter but you need $2000 dollars in fancy equipment to send one. Back in the day I could buy a Caddy for the price they spend on those new-fangled type-writers. All for something that you can do with a paper, pencil and a couple of stamps
BTW, can you believe how much stamps continue to go up? Criminal!
FRS 3 defines intangible assets as an identifiable
non-monetary asset without physical substance. In order for intangible assets to be identifiable, they must be separable from the business or must arise from contractual or other legal right.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset. Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Management is currently in the process of determining what effect the provisions of this Statement will have on the Companys financial position or results of operations.
If Hispanics stop "wanting to be laborers" before they make 3/4 of the country, they will never grow to be 3/4 of the country. Reproduction rates fall when incomes rise, that's one of the few reliable trends.
You totally miss the point. It's not just reproduction that is making Hispanics the majority of our population.
It's the fact they are nuclear families. They stick together. And the more Hispanics that are here, the more prosperous they will be all over the world. Viva Western Union!
RISK CAPITAL: "SV-and assets priced at unrealistic premiums are rational?Your argument is complete bullshit."
For credit instruments that are held to maturity, marking to market doesn't make much sense. Are you telling me that AIG, which reported something like $11b mark-to-market loss is going to take that much loss?
By the time the Bushwhackers get through with this economy, bond yields will be at 15 %. Thirty year treasuries in 1982 were at similiar levels.
When Bernanke, Greenspan, and accomplices figured out how to create the bubble econmy, the dollar was strong, there was an excess of borrowing capacity and a sombulent, zombie public.
The replay of the 2003 hail mary is backfiring so far. Each goofy drop in rates crashes the dollar, incites speculation, increases inflation, and increases loan costs. Duh.. I think we've hit an iceberg.
Misean : "SV,Where did you study accounting? Enron?"
I'm not an accountant. Only an accountant can possibly justify the current system. Certainly investors dn't benefit much. I may just be a working class guy but here is something from someone who knows what he is talking about (Martin Whitman--admittedly he is long monolines but I hope you value his thought more than his position):
"In analyzing each of the financial institutions, Generally
Accepted Accounting Principles (GAAP) tend to be
quite misleading. This is because GAAP require that
derivatives such as the Credit Default Swaps be marked
to market and market prices now are highly capricious,
to say the least.
Marks to market are the most appropriate, and helpful,
tool in the appraisal of publicly-traded common stocks
held in trading portfolios. Marks to market are an
inappropriate, and unhelpful, tool in the appraisal of
credit instruments held in portfolios where the intent is
to hold the credit instruments to maturity...
When I first trained as an
analyst some 50 plus years ago the primary role of GAAP
was to meet the needs of creditors who held credit
instruments to maturity. Thats all changed now. The primary role of GAAP seems to have become to fulfill the
perceived needs of equity holders who are vitally affected
by day to day changes in common stock prices. As Ive
pointed out in previous letters What a waste! GAAP cant
really be very useful to stock market speculators, but it can
hurt issuers like MBIA and Radian. In any event, TAVF, as
a safe and cheap investor, will continue to place primary
weight on what the numbers mean rather than on what
the numbers are --Martin Whitman.
one tech company that had an old computer running 24x7 with code that nobody used.<
I've seen this sort of thing, but it was because the company capitalized an IT project that failed. The SOP was to keep the project name, when the budget was blown and the project was hopeless, reduce the scope to whatever existed, and keep the name. As long as part of it was being used, they could amortize it over a reasonable period.
I never saw any massive projects successfully completed. Not to say it never happened anywhere, but maybe 0 out of 10 on data warehouses.
For the mark to market fanatics, banks don't have to revalue their loan portfolio every time interest rates move (for loans not in their trading portfolio).
If you have deep, liquid markets, then marking to market makes sense. However, even fluctuations in common stocks are not considered in the income statement. Unrealized gains/losses show up in the balance sheet and as a reconciling item in other comprehensive income.
The worst feature of mark to market, in my opinion, is marking your own debt to market. If you have a lot of debt and it gets hammered, then you book it at market value which results in income and additional capital.
Basically, over time, the values converge. These are timing differences and they eventually unwind. God knows it's a complex subject and I'm not an accountant.
Short term, accounting matters a lot. Longer term, the economics of the business will determine its value, not accounting conventions.
wallster writes:
Wheat, its not the total goodwill you should be looking at but the ratio of goodwill to equity. There are plenty of companies out there with a goodwill/equity ratio greater than berkshires.<
Actually wallster, for an investor interested in the present value of future cash flows, just ignoring goodwill works. Call it a zero and deduct it from book value.
You only really need to add it back in if you are comparing return on equity and including goodwill reduces the ROE.
Berkshire had a much better year if you focus on return on tangible capital and change in tangible book value.
I wonder how much fossil fuel is used to extract the materials and manufacture parts for wind machines?
I wonder how much fossil fuel is used in manufacturing solar panels?
I wonder how much fossil fuel is used mining nuclear materials?
Also, I have heard that there is only so much nuclear power we can reasonably generate because the materials are in such short supply. No doubt part of the reason that the price of uranium is shooting up.
Green technology is merely a way of rebranding fossil fuels to assuage peoples guilt.
I would love it if someone had a link to a site that had definitive numbers about how much energy goes into making green energy.
GARY: "Miracles (or highly improbable outcomes) do occur from time to time . . . but the writing is on the wall. You're f'ed."
The writing on the wall is sometimes wrong when it comes to capital markets...
It's not as obvious as you imply. I am probably screwed due to the imminent shareholder dilution. But even then, it's all very murky. All that has happened is that there have been massive mark-to-market losses. Yes, there have also been some real credit impairment in there but no one really knows what will happen in the future. No one knows how high the subprime mortgage losses will go; and no one really knows how CDOs will perform.
Oops - regaining my humour quickly and if somebody wants to quibble about the two I mentioned above, I'm ready to discuss the twoness of things ! or even
the tooness.
you have shown that you can cut and paste. you still haven't shown that you understand anything about goodwill.
There must be at least one instance where booking goodwill is justified, right? Find it and ask someone with an accounting background to explain it to you.
Then, once you understand why and how it is used, try to come up with a cogent argument that brk's goodwill is a problem.
Or go back and answer my question.
This really has more to do with bookkeeping. It has nothing to do with complex accrual issues. Forget fair value, etc. Just explain how you would account for a business purchased for more then book value. It's just arithmetic.
w: "...how much energy goes into making green energy."
I don't think the problem is the amount of fossil fuels required for the green energy. I'm sure it isn't a lot. I cannot see how the cost of fossil fuel inputs into creating a solar panel, for example, will be high. If you go and fill a large area in the middle of nowhere (say a desert) with solar panels, I'm sure the energy output will be higher than the fossil fuels required to create the panels. I think the ones that are net negative are things like ethanol (which really isn't considered a green energy in many circles)...
The problem with green energy has been their higher cost. Oil & natgas is cheaper. And coal is even cheaper...
Amen !!! You should see the dumbfounded looks when you start talking what energy will work...God forbid you mention nukes and then reprocessing waste...OMG!!! Three Mile Island !!!! And yes there is enough thorium to last a long,long,long time...
SV, but that is the thing, everyone assumes that the energy use is low. Is it?
If a solar panel uses 1 unit of fossil fuel and returns 10 units over its life time then is it simply going to take a 1000 years to exhaust the supply of fossil fuels instead of 100?
Either way the sequestered fossil fuels are going to be used and released into the atmosphere. If global warming is the problem scientists believe it to be then green tchnology will not avoid it but simply delay it. What is the point of having green technology if 4 Billion people are going to be living at the standard of Americans? It is only an excuse to keep consuming and feel good about it.
Iceland took about fifteen years to approach energy independence. They should be there shortly, if indeed they are not already.
Oil won't disappear suddenly. We have some time to work out practical alternatives relative to peak oil. The difficulty lies in the carbon 'footprint' of hydrocarbon fuel burning, i.e., the ecological clock never stops ticking.
With Florida incentives, recently renewed, on-grid solar is perfectly competitive today. One of my old schoolmates, Peter Belmont, installed solar at his mid-town residence last Summer for a few thousand. His meter runs backwards, on average.
I haven't asked him about the ROI/payout but, in the press, he says he'll be ahead of the game before long and, with rising utility rates and fees, sooner than he expected.
I don't think you can do this in Seattle. Obviously, you can in some sunny climates.
I think your 1:10 fossil/solar estimate may be off by an order of magnitude. A typical residential array is designed to last fifteen years or more, turning out two to three thousand KWH.
And then, there's nothing to prevent using solar power to manufacture solar panels .
burnside, the 1:10 is the low side of median ratio thet I could find online. Who knows how accurate that was. I am assuming that people are discounting the energy cost of maintenance and replacement by going lower than median. As energy gets more difficult to extract it may also require more energy to get it. Conversely technology will improve for the solar.
None of this really matters as more people worldwide increase their consumption. Green energy will stretch the fossil fuels we have but there will not be a drop in production and usage, just more people using them.
