For those rooting for a revival of buyout activity, the merger of the two companies shows that corporate predators are still on the prowl and adequate financing is still available for some big transactions.

But as Money Morning reported recently as part of its ongoing “Outlook 2009” economic forecasting series, the credit crisis has put the mergers-and-acquisitions (M&A) market into a deep freeze.  And not even the marriage of these two U.S. pharmaceutical giants will be enough to thaw out the deal-making market anytime soon.

Both the size of the deal and the players involved represent a unique combination of favorable financing terms and corporate balance sheets that not many other companies can match in the current economic climate.

Pfizer, a company with strong cash flow and lots of cash on its balance sheet, did get $22.5 billion in financing for the Wyeth buyout, but others are unlikely to get the same terms. The drug company has a rare, stellar “AAA” credit rating from Standard & Poor’s Inc.

Furthermore, lenders are “favoring sectors where there is the most stability” in earnings and revenue outlooks, like health-care stocks as well as certain education and technology firms, Howard Lanser, an investment banker at R.W. Baird, told BusinessWeek.

Other sectors such as retail are currently out of favor and likely to stay that way, he said.

That makes a return to the heady days of the mid 2000s – when bountiful M&A activity lined the pockets of Wall Street investment bankers – an unlikely pipe dream.

The volume of global mergers and acquisitions could fall about 35% in 2009 from an expected volume of $3.1 trillion in 2008, investment bankers say. That would be less than half of last year’s record $4.4 trillion in deals.

“There are substantial headwinds facing M&A and the headwinds are not subsiding,” Cary Kochman, co-head for Mergers and Acquisitions for the Americas at UBS AG (UBS), told the Reuters.

The No. 1 issue is the lack of available credit. Banks and other lenders have pulled back from financing deals, making loans, especially for big deals, scarce and more expensive.

“You are less likely to see deal sizes beyond the $20 billion mark in 2009,” said Larry Slaughter, co-head of European M&A for JPMorgan Chase & Co (JPM). “The balance-sheet capacity of the banking system will make it tough to finance much-bigger transactions.”

And fear is playing a close second fiddle to financing as a barrier to any revival of M&A activity.  Most firms are holding onto any cash they have as insurance against a prolonged economic downturn.

“It takes a little courage to step forward and pursue M&A in this environment,” Lanser says. “To spend that cash can be a big psychological hurdle.”

Private Equity & Hedge Funds No Help

Even the so-called “masters of the M&A universe” – the leveraged buyout firms – are unlikely to ride to the rescue this time.

The Blackstone Group LP (BX), the No. 1 leveraged-buyout firm is staying on the sidelines searching for profits by advising companies in restructuring distressed debt.

The company that orchestrated a then record $34 billion acquisition of Equity Office Properties Trust in 2007 is playing a more modest role working consulting with AIG (AIG), as it sheds units worth about $60 billion to repay the government after its bailout last year.

Bankruptcies at investment banking’s most-hallowed companies like Bear Stearns and Lehman Bros Holdings Inc. (LEHMQ) obliterated the global financial system after buyout firms helped inflate the credit bubble.  Now the private equity and hedge funds may be next to go, as LBO deal making enters the gravest crisis in its 40-year history.

Buyout firms such as KKR & Co. (KKR) and the Carlyle Group went on a record-breaking shopping spree in 2006-07, saddling themselves with $1.5 trillion in assets that they intended to sell for a profit. Since then, they haven’t been able to find buyers so they can reap the 20% profits they get for such deals.

“This is part of the biggest bubble to burst in our history.” Roy Smith, a former Goldman, Sachs & Co. (GS) partner told Bloomberg News. As many as 40 of the biggest 100 companies may collapse by 2011 as their debt- strapped assets default, according to a 2008 report by Boston Consulting Group Inc.

“These guys had a sense they could do no wrong,” Paul Schaye, managing partner of New York-based Chestnut Hill Partners, told Bloomberg.. “ Now they’re going through a very sobering experience. They have to figure out how to survive this environment.”

