Everyone also knows that some of the key culprits behind this financial mess were the credit-rating firms like Standard & Poor’s and Moody’s Investors Service, which assigned top-tier “AAA” ratings to investments that were actually backed by subprime mortgages and other toxic debt.

Whether it was collusion or incompetence almost didn’t matter: The firms claimed that the credit ratings they issued were constitutionally protected free speech. With this First Amendment shield, S&P, Moody’s and others said they were protected from lawsuits or other liabilities.

But that’s about to change.

A federal court judge in New York last week stripped the ratings firms of that defense, a decision that could expose the companies to billions of dollars worth of liabilities from investors who were burned by the faulty ratings.

Let’s legal case involved three specific firms – two firms that rated collateralized debt securities, and an investment bank that sold the debt. Those three companies were:

• Standard & Poor’s, which is owned by The McGraw-Hill Cos. Inc. (NYSE: MHP).
• The Moody’s Investor’s Service unit of Moody’s Corp. (NYSE:MCO), which is 19% owned by Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B).
• And Morgan Stanley (NYSE: MS).

This particular case had been brought against Moody’s and S&P by Abu Dhabi Commercial Bank PJSC and Washington State’s King County. The case involved losses suffered from an investment in a structured investment vehicle (SIV) called Cheyne Finance. Although the debt securities Cheyne issued were backed in part by subprime mortgages, they received ratings as high as “AAA.”

In return for the high rating, the companies received higher-than-normal fees.

The $5.86 billion Cheyne Finance SIV went bankrupt in August 2007. The plaintiffs claimed fraud. The suit is seeking class-action status on behalf of investors who were burned when Cheyne was forced to dump securities it had issued between October 2004 and October 2007.

Since lawyers for the plaintiffs say the ruling could be applied to any deal involving SIVs, it could have a substantive impact. Before the financial crisis caused the value of these asset pools to plummet, experts estimate there were $350 billion to $400 billion worth of SIVs in existence.

“There certainly will be other cases filed – that’s the future impact of this decision,” San Diego attorney Patrick Daniels told The Wall Street Journal.

Moody’s and S&P had sought a dismissal, citing their First Amendment protections. But U.S. District Court Judge Shira Scheindlin ruled on Sept. 2 that securities ratings that were distributed to a small group of investors don’t warrant the same First Amendment protections that are afforded to the widely circulated ratings of corporate bonds.

Judge Scheindlin acknowledged that ratings constituting “matters of public concern” are typically protected from liability. That’s especially true when the ratings are distributed to the general public. But it wasn’t the case here.

“Where a ratings agency has disseminated their ratings to a select group of investors rather than to the public at large, the ratings agency is not afforded the same protection,” Judge Scheindlin ruled.

The ruling will likely be appealed. And it could end up in front of the U.S. Supreme Court.

The case spotlights the biggest problem with the business of rating securities: The ratings firms are paid by the issuers to rate them.

When you get right down to it, ratings firms are in business not to rate but to make money for themselves by rating issuers and their securities. The surprise isn’t that the obvious lack of objectivity fostered abuses in the credit-rating process – it’s that the problem took so long to come to a head. The complexity of mortgage-backed securities (MBS),collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs) only exacerbated the investor risk.

The decision received widespread media attention. But it’s only half the story.

And the media missed the other half.

In an ironic twist that transforms the credit-rating firms into legal sacrificial lambs, the U.S. Securities and Exchange Commission (SEC) has in recent weeks acknowledged its own failure to protect the public from the same ratings firms that the federal agency mandates that investors rely upon.

This admission – combined with the legal assault on the constitutional protections ratings firms are used to hiding behind – could threaten the ratings firms’ very existence. It not only will further fuel investor ire, it could also provide litigants with additional needed legal ammunition. The ratings involve tens of billions – if not hundreds of billions – of dollars of failed securities.

A series of internal reviews by the SEC – one reaching back to last year – has highlighted some of the abuses.

About a year ago – in July 2008, to be exact – the SEC concluded a 10-month examination of the ratings industry that uncovered “poor disclosure practices and procedures guiding the analysis of mortgage-related debt and insufficient attention paid to managing conflicts of interest.”

According to the report, there was an obvious degree of knowledge and complicity in playing the ratings game.

E-mail exchanges between analysts at “unnamed” ratings firms back this up. In one, an analyst said the firm’s ratings model didn’t capture “half” of the deal’s risk, but said that the security “could be structured by cows and we would rate it.” In a Dec. 15, 2006 missive, a manager wrote that the ratings industry was creating “[an] even bigger monster – the CDO market.”

Confided the manager: “Let’s hope we are all wealthy and retired by the time this house of cards falters.”

In July of this year, in testimony to Congress, SEC Chairwoman Mary Shapiro said she supported proposals to impose liability standards that would make it easier for investors to sue credit ratings firms. That’s a bit ironic given that the SEC is charged with supervising the ratings firms.

According to the internal investigation conducted by the Office of Inspector General, the SEC failed to exercise its duties as the nation’s watchdog of the same credit ratings firms that many large investors are forced to trust.

By law, certain investors must rely on the ratings of a handful of companies, known as  “Nationally Recognized Statistical Rating Organizations,” or NRSROs. In many cases, the NRSROs determine what are “eligible” or “appropriate” investments. And it’s the SEC that determines who is, or who can be, an NRSRO.

For instance, most state insurance regulators say that insurance companies can only invest in assets that carry one of the top four credit ratings. And it’s the NRSROs that certify those ratings.

Similarly, money-market funds can only invest in the highest NRSRO-rated securities.

Countless institutions – public and private, domestic and international – rely on rules that determine what assets are acceptable investments. And that acceptability is determined by financial due diligence and the resulting credit ratings – as determined by SEC-certified rating agencies.

It’s not clear that any of this is really protecting investors, according to a Feb. 15, 2008 “Review & Outlook” piece in The Journal. Drexel University Finance Prof. Joseph Mason took a look at CDOs that were “Baa” (an investment grade rating) by Moody’s. His finding: They were 10 times more likely to default than equivalently rated corporate bonds.

In that same article, an S&P spokesperson was asked if they actually examined the mortgage debt that made up the investment pools that make up a CDO.

The spokesperson’s answer was not confidence-inspiring: “We are not auditors; we are not accounting firms.”

Source: The Credit Rating Firms Are Running Scared – It’s About Time

Here are listed sales in the filing, courtesy of 24/7WallStreet.com:

· 7/20/09… 1,817,000 at $28.7269 average in open market sale.

· 7/21/09… 3,915,100 at $26.9188 average in open market sale.

· 7/22/09… 2,254,200 at $26.6425 average in open market sale.

What took Buffett so long to start selling Moody’s? We have no idea. Moody’s runs one of the biggest scams on Wall Street. It charges the companies whose securities it rates (just like Standard & Poor’s and Fitch also do).