So, I see no benefit except reducing peoples guilt.
Not to sound like a ass but there is no way in hell your buddy installed a system for a few thousand. Ain't happening. Before the dollar collapsed panels were roughly 200 watts for 450-500.00. Currently they are north of 1k.
I just designed and priced a system for the parents. 110% power replacement.
80k dollars. Not 8k,80k. 60k for a bare bones system. No battery backup. Solar panels are currently not even close to being cost effective. The current electric bill? 180.00 month. Needless to say even with the tax incentives dad said fuck it...
If you don't believe me go to mrsolar.com and use the calculator they provide to size a system...
I think Warren Buffet makes a good point . We should ask ourselves is a Dow of 24 million or 14.6 million possible? What type of resource base will be required to support an economy like that?
Since I am not an economist, I find it hard to believe that we can base a system of infinite growth on a world of finite resources. As an example, If the Chinese drove as many cars, per capita, as Americans do, they would use all the oil the world currently produces plus 15 million extra barrels a day. everyday seems to bring us more evidence that we are approaching the limits of growth.
Sivaram Velauthapillai writes:
"I cannot see how the cost of fossil fuel inputs into creating a solar panel, for example, will be high."
I think W has a point. I also wonder how much energy it takes to manufacture a solar cells. After all, desert land is cheep, so if you think you could build a solar power plant that produces energy more cost effectively (that is without considering subsidies) then you can make a whole lot of profit AND be eco-friendly.
Maybe by 2099 a unified field theory
will have been conclusively proven, and
with the DOW terminated at 5300 in 2060,
the last Man(darin), in a ruined world,
will have taken the koolaid, leaving
time and chemistry to write the
post-human future.
To find out the fossil fuel costs of alternative energy I would look for EROEI at theoildrum.com. This is an important point, as the energy input increases, the energy cost is going to increase dramatically. Here is one example I found.
"We begin with a fundamental assumption (and one that is certainly problematic, but more on that later): the price of the solar PV system is a proxy for the totality of energy used in its production, in terms relative to the price of its productelectricity. Assume that a 2KW solar PV system installed on a residential roof in Phoenix, Arizona, costs $16,000 (grid intertie, no battery). [1] Assume that this system, in Phoenix, will generate 4,000 KW-hours per year. [2] At prevailing Phoenix-area electricity prices of $.10/KW-hour, this is the rough equivalent of $400/year. What is the present value of $400/year for the 40-year life-expectancy of the array? Accepting the Treasurys inflation adjusted rate of return, an annuity that will make 40 annual payments of $400 costs $8500 today. [3] That gives us an Price-Estimated EROEI of grid-intertie solar PV at 0.53."
I found this paper by Matthew Simmons very interesting. He read the 1972 book "limits to Growth" that used fairly simple mathematical equations to predict that, absent large changes, we would face global collapse due to declining resources and increasing population and pollution by about 2050. Matthew Simmons looked at the predictions in the book and found that their equations were for the most part accurate predictors of conditions in 2000.
"Is there time to begin the thoughtful work which the Club of Rome hoped would take place post 1972? I would hope so. But, another 10 years of neglect to these profound issues will probably leave any satisfying solutions too late to make a difference. In hindsight, The Club of Rome turned out to be right. We simply wasted 30 important years by ignoring this work."
This whole blog is a very interesting bit of psychological data. Why in general do housing and stock market bears believe in the general thesis of finite everything (in a timescale that matters)? Is this to justify bearish market bets or is it some deep seated 'need' to hope everything breaks so that the distribution of wealth compresses to near zero and no one is ahead or behind including them. Fascinating captain.
From a pure technology standpoint there is absolutely nothing stopping the US from building a 1000 nuclear power plants in the middle of the country far away from population centers and basically converting all of our energy use to electric. The technology for this is available today and it is only because of varied interests that this is not done. At $100 oil, it is also an economic win. As for running out of fissionable material in the near future, it ain't going to happen. But of course the sun is going to turn off in about 6 billion years so I guess we should all just spend the time discussing how we are going to get roasted and then froze in the distant future.
I wonder what percentage of the armageddon posters here have kids.
I'd bet it is a lot lower then the general population.
This whole blog is a very interesting bit of psychological data. Why in general do housing and stock market bears believe in the general thesis of finite everything (in a timescale that matters)?
I doubt it's the majority of us...
I'd but the majority of us actually build things. People that build things generally can see the problems, but can also see there way around problems.
I've spent a decent amount of time on sites like the oil drum. Yes, we may be getting close to peak oil production in the current social and political landscape. But, they are definitely more social and political than geological at this point.
On the oil drum, you've got a lot of arm-chair engineers who trot out back-of-the-envelope calculations that always show every energy source has an EROEI of between zero and negative a billion.
If, by chance, they accidently find some energy source that has an EROEI of more than zero they start back loading every energy need that society has until the EROEI goes negative again "let's see, the energy requirements to gestate a human embryo for 9 months, carry the 10".
If the EROEI still comes up positive, they will do yet more calculations to demonstrate that only one thousandth of the listed reserves of oil, coal, uranium, etc are actually recoverable.
And if that doesn't work, they degenerate into discussions about the environmental cost or that it will be too expensive to produce.
This whole blog is a very interesting bit of psychological data
See that? whole
That's why you differ from this blog and the vast majority of readers here. People here have perspective, they can deal with the armaggeddon posts as required. For you they are everything.
I'm sure that you apply the same philosophy to markets.
"there is absolutely nothing stopping the US from building a 1000 nuclear power plants in the middle of the country far away from population centers and basically converting all of our energy use to electric."
Try 10,000 nuclear power plants not 1000. At ~$4 billion a piece, that comes out to $40 trillion dollars. There are ways to mitigate the problems associated with peak oil but none are easy or cheap, and at this point we don't have much money or time.
"To produce enough nuclear power to equal the power we currently get from fossil fuels, you would have to build 10,000 of the largest possible nuclear power plants. Thats a huge, probably nonviable initiative, and at that burn rate, our known reserves of uranium would last only for 10 or 20 years."
The United States is the world's largest supplier of commercial nuclear power. In 2005, there are 104 U.S. commercial nuclear generating units that are fully licensed to operate. Together, they provide about 20 percent of the Nation's electricity. Individuals not familiar with the nuclear industry may wish to consult the introductory feature for general information.
So, total cost of about ~1T. And, that assumes that we'd want to replace 100% of our existing power production with nukes. Pull down Hoover Dam? And that prices and time to build won't drop when you are building a 100+ plants.
1 watt hour = 3.41 btu
1 barrel oil 5800000 btu
1 ge abwr 1350 megawatts
us consumes 20 million barrel oil/day
20,000,000 * 5,800,000 = 116,000,000,000
1 watt day = 82btu
1,350,000,000 * 82 = 110,592,000,000
1000 abwr = 110,592,000,000,000 btu/day which is about what we consume in oil.
The US consumes about 20M barrels of oil per day. Let's assume that you wanted to convert that to the same amount of electricity.
So, 20M barrels of oil per day is around 1460GW of energy. That works out to about ~1000 more nuke plants to replace all the energy in the oil we consume per day.
And those numbers are garbage. I'm comparing a refined energy source (electricity) with a raw energy source (oil). Basically, those numbers assume that we burn up a huge amount of the electricity we generate to refine oil products which we would no longer have a use for.
It also assumes that we'd be so stupid as to replace 100% of our energy sources with nukes.
If we just converted electricity generation from coal to nukes we would free up 965 million tons of coal per year. Converting that coal to gasoline would yield 199M gallons of gasoline per day. That's about half our current gasoline consumption
Of course, nobody should argue with a number pulled off a random internet site. Maybe we'll get lucky and bird flu will wipe-out 50% of the worlds population!
Brewster:
"I'm sure that you apply the same philosophy to markets."
Even though my analysis and philosophy are vastly deficient I have been blessed with an inordinate amount of pure unadulterated luck. Its been working for nigh on twenty years. And as they say here Whocoodanone?
I find it interesting that Buffet sold derivatives that bet that the stock price in 10-15 years will be less than it is currently. There must be some people with $billions that think the US and foreign indexes are in for a great depression.
Alternatively, there could be some people with massive shorts on Berkshire Hathaway gambling on the stock market crashing in the near future and BH taking a huge hit on earnings marking the derivatives to market.
It seems too much a 8% annual asset appreciation, given an expectation of 5% nominal GDP growth during the next (3.0% real growth + 2.0 inflation). If that happens, I guess Karl Marx was right. Corporate (capital) profit will increase markedly relative to GDP. Labor wage will shrink and capitalism will colapse.... another way to put is that the 3% increase in the sotck market compared to GDP growth will increase the stock market value / GDP by roughly 15x (i think i did the math correctly).
Most of the cost of nuclear power isn't even in the fuel. Even with uranium going from $1 a pound to $100 the cost of fuel is only about 1% of the cost of running a nuclear plant. rc helicopter Tactical Flashlights video game
The Dow probably was higher that day Buffett wrote the letter and did the math.