So what will persuade dealmakers to take on added risk in such a gloomy environment? Turns out the the very things preventing consolidation now – the recession and credit crunch – could spark the revival Wall Street craves.

Only the Fit Survive

“There is going to be a need for a lot of companies to consolidate to survive,” Mark DeGennaro, managing director at investment bank Gruppo, Levey & Co. told Bloomberg. Firms with falling sales figures and credit trouble may have no choice but to find buyers – often at very low prices, he said.

Corporations with cash on their balance sheets or stronger share prices have been taking advantage of the drop in equity valuations among their rivals to do deals.

In fact, 2008 was marked by a jump in hostile or unsolicited deal activity, including InBev’s (ABI) planned acquisition of Anheuser-Busch Cos. Inc. (BUD) and Exelon Corp.’s (EXC) bid for NRG Energy Inc. (NRG).

And despite the obvious risks, some private equity firms will still dip their toes in the LBO waters.

“The best returns in private equity have come in a period like the one we’re just entering,” Blackstone founder Stephen A. Schwarzman said in a speech to investors and buyout firms in Dubai in October. “This is an absolute wonderful time.”

Another traditional provider of capital – sovereign wealth funds – may also step up to the plate.

“Even though the price of oil is volatile, they have substantial amounts of money…they need to get to work and generate a reasonable rate of return,” Alan Alpert Senior Partner of M&A Transaction Services at Deloitte Touche Tohmatsu told Boardmember.com. “I think you’ll see sovereign wealth funds come back into the U.S. market and make investments.”

Source: The $68 Billion Pfizer-Wyeth Deal Won’t Revive the Moribund Merger Market

• Hewlett-Packard Co. (HPQ), the world’s largest maker of personal computers, offered a preview of its fiscal fourth-quarter profits – reporting that it will beat market expectations and raise its fiscal 2009 outlook. “HP is gaining market share in an extremely strong competitive position. They’ve got share gains, combined with very aggressive cost reduction,” Shannon Cross of Cross Research told Reuters.

• Lars Olofsson, Executive Vice President of Nestle SA, has been named Chief Executive Officer of Carrefour S.A., the world’s second-largest retailer. He’ll join the company in at the Carrefour’s next shareholder meeting in January, MarketWatch reported.

• Belgium’s InBev NV officially completed its $52 billion, or $70 a share, acquisition of Anheuser-Busch Cos., Inc. (BUD), as it won its last regulatory approval from China. The combined company will be based in St. Louis and named Anheuser-Busch InBev, Dow Jones reported.

• The Home Depot, Inc. (HD) reported a 31% decline in earnings during its fiscal third quarter ended Nov. 2. Profit declined 31% as well, but the home retailer expected steeper loses in the face of the U.S. housing crisis, Reuters reported.

• Kuwait’s Gulf Bank – the country’s second-largest lender – said Monday that it had lost $1.4 billion (375 million dinars) as a result of trading in derivatives and other financial instruments for customers who subsequently defaulted. The bank also said its board had resigned. To allay investor fears, Gulf Bank announced a plan to double its capital base by issuing 1.25 billion new shares. Investors knew there were losses. But the amount was nearly double the original estimate of $750 million. Trading in Gulf Bank shares remains suspended for their fourth week, Forbes.com reported.

• Mexican retail and media tycoon Ricardo Salinas Pliego could be building a controlling stake in bankrupt electronics retailer Circuit City Stores Inc. (OTC: CCTYQ), Reuters reported. Salinas already owns 28% of the company, having accumulated stock in the open market before and after the retail chain went bankrupt.

• Wholesale prices experienced the biggest one-month drop in more than 60 years in October, The Associated Press reported. Wholesale prices dropped by a record 2.8% last month, as the cost of oil and other raw materials declined.

Source: Global Investing Roundups Wednesday, November 19th, 2008

As August A. Busch IV, president and CEO, said his prepared statement, “Under the merger, the new company will expand Budweiser into new markets around the world, fulfilling the global ambitions my family has long dreamed about for this great American brand. I’m proud that the Budweiser tradition and our 150-year commitment to delivering the best brewed beer in the world will live on.”