So what do you think these ratings agencies did when presented with a whole load of junk mortgage-backed securities to rate? They assigned them investment grade status and pocketed the cash.

If these ratings agencies had instead acted honestly and responsibly (rather than pimping themselves out to the highest bidder) the whole subprime debacle and the ensuing credit crisis could have been avoided.

Buffett isn’t the only investment whizz who thinks Moody’s is heading for trouble. Hedge-fund legend David Einhorn of Greenlight Capital is selling Moody’s short.

Yesterday, Moody’s shares tumbled almost 4% on the news that the Buffett had began to unwind his position in the company. We’d like to see Moody’s go out of business. But that’s maybe wishful thinking. Make sure you don’t own any shares in Moody’s. And if you’re feeling speculative, consider going short Moody’s along with Einhorn.

One of the easiest ways of deciding what stocks you should own is by “standing on the shoulders of giants.” We’re no geniuses here at Notes. But at least we are smart enough to recognize it. And that’s why we track what people far smarter than us are doing with their money.

As of the end of the first quarter this year, this is how Warren Buffett’s holdings (via Berkshire Hathaway, his investment vehicle) looked like:

1. American Express Co. (NYSE:AXP) over 151.6 million shares, same as before.

2. Bank of America Corp. (NYSE:BAC) 5 million shares; same as last quarter.

3. Burlington Northern Santa Fe (NYSE:BNI) 76.77 million shares; HIGHER than 70.089 million shares of last quarter.

4. Carmax Inc. (NYSE:KMX) 12 million shares; LOWER than the 17.63 million and that is two straight quarters of declines.

5. Coca Cola (NYSE:KO) right at 200 million shares, still same as before.

6. Comcast (NASDAQ:CMCSA) 12 million shares, same as before.

7. Comdisco Holdings (NASDAQ:CDCO) roughly 1.5 million shares, same as before.

8. ConocoPhillips (NYSE:COP) is really lower than the 71.228 million shares reported as this has been used for cutting taxes, and we already know that the number is lower than what the filing says.

9. Constellation Energy Group (NYSE:CEG) was just updated this week so the number is actually about 12.4 million rather than what the filing shows as being 14.828 million shares.

10. Costco Wholesale (NASDAQ:COST) 5.254 million shares, same as before.

11. Eaton Corp. (NYSE:ETN) 3.2 million shares; looks like new holding but may have been missed before.

There’s a lot of talk these days about how Buffett has lost his touch. This may be so. But the guy remains the world’s most successful investor. If you have a medium- to long-term investment horizon, you could do a lot worse than consider following Buffett into some of these long positions. If you think you can outsmart the guy, go ahead. But we know who our money would be with…

Arriba! Cinco de Mayo heralds big news for the S&P 500 this morning:

After a manic 36% bounce from its March lows, the S&P 500 has turned positive for the year. It’s now sitting on a whopping 0.4% gain, thank you very much.

But before you down the Cuervo Gold and shimmy onto the parquet for a hat dance… consider this:
The resurgence in S&P 500 is being driven by only three sectors: Consumer discretionary, materials and tech. See for yourself.

It’s hard to believe in “bull market” when two-thirds of the players are in the red.

We’re taking a closer look at tech, but for the time being — as if you need another reason to turn off CNBC — health care, utilities and consumer staples, the classic refuges for mainstream money managers, aren’t such good choices during this sucker’s rally.
“Buffett thinks his utilities and insurance businesses will do ‘quite well’ despite the recession,” says Chris Mayer, recapping Berkshire Hathaway’s annual shareholder meeting.

“Berkshire has its fingers in many different businesses, so Buffett has an eye into many parts of the economy. Buffett was mostly gloomy. Aside from utilities and insurance, he saw weakness in service and manufacturing and his other lines.

“Also interesting was a comment that he was looking more in the U.S. now than overseas. Last year, Buffett seemed to be devoting more energy abroad — I recall a trip to Germany, for instance. Now Buffett seems to find the U.S. situation more interesting.

“One other note: Buffett may not see much in manufacturing, but I’d say it is a wide spectrum. In Capital & Crisis, for instance, we own a few manufacturers in key areas of water, infrastructure and energy. They’ve turned in great results. But Buffett doesn’t see these, as they are too small for his radar screen. Too bad for him. Big advantage for us.”

In fact, Chris booked a 117% gain on just such a stock yesterday, in less than five months. Special Situations readers could have taken another 30% yesterday too, if they were following Chris’ advice. How did you do? If you’re not privy, become so here.
Stocks soared again yesterday, thanks mostly to another batch of “less awful” data. Traders started to rush in after construction spending and pending home sales data hit the tape at 10 o’clock. Both were way better than expected: Construction spending rose 0.3%, after a 1% drop in February, and pending home sales rose for the second straight month.

Of course, historically speaking, both measures are still in the dumps. But better to buy first and ask questions later… major indexes jumped 2.5-3%.
Markets are more timid today. The Dow is down about 20 points as we write — we suspect profit taking. And…
“Right now, the credit markets are broadcasting the following warning,” says Dan Amoss. “The equity of overleveraged REITs is at risk of elimination or permanent impairment. Yet the stocks of real estate investment trusts (REITs), which are popular among income-oriented retail investors, are still trading at high enough levels that discount a ‘garden-variety’ recession in commercial real estate.

“REITs were designed to invest in portfolios of rental properties, and generally pay no corporate income taxes if they distribute at least 90% of their profits as dividends to their shareholders.

“REITs thrive in an environment of steadily rising property values and rents. But in this ice age for commercial real estate, the REIT business model will cease to function properly; a REIT’s tax-free status doesn’t allow it to retain much excess capital during lean times. Since REITs pay out all their earnings, they cannot grow without taking on more debt. During the boom, a REIT strategy encompassing growth, leverage, and acquisitions was a virtuous cycle that led to juicy dividends and soaring stocks; in this bust, it’s morphed into a vicious cycle of dividend cuts, dilutive equity offerings, debt offerings at double-digit interest rates and bankruptcies.

“The REITs that levered up and grew too fast at the peak will go to zero in bankruptcy. Others could fall into the low single digits by year-end as the market anticipates that creditors will take title to many properties in 2009 and 2010. These developments would push the value of the REIT Index dramatically lower.”

Following that logic, Dan just handed his Strategic Short Report readers a short-REIT play with “200% profit potential.” Thanks to yesterday’s rally, it looks a whole lot juicier today… details here.
“I don’t know what in all honesty,” White House Press Secretary Robert Gibbs “government can do about it,” highlighting another industry ripe for short selling: flailing newspapers.