At this rate, in 92 years, we'll be back somewhere around the 11th century.
eh, maybe Buffett did screw up the math. To reach 24m at 8% for 92 years, the would have to have been around 20,000.
CR,
You aren't reinvesting the dividends like some legends might.
Everytime I see one of those silly computations from the so called financial planning experts that use 8% to 10% average stock market gains routinely, it makes me feel very stupid. My wealth never seems to appreciate anything close to it! I wonder how much fees and taxes are sucking out...
WTF?....there will be no antiquated "DOW" thingy in 92 years.
Why? Most likely, we'll have a lot less people on earth in 2100. Economics and demographics go hand in hand, but not everyone realizes this until it's too late.
Buffet's comment seems rather strange. Why would the absolute level in 2100 indicate the ridiculousness of the claim? That's just what the math says, given that many years.
Better to argue that we can't expect 10% real returns based on long-term performance.
Looks like he used 98 years and Dow = 12600.
In 92 years the global economy, if such a thing still exists, will be fueled by dwindling supplies of wood and animal dung. And for the most part, the vast majority of any surviving humans will be living a 10th century life style.
Per a not yet released report, he and bill gates will be co-bunkering.
By 2100 I will need my 401K savings to pay to have my brain transferred to a robot. Hopefully a good-looking robot.
By 2100 the Nasdaq should be back to 5,000
Using average stock returns is like using patients' average temperature in a hospital, yet analysts love it.
I don't think the economy will be that much larger in 92 years.
New York City and Florida will be under water.
Wheat will cost $10,000 a pound.
3/4 of the country will be Hispanic.
And the Hispanics will not want to be laborers any more.
So, who will be doing actual productive work here?
I mean, besides the college professors and government workers.
Buffet's comment seems rather strange. Why would the absolute level in 2100 indicate the ridiculousness of the claim? That's just what the math says, given that many years.
Because stock market earnings can't grow faster than the worlds economy over the long term. Otherwise, the total profits of the public markets would be greater than worlds GDP at some point in the future.
And if long term valuations aren't related to earnings growth stocks are just a speculative vehicle.
I wonder when boomers are going to wake up and realize that 8% real returns "over the long haul" are fiction and a product of a one-time demographic dividend.
"New York City and Florida will be under water."
or under ice.
By 2100 my house will be back to it's 2006 value. I hope. Of course, MacDonald's will have the $1,000 Value Menu.
People talk as if having a lower economic output under today's measure is some sort of bad thing. It's not.
We could have happy, healthy, productive lives with 1/10th the crap we consume now.
Novice,
Fees are particuarly painful during periods of low or negative returns. For instance, a 1.5% fee is 15% of a a ten percent gain and 33% of a 4.5% gain.
Buffett failed to discuss his $33 Billion in Goodwill Accounting and unobservable Level 3 Assets! He may be fun to read, but IMHO, he is a crook!
Reading down further in his report, I loved the 'Bushwhacked' reference from Molly Ivins, "If his I.Q. was any lower, you would have to water him twice a day"...
We could have happy, healthy, productive lives with 1/10th the crap we consume now.
I agree.
3/4 of the country will be Hispanic.
And the Hispanics will not want to be laborers any more.
If Hispanics stop "wanting to be laborers" before they make 3/4 of the country, they will never grow to be 3/4 of the country. Reproduction rates fall when incomes rise, that's one of the few reliable trends.
I suppose you could try doing it the other way and see what the dow should have been in 1900.
Heh, ballparking it as 12000*0.92^100:
2.87
In fact it was about 50, indicating a return of about 5.5%... with no fees and I think it gets a bit of magic selection bias as things enter and exit the index, doesn't it?
No idea how valid that is, but I think it supports Buffet's point.
his math wrong is becuase he's a major player in the deriviaives market...
those guys always play fanatasy math.
I've heard Harvard and MIT give PHD's for proving 1+1=3
Because stock market earnings can't grow faster than the worlds economy over the long term. Otherwise, the total profits of the public markets would be greater than worlds GDP at some point in the future.
True, but profit margins can increase while revenues as a share of GDP are stagnant, and higher profits (rather than just revenues) lead to higher capital investment, increasing the growth rate.
Heck, maybe in a few years we'll be discovered by some good-natured extra-terrestrials. Then we can be the galaxy's cheap labor source and grow at 11% until the end of the century, provided we recycle incoming cash into planet-backed securities. But then, it's not just New York and Florida that could go underwater - so could be the Rockies!
This is interesting. Wonder who bought the puts against the indices, and what are the foreign indices?
Last year I told you that Berkshire had 62 derivative contracts that I manage. (We also have a few
left in the General Re runoff book.) Today, we have 94 of these, and they fall into two categories.
First, we have written 54 contracts that require us to make payments if certain bonds that are
included in various high-yield indices default. These contracts expire at various times from 2009 to 2013.
At yearend we had received $3.2 billion in premiums on these contracts; had paid $472 million in losses;
and in the worst case (though it is extremely unlikely to occur) could be required to pay an additional $4.7
billion.
We are certain to make many more payments. But I believe that on premium revenues alone,
these contracts will prove profitable, leaving aside what we can earn on the large sums we hold. Our
yearend liability for this exposure was recorded at $1.8 billion and is included in Derivative Contract
Liabilities on our balance sheet.
The second category of contracts involves various put options we have sold on four stock indices
(the S&P 500 plus three foreign indices). These puts had original terms of either 15 or 20 years and were
struck at the market. We have received premiums of $4.5 billion, and we recorded a liability at yearend of
$4.6 billion. The puts in these contracts are exercisable only at their expiration dates, which occur between
2019 and 2027, and Berkshire will then need to make a payment only if the index in question is quoted at a
level below that existing on the day that the put was written. Again, I believe these contracts, in aggregate,
will be profitable and that we will, in addition, receive substantial income from our investment of the
premiums we hold during the 15- or 20-year period.
"Heck, maybe in a few years we'll be discovered by some good-natured extra-terrestrials. Then we can be the galaxy's cheap labor source and grow at 11% until the end of the century, provided we recycle incoming cash into planet-backed securities."
"An alien race comes to earth, promising peace and sharing technology. A linguist and his team set out to translate the alien's language, using a book whose title they deduce is "To Serve Man". . . ."
Not much different from the current capitalists, really.
The actual number sounds huge, but much depends on the size of the economy - and that will be many many times larger in 92 years.
Unless we really do have to get per capital consumption in line with the planet's resources by then.
CR writes, "The actual number sounds huge, but much depends on the size of the economy - and that will be many many times larger in 92 years."
Absurd. The future of the US and the world depends on how gracefully we can redesign our cities and towns to survive in a world of limited energy.
Check out theoildrum.com ... they have some interesting graphs projecting energy supplies 100 years out. Oil and natural gas will be almost gone, and even coal will be in severe decline.
Take a look back about 100 years. That's the future. You don't have to be a doomer to understand that.. check out the books, 'Guns, Germs, Steel,' and 'Collapse' if you don't get it.
100 invested at 7 interest for 100 years will become 100000, at which time it will be worth absolutely nothing.
OT: CNBC douches literally congratulated Joe Lents (he of the $1.5 million mortgage in FCL with WAMU/DLJ and subject of recent Tanta blog) on his ability to screw the system. He got a Pop on their Pop/Drop segement.
Abe, NYC:
of course, Yellowstone could also explode before we get swamped.
Can't wait for his new book:
'Warren Buffett- Day Trader' (aka: 'How I'll get my damn 10%')
Goodwill and other intangibles............... 14,201
Total current assets................................. 12,831
Thus, our derivative positions will sometimes cause large swings in reported earnings, even
though Charlie and I might believe the intrinsic value of these positions has changed little. He and I will
not be bothered by these swings even though they could easily amount to $1 billion or more in a quarter
and we hope you wont be either.
Moody's said last month thy had $33 Billion in Goodwill?
Let's not forget the currently popular Rapture.
"New York City and Florida will be under water."
Per Case-Schiller, Florida is already underwater.
.
I recently received a note from Charles Schwab advising having 25x pre-retirement income saved upon retirement. I can imagine how this was calculated; someone figured if you want to sustain your present income in retirement, and might live for another 30 years, this is likely to suffice. But this is a ridiculously high target, and I think this kind of advice leads first to unrealistic expectations, potentially followed by unreasonable risk-taking, or simply giving up.
lly we can redesign our cities and towns to survive in a world of limited energy.
Yossarian | 02.29.08 - 5:55 p
The fact that you think energy is limited, thereby cornering yourself in the conservation realm of thinking shows your myopia.
There is plenty of available energy ready to be harvested, whether old (fossil fuels) or new technology. I suggest you build an earth ship in New Mexico. Tell us how it's working out for you 20 years. I know prices at the mean will be lower and my quality of life better.
The Malthusian Prophecy is just that...bullsh*t...