At $70 per share for A-B, the deal is valued at $52 billion. It now only requires approval from antitrust authorities in the U.S., U.K. and China to close.

Wall Street has been hounding A-B for years that it was too U.S-centric. Compared to other countries, America one of the slowest growing beer markets in the world.

While A-B holds nearly 50% the U.S. market, the company barely registers in Argentina, Brazil, Russia and Eastern Europe, where In-Bev dominates. The worldwide market-share numbers tell the story loud and clear…

InBev 16%
SAB Miller 12%
Anheuser Busch 9%

A-B saw the handwriting on the wall, after InBev’s overtures earlier this year. Most people don’t know that A-B was already distributing InBev’s products here in the U.S. In fact, A-B grew its volume last year by 2.9% from the previous year largely due to InBev’s Stella Artois, Beck’s and Bass premium beers.

For years, A-B has been trying to get into emerging markets with only partial success. The company owns 50.2% of Modello, the Mexican brewer behind Corona and other major brands. The partnership turned hostile earlier this year when Grupo Modelo Chief Executive Carlos Fernandez resigned from A-B’s board of directors after a 15-year clash between the Busch and Fernandez families.

Meanwhile, InBev had already been big in Latin America where the company has roots. InBev was formed from the merger of Belgium’s Interbrew and Brazil’s AmBev in 2004.

InBev is a true multinational. Headquartered in Leuven, Belgium, it is the number-one beer company in the world. Its operations encompass more than 130 countries. About 60% of its profits come from Latin America, giving it crucial experience in emerging markets.

While InBev savors 12% of the Chinese beer market, A-B may have wasted precious time setting up shop in what some experts say is the world’s biggest beer market.

A-B had acquired Harbin, China’s fourth-largest brewer at the time in 2004. Now Harbin has dropped to fifth place.

It may have bungled another China opportunity as well. A-B formed a strategic alliance in China with Tsingtao in 2002. Under the terms of the deal, A-B took a 27% interest in Tsingtao. At the time, Tsingtao held a 13% share. Five years later, Tsingtao reaches 14% of the market, according to Reuters. Obviously, not a great move on the part of A-B.

What does this deal mean for investors?

InBev’s stock has been a slide over the past year 43.5% and currently trades at 31.07 Euros. It trades in on the Brussels exchange (BRU:INTB). The stock dropped 5.33% after the merger announcement.

We believe it’s too soon to jump into InBev now. Wait until the economy turns around and people start to celebrate.

• General Growth Properties Inc. (GGP) warned it is on the brink of bankruptcy, as slow retail sales have forced many of its mall vendors to close their doors, CNNMoney.com reported. The nation’s second-largest shopping mall operator said in a SEC filing that it has more than $950 million in property and corporate debt, and is facing another $3.07 billion in debt that matures in 2009.

• Sales fell 7% in the third quarter for Macy’s Inc. (M), leading to a $44 million loss, or 10 cents a share. As a result, the Cincinnati-based retailer said it is cutting capital spending by as much as 45% in 2009, MarketWatch reported.

• Oil continued falling faster than it rose, as December futures for light sweet crude slid $3.08 overnight to $59.01 a barrel in electronic trading on the New York Mercantile Exchange. The sharp fall is blamed on concerns that global growth next year will clock in slower than expected, the Associated Press reported.

• October retail sales in China rose a robust 22%, sending a strong signal that its powerhouse economy could stand tall amidst global recession. The sales growth is nearly its fastest pace in nine years, Bloomberg reported.

• Yum Brands Inc. (YUM) said yesterday (Wednesday) that it would cut “several hundred” jobs as it restructures its U.S. business. The company plans to reduce the percentage of Pizza Hut and KFC restaurants it owns to from 20% to 10% by selling units to franchisees. The company will continue to own 20% of all Taco Bell restaurants.

• Anheuser-Busch Cos Inc. (BUD) shareholders yesterday (Wednesday) approved the $52 billion takeover offer from Belgian rival InBev NV. More than two-thirds of the Budweiser brewer’s shareholders voted, with 96% voting in favor of the deal. Anheuser-Busch and InBev will form the world’s largest brewer if and when federal regulators clear the deal.

