A Father’s Day Gift for Warren Buffett

I was shocked when I read yesterday the auction high bid price for lunch with Warren Buffett had only reach $200,000, with less than 24 hours to go. Below is a chart of previous winning prices for lunch with Warren, courtesy of CNBC:

Mr. Buffett is on a bit of a losing streak, lately. The billionaire’s offer to buy Residential Capital (ResCap) from Ally Financial Inc. (ALLY) before the government-owned company put the home lender in bankruptcy was rejected, according to a May 17^th, Bloomberg article.

The Bloomberg article also suggests that Berkshire Hathaway Inc. (BRK/A) would have paid little cash upfront while taking on potential liabilities. Instead, ResCap voted to declare bankruptcy and arrange a sale to Fortress Investment Group LLC (FIG) and Nationstar Mortgage Holdings Inc. for approximately $2.3 billion.

The Bloomberg story concludes with “Fortress and Nationstar won’t take on the liabilities that Berkshire had proposed assuming…” Former hedge-fund manager Ted Weschler, assigned to negotiate the offer with Ally, happens to be last years’ winner of Lunch with Warren, paying the $2,626,411 for a chat and chew.

I’ve watched WB expound for the past six months about the various virtues of owning real estate at this time. It just so happens a very attractive deal came into my inbox the other day.

Although this would be a light snack for you, perhaps just an appetizer, I know of a portfolio that will become available this June 15^th, through a receivership’s auction. As a fan of yours, I would be remiss if I did not bring this opportunity to your attention to pay $.40 cents for dollar bills. Consider it an early Father’s Day gift.

One of the major real estate firms in this country has sent out a marketing brochure featuring 3,701 units of multi-family housing, comprising of 14 different properties. It is an all cash auction. The portfolio is cash flowing at $27 million, annually.  This is a meal for big boys.

Looking at a quick and dirty calculation of these properties; the cash flows are decent, vacancy rates are small, and in this era of yield starving investors (the 10-year T-note made historical low on June 1, of 1.45%), and you can purchase this cash flow and turn it around within 6 to 9 months in any number of ways.

For comparison, capturing a $27 million a year in cash flow using two-year treasuries, with a current yield of just .26%, would require a cash outlay of greater than $10 billion dollars. Even going out 10 years, your outlay would require $1.7 billion for treasury notes to secure $27 million in annual cash flow.

Below is the list of properties that will be sold to the highest bidder. Due to a confidentiality statement I signed, I cannot get more specific about these properties in an article (have your people call me; I have no people, it’s just me and my Apple iPhone).

Properties	Locations	Total Units	Occupancy	Monthly Cash Flow	Annual Cash Flow
1	Maryland	144	97	$164,682.72	$1,979,084.64
1	Virginia	128	95	$84,268.80	$1,013,901.60
1	South Carolina	112	97	$65,401.28	$787,323.36
1	Florida	193	99	$136,997.19	$1,647,470.28
3	Nevada	860	89	$480,462.00	$5,776,932.00
7	Texas	2,272	95	$1,322,589.61	$15,899,479.32
14		3,709	94	$2,254,401.60	$27,104,191.20

According to Barron’s, a company seeking to become a REIT must satisfy two main criteria: It must derive at least 75% of its revenue from rents and other direct real-estate activities, and it must pay out at least 90% of its profits to shareholders as dividends. In return, those profits are untaxed at the company level, and the hope is that yield-focused investors will flock to the shares.
But you are a man with many options if you decide to make this investment. Off the top of my head, I can see you purchasing this portfolio for one of your current philanthropic organizations. Or, a private label income investment vehicle option for the Berkshire Hathaway employees’ retirement account. Or, you could package this portfolio and convert it into a publicly traded REIT along the lines of AvalonBay Communities, Inc. (AVB), Essex Property Trust, Inc. (ESS), or Mid-America Apartment Communities Inc. (MAA).

UPDATE; AP: The cost to dine with investor Warren Buffett has apparently spiked in value, with one deep-pocketed bidder forking over nearly $3.5 million during a charity auction.

The annual auction for a private lunch with the Nebraska billionaire closed following a flurry of activity in the final hours Friday night. In the end, the highest bid was a record-breaking $3,456,789.