Of course, Gibbs assured us President Obama “believes there has to be a strong free press,” but it seems that any hope of a GM-sized bailout check from Uncle Sam was informally squashed yesterday. Alas, papers like The New York Times and McClatchy have borrowed just enough money to go out of business, but not enough to pose the all-so-critical “systemic risk” to the U.S. economy.

Only magnificent failure is rewarded in I.O.U.S.A.
Ten of the 19 banks undergoing government stress tests are going to have to raise capital… that’s the word from The Wall Street Journal this morning. Wells Fargo has now joined Citi and Bank of America on the unnofficial list of banks rumored to have been naughty.

No one will really know for sure until Thursday, when the government has promised to release results. But seriously, who’s cereberally challenged enough to believe this charade anyway?
The mighty greenback is looking knock-kneed and feeble as stocks soar. The dollar index dropped a full point, to 83.8, during yesterday’s rally. That’s a one-month low and nearly 6 points off its credit crisis high.

The dollar swing has given the euro a 2 cent shot in the arm, too. It’s up to $1.34 as we write. The pound followed suit, rising from $1.48 to $1.51 in less than 24 hours. Only the yen held pretty steady… around 98.
Gold likes it when the dollar sucks air. The spot price climbed $15 yesterday and another $10 this morning, bringing the current price up around $915 and ounce. Work it.
Oil has also been enjoying the stock rally, too. The light sweet stuff edged up higher again yesterday, this time to a 2009 high of $54.47 a barrel.
Quietly, gas has been inching back up to levels of concern. The national average price for a gallon of the cheap stuff is now solidly above two bucks… $2.07, to be exact.

Although compared to the average price this time last year — $3.61 — who’s complaining?
A bankruptcy judge OKed Chrysler’s request to tap a $4.5 billion government loan yesterday, even though holders of their senior secured debt have yet to be repaid.

Investors and funds are filing motions left and right to stop the transfer of any assets to Chrysler… at least until the company ponies up $6.9 billion in assets to cover their debt obligations.

We doubt those “evil Wall Streeters” will get their way, but… oy… this thing is already a mess.

“The gurus in Washington say that the Chrysler bankruptcy is prepackaged,” writes Byron King. “And it’s going to be fast and easy. Yeah, right. Beware hubris. Like the previous administration thought that the Iraq war was going to be fast and easy.

“I used to practice bankruptcy law. Is there a courtroom anywhere in this land that’s big enough to hold all the players in a Chrysler bankruptcy? It’s the first ‘big’ automobile bankruptcy in the U.S. since Studebaker in 1933. There’s no recipe book for doing this.

“The judge in the case might just have to book Madison Square Garden to have enough space for all the participants. And everyone is entitled to their day in court. Considering the tens of billions of dollars in play, I expect we’ll see many days in court, up to and including the U.S. Supreme Court. That should take only a few years.”

But at least you’ll be able to drive one of these afterward:

The Fiat 500: Not Currently Available Near You

“After researching, over the past 10 years, the different venues of alt energy,” writes a reader, “I have invested what I can in geothermal. There is no other source that runs 24/7, has zero ecology damage and zero carbon footprint, is available virtually under every rock and is economically less expensive than any other source. We don’t have to wait for the sun, wind or enough uranium to be mined. Oh! We don’t have to figure out how to bury the byproduct in somebody else’s backyard (NISEBY).

“It is such a no-brainer that considering any other way must mean that there are serious politics involved. Maybe the wrong people will make the money. The difference in costs could go to solving the problems raised in I.O.U.S.A. Do you suppose that Big Oil would find it a problem if the grid were run on geo? It can be done.”

The 5: We suppose they’d be annoyed, but as an investor, why choose one or the other? Byron’s Energy & Scarcity Investor has strong plays in both oil and geothermal… check it out, here.
“So what if Byron King is right,” writes a reader, “that China now controls the ‘rare earth metals’ that are integral to the manufacture of guided ballistic missiles (and all the other knickknacks that we don’t really need — and some we probably do).

“I’d rather have the Chinese control them than the delusional, slobbering cowboys in our military. Maybe they’ll do something with these metals other than design weapons whose purpose is the wholesale slaughter of human beings. Besides, what are they going to do with them? Eat them? Of course not. They’ll sell them on the world market at market price and we can go on happily making new bombs, which, it seems, is the only thing we are really good at.”

The 5: Heh. You have a good point there.
“Hey, 5,” writes the last, “thanks for the ‘tip o’ the mug’ to Red Emma’s. In this day of lunatics and liars, Red Emma’s gives us a break, helps keeps us grounded. Not enough of that around these days.”

The 5: Best coffee (and transgender anarchist poetry selection) in Baltimore.

Source: Market Comeback, Sector to Short, Berkshire Meeting, Investing in Swine Flu and More!

A GM bailout would cost $200 billion, say the papers. Uh oh…that’s more than the feds have on hand. And right behind GM are cities, states, colleges…all with their hands out…

Yes, they are all of “vital national importance.” We can’t let them fail, can we?

Of course, it’s all nonsense. Automakers…governments…they go broke from time to time; it’s no big deal. And colleges…who needs them? You can get a much better education just keeping your eyes open. Right now, Mr Market’s Advanced Seminar on Economic Corrections is delivering one helluva lesson. Of course, the tuition is very expensive…

Stocks are down so much that dividend yields are beginning to look respectable again – averaging about 3.8%. For the first time in 50 years, you can get more yield from a stock than from a 10-year US Treasury bond. You remember, stocks were supposed to pay lower dividends because stockholders are supposed to earn capital gains as well as dividends. The combination of capital gains and dividends gives investors a total return greater than bonds; this is the “risk premium” that you get to compensate you for periods when stocks go down. What happened to the risk premium? Here it is!

When is the risk premium at its lowest? At the very moment when investors believe it is highest. That is, at the end of the ‘90s, investors came to believe that they couldn’t go wrong with stocks. They were so sure that stocks were the way to go that they willingly bought stocks that paid little or nothing in dividends. They thought the price of the stock would go up; so they didn’t need dividends.

But stocks have gone nowhere since the mid-‘90s. Now, investors want dividends.

Meanwhile, to those who have been given the most Mr Market takes the most back. No country got as much out of the credit expansion as Britain. Its leading industry – finance – was in high cotton for the last decade. Gone were the conservative old bankers with their derby hats and pin striped suits. The new breed of go-go moneymen in the City wore fancy Italian suits and came up with plenty of fancy investments too.
But just as the bankers were fashion victims, so were their clients.

Poor RAB Capital, for example. The hedge fund manager is traded in London. It’s seen its funds under management fall by 70%…and its share price is down 92%.

The pound is down 25% against the dollar over the last 90 days. Housing is down about as much as in the US. “Help wanted,” signs are disappearing from shop windows. And suddenly you can get a table at a good restaurant without a reservation.

But that’s the trouble with a downturn. Just when other people can’t afford to eat at fancy restaurants – neither can you!