So, X,
Where's all of this cheap, abundant energy you allude to?
Fitch Affirms Berkshire Hathaway's Ratings; Outlook Revised to Stable
Friday, December 14, 2007; Posted: 02:17 PM
http://www.tradingmarkets.com/.site/news/Stock%20News/916087/
Fitch views BRK's use of financial leverage as moderate and the company's cash position and liquidity as extremely strong. At Sept. 30, 2007 the company's consolidated debt to total capital ratio was 22% including approximately 14 percentage points from debt issued by BRK subsidiaries that is not guaranteed by BRK.
The company's ratio of debt-to-capital excluding its $33 billion goodwill asset was moderately higher at 28%. However, Fitch believes that BRK's excellent acquisition track record largely offsets concerns about tangible capital quality. Fitch also notes that BRK had $39 billion of cash and equivalents at Sept. 30, 2007 and that the company's cash and equivalents averaged $36 billion between year-end 2002 and year-end 2006.
"Plenty," huh?
"Ready to be harvested," you say?
Sounds good! Are you currently selling stock in this enterprise?
those guys always play fanatasy math.
I've heard Harvard and MIT give PHD's for proving 1+1=3
this reminds me of my college days.
I remember when I proved that 1.99999(repeating) is EQUAL to 2. It seems like it's just a weeee bit less than two, but nope it's exactly equal to two.
(the math for you dorks)
x= 1.9999(repeating)
10x = 19.9999(repeating)
(SUBTRACT THEM)
10x = 19.9999(repeating)
x = 1.9999(repeating)
9x = 18
so
x = 2
(but from above, x = 1.999 repeating)
Ifn I had a pig that was a silk purse, thisd be it: The company's ratio of debt-to-capital excluding its $33 billion goodwill asset was moderately higher at 28%. However, Fitch believes that BRK's excellent acquisition track record largely offsets concerns about tangible capital quality.
How in the Sam Hill can this company have $33 billion in goodwill accounting and no one give a rats behind and on top of that, the goodwill numbers are growing and then people look away and focus on his sweet candy touting and con job! I hope when I get to be 90 that people let me off the hook for crimes like this!
Heck, maybe in a few years we'll be discovered by some good-natured extra-terrestrials. Then we can be the galaxy's cheap labor source and grow at 11% until the end of the century, provided we recycle incoming cash into planet-backed securities. But then, it's not just New York and Florida that could go underwater - so could be the Rockies!
Goobacks?
I, personally, have 6 trillion of good will held by my family and close friends. I'm going to leverage it on a pony farm.
wheat engineer:
are you the same as "anonymous" who posts all the time about Buffet's Goodwill accounting?
why are you on such a mission with it?
just curious. I have nothing for/against Buffet...
you're the only person who seems disturbed by this info
(not saying more or less people shouldn't be, just wondering how this bee got in your bonnet if you will... what's your interest in this?)
CR not a big fan of this guy huh?
Leonhard Euler - Wikipedia, the free encyclopedia
I get $19,217,274
We're getting closer!
If he wrote off goodwill he could not continue his great "book value increase" performance results that start out in every letter every year.
marcus:
i've already showed my math accumen.
Allow me to be your accountant. I figure I can't be any worse than the current crop, right?
I'll prove that your $6 Trillion is actually EQUAL (not slightly different, but truly EQUAL) to $100 Trillion worth of gold. And I'll even give you a AAA and a pony just for giggles.
rich, too funny! But haven't you heard the hispanics are moving to Canada. You know, NAFTA and all. With the good skiing and an a strong dollar (C$ not US peso).
What will the pony be equal to?
opps: 19,280,147
What will the pony be equal to?
Mortgage pig of course! (sans tail)
yearning to learn, WTF?
9x = 17.99999(repeating)
"I remember when I proved that 1.99999(repeating) is EQUAL to 2. It seems like it's just a weeee bit less than two, but nope it's exactly equal to two.
(the math for you dorks)
x= 1.9999(repeating)
10x = 19.9999(repeating)
(SUBTRACT THEM)
10x = 19.9999(repeating)
x = 1.9999(repeating)
9x = 18
so
x = 2"
I'll guess that one of four Buffett candidates for running investments is Mohnish Pabrai.
Jesus Christ, what is the deal with the anti-Buffett goodwill rants? Every company has goodwill! If you pay over book for any entity, you record goodwill - read FAS 142. How the hell is Buffett's a fraud?
Ridiculous statement.
year,
Yah, yah,
Go look at accounting related to goodwill and the abuse of this type of entry; as you may recall, in the dotcom burst, companies like Cisco had to eventually come to terms with the reality of allowing for too much goodwill and restate earnings. I just think warren gets away with murder for some unknown reason and his investment in ratings companys helps to substantiate this type of accounting -- which is very Enron-like IMHO! Very much the attitude that we see here: When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling replied "Well, thank you very much, we appreciate that . . . asshole." Though the comment was met with dismay and astonishment by press and public, it became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling's lack of tact.
Dow 24,000,000 <a href="http://www.quatloos.com/>quatloos!
Where's all of this cheap, abundant energy you allude to?
Start with about 250 years worth of coal. Of course, nobody's going to invest in it with looming carbon taxes. Coal can be turned into gasoline, btw.
Then there is natural gas, better C02 profile but the biggest problem is that the biggest supply is a long way away from the biggest demand. Lots of companies already building LNG terminals, etc.
Conventional nuclear has a lot of kick. The amount of fuel needed for a family for 30 years can fit in a shoe-box. Use breeder reactors and reprocessing and it would be the size of a pea.
Of course, the US doesn't reprocess because of proliferation.
France generates 80% of it's electricity from nuclear power and all the fuel it's used in the last 30-40 years fits in an area the size of two tennis courts.
Of course, try to get a nuclear plant built in the US in the last 30 years?
Beyond burning uranium (which can be isolated from seawater) new reactors can burn thorium (which is much more plentiful).
Geothermal is a possibility if you can drill deep enough with enough accuracy (and have enough water to not worry about leaks). Iceland is gambling its future on it.
Of course, none of these energy sources are sexy and generate the same consumer warm-fuzzies as energy from wind, tidal, solar, iPhones or butterfly burps has. But, even though consumers love the idea of "green" energy they don't want to pay for it at this point. I doubt they could afford it.
You might be interested in reading an interview with Warren Buffett from two weeks ago. He really is a great storyteller, and obviously a brilliant investor. Some interesting bits on moral hazard, taxation and the fed, but mostly just him telling his story.
Underground Value: Notes From Buffett Meeting 2/15/2008
In The Year 2100
In The Year 2100...
...
In a stunning reversal of course, Bill Ackman announces the purchase of MBIA calls with all of his excess capital. When asked why, Ackman answers: I had to do something that would grab even more attention.
1.9999999999
IN the year 2100, 24 million dollars = 800 bonars. What's wrong with 800 bonars, now?
So you think his investment in Moody's impacts Fitch and S&P exactly how?
Are all the other companies with goodwill on their balance sheet frauds as well?
If you don't like goodwill accounting, that is a valid position. Singling out Buffet is not.
Buffett's investments have historically worked out, completely justifying the price he paid for them. Under current accounting, that means goodwill is not impaired.
Smart investors also look through goodwill to tangible equity in evaluating companies. Without goodwill, however, companies have to record a loss every time they make an acquisition over book, for the most part.
will be profitable and that we will, in addition, receive substantial income from our investment of the
premiums we hold during the 15- or 20-year period.
MarkS
nice catch mark ,
now, do you suppose he has to MTM the current value of the contract, especially when the market is off 10%?
In The Year 2100
In The Year 2100...
...
Warren Buffett re-emerges on earth to take advantage of a 300bps spread between GSE MegaJumbo paper and WorldCurrenty(tm) treasuries. When asked to comment about GSE paper, Buffett responds: "we do not comment on speculation".
Let's not forget the old joke:
A man wakes up from suspended animation after 100 years. The first thing he does is call up his broker. "How much am I worth?" "600 million" comes the reply. "Woo-hoo, I'm rich!" he exclaims . "Please deposit 6 million for the next 3 minutes", the operator says.
Perhaps we can chuckle at the exaggerated premise of this joke, but there is some kernel of truth to it. No, not the inflation rate, the idea that pay phones will still exist in the future.
Ok,
One last point then Im done here.
In regard to commodities being pumped into the next speculative bubble which will result in hyper inflation and the destruction of global economies...
What if we end up with companies like BRK or CSCO using commodities like wheat as hedges to help them grow EPS, and thus what if they depend on speculation from these food-based commodities to maintain growth. These corporations could invest money into investments that would fuel hyper-inflation and cause food prices to rocket. Therefore, what if this is the case with oil, which is goosed to produce greater profit, greater volatility which fuels and feeds the mechanism of future growth, while increasing costs for the little guys not in the fun games?
What will it be like if wheat goes up 200% and soy beans go up 80% and oil goes up, just because commodities are being manipulated as the last chance hedge for corporations that can only grow by using synthetic derivatives?