Slipping Into Darkness

From October 29, 2008

The Federal Reserve Board today, at 2:15 pm, announced their obligatory 50 basis point cut of the Federal Funds Rate, from 1.5 per cent to 1 per cent. This is the latest action taken to assuage investors’ fears about the hydra-bear market that has engulfed all capitalism. A triple digit rally was quickly vaporized with an erroneous General Electric rumor concerning the company’s 2009 earnings.

What are not mistaken rumors are the disastrous economic data that continues to flow. On Tuesday came the U.S. consumer confidence index, by the Conference Board, reporting an all time low of 38, down from 68 the previous month. That same day, the S&P Case-Shiller home price index fell 1 per cent, in August from July, and 16.6 per cent, from the previous year. The Census Bureau estimates for the 3rd quarter of 2008, of some 130 million housing units, nationwide, 18.6 million stand empty; 13.8 million year-round, 4 million for rent, and 2.2 million for sale.

On Wednesday, Durable Goods Orders were reported a curved up .8 per cent versus an expected decline of 1.8 per cent. For Thursday, the October 25th week Initial Jobless Claims are announced. Expect a drop of 3,000. Why, I’m not sure.

A General Motors -Chrysler shotgun merger is one step closer to happening, according to reports. If completed, it may add an additional 25,000 auto blue and white collar auto workers to the unemployment line of fixed income investment bankers recently cashiered.

Employment is rising, however, in villages and hamlets across the land as Investment Advisors and Money Managers are deploying their minions to hotel banquet rooms and restaurant’s private cubby holes, armed with clever four-color handouts, PowerPoint Presentations, and empty explanations, as to why their propriety indicators and models could not see the greatest bear market since the Great Depression, sneak up behind them.

I have a feeling that the traditional holiday feathered vertebra – turkey; will not be served this Thanksgiving. Instead, investors will be dining, if they can still afford a meal, on black swan; only recently very, very popular fowl of spenders of others-peoples-money. Of course, it’s too late to sale stocks with portfolios down 30 to over 50 per cent. But, if these Money managers are wrong again, keep some Gray Goose handy.

The Lost Decade: Widespread and Furious

Last Friday morning before the US stocks markets opened, the American financial system was staring into the abyss – again. Complete liquidation had occurred throughout the night in Asia and Europe, and now it was our turn. The US was given a death row reprieve, at least for now.

Virtually every measurement for wealth, even if casually examined since the year 2000, shows a decline in value or no change. The S & P 500, the DJIA, and NASDAQ, closed on December 29, 2000, at the levels of 1,320.28, at 10,786.85, and 2,341.70, respectively. Friday, October 24th, their respective levels were 876.77, 8,378.95, and 1,202.27.

Also on December 29, 2000, the Wilshire 5000 Composite Index closed at 12,175.88 versus 8,806.20, October 24th; the 10-year Treasury note at 5.12 per cent versus 3.69 per cent, October 24th; and Value Line – Geometric closed at 393.47 versus 226.82 last Friday.

REITs, open and closed end mutual funds, individual stocks, and all classes of equity assets have been savagely beaten up by the Great Bear market of 2008, with the same ferocity as it counterpart, the Great Bull Market of 1982-2005, rose. Leverage and deregulation ushered in 30 years of miraculous wealth and prosperity. Now, the tide has reversed. Asset values, first real estate, ultimately all assets, in the short term, have nowhere to go but down.

The federal government is using all of its power to soften the landing, but historically, expansionary monetary policy will only debase our currency and opens the door for massive inflation once we exit the impending recession.

This summer I wrote about the inevitable pain deleveraging would inflict on the economy and why it had to occur. I think we are far from the end of this cycle. Municipal Market Advisors reported municipal bonds staged one of their biggest one day rallies in history on October 22 and the 30-year Treasury bond traded at an unbelievable 3.96 yield Friday. The cash price for gold is currently being pushed lower through forced liquidation.

Baby Boomers, still traumatized by their 3rd quarter retirement account and September brokerage account statements, are having a collective epiphany about their upcoming retirement years. Their careful planning and hard work to secure a comfortable 'golden years' lifestyle has been robbed.

What's next for the economy? Just as all other assets are unwinding, in time, so will the bond markets and the US dollar. By then, TIPS, gold, and non-credit dependent stocks should be your first line of investing defense.

