Both Bloomberg and MarketWatch are reporting that Warren Buffett is sitting on a $40 billion war chest, and there is increasing speculation that the “Oracle of Omaha” may increase acquisitions through Berkshire Hathaway in light of the recent market conditions. Buffett has already taken advantage of the current climate through investments in:

• Auction-rate securities- Berkshire Hathaway built up a $4 billion position in auction-rate securities in February and March. Auction-rate debt carries yields similar to long-term debt but acts like short-term investments because investors can sell at weekly or monthly auctions, when rates reset.
• High-yield (junk) bonds- Berkshire bought junk bonds in 2002 during the depths of the dot-com bust, and made billions on the positions, according to MarketWatch.
• Derivatives- Berkshire Hathaway owns derivatives contracts that require it to pay up if certain junk bonds default. They expire from 2009 to 2013. According to the company’s latest annual report, the company collected $3.2 billion in premiums on these contracts last year and paid $472 million in losses.
• Bond insurance arm- Berkshire has started its own bond insurer, Berkshire Hathaway Assurance Corp., to participate in the lucrative municipal bond guaranty business.

Other notable investments as of late include $4.5 billion last month for a 60% stake in the Pritzker family’s Marmon Holdings Inc. Just this week, Buffett committed $6.5 billion to help finance chocolate giant Mars Inc.’s takeover of Wm. Wrigley Jr., the world’s biggest maker of chewing gum. Also included in the deal is $2.1 billion for a minority holding in Wrigley that Berkshire will get at an unspecified discount, according to Bloomberg.

Still, Buffett has been noticeably absent from the bailouts of struggling financial institutions in recent months, according to MarketWatch’s Alistair Barr yesterday. He added that the Omaha-based investor has also avoided the purchase of complex mortgage-related securities such as collateralized debt obligations (CDOs), which have been among the hardest hit investments during the credit crunch. Barr wrote:

For some Berkshire shareholders, that suggests Buffett may be waiting for markets to deteriorate further before making major acquisitions or investments.

“It’s very, very telling that he has not made any investments,” said Whitney Tilson, head of hedge fund firm T2 Partners LLC and a Berkshire investor. “Every major pool of capital in the world has made big investments in distressed financial institutions. He’s seeing every deal, so why hasn’t he done one? Maybe because he thinks things will get a lot worse.”

Barr added:

Indeed, Buffett told Fortune magazine in early April that the markets and the U.S. economy may be a long way from turning a corner.

“It seems everybody says it’ll be short and shallow, but it looks like it’s just the opposite,” he said.

In the meantime, Buffet will continue to look for bargain outfits, most notably in Europe, where he will be conducting a four-city tour starting May 19. Bloomberg’s Josh Hamilton wrote this morning:

Buffett has said in recent years that investments meeting his criteria and big enough to make a difference to Berkshire have become scarce, prompting him to look abroad. He said at last year’s annual meeting that he would welcome a $40 billion to $60 billion deal. Buffett also has said he expects the dollar to depreciate, making earnings in other currencies more important.

Photo by Ove Tøpfer, stock.xchng

Sources:

“Buffett gets a crisis to put Berkshire’s cash to work”
Alistair Barr
MartketWatch, May 1, 2008

“Buffett Plots Buying Spree as Crunch Diverts Bidders (Update1)”
Josh Hamilton
Bloomberg, May 2, 2008

Bloomberg’s Deborah Finestone did some research yesterday and found that Pacific Investment Management Co.’s Bill Gross increased holdings of mortgage debt in the world’s largest bond fund to the highest since 2000, while at the same time put on the biggest bet against government debt since at least the same year.

Finestone wrote yesterday:

The $125.1 billion Pimco Total Return Fund had 59 percent of assets in mortgage debt in March, up from 52 percent the prior month and 23 percent in March 2007, according to data on the Newport Beach, California-based firm’s Web site. The fund’s cash position dropped to 32 percent, the lowest since July 2006, from 34 percent in February…

The fund also increased derivative positions that make it short in Treasuries, meaning it will profit from declines in the securities. It held negative 18 percent of assets in government debt in March, the most bearish stance since at least June 2000, according to data compiled by Bloomberg News.

PIMCO, which is a unit of Munich-based insurer Allianz SE, manages $746.3 billion. The Total Return Fund, which through Wednesday had earned 4.03 percent this year, has outperformed all competitors in the intermediate bond fund category, according to Chicago-based research firm Morningstar.

Source:

“Pimco’s Gross Holds Most Mortgage Debt Since 2000 (Update1)”
Deborah Finestone
Bloomberg, April 10, 2008

This afternoon, Barron’s made the article “What Buffet’s Been Buying” available for free viewing on its website. According to Barron’s Andrew Bary:

For someone who has been publicly lukewarm on the equity market, Warren Buffett has been buying a lot of stocks for Berkshire Hathaway.

In 2006, Berkshire Hathaway bought $9.2 billion worth of stocks. In 2007, the value of stocks purchased more than doubled to $19.1 billion. Their equity portfolio grew to $75 billion last year, up from $61.5 billion in 2006 and $37 billion as recently as 2004. Today, the company’s largest holdings are Coca-Cola ($11.9 billion), Wells Fargo ($8.5 billion), Procter & Gamble ($6.8 billion), and American Express ($6.4 billion).

In 2007 Berkshire Hathaway acquired stock in Burlington Northern Santa Fe, Kraft Foods, Wells Fargo, and Johnson & Johnson, according to their last annual report. Bary noted that they also added to an “intriguing” equity-derivative holding that amounts to a $4.5 billion bet that equity markets will not decline over the next 11 to 19 years. Furthermore, Berkshire has taken in $3.2 billion by wagering that a group of high-yield bonds does not default. He wrote:

Memo to Buffett watchers: The Great One seems increasingly bullish about depressed junk bonds. Berkshire’s corporate-debt holdings increased last year to $9.5 billion from $6.9 billion, which could reflect added junk holdings. Buffett, Berkshire’s 77-year-old CEO, doesn’t get much credit for his credit acumen, but he’s one of the sharpest investors in junk debt.

And what will Warren Buffett and Berkshire Hathway do in 2008? Bary predicted:

With the S&P 500 down 11% this year, it’s a good bet that he’s been buying more stocks.

Barron’s estimated that Berkshire’s equity portfolio is down more than 6% for 2008. They also believe the portfolio may have gained about 2% in 2007.

Seeing that Wall Street’s big financial firms have raised significant amounts of capital in the last few months, why hasn’t Buffett entered the fray? Bary wrote:

Interestingly, Berkshire hasn’t helped shore up financial giants such as Citigroup (C) and Merrill Lynch (MER), which collectively have raised more than $100 billion in new capital since the fall to offset losses. Buffett isn’t a big fan of Wall Street, owing in part to his experience helping to rescue Salomon Brothers after its government-bond scandal in the early 1990s. He is uncomfortable with large, highly leveraged and seemingly incomprehensible balance sheets, common at all the major Wall Street firms.

According to Bary, the bottom line for Buffett’s Berkshire Hathaway in 2008 is:

Berkshire’s earnings could be down this year because of a tougher insurance market. But its investment portfolio is likely to grow as Buffet buys beaten-up junk bonds and stocks.

Source:

“What Buffett’s Been Buying”
Andrew Bary
Barron’s, March 10, 2008