“Everybody’s got to cut back,” we told the family again on Saturday. “This is a global financial crisis. We don’t know how long it will last or how bad it will get. But we’re saving every possible penny – just in case.”

This is what economists call the “propensity to save.” It’s what happens in a serious downturn. But the propensity to save is not necessary shared by all the members of the family alike. Edward, 15, put his finger on what economists call the “paradox of thrift:”

“Hey, Dad, but if we all stop spending…nobody will have any money, will they? Besides, you said you’d get me a new skateboard for my birthday.”

Edward is more civic minded than his father.

High rates of saving causes a recession to turn exceptionally nasty. People cut back…and all of a sudden…the cutbacks are magnified by millions of little decisions all up and down the economic ladder. The rich cancel their restaurant reservations…the poor buy a little less meat. But one man’s expense is another’s revenue. Pretty soon, money is getting tight throughout the whole system. That said, the man whose financial advisor tells him to keep spending in order to help the economy has a fool for a counselor. The smart thing to do is to cut back; let someone else go broke.

*** We are so happy to see Thomas L. Friedman back in the pages of the International Herald Tribune…and back in form too!

The NY Times columnist is always entertaining…and helpful. Unwittingly, of course, the only way possible for Friedman. What makes him entertaining is that he is perpetually in a state of emergency…and irrepressible alarm…that causes him to run around wildly and crash into things.

Remember the terrorism scare of the early 2000s? Friedman was right at the front of it…howling at the mob to mobilize…urging them to panic. Otherwise, the terrorists were going to blow up every public building and underwear store in Christendom. More recently, there was his fright about rising oil prices. Once again, we had to “do something!” He called for a massive, nationwide campaign, “similar to the Manhattan project,” in order to save America from the oil exporters.

Now, it’s the financial crisis that has the man in a sweat. What a delight to have his views on the financial world! He is such a shallow thinker that his errors are always right on the surface. It is reassuring too; if Freidman agreed with our position, we’d have to rethink it.

“If you are going to fight a global financial panic like this, you have to go at it with overwhelming force,” writes Freidman. How does he know that? How many of these things has he seen? Well, none. No one ever has…which he admits a few lines earlier.
But ignorance never stops Freidman. He may not know where the enemy is…but he gives the order anyway: “Charge!”

“This is no time for half-measures,” he continues. How does he know what is a half-measure and what is a full measure? And what about no measure at all? Again, he doesn’t explain. But this is no time for thinking – it’s once again, into the breach! What we need now is “an overwhelming stimulus that gets people shopping again. And an over-whelming recapitalization of the banking system that gets it lending again.”

“Go shopping,” he summarizes.

Anyone with half a brain knows that it was too much shopping and too much lending that got the US into this jamb. But that disqualifies Friedman right there. Not that he isn’t a smart fellow; but he’s determined not to let thinking get in his way. He’s smart enough to know that once you start thinking about things, they always turn out to be more complicated and nuanced than you had hoped.

But if you concern yourself only with appearances, you don’t have to worry about it. What do people in a healthy economy do? They go shopping. What do banks in a healthy economy do? They lend money. So, hey, this is easy. If banks would just lend and consumers would just buy things – we’d have a healthy economy, no?

Another charming feature of Friedman’s pensée is his willingness to chuck principles, rules and dignity whenever they get in the way. Dismissing the question of why the taxpayer should pay for Wall Street’s mistakes, he writes: “…fairness is not on the menu anymore. …we need to throw everything we can at this problem…”

And now we turn our attention to the White House. George W. Bush is said to be not merely a lame duck president…but a dead duck too. He cost Republicans a victory, say pundits: he ruined the country…he destroyed the empire…he wrecked the economy. Today, you could accuse the man of sorcery or child molesting and half the nation would believe you.

Before we come to our revisionist look at the man, we repeat our advice. Just this weekend, Barack Obama pledged to put an end to Bush’s disgraceful torture policy. Dubyah should watch his back and avoid foreign travel; otherwise he’s likely to arrested and slapped with a human rights violation. After all, most of the world would like to see him do the perp walk. Besides, he deserves it.

But here at the Daily Reckoning we always take the side of the underdog and the lost cause. Poor George is both. So, when we read the text of his speech last week in New York, we found it to our liking. Here is a man who has had some sort of brain operation or brain washing, we decided. They severed the connections, making it possible for him to think one thing and so something entirely different.

“History has shown that the great threat to economic prosperity is not too little government involvement in the market. It is too much government involvement in the market. … And the surest path to…growth is free markets and free people.

“Capitalism is not perfect. But it is by far the most efficient and just way of structuring an economy. Capitalism offers people the freedom to choose where they work and what they do, the opportunity to buy or sell products they want and the dignity that comes form profiting from their talent and hard work…

“The record is unmistakable: if you seek economic growth, social justice and human dignity, the free market system is the way to go.”

These insights are, to our mind, correct. But the US government with George W. Bush at the controls hardly favored free-market capitalism. Instead, the Bush administration presided over a “mixed economy” – both “innocent fraud,” as John K. Galbraith described the free-market’s excesses, and the government’s armed robbery.

… 36% of GDP was spent by government…and more than half of all eligible voters depended for their livelihoods – in whole or part – on government checks

…federally–chartered mortgage lenders – Fannie and Freddie – helped stimulate a huge bubble in the housing market

…the US government’s central bank – the Federal Reserve – led by Mr Bush’s appointee, Alan Greenspan, practically single-handedly caused a huge bubble in finance, credit, speculation and consumer spending

…when the bubble inevitably burst, Mr Bush’s own Treasury Secretary (recently one of the Wall Street bankers who had most benefited from the financial bubble) rushed in to use government money (aka taxpayers’ money) to buy up Wall Street’s mistakes…

…then, the feds partially nationalized the nations leading banks…

…and further lowered the cost of credit, in order to try to blow the bubble up again…

…and now, the US, along with the world’s other leading governments, is pledging to give the world what it least needs – more regulation!

Source: Mr Market’s Advanced Seminar on Economic Corrections

Not even Warren Buffett was immune to the stock market’s rampant first-half gyrations, as Berkshire Hathaway Inc. notched its worst first half in 18 years, with the shares skidding more than 16%. But only a fool would count out the great Oracle of Omaha, who has spent the past several months restructuring his company’s portfolio and is now ready to come out swinging for the year’s second half.

As Money Morning’s Horacio Marquez noted in his most recent “Buy, Sell, or Hold” feature, Berkshire Hathaway has had a tough start for the year.

The company’s net earnings for the first half were $3.8 billion – a 33% decline from the $5.7 billion reported for the same period last year. But even though the second quarter was weak – especially by Buffett’s standards – it showed marked improvement from the first three months of the year.

