Now trading at $90,560, Berkshire Hathaway class A shares (NYSE: BRK.A) have plunged 60% from their 2007 peak of $149,000. According to Barron’s:

In the past decade, the stock has traded for an average of 1.6 to 1.7 times book value, a measure of shareholder equity per share. The current price-to-book ratio is near the low reached in early 2000, when Berkshire’s stock bottomed at about $40,000.

The turmoil in the financial markets has seriously dented confidence in Berkshire. And some would say with good reason. In March, Berkshire made a loss of about $5 billion on long-term put options on equity indexes – just as share prices were beginning to take off again. And the company has also suffered losses on stakes in  ConocoPhillips and American Express.

But as we’ve been at pains to stress here at Notes, the markets are topsy-turvy right now. And the recent rally has favored what Mr Market has seen as “offensive” stocks (read junk stocks: low quality, debt laden and consumer sensitive) over so-called “defensive” stocks such as Berkshire – those with strong cash positions and low debt levels.

Berkshire class A shares could top $110,000 in the next year, according to Barron’s. This would put them at roughly 1.4 times Barron’s estimate of book value in 12 months time: $80,000 a share. Even better values are Berkshire’s class B shares (NYSE: BRK.B):

Berkshire’s class B shares (BRK-B), worth 1/30th of the A shares, fetch about $2,750 each. The B shares look like a better buy than the A shares, because they sell at a 3% discount to their theoretical value. But the discount has persisted for some time, and could continue, as the B shares can’t be converted into A shares.

Rahm Emanuel is right about one thing: this crisis is an opportunity. Buying Berkshire shares now could be one of the best value plays in a generation.

While this week’s data from the manufacturing and housing sectors will be eagerly anticipated, nothing compares to Friday’s reports on unemployment and the picture of the ailing labor market.  After nine consecutive months of job contraction, few analysts hold out much hope for optimism.  In fact, some believe the jobless rate will climb to 7.5% during 2009.

Clearly the new president will have some major problems to solve, perhaps the biggest being that he’ll have to find a way to restore investor confidence.

After all that’s happened in the global economy and in the stock market in recent weeks – with the tremendous whipsaw volatility, that will be easier said than done.

Even so, watch this week as Money Morning carries several investment reports that will tell you what to expect, what to avoid, and where you may potentially profit.

Stay tuned.

Market Matters

For most investors, Halloween was a welcome treat from the haunted trickery of the markets over prior few weeks.  In fact, despite some frightful economic releases that virtually confirmed recession (as already noted), the major equity indexes received a nice reprieve this past week as investors moved beyond mass hysteria and found bargains in the carnage.  On Tuesday alone, the Dow Jones Industrial Average and Standard & Poor’s 500 Index each shot up more than 10%, and then proceeded with their remarkable (if not illogical) runs as the week continued.

Despite the positive moves, the Dow plunged by 14% in October, while the S&P 500 lost about 17%, making it among the worst performing months in over two decades.  The volatility was almost too much for investors to bear as the Dow experienced triple digits moves from open to close on all but three trading sessions.  Global markets underwent similar gyrations, with Hong Kong’s major index – the Hang Seng Index, for example, plunging 12.7% one day before soaring 14.4% the very next session.

The recent panic seemed to have subsided as some of the stimulus packages began to take effect.  The credit markets have thawed as corporations took advantage of the Fed’s decision to buy short-term commercial paper, thus, providing them much needed liquidity.  Major banks began receiving capital injections from the government as part of the bailout package and were “told” (in no uncertain terms) by their new “partner” to re-initiate lending programs.

Capital One Financial Corp. (COF) and Sun Trust Banks Inc. (STI) chose to be participate in the government’s generosity by selling preferred stock and warrants, though both were rumored to be eyeing weaker institutions as acquisition targets – a a strategy that may have differed from the Bush Administration’s goal of enhanced lending. [Editor’s Note: For an in-depth report on U.S. bank’s using government  money to mount takeover campaigns – instead of for increased lending --  please click here. The report is free of charge].

The week’s quarterly earnings releases were mixed at best though companies continued to warn about future weakness (which will hopefully lead to some positive surprises).  Exxon-Mobil Corp. (XOM) reaped another record quarter and rival Chevron Corp. (CVX) – the subject of a recent “Buy, Sell or Hold” featurue here at Money Morning just saw its profits double during the period.  Bear in mind, crude has plunged over 50% since mid-July (and suffered its worst monthly decline on record) so their future results may not be as strong.

United States Steel Corp. (X) announced favorable earnings, athough it also warned that weakness in commodities could impact its operations. The Procter & Gamble Co. (PG) experienced a better-than-expected quarter, though management reduced its sales estimates for the remainder of the year.  Motorola Inc. (MOT) announced a quarterly loss and laid off 3,000 workers to cut expenses. General Motors Corp. (GM) and Honda Motor Co. Ltd. (ADR. HMC) both reported poor quarters, as automakers struggled worldwide.

Economically Speaking

For days, weeks, months, maybe even years, analysts warned about the dreaded “R” word and, with each new report, the inevitability of such a downturn became more and more possible.

The afore-mentioned third-quarter GDP report confirmed that the economy actually contracted by 0.3% during the period, the worst results in seven years.  By definition, two straight quarters of negative growth translates into a recession, so the economy is officially halfway there (especially since the fourth quarter data is shaping up to be just as depressing).

Sluggish consumer activity highlighted the GDP report, as consumer spending plunged by 3.1% during the quarter. Such activity accounts for about 70% of the growth of the economy, so the ongoing concerns about future employment, market losses, and housing valuations (among others) have kept consumers out of the malls. And those reports now to significantly hinder the upcoming holiday season.  In fact, a recent BDO Seidman survey showed that retail-marketing execs believe their November and December sales will fall by 2.7% from the same periods last year.

On an even more pessimistic note, consumer confidence in October fell to its lowest level ever reported.

Almost lost in the negativity was the fact that new home sales actually climbed by an unexpected 2.7% in September, as bottom fishers found some bargains within the worst housing market in decades.  Still, sales remained more than 30% behind last year’s levels.

The central bankers continued their (somewhat coordinated) efforts to stem the global economic slowdown.  U.S. Federal Reserve Chairman Ben S. Bernanke and friends announced a half-percentage-point cut in the Fed Funds rate, reducing its target for that benchmark for U.S. interest rate. It was the second such move in October.

Some Fed watchers believe that policymakers could drop the rate even lower as conditions seem worse today than when that rate touched this level – in 2003.  Others feel that such moves have become more symbolic than substantive, and believe the Fed needs to halt future actions to let the lower rates work their ways through the system and begin impacting the economy over the next six to 12 months.

In other moves, central bankers in South Korea, China, and Norway each reduced their respective rates, and the European Central Bank (ECB) appears to be leaning toward a similar cut next week.

Weekly Economic Calendar

Source: Uncertainty Escalates as Tomorrow’s Presidential Election Looms