Source: Global Investing Roundups Thursday, November 13th, 2008

And the “Oracle of Omaha” isn’t done, yet.

Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) agreed to buy $5 billion in perpetual preferred Goldman shares that pay 10% interest. In addition, Berkshire receives warrants giving it the right to buy $5 billion worth of Goldman’s common shares at any time over the next five years at a price of $115 per share. The shares closed Tuesday at $125.05 and yesterday (Wednesday) at $133, up $7.95, or 6.36%, each.

“Goldman Sachs is an exceptional institution,” Buffett said in a statement. “It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”

Based on Tuesday’s closing price of $125.05, Buffett made an almost instantaneous paper profit of about $437 million on the warrants. With yesterday’s advance, that paper profit rose to $783 million.

Scott Roth, management partner at Severn River Capital Management, told Bloomberg News that by his calculations Buffett is buying the preferred stock for about $3.2 billion, after accounting for the warrants. Roth worked at Goldman more than a decade ago and is betting the stock won’t drop.

“As usual Mr. Buffett has struck an extremely attractive deal,” Guy Moszkowski, an analyst at Merrill Lynch & Co. Inc. (MER), wrote in a note to clients. “He is, we believe, getting a better deal than he did in 1987 when he bought a Salomon Bros. convertible with a 9% yield, for a company that is considerably more attractive than the ‘87 Salomon.”

Goldman Sachs, which has booked roughly $5 billion in losses and write-downs, and which has lost about 40% of its market value this year, is benefiting, too. In addition to Berkshire’s cash infusion, the firm gets a vote of confidence from Wall Street’s greatest legend at a time of extreme uncertainty.

The collapse of The Bear Stearns Cos. Inc. and Lehman Bros. Holdings Inc. (OTC: LEHMQ), and the hurried sale of Merrill Lynch to Bank of America Corp. (BAC), sent shockwaves through the industry. And many investors, up until this point, were unsure of just how successful Goldman’s transition to a holding company would be.

Buffett is “getting very attractive terms, but Goldman is getting very attractive affirmation of their value from an investor with Warren’s stature,” Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages more than $3 billion, including Berkshire shares, told Bloomberg.

Goldman got an immediate lift in its share price, which rose 4% over the past two days, as investors and mutual funds mimicked Buffett’s strategy.

Buffet also gave a boost to the overall market, as he braved the treacherous terrain of financials.

The purchase “is a significant sign, as Mr. Buffett is of course known for making prudent, long-term investments in companies with good fundamentals and solid growth potential,” Sacha Tihanyi, a currency strategist at Scotia Capital told The Wall Street Journal. “The ‘Oracle of Omaha’ believes not only in Goldman, but also the industry’s prospects over the medium term.”

Jim Cramer Backs Buffett

In an article that appeared on the TheStreet.com, site director and co-founder Jim Cramer broke down both Buffett’s Goldman stake, as well as his recent bid for Constellation Energy Group Inc. (CEG).

“These investments are the first sign that someone, some grown-up, is coming in from the sidelines, not because he has been talked into something that he doesn’t want to do or understand – which has been the case in all of the other bank financings – but because he sees a delicious rate of return that will be hard to take away now that he has put his balance sheet to work, one of the last with any firepower to make a difference,” said Cramer.

Earlier this month Buffett’s MidAmerican Energy Holding Co. offered $4.7 billion, or $26.50 a share for Constellation. MidAmerican displaced Electricite de France SA (PINK: ECIFF), Europe’s biggest power producer as Constellation’s top shareholder Monday, after paying $1 billion in cash for a 19.9% stake.

Both Goldman and Constellation fit into the typical Buffett model of having strong management and well-established business models. But they’re facing problems that have transformed them into bargain-basement profit plays.

“It is more than ironic that [Buffett] came in after a multitude of articles that talked about how Goldman is worth far less than it was before it became a commercial bank, because the truth is that it is worth far more as a commercial bank because it can do more and have access to more capital and is safer,” Cramer said. “The press didn’t believe it because the press gets its information from the [short-sellers]. But Buffett did. Perhaps we should be thinking more like Buffett and less like the press.”