Berkshire reported about $1.6 billion in unrealized losses from derivatives in the first quarter. But after warning that derivatives contracts will often “swing wildly,” the company posted $689 million in derivatives gains in the second quarter.

Berkshire’s revenue actually rose 10% to $30.09 billion for the quarter.

But that’s not enough for Buffett, who has set about restructuring his company’s holdings. In the past few months, Berkshire has reduced its investments in Anheuser Busch Cos. (NYSE:BUD) and Trane Inc., and added positions in NRG Energy Inc. (NYSE:NRG), Ingersoll-Rand Co. Ltd (NYSE:IR), and Sanofi-Aventis (ADR:SNY).

According to filings with the U.S. Securities Exchange Commission (SEC), Berkshire in June reduced its stake in Anheuser Busch to 13.85 million shares, less than half the 35.56 million shares it held as of March 31. It’s likely the company received a tidy sum for its shares, as earlier that month InBev SA (PINK: INBVF) offered $65 a share for the American icon. Buffett admits to bailing on the Bud brand before InBev raised its offer to $70 a share, but AB was trading at close to $62 a share on June 30, much higher than the $47 a share the company was valued at in late March.

Also in March, Berkshire dumped its 10.9 million shares of Trane Inc. That stake was valued at more than $500 million as of March 31.

After unloading in the spring, Buffett treated Berkshire Hathaway to a $4-billion shopping spree over the next several months. By the end of the second quarter, Berkshire’s stake in French drug maker Sanofi Aventis had shot up 317,200 shares to reach 3.9 million. Berkshire also added 5 million shares of Ingersoll-Rand, and announced new holdings in NRG Energy, the second-biggest power producer in Texas. Berkshire had 3.24 million NRG shares as of June 30.

Even more interesting, in a move that highlighted Buffett’s bullishness on railroad stocks, Berkshire doubled its stake in Union Pacific Corp. (NYSE:UNP), taking its holdings from 4.45 million shares at the end of March to 8.91 million shares as of June 30.

Last year, Buffett and Berkshire road the rails hard. Buffett made his first move on Burlington Northern Santa Fe Corp. (NYSE:BNI) last April, acquiring nearly 40 million shares – or close to 11% – of the railroad. He then moved on to snap up 10.5 million shares of Union Pacific Corp., and 6.4 million shares of Norfolk Southern Corp. (NYSE:NSC).

Later in August, Berkshire went shopping again, loading on an additional 3.3 million shares of Burlington and another 6,000 in September. But Buffett didn’t stop there: He added yet another 10,300 shares of Burlington over the two-week period ending Jan. 22, bringing Berkshire’s total stake in the company to 18.2%.

Berkshire’s second-quarter acquisitions, which were disclosed in an SEC filing last week, are only a fraction of the $3.98 billion Berkshire spent on stocks in the April-June period.

Even if Buffett bought the shares at their highest second-quarter prices, which he almost certainly did not, the total cost would only have been about $260 million. That means more than $3.5 billion went into smaller amounts of unnamed stocks the company was not required to disclose.

Where that money went is anybody’s guess, but Buffett indicated in a recent interview with CNBC that a portion of it went into one of two stocks: Wells Fargo & Co. (NYSE:WFC) or American Express Co. (NYSE:AXP).

Wells Fargo stock has plummeted 22% in the past year, while American Express is down more than 37% in that time. However there may be some clues as to which stock Buffett really believes will rebound in some earlier comments he made.

“We’ll say at American Express… they are experiencing credit deterioration and they’re experiencing it sort of in all segments,” Buffett said earlier on CNBC’s Squawk Box. “So they’re seeing the rich customers slow down in payments, slow down in purchases.

“And American Express can describe that rather than I,” he added, “but I pay a lot of attention to that sort of thing. And incidentally, it will get cured at some time in the future, but right now the situation is getting worse and I would say that I don’t see any early end to that.”

That assessment doesn’t seem particularly favorable, particularly compared with comments Buffett made with regards to Wells Fargo just a few months ago.

“Wells Fargo stock was down last year,” Buffett said, “I don’t think the intrinsic business value shrunk. In fact, I said I thought it probably increased a touch.”

Berkshire already owns considerable stakes in both companies.

Source: Buffett Reignites Berkshire Hathaway with a $4 Billion Spending Spree

As a sign of the times, InBev’s Chief Executive Carlos Brito did it with style – appearing on an interview-style video on InBev’s web site that directly addresses the fears of the legion of Anheuser workers and drinkers – jobs, foreign ownership, brand synergy.

“I think what’s in important here is that Budweiser the beer will continue to be brewed in the same brewers – we don’t have plans to close any brewers – by the same people according to the same recipe,” Brito said. 

The proposed merger, which appraises Anheuser at a 35% premium, is a combination of high performance and common sense, he said.

“This company is going to be the world’s leading brewer,” Brito noted, calling the merger a natural step. “It’s going to be among the top five consumer goods companies in the world.”

InBev’s line of beers includes Stella Artois, Beck’s, Hoegarden and Brahma.

Anheuser is the maker of Budweiser, Busch and Michelob brands. It also owns a 50% share in Grupo Modelo, Mexico’s leading brewer, and a 27% share in China brewer Tsingtao, whose namesake beer brand is the country’s best-selling premium beer.

News of the proposal sent shares of both companies up in morning trading today (Thursday). And that’s a more elemental to the proposal than before now that the long-time Busch family-run brewer owns only 3.5% of the company’s shares.

Instead, the top shareholder is Warren Buffet’s Berkshire Hathaway (BRK.A, BRK.B) with a 5% stake. And with controlling power dispersed, it’s much easier for shareholders to push the deal through.

Anheuser-Busch said in a statement that its board of directors will evaluate the proposal carefully and in the context of all relevant factors, including the company’s long-term strategic plan.

“The board will pursue the course of action that is in the best interests of Anheuser-Busch’s stockholders” and “expects to make its determination regarding InBev’s proposal in due course.”

Beverage Providers Stirring Global M&A

Yesterday, (Wednesday), Merrill Lynch & Co. Inc. (MER) analysts said that Foster’s Group Ltd. (OTC: FBRWY) – Australia’s biggest beer and wine maker – may be a takeover target after it conducts a review of its wine business.

Earlier this week, Foster’s cut its earnings forecast and announced a $730 million write-down of its wine unit, causing Chief Executive Officer and Executive Director Trevor Louis O’Hoy to announce his resignation from his post.

Should Foster’s put itself on the block, it would join Anheuser, InBev and other major global beverage providers that have been on the giving and receiving end of billion-dollar buyout offers.

In March, France’s Pernod Ricard SA won a highly contested auction to buy V&S Group – makers of Absolut vodka and Cruzan rum – from the Swedish government for $8.9 billion.

In January, Carlsberg A/S and Heineken N.V. (OTC: HINKY) agreed to buy Scottish & Newcastle PLC for $15.4 billion.

