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Buffett’s Berkshire Hathaway: Good timing or bad?

Once again, a quarterly report from Warren Buffett’s Berkshire Hathaway has left more questions than answers for markets to ponder. Has another quarter of concerted share sales been an accurate reflection of what he thinks of the current value of equities, given his continued investment in bonds and cash? Or have he and his Berkshire managers misjudged the situation amidst the sudden change of heart by investors in the wake of the Federal Reserve’s monetary policy stance and the surge in share markets late last week?

One thing is certain, though: Buffett and his managers have the Omaha-based conglomerate doing okay, but nowhere near top gear. Nevertheless, they managed to report record quarterly operating earnings of $10.761 billion in the three months to September, with better results from insurance. That was 40.6% higher than the number from the same quarter a year ago, when operating earnings totaled $7.6 billion and took a hit from insurance losses due to a nasty hurricane.

The September quarter’s statutory loss was $12.8 billion, thanks to $24 billion of paper losses on its portfolio—mostly Apple shares. The statutory loss was up sharply from the $2.8 billion loss, which included an Apple loss, in the September quarter of 2022.

The reason for the improvement lies in the better performance of Berkshire’s huge insurance operations, with a mild US hurricane season this year. The insurance operations earned $4.89 billion. A year ago, Hurricane Ian cost the business $2.7 billion, while higher interest rates saw a surge in interest income compared to a year ago.

Berkshire held a record level of cash at the end of September—$157.2 billion (over $240 billion), higher than the previous record of $149.2 billion in the same quarter of 2021. Buffett has made it clear this year that surging bond yields towards 5% are a more attractive destination for the company’s money than equities. Berkshire lifted its holdings of short-dated T-bonds, buying up short-term Treasury bills yielding at least 5%. This saw holdings of bonds surge from $93 billion a year ago to $126.4 billion at September 30, generating more than $5 billion in income in the past 12 months.

Buyback activity continued to slow down as Berkshire shares roared to a record high during the quarter. The firm spent $1.1 billion to repurchase shares, bringing the nine-month total to approximately $7 billion.

Berkshire’s Class A shares have performed well this year. After reaching an all-time high on September 19, the shares dipped as markets sold off in October but surged more than 6% last week to be up 13.9% for the year to date, just ahead of the S&P 500’s 13.2% (after its 5.9% rise last week).

The quarterly report shows Berkshire sold more than $5 billion worth of US and foreign stocks in the third quarter. These sales lifted Berkshire’s divestments of listed shares to nearly $40 billion over the past year. Investors must wait a further two weeks before they can see how Buffett adjusted Berkshire’s portfolio (November 14 for its 13F fund managers filing). But Saturday’s results filing indicated the company sold more than 12 million Chevron shares before it bought Hess for $53 billion in an all-stock deal in late October.

The value of Berkshire’s portfolio of shares shrank to $319 billion from $353 billion at the end of June, a decline fueled by the slide in the broader stock market as investors came to believe that the Federal Reserve would keep interest rates higher for longer. The value of Berkshire’s stake in Apple alone dropped by more than $20 billion, as shares of the iPhone maker fell 11.7% in the three months to the end of September. Apple shares are up 3% since then, but the weak quarterly report for the three months to September didn’t impress investors last week.

Once again, Buffett and the company urged investors to ignore accounting regulations that require an earnings line that includes unrealised losses and profits. “The amount of investment gains/losses in any given quarter is usually meaningless and delivers figures for net earnings (losses) per share that can be extremely misleading to investors who have little or no knowledge of accounting rules,” the company said in a statement.

The improvement in insurance, especially reinsurance, helped cloak weaknesses elsewhere. Berkshire’s third-quarter operating earnings, excluding insurance, fell 20% compared to the same quarter in 2022. As noted previously, weakness in railroad volumes and Berkshire’s significant exposure to residential housing have weighed on earnings outside of insurance. Sales slid at the apparel and shoemakers it owns, which includes Fruit of the Loom and New Balance, and its real estate-related businesses continued to struggle with lower demand due to high mortgage rates.

BNSF also reported lower rail shipment volumes, but the company’s fractional private jet ownership business, NetJets, reported a jump in demand from wealthy clients, and its car dealerships reported rising sales of new vehicles.

While Berkshire scored a very solid increase in operating earnings, the conglomerate did acknowledge the negative economic impact from the pandemic, as well as geopolitical risks and inflation pressures. “To varying degrees, our operating businesses have been impacted by government and private sector actions to mitigate the adverse economic effects of the COVID-19 virus and its variants as well as by the development of geopolitical conflicts, supply chain disruptions, and government actions to slow inflation,” Berkshire said. “The economic effects from these events over the longer term cannot be reasonably estimated at this time.”

This boilerplate type comment from the company suggests a lack of confidence about the prospects for 2024.

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