What Buffett’s Been Buying

According to a recent study, buying what Buffett has bought – even a month after his purchases – is a pathway to superior returns. In fact, over the past three years, this strategy has delivered double the return of the Standard & Poor’s 500 Index, according to research by professors at both American University and the University of Nevada at Las Vegas.

That means it’s well worth the time to revisit what Warren’s been up to.

In February, Berkshire took an 8.6% stake in Kraft Foods Inc. (KFT), becoming the foodmaker’s biggest shareholder. That was followed in March by the $4.5 billion purchase of Marmon Holdings Inc. In April, Buffett supplied Mars Inc. with $6.5 billion to help the candy company acquire Wrigley Jr. Co.

Last month, filings with the U.S. Securities Exchange Commission (SEC) shed more light on just what Berkshire was up to during the second quarter.

Prior to putting $3 Billion into Dow Chemical Co.’s (DOW) $15.4 billion takeover of Rohm & Haas Co. in July, Berkshire reduced its investments in Anheuser Busch Cos. (BUD) and Trane Inc., and added positions in NRG Energy Inc. (NRG), Ingersoll-Rand Co. Ltd (IR), and Sanofi-Aventis (ADR: SNY).

According to the 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. 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. By the end of the second quarter, Berkshire’s stake in French drugmaker Sanofi Aventis had shot up by 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 held 3.24 million NRG shares as of June 30.

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

But the acquisitions disclosed to the SEC were 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.

At the year’s mid-point, Berkshire had $31.2 billion in cash, down from $44.3 billion at the end of 2007, Bloomberg News reported.

“It’s nice to have a lot of money, but you know, you don’t want to keep it around forever,” Buffett recently told Bloomberg. “I prefer buying things. Otherwise, it’s a little like saving sex for your old age.”

Source: Buffett’s Goldman Deal Has Big Benefits, but What Else is Berkshire Up To?

Alexander Green says BRK’s drop creates an outstanding buying opportunity. Buffett has an unrivaled track record as an investor. He has always followed a disciplined value-based strategy. And this still holds true today.

BRK.B shares are trading at $3,860, down from a 52-week high of $5,059. This makes them a no-brainer buy right now.

This from Investment U:

Warren Buffett’s holding company Berkshire Hathaway has been the single greatest investment of our lifetimes.

His compounded annual gain from 1966 to 2007 was 21.1% for an overall gain of 400,863%, compared to 10.3% and 6,840% for the S&P 500. However, Buffett experienced a rare earnings letdown during the second quarter of this year.

Although revenue increased 10% to $29.3 billion, insurance related write-downs hurt the company’s bottom line. Still, the shortfall was far from cataclysmic. For the quarter, earnings fell 7.6% to $2.88 billion. Despite the shortfall, the company still maintains a top-notch credit rating and has over $28 billion in cash, a war chest for the world’s greatest investor.

How has Warren Buffett’s investment strategy been so successful? He takes a disciplined value approach to investing. And he sticks with it.

Warren Buffett’s Investing Questions

Before Warren Buffett invests a dime, he asks:

• Is the company in an industry with good economics? That is, is it not in an industry competing on price?
• Does the company have a consumer monopoly or brand name that commands loyalty?
• Can anyone with an abundance of resources compete successfully with the company?
• Are the earnings on an upward trend with good and consistent profit margins?
• Is the debt-to-equity ratio low, or is the earnings-to-debt ratio high? Can the company repay debt even in years when earnings are lower than average?
• Does the company have high and consistent returns on invested capital?
• Does the company retain earnings for growth?
• Does the business have high maintenance cost of operations, high capital expenditure or investment cash outflow? (If so, that’s not good.)
• Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
• Is the company free to adjust prices for inflation?

In short, he makes companies jump through a lot of hoops before he considers putting them in his portfolio.

Buffett’s Investment Strategy – Concentrated Purchases

Buffett also makes concentrated purchases within his investment strategy. For its size, Buffett’s portfolio has few stocks. But once a downturn comes, he buys millions of shares of solid businesses at reasonable prices.