And late last year, British-owned SAB Miller PLC (OTC: SBMRY) and Canada’s Molson Coors Brewing Co. (TAP), agreed to merge their U.S. brewing operations.

Source: InBev Offers Anheuser $46.3 Billion, a Deal That Would the Create World’s Largest Brewer

As I was doing my usual bout of “marathon weekend reading” I came across an interesting piece on Warren Buffett’s recent trip overseas. For those who don’t keep tabs on the “Oracle,” Buffett has been touring Europe for the last week or so in an effort to promote Berkshire Hathaway on the other side of the pond.

Reason being, Buffett’s looking to start buying up “family owned, privately held” businesses on the cheap overseas.

It’s difficult for him to find “Buffett-sized” deals in the U.S. anymore, so it only makes sense that he’d look for greener pastures elsewhere. However, Buffett also gave another reason for why he might want to start placing his bets in other parts of the world…

My friends and I have been debating the “recession” topic for a while now: Are we currently in one? Will we run into one this year or next? What will the effects be?

But when I read that Buffett thinks the U.S. is already in a recession and it will be “longer” and “deeper” than any we’ve seen for quite some time, I definitely began to think less about “what if we go into a recession” and more along the lines of “What should I do with my money now?”

There are dozens of questions (and even more answers) on TickerHound about which sectors hold up the best during a bear market, but a recent question is what inspired me to write today’s article:

“Will certain retailers do well during a recession?”

Traditionally, retailers don’t do well at all during a downturn — consumers start to curtail their discretionary spending as times get tougher, and items like clothes, cars and all the other little “extras” aren’t ranked very high on the “purchasing priority list.” However, if you really think about it, there are some retailers that “should” do rather well during a protracted downturn.

The fact of the matter is, people aren’t going to completely stop buying the little extras, they’ll just be more selective about where they buy them.

While I’ve come a long way since my childhood, I still remember what it was like when times were tough around my house. We were a blue collar household, three kids, my parents were always hustling at the end of each month to make ends meet — so when one of us needed new clothes, school supplies, etc, we’d take a trip to the closest discount store and bargain hunt.

Without doing a survey of every household in the U.S., I’d bet that when times are tough and a recession is imminent, most of America behaves the same way. In fact, if you take a look at a 10-year chart for some of the discount retailers, you’ll immediately see that their stocks do better when the market is doing worse!

So here are a few discount retailers that I think are worth digging into if you’re looking for some “Retailers for a Recession”:

1. Dollar Tree (DLTR: NASDAQ)

• Market Cap: $2.99 Billion
• P/E: 15.67
• Dividend: N/A
• 12 Month Price Gain (Loss)%: (19%)

2. Family Dollar Stores (FDO: NYSE)

• Market Cap: $2.76 Billion
• P/E: 13.5
• Dividend: 2.5%
• 12 Month Price Gain (Loss)%: (40%)

3. Fred’s (FRED: NASDAQ)

• Market Cap: $438.65 million
• P/E: 41.13
• Dividend: 0.7%
• 12 Month Price Gain (Loss)%: (25%)

4. 99 Cents Only Stores (NDN: NYSE)

• Market Cap: $538 million
• P/E: 85
• Dividend: N/A
• 12 Month Price Gain (Loss)%: (46%)
  ]]> http://www.contrarianprofits.com/articles/as-buffett-places-bets-abroad-your-profits-may-still-be-in-the-us/2672/feed 0 http://www.contrarianprofits.com/articles/bill-gates-buys-stake-in-carpetright/2633 http://www.contrarianprofits.com/articles/bill-gates-buys-stake-in-carpetright/2633#comments Thu, 29 May 2008 17:16:19 +0000 Theo Casey http://www.contrarianprofits.com/articles/bill-gates-buys-stake-in-carpetright/2633 When Philip Harris, now Lord / Baron Harris of Peckham, set up his first Carpetright on the Manor road, Canning town in 1988 he can’t have imagined it would all come to this.

  Bill Gates, of Microsoft and ‘world’s richest man’ fame snapped up 3% of the high-street retailer Carpetright (LSE: CPR) through his Cascade Investment fund. The move has given shares in the FTSE 250 stalwart a boost.

  Gates’ £15m investment comes at a time of great turbulence for the group. So, why has the Microsoft maestro opted for a stock that has (carpet) bombed in the last year?

  Having fallen 28% since June 2007 the carpet and floorings retailer disappointed the City in April. A so-so trading statement suggested that profits…

  ]]> When Philip Harris, now Lord / Baron Harris of Peckham, set up his first Carpetright on the Manor road, Canning town in 1988 he can’t have imagined it would all come to this.

  Bill Gates, of Microsoft and ‘world’s richest man’ fame snapped up 3% of the high-street retailer Carpetright (LSE: CPR) through his Cascade Investment fund. The move has given shares in the FTSE 250 stalwart a boost.

  Gates’ £15m investment comes at a time of great turbulence for the group. So, why has the Microsoft maestro opted for a stock that has (carpet) bombed in the last year?

  Having fallen 28% since June 2007 the carpet and floorings retailer disappointed the City in April. A so-so trading statement suggested that profits for the year would be ‘in-line with expectations’ but that the trading environment is deteriorating.

  Group-wide sales increased by 5.6% and Carpetright widened their net, boasting 675 stores, but the three months to April saw sales growth of only 0.6%… raising the spectre of a profit warning to an already panicky investor base. Niche broker Pali International suggested the shares look overvalued and according to Retail bulletin, it was one of the most shorted stocks in the bearish sector with as much as 22% of the stock ‘on loan’ to traders driving down the price.

  Investors are also quizzical of where exactly the company is going. Lord Harris had to scrap plans for an £800 million buyout in December as a result of the credit crunch. He wanted to take the business private to speed up expansion in the UK and abroad, thus escaping the constant scrutiny of the press, “Every six weeks I have to think about what I’m saying to the City in six weeks’ time” said Harris.

  Perhaps Gates’ foray into the world of carpet will facilitate the move? Or Bill could be taking advice from his old pal Warren Buffett whose Berkshire Hathaway owns Shaw Industries, the world’s largest carpet maker. They may not be as flashy as you’re average oil explorer but way-ahead in terms of consistency… Bill could be onto something. Take a look at the firm’s prospective revenue stream:

  2006: £451.4m 2007: £475.9m 2008: £514.8m* 2009: £527.1m* 2010: £550.0m*

  * Analysts’ Estimates

  Exciting, it ain’t… but it’s not difficult to see what’s caught Mr Gates’ eye here. As retail goes, Carpetright operates in a fairly defensive, counter-cyclical part of the sector.