Market Depending on the Kindness of Strangers

To paraphrase Blanche DuBois from “A Streetcar Named Desire”, the Tennessee Williams 1948 Pulitzer Prize winner for Drama for a play, which later became a 1951 movie nominated for 11 Academy Awards, winning four Oscars, the stock market this past week, as well as for the month of July, was beholding to the kindness of strangers. And the primary stranger for the stock market was the gyrating price of oil. Other commodity prices continued to recede from their late June/early July highs, too. The secondary stranger was a dastardly set of economic data that perturb the market in an unkindly manner.

Break out the Dramamine and the Bourbon because after a roller coaster ride like this, six flags has been scratched off my things to do list for the remainder of the summer of 2008. Much of it had to do with short covering, end-of-the-quarter window dressing, and good old fashion profit taking.

The last week in July displayed an intense market; a triple digit decline for the DJIA Monday of 239.61, followed by Tuesday and Wednesday gains of 266.48 and 186.13, respectively, and a triple digit decline Thursday of 205.67. Finally, dry heaves Friday ended the day down 51.70. For the full week, the Dow lost just 44 points stopping at 11,226.32. The S & P 500 closed at 1,260.31 and NASDAQ finished the week at 2.310.96. Both were down for the week as well.

The auto industry had to come clean last week. General Motors (GM) led the way by reporting a $15.5 billion loss or $27.33 per share for the second quarter on revenues of $28.2 billion. GM also mismanaged to lose $39 billion in the third quarter of 2007.

The entire auto industry recorded dismal sales in July; Toyota (TM) was down 18.7 percent, Ford (F) was down 21.5 percent, General Motors was down 32.4 percent, Chrysler was down 34.2 percent, and Honda (HMC), winning the brass ring, was down 9.2percent. Total car sales in July were tracking at 12.55 million annual units, a million units below June. Truly ugly numbers for an economy not headed into recession.

Not to beat a dead horse, the S & P/Case Shiller Index for May reported a 15.8 percent YOY drop in housing prices. This was more than the 15.2 percent drop reported for April. Bank regulators shut down First Priority Bank of Florida on Friday. SunTrust Banks Inc. (STI) agreed to take over the insured deposits and to reopen the six branches on Monday. The deleveraging of America continues unabated.

Speaking of non-surprises, Exxon Mobil (XOM) only managed to save a lousy $11.6 billion on gross sales of $138 billion. Royal Dutch Shell PLC (RDS.A) pocketed $11.56 billion in profits from $131.42 billion, when they reported their second quarter earnings. This works out to almost $1 Billion in net profit each week or every 7 days. Wow. If only the U.S. government owned oil.

Second quarter Gross Domestic Product [GDP] advance report came out at 1.9% which proved that the economy is still expanding although the fourth quarter 2007 was revised down to a negative .2 percent from a positive .6 percent. It was a magnificent work of fiction. That second quarter GDP figure includes the $160 billion stimulus package rebate that was spread throughout the country beginning April 17th. The price of oil closed on June 30th at $140 a barrel which means the pain felt in the economy from the zenith in crude prices was fractionally captured in the 1.9 percent data. Do we need an asterisk next to this GDP figure like Barry Bonds homerun record? Juicing is juicing. The unemployment rate rose to 5.7 percent while an additional 51,000 jobs were lost; the seventh consecutive month for fewer jobs in the economy.

There was improvement in Treasury prices last week, the Two Year Note yield moved down 20 basis points to 2.51 percent and the benchmark Ten Year Note ended the week at 3.94 percent, down 16 basis points. The Ten Year Note auction will be held Wednesday August 6th and the Thirty Year Bond auction is scheduled for Thursday August 7th. The Federal Open Market Committee meets Tuesday, August 5th to review monetary policy. Rates are expected to remain at 2 percent.

August 4th, June Personal Income, June Personal Spending, and June Factory Orders will be announced. August 5th, the July Institute for Supply Management [ISM] Non-Manufacturing Composite Index comes out. August 6th, MBA Mortgage Application Survey Refinancing Index is due. August 7th, Initial Jobless Claims, June Pending home Sales and June Consumer Credit is revealed. August 8th, 2Q preliminary Nonfarm Productivity and Unit Labor Costs are reported.

Batman has now earned $400 million in domestic ticket sales in just 17 days. The caped crusader has still sold fewer tickets than the all time box office champ, the 1996 released “Titanic” that grossed $600 million, domestically. Batman ticket prices are also 50 percent higher than they were for the champ. That’s called inflation.