Berkshire is a major player in the markets for insurance, soft drinks, chocolates, shoes, jewelry, publishing, furniture, steel, energy, homebuilding and private jets.

Berkshire owns significant portions in well-known, cheap dividend paying stocks like:

• Coca-Cola (NYSE:KO)
• Wells Fargo (NYSE:WFC), one of the few U.S. banks in good standing.
• Procter & Gamble (NYSE:PG)
• Anheuser Busch (NYSE:BUD), which has seen a major boost in its share price thanks to the takeover bid from InBev.
• Conoco Phillips (NYSE:COP)
• Kraft Foods (NYSE:KFT) and others.

What is Warren Buffett Buying Now?

Besides buying large chunks of Swiss Re (OTC:SWCEY.PK), a major reinsurer, Buffett has been buying unloved – but sound – financial stocks.

He’s increased his position in the Midwestern banking powerhouse U.S. Bancorp (NYSE:USB). (Documents show Berkshire is now the company’s largest shareholder.)

Many household financial stocks have imploded in 2008. Bear Stearns and IndyMac, for example, are gone. Lehman Brothers is down 80% this year. Yet USB has held steady.

Buffett is also buying more Burlington Northern (NYSE:BNI), acquiring shares during the recent market weakness.

Warren Buffett’s Investment Strategy & The Economic Downturn

Why is Buffett buying companies if by his own admission, the economic downturn, is likely to be deeper and longer lasting than generally expected?

• First off, because he knows that nobody can accurately or consistently predict something as big, diverse and dynamic as the global economy.
• Secondly, he knows that even if you somehow knew what was going to happen in the economy, you still wouldn’t necessarily know what is about to happen in the stock market. Perversely, stocks sometimes fall during good times. They often rally during bad times.
• Thirdly, Buffett knows that the stock market is a discounting mechanism. It takes the news and reflects it into stock prices immediately. Who in their right mind would sell their stocks today because he realizes the economy is slowing down? We’ve known that for months now.

Buffett knows that nothing beats the long-term returns available in equities. Where else can you put your money to work today? With real estate caught in a death spiral? In bonds that pay less than 5%? In money markets yielding 2%?

When we first recommended Berkshire Class B shares in February 2001, they were trading at $2,295. At the peak, shares traded as high as $5,059 in December 2007, a 123% return in a little more than seven years.

Yet the B shares are currently trading at $3,860, off 24% from the 52-week high and 20% year-to-date.

History shows that when Berkshire is down 24%, it’s not just a good buy… it’s an outstanding one.

Source: Warren Buffett’s Investment Strategy, Time to Buy the Ultimate No-Brainer

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

Buffett’s investment vehicle, Berkshire Hathaway (NYSE:BKR.A), made its best gains in the ’70s and ’80s, when its tight budget meant it could only investment in small-caps. It is much easier to make huge gains when starting from a low base.

Berkshire now deals with the world’s largest organizations. The next Buffett will be investing in today’s penny stocks. More from Jim…

In 1936, one smart six-year-old purchased a few six-packs of Coca Cola from his grandfather’s grocery story for a quarter per pack and resold each bottle for a nickel apiece. With that initial 20% profit he made of each six-pack, the world’s richest man got his start in business.

Today, that same man owns $12.2 billion worth of the Coca Cola Co. Obviously, I’m talking about Warren Buffet…

Everyone already knows all there is to know about him…or so they think…

Sure, we know that he went to Columbia to study under Benjamin Graham. And, that he’s one of the largest owners in many of the brand names we enjoy everyday — General Electric (NYSE:GE), Anheuser Busch (NYSE:BUD), Bank of America (NYSE:BAC), and of course, Coca Cola (NYSE:KO). He’s also the wealthiest man in the world, totaling $62 billion.

But there is something that only a handful of people know… He wants to be poor again.