It makes me fear the future to know this could happen and perhaps even within a few weeks, i.e, inflation could virtually explode like a housing bubble as too many people jump into commodities and force a bag of flour to $10 by the end of March, and then why not $20 by years end?
There is plenty of energy available; that's true (solar, geothermal, nuclear, etc.) It's the harvesting part that's the trick.
And that's also the reason serious market students question buffet's prowess when he get's involved in opaque sham transaction of dubious intent.
wallster,
Go find a company out there with $33 billion in goodwill, then we can chat!
In The Year 2100
In The Year 2100...
...
Jim Rogers predicts that the price of cotton will rise by another 500-fold. When asked about the underlying supply-demand imbalances, the former Soros sidekick says: "Now that the bow-tie wearing is punishable by the death penalty in China, I need to buy me 365 cotton ties - one for each day of the year."
"The actual number sounds huge, but much depends on the size of the economy - and that will be many many times larger in 92 years."
Let's see, we're obviously really good at accounting for the horrendous externalities of "growth" and "production." We're so good at this, that, heck, we now can even have people write books like "Gaia's Revenge" about planetary homeostasis gone haywire, and that is so banal!!!! Thank you Alfred Marshall!!!!!!!!!!!
yearning to learn, WTF?
9x = 17.99999(repeating)
No...
the key is the (repeating to infinity) part
If x = 1.99999(repeating to infinity)
multiply both sides by 10 and:
10x = 19.99999(repeating to infinity)
if you subtract the above (each side of the "equal sign"
you get
LEFT SIDE OF EQUAL SIGN
10x
- x
= 9x
and
RIGHT SIDE OF EQUAL SIGN
19.9999(repeating)
- 1.9999(repeating)
=18
(the .9's are repeating to infinity and thus they cancel each other out when you subrtact them)
thus you get
9x=18
(divide each side by 9)
x=2
but the first part of the equation was
x=1.9999(repeating)
and the end answer was
x=2
so
2=x=1.9999(repeating)
or
2=1.9999(repeating)
What's with the goodwill outrage?
When Buffett purchased Sees candies back in the 70's he paid 25 million for it and the purchase price over tangible assets was recorded as goodwill and written off gradually.
The current value of See's of course is much higher than any residual goodwill carried on the balance sheet. For recent acquisitions the goodwill will not have been written down yet and for some purchases the fair market value is probably much higher than the goodwill on the books and for some (Gen Re) it may be less than what is stated but on the whole it is probably if anything slightly understated not overstated.
So what is the problem?
CR,
He wrote about "during this century". I think his baseline is December 2000.
1.08 to the 100th power is 2199
His calculation would imply the DJ at around 10900, which looks about right from my 80 year chart.
CR
If he said 'this century' then he would have logically selected price on 1/3/2000, the first trading day of the century, on which the DOW closed at 11,357. In this case
1.08^100 x 11,357 = 24,982,688. Maybe he didn't want to exaggerate by rounding up...
wheat engineer, you have not addressed the question of whether you have previously been posting about Berkshire's goodwill as anonymous.
Please answer.
And FYI, for a business like Berkshire goodwill is expected. You're chasing ghosts.
Busy news day-AMBAC 10K just filed-
"In addition, Ambac is in the process of evaluating several options related to its capitalization which are focused on maintaining Ambac Assurance's triple-A financial strength rating from the major rating agencies. These options may include a plan to raise additional capital. In the event that we do not maintain our current ratings, we believe that we can execute a significantly reduced business plan to operate with double-A ratings that will include Structured finance, International and reinsurance across a variety of bond types. In that circumstance, we expect to accumulate capital and position ourselves to regain our triple-A ratings. Ambac will continue to work closely with the regulators and the rating agencies to design and implement a strategy to address the credit issues within its portfolio and to preserve and grow the business franchise."
The resource cannot be found.
"BOSTON/NEW YORK, Feb 29 (Reuters) - Several U.S. lenders have taken control of failing hedge fund Peloton Partners' assets, one day after the fund said it was liquidating a portfolio, a person familiar with the situation said on Friday."
UPDATE 1-Lenders seize failing hedge fund Peloton's assets
| Reuters
"NEW YORK (Reuters) - The number of companies at risk of being downgraded rose to a record 700 globally in February, seventy more than at the same time last year, Standard & Poor's said on Friday."
S&P says record 700 companies at risk of downgrade
"Nine large banks must provide detailed information on mortgage delinquencies and foreclosures every month to a federal regulator."
Business Week Online > File Not Found
and lastly, the let us carry all assets at "par" cry-
"The massive write-downs that financial firms are posting have begun to spur a backlash among some investors and executives, who are blaming accounting rules for exaggerating the losses and are seeking new, more forgiving ways to value investments."
Wave of Write-Offs Rattles Market - WSJ.com
I'm with wheat engineer, a lot of the current price of oil is due to speculative trading rather than fundamental supply and demand issues. Ask the Saudis if you want confirmation; they've been telling this to anyone who'll listen.
I can eat 1.99999(repeating) eggs.
risk capital,
Management always wants to blame the accountants when the financials look bad; on the other hand when the numbers are good it's due to management's "skill" and bonuses must be forthcoming.
Wheat/Anon....
Part 1.
If you buy a company for $1500, and its book value is $750, what happens to its balance sheet?
Cash decreases by ???
Assets increase by ???
Goodwill increases by ???
Three numbers, not a lot of theories.
Part 2. Extra Credit.
Why might a company be worth more then book value? How many companies in the Dow are selling for more then book value?
When Buffett purchased Sees candies back in the 70's he paid 25 million for it and the purchase price over tangible assets was recorded as goodwill and written off gradually.
The rules changed in 2001. Goodwill no longer needs to be amortized. If management feels that the asset is "impaired" it can writedown the value of goodwill it carries on the books:
The Effect of the New Goodwill Accounting Rules on Financial Statements
Of course, no CEO in his right mind is going to do that voluntarily. I remember hearing a story about one tech company that had an old computer running 24x7 with code that nobody used. It had to be kept running because it was the only bit of a long ago purchase and shutting in down would have required writing off the goodwill.
YamhillMan writes:
I'm with wheat engineer, a lot of the current price of oil is due to speculative trading rather than fundamental supply and demand issues. Ask the Saudis if you want confirmation; they've been telling this to anyone who'll listen.
YamhillMan
in the same vane, holding dollars is a speculative trade also, as it's value fluctuates daily in regards to it's purchasing power.
you can't really lament the OIL market, and not include all other consumable goods, especially when there ratios' against one another are maintained...
ie gold/oil
oil/oj
oj/wheat
my poor savings account writes:
People talk as if having a lower economic output under today's measure is some sort of bad thing. It's not.
We could have happy, healthy, productive lives with 1/10th the crap we consume now.
Hopefully by 2100 we'll be more interested in sustainability instead of growth.
kicker,
Everything you mention has an absolutely huge physical capital requirement, which would have to be executed on a societal scale - not impossible but expensive and disruptive - we aren't close to running out of energy, just the cheap energy.
And speculation in oil is bad because...?
At least oil, unlike housing, is just a commodity that no one needs so who cares if there is a bubble in the price of oil...
As for Buffett and his comments about annual 10% gains...
The SP500 was at about 1125 10 years ago and it is now at 1330. Hmmm - that makes about 20% in 10 years not 10% per year? What am I missing?
Paul,
He meant that you should not expect 10% return annually per year.
Wheat, its not the total goodwill you should be looking at but the ratio of goodwill to equity. There are plenty of companies out there with a goodwill/equity ratio greater than berkshires.
wheat engineer: "Go look at accounting related to goodwill and the abuse of this type of entry; as you may recall, in the dotcom burst, companies like Cisco had to eventually come to terms with the reality of allowing for too much goodwill and restate earnings."
I don't really follow Berkshire closely but I don't see much of an issue with your goodwill argument. First of all, $33billion, although nothing to ignore, is not that large for a company of Berkshire's size. Many companies have larger goodwill on their books eg. GE ($88 billion), Citigroup ($41b), etc.
Goodwill can be abused but it depends on what someone is doing with it. The problem with some tech companies during the dot-com boom was that they were buying other companies at inflated values. Furthermore, most of the value of tech firms come from intellectual property so they have large uncertainty over the value. I doubt too many people, let alone the thousands of Berkshire shareholders, think that Buffett has bought overpriced companies. If anything, Buffett buys things for dirt cheap.
Everything you mention has an absolutely huge physical capital requirement, which would have to be executed on a societal scale - not impossible but expensive and disruptive - we aren't close to running out of energy, just the cheap energy.
The technology's been around since the 50's. Some of the ideas the new reactors are based on are almost as old. Most of the capital we're talking about is mostly of the human kind. The amount of cement and rebar needed is pretty small in the scheme of things.
Most of the cost of nuclear power isn't even in the fuel. Even with uranium going from $1 a pound to $100 the cost of fuel is only about 1% of the cost of running a nuclear plant.
