Wednesday, November 19, 2008 2 comments ++[ CLICK TO COMMENT ]++

Sign of a recession is here: Berkshire Hathaway stock crashes

Berkshire Hathaway shares have a habit of collapsing during recessions and stock market crashes. Well, it looks like Berkshire Hathaway shares are ringing in the recession:



Nearly all the insurers are getting hit hard this week so it's not a Berkshire-specific sell-off. However, some, such as Felix Salmon, suggest that the market is getting concerned with the possibility of Berkshire Hathaway losing its AAA rating. Felix is one of the best bloggers--too bad Portfolio is targeting a market that probably wouldn't buy magazines: high-end and oriented towards executives/wealthy--and makes some good points. But I doubt that Buffett and Munger would have written derivatives contracts that require collateral to be posted in the manner of AIG (or Ambac, MBIA, et al in their investment portfolios.) I am also not sure if Berkshire depends on AAA as much as someone like G.E. (except for their start-up monoline.)

In any case, Berkshire stock does poorly during recessions and market corrections as you can see below in the log graph:



Historically buying on the sell-offs have worked well. What is different this time is that Buffett and Munger may not be around in 10 years so the question of how Berkshire will be run in their absence takes on more prominence. I have never been bullish on Berkshire (this is just in the last 5 to 10 years; ever since I started following the markets) because it always trades at higher multiples than other insurance companies. It's more diversified than a typical insurance company so maybe it deserves a slight premium on that front. However, it is also somewhat like a closed-end fund and my understanding is that closed-end funds should trade at a discount due to their opaqueness. Clearly Berkshire trades at a premium because of Buffett but I don't invest based on individuals.

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2 Response to Sign of a recession is here: Berkshire Hathaway stock crashes

contrariandutch
November 19, 2008 at 5:39 PM

Ambac does it again, with the stock dead, it's ratings cut to zip and people crowing about it's imminet bankruptcy it converts a chunk of CDO2 wrecks...

Anonymous
November 23, 2008 at 6:54 PM

Berkshire may have to post some collateral if it is downgraded (I believe what the market is worried about is how much and what kind of a downgrade triggers it). From the latest 10-Q:

Under certain circumstances, including a downgrade of its credit rating below specified levels, Berkshire may be
required to post collateral against derivative contract liabilities. However, Berkshire is not required to post collateral with
respect to most of its credit default and equity index put option contracts and at September 30, 2008 and December 31,
2007, Berkshire had posted no collateral with counterparties as security on these contracts.

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