That’s right! Back in 1999, he told BusinessWeek “…it’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

The reason for his guarantee is simple… The best opportunities in the world are in small-caps. If you have a tiny company worth 50 cents per share, it’s a lot easier for it to go to $1, as opposed to a $50 one going to $100. But that’s not the only reason Buffett loves small-caps.He also discusses his affinity for finding little nuances in companies that other investors don’t see right away. In a 2005 Kansas University interview, Buffett elaborates, “You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map — way off the map. You may find local companies that have nothing wrong with them at all…”

You can’t do that with big blue chips…

If a small company has a hidden asset that investors haven’t picked up on yet, it would take some work, but you could find it and make big money off of it. Finding a large company with a hidden asset is exponentially tougher.

There are a thousand reasons why smaller companies offer more potential, but at the end of the day, it comes down to one thing. How much more money can I make with small-caps.

Let’s take a look at two charts for a minute:

The top one is Berkshire Hathaway (NYSE:BKR.A), Buffett’s investment vehicle, from 1977 to 1992. The bottom one is Berkshire from 1992 to 2007.

Upon quick glance, they both look pretty good. In fact, they look nearly identical except the spike at the end of the century, which happened in nearly every single stock traded at the time.

But if you look closer there is a big difference between the two charts. Notice how in the first one, Buffett brought investors gains of 10,000%, and in the second, he only brought a 1,200% gain. Now, I know that still sounds pretty darn good (which it is), but the question remains, why did he do so much better in the first 15-year period of Berkshire than the second 15-year period? The answer is small-caps…

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You see, back in 1977, Berkshire was a much smaller company, with a lot less money to invest. So, Buffett was able to invest in smaller companies at the time, including American Express (NYSE:AXP), Disney (NYSE:DIS), and the Washington Post Company (NYSE:WPO)… Those companies were able to grow much faster than the ones Buffett is restricted to now. Now, Buffett has to look at companies worth tens of billions of dollars. In ‘77, he could look at companies worth just a few hundred million dollars.

But to do even better than Buffett, your only chance is to look for companies even smaller. I’m talking companies flying way under the radar. Companies in the tens of millions of dollar range… Simply put, buy penny stocks because Warren Buffett can’t.

Source: Beating Buffett with Today’s Penny Stocks

“Road trip!” Remember those epic words?

When I was seven or 8 years old, my dad and I took a cross-country trip in a beaten-up old VW bug. He had bought it for the princely sum of one dollar, from a friend who had simply gotten tired of fixing the thing. (It needed about $900 worth of repairs.)

I’ll never forget that little bug. It was light blue with rust accents from all the dings and dents. The shifter was a crystal doorknob taken from someone’s house. And the entire back seat had been torn out, making room for a sleeping bag area where dad and I could sleep.

The trip took us from San Jose to Detroit… then down to Atlanta… then a westward swing through El Paso, Texas, and back home again to Cali.

On some of the wide-open stretches where no one was around for miles — just us and the 18-wheelers out in the great American landscape — Dad would sometimes let me drive. I would sit in his lap and steer while he worked the pedals. For an 8-year-old, that was pretty much the coolest thing in the world.

Like rock and roll, the road trip will never die. But it’s certainly taking a beating these days. Based on current trends, this will be the first year Americans drive less since 1980.

The road used to be a symbol of freedom. There are countless books and songs written about it, some more well-known than others. But thanks to the cost of a gallon of gas these days, that symbol of freedom has morphed into a symbol of oppression. The highway has become a driveway: “You want to drive how far? Do you realize how much gas money that would take? Maybe we should just fly…”

My Other Car Is a Hot Wheels

Detroit’s “Big Three” — Ford, GM and Chrysler — are really feeling it, too. With the three-ring circus unfolding on Wall Street, many haven’t noticed how bad things have gotten for motor city.

There are plenty of stats to illustrate just how hard up the big automakers are right now. But here is one of my favorites…

The market cap of General Motors (as of this writing) is $6.4 billion. The market cap of Mattel Inc. — the company that makes “Hot Wheels” — is $7.3 billion. (The tickers are GM and MAT respectively.)

So basically, it’s more profitable these days to make those little toy cars we all used to scoot around the kitchen floor as kids than it is to be the No. 1 or No. 2 volume automaker in the world.