The cost of synthetic gasoline, nuclear energy, etc are going to be higher than energy prices of 2002/2003 but they are probably lower than what we are paying now. Coal liquification was profitable at $60 dollars a barrel last time I looked (not sure what it is now).
The problem is more one of national will. We no longer see ourselves as masters of the universe, bending nature to our will like we used to. The percentage of people who actually build things is so small that few of us actually believe that projects that large actually can be built.
There is also an apathy that I can't put my finger on. It's like American's believe that the solutions will just arrive with no effort or cost on anyones part.
Sigh...
"PANAMA CITY BEACH
Shores of Panama, a major resort condominium project on the gulf beachfront, has filed for protection under Chapter 11 of the federal bankruptcy code.
Occupying a 7-acre site at the corner of South Thomas Drive and Front Beach Road, Shores of Panama opened last September with 709 luxury condominium units in a curving, C-shaped structure that climbs 22 stories above ground. It also has a multi-story parking garage for its owners and guests."
404 Not Found : The News Herald
RISK CAPITAL:"...lastly, the let us carry all assets at "par" cry-
"The massive write-downs that financial firms are posting have begun to spur a backlash among some investors and executives, who are blaming accounting rules for exaggerating the losses and are seeking new, more forgiving ways to value investments." "
When it's all said and done, the mark-to-market requirement is going to be one of the worst things accountants have done this decade. Market prices are often irrational during stressful times and trying to pick a market price may be misleading. It exacerbates volatility and causes all sorts of misleading signals. Credit instruments held to maturity should not be marked to market yet the accounting profession seems to insist on it.
SV-
and assets priced at unrealistic premiums are rational?
Your argument is complete bullshit.
The cost of synthetic gasoline, nuclear energy, etc are going to be higher than energy prices of 2002/2003 but they are probably lower than what we are paying now.
Sorry, the number was closer to $30 dollars a barrel when I last looked. Sasol is a big producer of synthetic gasoline and there are more plants in China and Mongolia in the planning stages. Looks like Sasol is also planning a natural-gas to gasoline plant:
Sasol and the Liquid Coal Revolution -- Seeking Alpha
In terms of the crap we buy and sell to each other, it seems to me that technological improvements are becoming more and more trivial. How many all-in-one telephone/music/video/GPS devices do we need, anyway? We now have refrigerators with LCD TVs in the doors; is this what people were really dreaming of?
When you look at the software or webapps that it seems every young guy under 25 is working on, when you look past the flashy Web 2.0 promotional websites and breathless explanations of how "revolutionary" and "transformative" each new application is... eventually you realize that these products do very, very little that is new. It's all just TWEAKS. Tweaks with a lot of hyperbole attached. I realized this a couple years ago when I was looking for plugins for my blog software and realized that 90% of the stuff out there, didn't actually do anything terribly useful (except in the mind of its creator, some teenage hacker who thought it was the greatest thing since sliced bread...)
It seems to me that 90% of our consumer technology is mostly hype and rearrangements of existing pieces, perhaps with flashy new GUI's attached.
So, too, it seems, our booming economy has turned out to be.
Hype built on puffery. Innovation built on mere tweaks. Wealth built on nothing.
An illusion.
Too bad more financiers are not clones of Buffett. I suspect lots of his good sense comes from being born in Omaha, Nebraska and staying put. (PS I was also born in Nebraska but not in Omaha.)
wheat engineer writes:
"Go find a company out there with $33 billion in goodwill, then we can chat!"
I think you misunderstand understand goodwill accounting and Berkshire.
Buffett has bought a lot of companies over the years and they have tended to be highly profitable companies that are very efficiently run. These companies tend to have a high return on their tangible assets.
When Buffett pays a fair EBITDA multiple for the company his purchase price will likely be large relative to the tangible assets of the company he's buying. He's paying for the future profits, not necessarily the tangible assets.
Goodwill will grow as he acquires additional profitable & efficiently run businesses, and so will profits. Get used to it.
It seems to me that 90% of our consumer technology is mostly hype and rearrangements of existing pieces, perhaps with flashy new GUI's attached.
Welcome to middle age.
That "Internet" thing is just a bunch of over-hyped hoo-haa. Bunch of people sitting around hunched over a type-writer sending messages to each other over tubes. Nothing more than a letter but you need $2000 dollars in fancy equipment to send one. Back in the day I could buy a Caddy for the price they spend on those new-fangled type-writers. All for something that you can do with a paper, pencil and a couple of stamps
BTW, can you believe how much stamps continue to go up? Criminal!
Buffet will never lose money. He walks on water, he doesn't go under.
Focus on goodwill, intangible assets
http://www.pwc.com/pdf/my/eng/issues/intangibleassets.pdf
FRS 3 defines intangible assets as an identifiable
non-monetary asset without physical substance. In order for intangible assets to be identifiable, they must be separable from the business or must arise from contractual or other legal right.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset. Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Management is currently in the process of determining what effect the provisions of this Statement will have on the Companys financial position or results of operations.
Anon/wheat engineer:
You're right. Berkshire is a massive fraud. get out there and start shorting away!
You totally miss the point. It's not just reproduction that is making Hispanics the majority of our population.
It's the fact they are nuclear families. They stick together. And the more Hispanics that are here, the more prosperous they will be all over the world. Viva Western Union!
The Canadians are smart. They welcome Hispanic families with open arms. Because they need the laborers, diversity and economic growth they bring.
And they already have a single-payer health care system that can absorb more labor.
The Canadians are going to eat our lunch.
RISK CAPITAL: "SV-and assets priced at unrealistic premiums are rational?Your argument is complete bullshit."
For credit instruments that are held to maturity, marking to market doesn't make much sense. Are you telling me that AIG, which reported something like $11b mark-to-market loss is going to take that much loss?
You mean Carol Loomis' letter?
SV,
Where did you study accounting? Enron?
Cheers,
By the time the Bushwhackers get through with this economy, bond yields will be at 15 %. Thirty year treasuries in 1982 were at similiar levels.
When Bernanke, Greenspan, and accomplices figured out how to create the bubble econmy, the dollar was strong, there was an excess of borrowing capacity and a sombulent, zombie public.
The replay of the 2003 hail mary is backfiring so far. Each goofy drop in rates crashes the dollar, incites speculation, increases inflation, and increases loan costs. Duh.. I think we've hit an iceberg.
Measured in Ambac share price, SV paid the highest price for an accounting education of anyoneon this board . . . and he still gets a D-.
Misean : "SV,Where did you study accounting? Enron?"
I'm not an accountant. Only an accountant can possibly justify the current system. Certainly investors dn't benefit much. I may just be a working class guy but here is something from someone who knows what he is talking about (Martin Whitman--admittedly he is long monolines but I hope you value his thought more than his position):
"In analyzing each of the financial institutions, Generally
Accepted Accounting Principles (GAAP) tend to be
quite misleading. This is because GAAP require that
derivatives such as the Credit Default Swaps be marked
to market and market prices now are highly capricious,
to say the least.
Marks to market are the most appropriate, and helpful,
tool in the appraisal of publicly-traded common stocks
held in trading portfolios. Marks to market are an
inappropriate, and unhelpful, tool in the appraisal of
credit instruments held in portfolios where the intent is
to hold the credit instruments to maturity...
When I first trained as an
analyst some 50 plus years ago the primary role of GAAP
was to meet the needs of creditors who held credit
instruments to maturity. Thats all changed now. The
primary role of GAAP seems to have become to fulfill the
perceived needs of equity holders who are vitally affected
by day to day changes in common stock prices. As Ive
pointed out in previous letters What a waste! GAAP cant
really be very useful to stock market speculators, but it can
hurt issuers like MBIA and Radian. In any event, TAVF, as
a safe and cheap investor, will continue to place primary
weight on what the numbers mean rather than on what
the numbers are --Martin Whitman.
I've seen this sort of thing, but it was because the company capitalized an IT project that failed. The SOP was to keep the project name, when the budget was blown and the project was hopeless, reduce the scope to whatever existed, and keep the name. As long as part of it was being used, they could amortize it over a reasonable period.
I never saw any massive projects successfully completed. Not to say it never happened anywhere, but maybe 0 out of 10 on data warehouses.
Gary: "Measured in Ambac share price, SV paid the highest price for an accounting education of anyoneon this board . . . and he still gets a D-."
The game isn't over till it is. Didn't anyone tell you not to celebrate before the game is over?
Dissapointing so far but still haven't given up. I have some good players on my side (Whitman, Warburg Pincus, etc). We'll see who wins in the end...
"Years of supply" for condos in Miami. 9 years in some price ranges. Incredible.
Miami & Miami Beach Condo Trends – February 2008 » Miami Condos, real estate, Miami Condos Blog,Foreclosures, South Beach
"I'm not an accountant."
It's one thing not to be an accountant, it is another not to understand accounting.
BTW, I'm not in the game, I'm not betting on the game (not even against you, and that's easy money!) . . . I'm just watching.