  The allure of boring stocks

  American fund manager Allan Roth made a career out of boredom. His ‘Dare to be Dull’ mantra is the foundation of his firm Wealth Logic. He says that if you are having fun investing, and if you find it exciting, you are probably doing, or are about to do, something wrong. In his world, investing should be as dull as receiving interest payments from the bank… only more lucrative!

  Now it’s not a panacea, in fact following this belief would have prevented you from getting into the uber-exciting energy and mining stocks that have yielded triple digit returns over the past few years. However, it also would have saved you from buying investment banks with their mysterious, clever-sounding structured investment vehicles that have turned out to be very costly duds.

  So what other dreary deals can we find on the UK market?

  Paypoint (LSE: PAY)

  Another member of the steady incline club, Paypoint’s revenue and earnings charts look very appetising, much more interesting than the business model anyway… Paypoint operates thousands of chip & pin terminals and ATMs around the country. Their latest set of figures showed strong growth in sales and profits thanks to a 22% jump in transactions.

  “We expect further growth in revenues in the UK by increasing market share in bill and general payments, mobile top-ups, ATMs and from Post Office closures,” it said. The group is also to install 1,500 terminals in Romania this year, adding that current trading is in line with growth expectations.

  Lloyds TSB (LSE: LLOY)

  As investment strategies go, sitting on your hands seems to be working for Lloyds TSB. The credit crunch has been the bane of the banking sector, but Lloyds’ business has been left relatively unscathed. They’ve not had to boost capital via a rights issue, and they’re not going to either according to Sanlam’s Kokkie Kooyman.

  In his view Lloyds will escape the crunch, due to a lack of exposure in mortgage-backed assets and structured products, hence limited related losses. Described as a safe haven, Lloyds revealed a fair set of figures and Collins Stewart promptly upped their target price for the high-yielder to 609p.

  Speaking of boring, my colleague Ben Traynor has just informed me about a recent Fleet Street Letter tip that specialises in a unique arm of the retail market. Like Carpetright, they have managed to dodge much of the fallout of the credit crunch and look good value at today’s prices. Check out his free pack today…

  Theo CaseySource: Bill Gates Buys Stake In Carpetright

  ]]> http://www.contrarianprofits.com/articles/bill-gates-buys-stake-in-carpetright/2633/feed 0 http://www.contrarianprofits.com/articles/the-value-investors-stock-market/2529 http://www.contrarianprofits.com/articles/the-value-investors-stock-market/2529#comments Tue, 27 May 2008 18:49:12 +0000 Theo Casey http://www.contrarianprofits.com/articles/the-value-investors-stock-market/2529 Bowing to peer pressure from Eurocentric readers, today’s comment focuses squarely on opportunities in European indexes, or should that be ‘bourses.’

  It seems that European stocks are at their cheapest levels in six years and the French and German stocks top the list of bargains on the continent.

  According to Bloomberg, the XETRA DAX and France’s CAC 40 are the least expensive of the world’s 10 biggest markets. But let’s not get carried away just yet… markets are often said to be cheap when stocks have fallen, rather than the preferential scenario where huge profit growth has been missed by the market. We’re seeing the prior here, falls in earnings and a bearish turn in sentiment.

  First-quarter corporate profits in Western Europe dropped…

  ]]> Bowing to peer pressure from Eurocentric readers, today’s comment focuses squarely on opportunities in European indexes, or should that be ‘bourses.’

  It seems that European stocks are at their cheapest levels in six years and the French and German stocks top the list of bargains on the continent.

  According to Bloomberg, the XETRA DAX and France’s CAC 40 are the least expensive of the world’s 10 biggest markets. But let’s not get carried away just yet… markets are often said to be cheap when stocks have fallen, rather than the preferential scenario where huge profit growth has been missed by the market. We’re seeing the prior here, falls in earnings and a bearish turn in sentiment.

  First-quarter corporate profits in Western Europe dropped 25%, even worse than US firms! “The U.S. has been at the epicentre of the problems, but the shockwaves are more felt here in the euro zone. Cheap valuations are a direct result,” said fund manager Franz Wenzel.

  Despite this, the contrarian club is unshaken… is it time to buy?

  Well, according to Anthony Bolton, the negativity can act as a cloak to sneak in and pick up the real pearls. It is always difficult to buy recovery stocks, but it’s when stocks are at their most unloved is where the biggest rewards can be had. Do your buying in a bear run, and superior returns can be yours.

  It’s this belief that propelled Warren Buffett onto a shopping tour of Europe in recent weeks, with a focus on Germany.

  “We would like more family owners of Germany businesses who, when they feel some need to monetize their business, to think of Berkshire Hathaway,” said Buffett.

  “We are happy to invest in businesses that earn their money in the euro, or in companies that derive their earnings in Germany, or from sterling in the U.K. because I don’t have a feeling that those currencies are going to depreciate in a big way against the dollar,” added the world’s most successful investor.

  And he might be onto something… Ben Traynor at the Fleet Street Letter tells me that companies in the French and German markets are trading at a 40% discount to those in the American S&P 500. It’s a market packed with right bobby dazzlers.

  So, why the weakness?

  Profit warnings left-right-and-centre is why. Not just in banking, neither. Nokia, SAP, InBev, Roche are all firms that have fallen short of expectations through the tumultuous earnings season. It’s not just poor headline figures, but weak outlooks that really put the fear of god into investors. Commodity prices and inflation is soaring, knocking input costs while demand is set for a tumble as buyers grapple with the increasingly pricey Euro.

  Though it could have been a lot worse. Earnings in the first quarter fell 18% but were odds-on to fall 23%. And, if you strip out the performance of financial firms like UBS and Deutsche Bank, the first quarter would have actually been in-the-money.

  Big banks still see Europe slightly higher for the year, and back in double-digit growth for 2009. Too optimistic? Reasons to be cautious? Probably, but given the discount that shares on the continent trade at, it looks to be worth the risk.

  We tend to find more value opportunities in a bearish market, and this is no exception. Whilst it can be emotionally difficult to pick up companies that have been receiving a bad press, if you can justify the purchase in value and growth then you go with your convictions.

  Deutsche Bahn steams into the picture

  And here’s the newest stock on offer… Deutsche Bahn, Europe’s biggest rail group, is en route to be one of the biggest stock market listings of the year, set for a £6.4 billion initial public offering (IPO).

  The German rail operator is set to list on the DAX with Deutsche Bahn itself to control most of the consideration with a 25% stake selling in the IPO. The launch is set for the end of the year and should reassure investors that there is still a market, and hopefully an appetite for new listings amid the credit crunch.

  Nonetheless, I’m not a fan of IPOs. I subscribe to the Ken Fisher school of thought that IPO should stand for ‘It’s Probably Overpriced.’ This is based on the frequent share price capitulations that follow the initial ‘stabilisation’ or honeymoon period &mdahs; where newly listed companies shares are bought by investment banks to prop up the price in the early days. When this support subsides, the shares invariably take a tumble.

