Buffett & Berkshire Earnings Likely Get Last Laugh On Derivatives (BRK-A)

Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) will get much of the attention after the big jobs report on Friday.  The insurance giant, holding company, and conglomerate reports earnings tomorrow after the close.  Just last week we noted how so many Buffett stocks, even many of his non-financial stocks, have effectively more than doubled since the market bounce in March.  But what is likely to be front and center, is that Buffett might get a chance to say “I told you so!” about his derivative bets.

We still believe that Buffett was talking down earnings from his economically sensitive holdings inside the Berkshire operational portfolio.  But his investments have recovered handily.  His call for a second stimulus is another tell that operations inside the units might not be where he wants them to be.  But another loss is not likely.  There are actually less than a handful of estimates, but the three we have seen are all expecting north of $1,000.00 in earnings per share.

He paid out close to $675 million on credit risk derivatives in the last quarter and another $450 million on credit default derivatives since then.  It also had roughly $3.3 billion set aside in reserves for future derivative losses tied to the same.  It is unclear if all of those credit derivatives have recovered, but things are likely looking far better than last quarter.

Berkshire’s big derivative bets tied to major stock indexes have also recovered handily if he had to mark to market. The four indexes he bet on were the the S&P, the FTSE 100 Index, Nikkei 225, and the Dow Jones Euro Stoxx 50 Index. Berkshire has to pay out against these bets starting in 2019 if those indexes are lower than where they were when he made the deals. But Buffett gets to invest that money and keep his profits on that from now until then.  He has also said the markets effectively have to go to zero for the full amount of those bets to be at risk.  Over the last quarter we saw huge index gains of roughly 15% in the S&P 500, over 20% in the Nikkei, right at 16% in the Dow Euro Stoxx, and about 8% in the FTSE.   As far as what to call for a market in 2019, let’s just say that we will probably have at least one more recession between now and then.

Berkshire Hathaway was close to $95,000 at the last report, and shares sit around $106,000.00 the day before earnings.

JON C. OGG
August 6, 2009