Miracles (or highly improbable outcomes) do occur from time to time . . . but the writing is on the wall. You're f'ed.
For the mark to market fanatics, banks don't have to revalue their loan portfolio every time interest rates move (for loans not in their trading portfolio).
If you have deep, liquid markets, then marking to market makes sense. However, even fluctuations in common stocks are not considered in the income statement. Unrealized gains/losses show up in the balance sheet and as a reconciling item in other comprehensive income.
The worst feature of mark to market, in my opinion, is marking your own debt to market. If you have a lot of debt and it gets hammered, then you book it at market value which results in income and additional capital.
Basically, over time, the values converge. These are timing differences and they eventually unwind. God knows it's a complex subject and I'm not an accountant.
Short term, accounting matters a lot. Longer term, the economics of the business will determine its value, not accounting conventions.
BTW, can you believe how much stamps continue to go up? Criminal!
I thought everyone here bought a lifetime supply of the forever stamps as an inflation hedge.
Was it just me?
PS - I have some stamps I can sell you, cheaper than the Post Office charges.
Actually wallster, for an investor interested in the present value of future cash flows, just ignoring goodwill works. Call it a zero and deduct it from book value.
You only really need to add it back in if you are comparing return on equity and including goodwill reduces the ROE.
Berkshire had a much better year if you focus on return on tangible capital and change in tangible book value.
Goodwill is always suspicious except with someone like Buffett. There is a high probability that he'll receive a return on the goodwill.
All the Buffett chatter over the years has turned nauseating. Buffett's real investing coup was from '66 to '81.
I wonder how much fossil fuel is used to extract the materials and manufacture parts for wind machines?
I wonder how much fossil fuel is used in manufacturing solar panels?
I wonder how much fossil fuel is used mining nuclear materials?
Also, I have heard that there is only so much nuclear power we can reasonably generate because the materials are in such short supply. No doubt part of the reason that the price of uranium is shooting up.
Green technology is merely a way of rebranding fossil fuels to assuage peoples guilt.
I would love it if someone had a link to a site that had definitive numbers about how much energy goes into making green energy.
GARY: "Miracles (or highly improbable outcomes) do occur from time to time . . . but the writing is on the wall. You're f'ed."
The writing on the wall is sometimes wrong when it comes to capital markets...
It's not as obvious as you imply. I am probably screwed due to the imminent shareholder dilution. But even then, it's all very murky. All that has happened is that there have been massive mark-to-market losses. Yes, there have also been some real credit impairment in there but no one really knows what will happen in the future. No one knows how high the subprime mortgage losses will go; and no one really knows how CDOs will perform.
2=1.9999(repeating)
Yearning to learn + one more
O for goodness sake - what do they teach at undergrad and grad school nowadays ?
I was taught Cauchy sequences for real numbers
Real number - Wikipedia, the free encyclopedia
and
Integer - Wikipedia, the free encyclopedia
The two are two f**cking different things, damnit.
-K
Oops - regaining my humour quickly and if somebody wants to quibble about the two I mentioned above, I'm ready to discuss the twoness of things ! or even
the tooness.
-K
Wheat guy....
you have shown that you can cut and paste. you still haven't shown that you understand anything about goodwill.
There must be at least one instance where booking goodwill is justified, right? Find it and ask someone with an accounting background to explain it to you.
Then, once you understand why and how it is used, try to come up with a cogent argument that brk's goodwill is a problem.
Or go back and answer my question.
This really has more to do with bookkeeping. It has nothing to do with complex accrual issues. Forget fair value, etc. Just explain how you would account for a business purchased for more then book value. It's just arithmetic.
w: "...how much energy goes into making green energy."
I don't think the problem is the amount of fossil fuels required for the green energy. I'm sure it isn't a lot. I cannot see how the cost of fossil fuel inputs into creating a solar panel, for example, will be high. If you go and fill a large area in the middle of nowhere (say a desert) with solar panels, I'm sure the energy output will be higher than the fossil fuels required to create the panels. I think the ones that are net negative are things like ethanol (which really isn't considered a green energy in many circles)...
The problem with green energy has been their higher cost. Oil & natgas is cheaper. And coal is even cheaper...
Annual percent change in book value of 11% is over 14% if you include only tangible equity.
Sigh...
Kicker | 02.29.08 - 8:25 pm |
Kicker...
Amen !!! You should see the dumbfounded looks when you start talking what energy will work...God forbid you mention nukes and then reprocessing waste...OMG!!! Three Mile Island !!!! And yes there is enough thorium to last a long,long,long time...
Chris
SV, but that is the thing, everyone assumes that the energy use is low. Is it?
If a solar panel uses 1 unit of fossil fuel and returns 10 units over its life time then is it simply going to take a 1000 years to exhaust the supply of fossil fuels instead of 100?
Either way the sequestered fossil fuels are going to be used and released into the atmosphere. If global warming is the problem scientists believe it to be then green tchnology will not avoid it but simply delay it. What is the point of having green technology if 4 Billion people are going to be living at the standard of Americans? It is only an excuse to keep consuming and feel good about it.
Iceland took about fifteen years to approach energy independence. They should be there shortly, if indeed they are not already.
Oil won't disappear suddenly. We have some time to work out practical alternatives relative to peak oil. The difficulty lies in the carbon 'footprint' of hydrocarbon fuel burning, i.e., the ecological clock never stops ticking.
With Florida incentives, recently renewed, on-grid solar is perfectly competitive today. One of my old schoolmates, Peter Belmont, installed solar at his mid-town residence last Summer for a few thousand. His meter runs backwards, on average.
I haven't asked him about the ROI/payout but, in the press, he says he'll be ahead of the game before long and, with rising utility rates and fees, sooner than he expected.
I don't think you can do this in Seattle. Obviously, you can in some sunny climates.
I've got about 25 years until I can raid my 401(K) which is all in BRK, so I wish Warren very, very long life.
w,
I think your 1:10 fossil/solar estimate may be off by an order of magnitude. A typical residential array is designed to last fifteen years or more, turning out two to three thousand KWH.
And then, there's nothing to prevent using solar power to manufacture solar panels
.
for an econ blog, this is some of the worst math I have ever seen. Of course, that probably makes sense for an econ blog.
Don't any of you have a spreasheet or financial calculator? Are any of you investors?
Sheesh.
burnside, the 1:10 is the low side of median ratio thet I could find online. Who knows how accurate that was. I am assuming that people are discounting the energy cost of maintenance and replacement by going lower than median. As energy gets more difficult to extract it may also require more energy to get it. Conversely technology will improve for the solar.
None of this really matters as more people worldwide increase their consumption. Green energy will stretch the fossil fuels we have but there will not be a drop in production and usage, just more people using them.
So, I see no benefit except reducing peoples guilt.
burnside | 02.29.08 - 11:33 pm |
Not to sound like a ass but there is no way in hell your buddy installed a system for a few thousand. Ain't happening. Before the dollar collapsed panels were roughly 200 watts for 450-500.00. Currently they are north of 1k.
I just designed and priced a system for the parents. 110% power replacement.
80k dollars. Not 8k,80k. 60k for a bare bones system. No battery backup. Solar panels are currently not even close to being cost effective. The current electric bill? 180.00 month. Needless to say even with the tax incentives dad said fuck it...
If you don't believe me go to mrsolar.com and use the calculator they provide to size a system...
Chris
I think Warren Buffet makes a good point . We should ask ourselves is a Dow of 24 million or 14.6 million possible? What type of resource base will be required to support an economy like that?
Since I am not an economist, I find it hard to believe that we can base a system of infinite growth on a world of finite resources. As an example, If the Chinese drove as many cars, per capita, as Americans do, they would use all the oil the world currently produces plus 15 million extra barrels a day. everyday seems to bring us more evidence that we are approaching the limits of growth.
Sivaram Velauthapillai writes:
"I cannot see how the cost of fossil fuel inputs into creating a solar panel, for example, will be high."
I think W has a point. I also wonder how much energy it takes to manufacture a solar cells. After all, desert land is cheep, so if you think you could build a solar power plant that produces energy more cost effectively (that is without considering subsidies) then you can make a whole lot of profit AND be eco-friendly.
"Beware the glib helper who fills your head with fantasies while he fills his pockets with fees."
Quote of the Year!
No, Chris, you don't sound like one of those - and I always enjoy reading you. Think we're pretty much neighbors.
Peter has about $10,000 in his installation after rebates. Twelve 200-watt panels installed by Solar Direct in Bradenton, June of 07.
Neighborhoodtimes: More solar power to him - on roof
What he says may actually not be true, but I don't know why he'd have done it if there were no advantage?
Maybe by 2099 a unified field theory
will have been conclusively proven, and
with the DOW terminated at 5300 in 2060,
the last Man(darin), in a ruined world,
will have taken the koolaid, leaving
time and chemistry to write the
post-human future.
"everyday seems to bring us more evidence that we are approaching the limits of growth"
It is the logistics of cancer. Eventually the system takes it out or the system crashes. Logistic growth is inherently unsustainable in the long run.