  More important than the investment case of Deutsche Bahn is that, like Visa in the US, the gesture will give heart to the investment community. It serves as evidence of life after the credit crunch. When shares are trading as cheaply as they are now, it may be the best time to stock-up on shares across the border.

  The sharp cookies over at The Fleet Street Letter have not been MIA on European opportunities… our portfolio includes a Paris-listed gem that has outperformed the market by nearly 30% since our tip in 2007. With property rights in the South of France, it has profited from high-net-worth individuals and looks set to continue…

  Theo Casey Source: The Value Investor’s Stock Market

  ]]> http://www.contrarianprofits.com/articles/the-value-investors-stock-market/2529/feed 0 http://www.contrarianprofits.com/articles/warren-buffett-the-%e2%80%9coracle-of-omaha%e2%80%9d-tells-german-audiences-that-the-us-economy-is-in-a-deep-recession/2500 http://www.contrarianprofits.com/articles/warren-buffett-the-%e2%80%9coracle-of-omaha%e2%80%9d-tells-german-audiences-that-the-us-economy-is-in-a-deep-recession/2500#comments Tue, 27 May 2008 13:00:16 +0000 William Patalon III http://www.contrarianprofits.com/articles/warren-buffett-the-%e2%80%9coracle-of-omaha%e2%80%9d-tells-german-audiences-that-the-us-economy-is-in-a-deep-recession/2500 The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investment guru Warren Buffett said in an interview published Saturday in the German magazine Der Spiegel.

  The United States is “already in recession … perhaps not in the sense that economists would define it [with two consecutive quarters of declining gross domestic product (GDP)] but the people are already feeling the effects,” Buffett said. “It will be deeper and last longer than many think.”

  As Money Morning reported back in March, Buffett made a similar pronouncement to U.S. audiences during an interview with the popular cable-television network, CNBC-TV.

  Buffett is the world’s richest man, with a net worth of $62 billion. As…

  ]]> The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investment guru Warren Buffett said in an interview published Saturday in the German magazine Der Spiegel.

  The United States is “already in recession … perhaps not in the sense that economists would define it [with two consecutive quarters of declining gross domestic product (GDP)] but the people are already feeling the effects,” Buffett said. “It will be deeper and last longer than many think.”

  As Money Morning reported back in March, Buffett made a similar pronouncement to U.S. audiences during an interview with the popular cable-television network, CNBC-TV.

  Buffett is the world’s richest man, with a net worth of $62 billion. As the chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B), investors have for years followed Buffett’s moves to see which investments are going to take off next. Financial-research studies actually show that mimicking Buffet’s investment moves can be a most-profitable strategy.

  A New Focus

  Within the last year, Buffett has shifted his focus abroad – the precise strategy that Money Morning has been advocating since this global-investing news service was formed back in 2007.

  Back in October, the Oracle of Omaha’s trip to South Korea encouraged our own bullishness on that country’s stock market.

  And now Buffett has decided to have a look at Germany. However, Buffett remains most interested in German companies that are family-owned and well-managed. And he’s always in the hunt for carefully selected companies with great brand names and strong market positions.

  “If the world were falling apart I’d still invest in companies,” he said.

  Berkshire’s recent play for U.S. chewing gum icon Wm. Wrigley Jr. Co. (WWY) underscores that willingess to invest in the “right” opportunity, regardless of the general economic outlook. Just last month – against a backdrop of recessionary and inflationary fears, a weak dollar, soaring energy prices, and a spiraling credit crunch – Berkshire joined forces with closely held Mars Inc. and agreed to provide $4.4 billion in financing for the $23 billion deal. In addition to providing the debt financing, Berkshire will make a minority investment in Wrigley, valued at about $2.1 billion. It’s believed that Buffett is getting a discount on the Wrigley stake.

  Once the deal closes, Wrigley will become a separate Mars subsidiary. And there may be a lot more to the deal in the long run, sources say. By helping Mars buy Wrigley, Buffett may actually be helping himself: As one, big privately held entity, the merged Mars-Wrigley giant would be much easier for Berkshire to buy outright should the secretive family that runs the business ever decide to sell it, sources said.

  On a recent trip to Europe, Buffett made stops in Germany, Switzerland, Spain and Italy. But his first priority was to meet with leaders of the German mittelstand – the family-owned, medium-sized companies that are the backbone of the German economy.

  “We would like more family owners of German businesses who, when they feel some need to monetize their business, think of Berkshire Hathaway,” Buffett said to the Financial Times.

  Buying into privately held companies – usually those whose ownership remains in the hands of the founding family – is an investment play Buffett has run time and again – and virtually always successfully. Back in 2006, he made what then was his largest investment ever outside the U.S. market, when he spent $4 billion for an 80% stake of an Israeli metalworking firm that was family operated. At the time, Israel was out of fashion with U.S. investors, though Buffett’s headline-making deal changed those attitudes rather quickly.

  Like Israel was then, and like Japan is now, Germany is currently unfashionable with U.S. analysts. As is also true of Japan, it seems to come as a surprise every time Germany comes out with a positive gross domestic product (GDP) number. Both countries had horrible periods in the 1990s, but analysts who think Germany is doomed to slow growth forever haven’t been paying attention.

  Buffett also renewed his criticism of the derivatives trading that helped create the current global credit mess.

  Buffett Criticizes Waste

  “It’s not right that hundreds of thousands of jobs are being eliminated, that entire industrial sectors in the real economy are being wiped out by financial bets even though the sectors are actually in good health,” Buffett told the German magazine.

  Buffett complained about the lack of effective controls.

  “That’s the problem,” he said. “You can’t steer it, you can’t regulate it anymore. You can’t get the genie back in the bottle.”

  When it comes to choosing investment targets, Buffett favors companies that have a competitive advantage, offering products or services that can’t easily be replicated by rivals. Businesses such as Mars and Wrigley, which each have strong consumer brands, fit the bill, Jerome V. Bruni, president of J.V. Bruni and Co., a Colorado Springs, Col.-based investment banking firm, recently told the Dow Jones Newswires.

  The Wrigley deal is just the latest in a string of recent deals for the so-called “Oracle of Omaha.” Other recent investments include a stake in Kraft Foods Inc. (KFT) and GlaxoSmithKline PLC (GSK), Europe’s largest drugmaker.

  Since taking over Berkshire Hathaway in 1965, Buffett has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies and that has a market value of $200 billion.

  As of the end of last year, Berkshire owned 3.3% of Procter & Gamble Co. (PG), a consumer-products giant, along with big chunks of The Coca-Cola Co. (KO) and Anheuser-Busch Cos. Inc. (BUD).

  Source: Warren Buffett, the “Oracle of Omaha,” Tells German Audiences That the U.S. Economy is in a Deep Recession

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