If ever there were a lesson that “bigger ain’t necessarily better,” this would be it. General Motors’ total revenue in 2007 was more than 30 times that of Mattel Inc’s… roughly $181 billion, in comparison to just under $6 billion.

The trouble is, GM booked a whopping loss of nearly $39 billion in 2007… whereas Mattel showed a profit.

Trouble in the Heartland

And here’s an ironic thing: It used to be that U.S. car market was a huge profit center for Detroit’s Big Three. The rest of the world was more of an afterthought.

Now things have been flipped around. It’s the international market that looks good, and the home market that’s dragging the numbers down.

The Big Three are making decent money in regions like Asia, Africa, South America and the Middle East. At home they are drowning in red ink, thanks to sky-high labor costs, tightened belts, and a nasty drop-off in truck and SUV sales. Gas-guzzling SUVs and oversized trucks were huge cash cows before the gas crisis hit. For many years, the American love affair with “big iron” helped Detroit fend off the onslaught of smaller foreign models. Not anymore.

And how about the overseas automakers? How are they doing? I checked in with Sara Nunnally, our globe-trotting foreign markets analyst, to find out.

Sara’s view was surprisingly upbeat. “You’d be surprised to see how well foreign automakers are performing,” she said.

“Take Honda for example… When you combine high commodity prices and a strong Japanese currency, you might expect tough times for a big exporter like Honda. But Honda actually just increased its quarterly net profits by 8%! Its yearly profit forecast remains strong, too.

“And Toyota, while forecasting a drop in profit for this year, is still expected to top GM’s sales for the year, and for the first two quarters is living up to that expectation, selling 300,000 more vehicles than GM so far.”

We already saw that bigger isn’t always better with the GM / Mattel comparison. The ultimate bottom line is profit, not gross revenues or market share. But the fact that Toyota is now so close to confirming the No. 1 crown, and turning a fair profit while doing so, speaks volumes.

The Future Is Elsewhere

So what is the answer to the Big Three’s problems? We already know those problems are set to get worse… much worse.

The 2007 numbers for GM, Ford and Chrysler were ugly as sin — and that was all before gas skyrocketed to $4 a gallon, consumers started cutting up their credit cards, and banks started pulling in their horns on leasing and finance programs for pricey vehicles.

If there were no political element, the solution would be painful but clear… the Big Three should say goodbye to American markets. Let North American operations die, or otherwise naturally shrink back to a viable size.

(I’m reminded here of a tree I came across hiking through the Australian desert. This tree managed to survive countless droughts by letting its limbs die off from the top down, keeping precious water reserves in the trunk and roots. When the rains came back, the tree would resume growth in its upper limbs again.)

On Wednesday morning, the Fed Beige Book comes out. The market looks at this report to see if there is any hint of economic improvement. Last month, three districts reported softer economic activity, four reported slower growth, and the remaining five reported stable activity. I would expect the “softer” or “slower” growth to spread to the districts that reported “stable” activity, as the economy will likely sputter for a while longer.The Existing Home Sales report for June comes out on Thursday, and is expected to show a decline of 50,000 homes sold compared to May. The previous two months the report has managed to beat expectations. I expect it to beat the estimate again this month.

The New Home Sales report comes out on Friday and the market is expecting it to show a decline of 7,000 units. This report has also managed to beat expectations for the last two months, and I also expect it to beat expectations again this month.

The other report of note this week is Durable Orders for June. In May, the report showed no gain, and is expected to post a 0.10 percent gain this month. I am not sure if reports are ever issued in smaller increments, but a 0.10 percent gain is about as small as it gets while still being considered a gain. This report wouldn’t surprise me if it comes in negative, as durable goods orders for the past few months may have been fueled by stimulus checks, which have likely run their course and aren’t being spent in any significant amount anymore.

Earnings Calendar:
Monday: MRK, TXN
Tuesday: CAT, DD, YHOO
Wednesday: BA, ATT, PFE, PEP, BUD, AMZN
Thursday: LLY, F

Source: A Full Week of Economic and Earnings Reports