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Buffett's Berkshire Goes Bear

Written By Brian Hicks

Posted July 3, 2008


bear car


The Dow Jones Industrial Average isn’t the only one in bear market territory these days.

Even Berkshire Hathaway has fallen on hard times of late.

Here is the skinny on Berkshire’s fading fortunes.

From Bloomberg by Josh P. Hamilton entitled: Buffett’s Berkshire Has Worst First Half Since 1990

“It must be a bear market because even billionaire Warren Buffett’s Berkshire Hathaway Inc. has slumped almost 20 percent since December.

The decline exceeds the drop of the Standard & Poor’s 500 Index and marks the worst first half for the Omaha, Nebraska- based investment and holding company since 1990. Price competition has driven down revenue at Berkshire’s insurance units, which account for about half of its income.

Berkshire is “close to getting more fairly priced,” said Charles Hamilton, a Nashville, Tennessee-based analyst at FTN Midwest Securities Corp., who has a “neutral” rating on Berkshire. “I wouldn’t say it presents a buying opportunity right now.”

After reporting record 2007 earnings of $13.2 billion, the 77-year-old Buffett told shareholders in February that profit margins from insurance will drop.

“That party is over,” Buffett wrote in his annual letter to shareholders in February. “It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008.”

Berkshire also has been hurt by the declines of Wells Fargo & Co., American Express Co. and U.S. Bancorp, three of the company’s 10 biggest equity holdings at the end of March. Wells Fargo, Berkshire’s second-largest holding, dropped 18 percent in the second quarter, while American Express and U.S. Bancorp slipped 14 percent.

Buffett says the U.S. is mired in “stagflation,” a period of slowing economic growth and accelerating inflation.

“We’re right in the middle of it,” Buffett said in a June 25 interview. “I think the `flation’ part will heat up, and I think the `stag’ part will get worse.”

An economic recovery isn’t “going to be tomorrow, it’s not going to be next month, and may not even be next year,” he said.”

Buffett is right. The road ahead is going to be a bumpy one-especially for the financials.

After all, the banks can’t bottom until housing does and that could be a long time now.

But hey, at least they’re not General Motors. GM plunged yesterday to its lowest level since September 1954 on cash concerns.