Oops.. logistic = exponential in my second usage (was heading towards logarithmic in my head)
To find out the fossil fuel costs of alternative energy I would look for EROEI at theoildrum.com. This is an important point, as the energy input increases, the energy cost is going to increase dramatically. Here is one example I found.
The Oil Drum | EROEI Short #3: Price-Estimated EROEI
"We begin with a fundamental assumption (and one that is certainly problematic, but more on that later): the price of the solar PV system is a proxy for the totality of energy used in its production, in terms relative to the price of its productelectricity. Assume that a 2KW solar PV system installed on a residential roof in Phoenix, Arizona, costs $16,000 (grid intertie, no battery). [1] Assume that this system, in Phoenix, will generate 4,000 KW-hours per year. [2] At prevailing Phoenix-area electricity prices of $.10/KW-hour, this is the rough equivalent of $400/year. What is the present value of $400/year for the 40-year life-expectancy of the array? Accepting the Treasurys inflation adjusted rate of return, an annuity that will make 40 annual payments of $400 costs $8500 today. [3] That gives us an Price-Estimated EROEI of grid-intertie solar PV at 0.53."
I found this paper by Matthew Simmons very interesting. He read the 1972 book "limits to Growth" that used fairly simple mathematical equations to predict that, absent large changes, we would face global collapse due to declining resources and increasing population and pollution by about 2050. Matthew Simmons looked at the predictions in the book and found that their equations were for the most part accurate predictors of conditions in 2000.
Revisiting The Limits to Growth: Could The Club of Rome Have Been Correct, After All? (Part One) | Energy Bulletin
Matthew Simmons wrote this 8 years ago.
"Is there time to begin the thoughtful work which the Club of Rome hoped would take place post 1972? I would hope so. But, another 10 years of neglect to these profound issues will probably leave any satisfying solutions too late to make a difference. In hindsight, The Club of Rome turned out to be right. We simply wasted 30 important years by ignoring this work."
This whole blog is a very interesting bit of psychological data. Why in general do housing and stock market bears believe in the general thesis of finite everything (in a timescale that matters)? Is this to justify bearish market bets or is it some deep seated 'need' to hope everything breaks so that the distribution of wealth compresses to near zero and no one is ahead or behind including them. Fascinating captain.
From a pure technology standpoint there is absolutely nothing stopping the US from building a 1000 nuclear power plants in the middle of the country far away from population centers and basically converting all of our energy use to electric. The technology for this is available today and it is only because of varied interests that this is not done. At $100 oil, it is also an economic win. As for running out of fissionable material in the near future, it ain't going to happen. But of course the sun is going to turn off in about 6 billion years so I guess we should all just spend the time discussing how we are going to get roasted and then froze in the distant future.
I wonder what percentage of the armageddon posters here have kids.
I'd bet it is a lot lower then the general population.
David,
It's a negative fascination. Nihilism, really.
This whole blog is a very interesting bit of psychological data. Why in general do housing and stock market bears believe in the general thesis of finite everything (in a timescale that matters)?
I doubt it's the majority of us...
I'd but the majority of us actually build things. People that build things generally can see the problems, but can also see there way around problems.
I've spent a decent amount of time on sites like the oil drum. Yes, we may be getting close to peak oil production in the current social and political landscape. But, they are definitely more social and political than geological at this point.
On the oil drum, you've got a lot of arm-chair engineers who trot out back-of-the-envelope calculations that always show every energy source has an EROEI of between zero and negative a billion.
If, by chance, they accidently find some energy source that has an EROEI of more than zero they start back loading every energy need that society has until the EROEI goes negative again "let's see, the energy requirements to gestate a human embryo for 9 months, carry the 10".
If the EROEI still comes up positive, they will do yet more calculations to demonstrate that only one thousandth of the listed reserves of oil, coal, uranium, etc are actually recoverable.
And if that doesn't work, they degenerate into discussions about the environmental cost or that it will be too expensive to produce.
This whole blog is a very interesting bit of psychological data
See that? whole
That's why you differ from this blog and the vast majority of readers here. People here have perspective, they can deal with the armaggeddon posts as required. For you they are everything.
I'm sure that you apply the same philosophy to markets.
They looked down at Chicken Little
and had a good laugh, cut short
when they were crushed by the sky.
"there is absolutely nothing stopping the US from building a 1000 nuclear power plants in the middle of the country far away from population centers and basically converting all of our energy use to electric."
Try 10,000 nuclear power plants not 1000. At ~$4 billion a piece, that comes out to $40 trillion dollars. There are ways to mitigate the problems associated with peak oil but none are easy or cheap, and at this point we don't have much money or time.
"To produce enough nuclear power to equal the power we currently get from fossil fuels, you would have to build 10,000 of the largest possible nuclear power plants. Thats a huge, probably nonviable initiative, and at that burn rate, our known reserves of uranium would last only for 10 or 20 years."
The End of the Age of Oil | Energy Bulletin
The United States is the world's largest supplier of commercial nuclear power. In 2005, there are 104 U.S. commercial nuclear generating units that are fully licensed to operate. Together, they provide about 20 percent of the Nation's electricity. Individuals not familiar with the nuclear industry may wish to consult the introductory feature for general information.
U.S. Nuclear Generation of Electricity
So, to get 100% you'd need what? 400 more? Help me, I'm not so good with math.
Even in the most hostile political and regulatory environment we managed to build 100 of them but we can't build 400 more?
The cost is closer to 2.6B for a 1.4MW plant.
Uncertainties Slow Push for Nuclear Plants - washingtonpost.com
So, total cost of about ~1T. And, that assumes that we'd want to replace 100% of our existing power production with nukes. Pull down Hoover Dam? And that prices and time to build won't drop when you are building a 100+ plants.
That is just for electricity. Very little oil goes towards electricity, it is mostly used for transport and manufacturing.
You also need to factor in the costs of adjusting our infrastructure to have electric cars, etc.
1 watt hour = 3.41 btu
1 barrel oil 5800000 btu
1 ge abwr 1350 megawatts
us consumes 20 million barrel oil/day
20,000,000 * 5,800,000 = 116,000,000,000
1 watt day = 82btu
1,350,000,000 * 82 = 110,592,000,000
1000 abwr = 110,592,000,000,000 btu/day which is about what we consume in oil.
sorry left three zeros on the oil calc
should be 20,000,000 * 5,800,000 = 116,000,000,000,000.
The 1000 power plants is correct to this number.
Buffett probably made the calculation in October 2007, using round numbers.
DJIA = 14000
ln(14000) = 9.55
r = 0.08
r * 93 = 7.44
e^(9.55 + 7.44) = 23.9 *10^6. Call it 24 million.
The US consumes about 20M barrels of oil per day. Let's assume that you wanted to convert that to the same amount of electricity.
So, 20M barrels of oil per day is around 1460GW of energy. That works out to about ~1000 more nuke plants to replace all the energy in the oil we consume per day.
And those numbers are garbage. I'm comparing a refined energy source (electricity) with a raw energy source (oil). Basically, those numbers assume that we burn up a huge amount of the electricity we generate to refine oil products which we would no longer have a use for.
It also assumes that we'd be so stupid as to replace 100% of our energy sources with nukes.
If we just converted electricity generation from coal to nukes we would free up 965 million tons of coal per year. Converting that coal to gasoline would yield 199M gallons of gasoline per day. That's about half our current gasoline consumption
Of course, nobody should argue with a number pulled off a random internet site. Maybe we'll get lucky and bird flu will wipe-out 50% of the worlds population!
Brewster:
"I'm sure that you apply the same philosophy to markets."
Even though my analysis and philosophy are vastly deficient I have been blessed with an inordinate amount of pure unadulterated luck. Its been working for nigh on twenty years. And as they say here Whocoodanone?
I find it interesting that Buffet sold derivatives that bet that the stock price in 10-15 years will be less than it is currently. There must be some people with $billions that think the US and foreign indexes are in for a great depression.
Alternatively, there could be some people with massive shorts on Berkshire Hathaway gambling on the stock market crashing in the near future and BH taking a huge hit on earnings marking the derivatives to market.
Re: Why in general do housing and stock market bears believe in the general thesis of finite everything (in a timescale that matters)
Bears will always win, it is a fact!
It seems too much a 8% annual asset appreciation, given an expectation of 5% nominal GDP growth during the next (3.0% real growth + 2.0 inflation). If that happens, I guess Karl Marx was right. Corporate (capital) profit will increase markedly relative to GDP. Labor wage will shrink and capitalism will colapse.... another way to put is that the 3% increase in the sotck market compared to GDP growth will increase the stock market value / GDP by roughly 15x (i think i did the math correctly).
Most of the cost of nuclear power isn't even in the fuel. Even with uranium going from $1 a pound to $100 the cost of fuel is only about 1% of the cost of running a nuclear plant.
rc helicopter
Tactical Flashlights
video game