America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.
Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.
For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.
Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”
Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.
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But that’s not good enough to protect public pension stakeholders.
No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.
The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.
Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?
Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.
Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.
Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.
Berkshire Hathaway’s 4 Worst Performing Stock Positions
Warren Buffett often talks about the importance of holding onto equities despite the many ups and downs they may experience because that’s just the nature of value. Investors must hold on and ride the waves, it is said by the sage, because sometimes the stock may require just that kind of patience.
That said and understood, it may be testing the patience of the Omaha investment brain trust to see how far down certain of their favorites have fallen. Berkshire Hathaway’s BRK.B biggest position by far, Apple AAPL , hangs in there, despite the threat from China to Taiwan Semiconductor, Tim Cook’s number one chip supplier.
In the meantime, while that plays out in Asia, here are Warren and Charlie’s 4 worst performing positions. It’s based on the drop from the stock’s most recent peak on its weekly chart to its current price. Whatever the fundamental reasons may be, this is some serious negative price movement:
Liberty Latin America (NASD:LILA) -66%
This Bermuda-based communications company operates in Chile, Puerto Rico, the Caribbean and different locations around Latin America. Bundled services are offered to homes and businesses with video, broadband internet and mobile phone available. Note that Liberty Latin America has been trading below that downtrend line since mid-2019, a long time, even in Omaha.
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RH (NYSE:RH) -64%
This specialty retail firm is headquartered in Corte Madera, California. In a news release dated 6/29/2011, CEO Gary Friedman put it this way, “The deteriorating macro-economic environment has resulted in lower than expected demand since our prior forecast, and we are updating our outlook, particularly for the second half of the year.
“Taking into account the macro-economic conditions and our current business trends, we are providing the following outlook for the second quarter and full year, which assumes demand will continue to soften during the remainder of fiscal 2022: Fiscal 2022 net revenue growth in the range of (2%) to (5%), with adjusted operating margin in the range of 21.0% to 22.0%.”
NU NU Holdings (NYSE:NU) -62%
At least it could be said that Nu Holdings has broken above the weekly downtrend line and appears to show the very beginnings of a bounce. The Brazilian digital bank perhaps IPO’ed at just the wrong time as interest rates began to rise significantly, making it a tough go for an interest rate-sensitive equity.
Snowflake (NYSE:SNOW) -59%
Snowflake is a software application company that calls itself a “globally distributed enterprise with more than 3,000 employees working in 20 countries.” The company’s earnings per share this year are off by 20.90% and there is no “past 5 year” EPS record yet as it hasn’t been around that long. One thing that very likely appeals to Berkshire Hathaway: Snowflake has no debt, long-term or otherwise. Now, if the stock price would just stop going down.
(This list leaves out Paramount Global’s minus 75% from its most recent weekly peak price to its current price — because it’s an extreme kind of outlier.)
Not investment advice. For educational purposes only.
Crucial Takeaways From Berkshire Hathaway’s Second Quarter 2022 Earnings
Berkshire Hathawa BRK.B BRK.B y’s (BRK/A, BRK/B) slipped to a loss of over $43.7 billion in the second quarter versus a profit of over $28 billion in the same quarter of 2021. Thanks to sharp declines in the stock market, that result is dominated by losses from the investment portfolio since unrealized gains from their portfolio are included in earnings. Operating earnings, which remove the distortion from market changes and better reflect the firm’s earnings power, for the quarter rose sharply by 39% versus 2021. Year-to-date operating earnings rose by 19% over the same period in 2021. Providing an illustration of the value from share repurchases, per-share operating income for the second quarter increased by 43% versus 2021.
Because the Covid-19 pandemic negatively impacted most businesses, including Berkshire, in early 2020, comparing current results to pre-pandemic 2019 results is helpful. Operating earnings for the second quarter of 2022 are 51% above 2019. And thanks to share repurchases, operating earnings per share are a whopping 68% above 2019.
A further look into the different operating segments in 2022 shows strong earnings growth across most segments versus 2021. Notably, the operating income for all segments is significantly above the pre-pandemic levels of 2019.
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Insurance: Second quarter investment income was 56% higher than 2021 and 27% better than 2019, primarily due to higher interest income from short-term investments. Investment income was depressed by ultra-low interest rates implemented in response to Covid, but the Federal Reserve has raised rates aggressively in the second quarter to fight inflation. Investment income should continue to see improvement as the Federal Reserve is likely to be in hiking mode for the remainder of the year. While underwriting results were positive overall, Geico had an underwriting loss. Geico continues to suffer from more frequent auto claims and rising claims severity due to the higher valuation of used vehicles. Geico has posted an underwriting loss year-to-date, which drove the 53% decline in Berkshire’s year-to-date underwriting profit relative to 2021. During the annual meeting earlier in the year, there was a question about the strength of Berkshire’s Geico car insurance business relative to Progressive PGR (PGR). Progressive has done better than Geico recently based on their earlier adoption of telematics. Geico recently moved in that direction, and it will be instructive to see if Geico can close the gap in the coming years.
The two most essential concepts in insurance investing are “float” and underwriting profit. In simple terms, float is created for insurance companies because insurance premiums are paid before any claims are made by the insured. Insurance companies can invest the float, sometimes for years, before insurance losses are reimbursed. Berkshire has a history, unlike many insurance companies, of earning an underwriting profit, meaning that their float costs them nothing and makes them money in addition to allowing them to earn a profit off of investing the float. An underwriting profit means the insurance premium exceeds all insurance claims and expenses. Berkshire had an underwriting profit for the second quarter of 2022, year-to-date 2022, and calendar years 2021, 2020, and 2019. Berkshire’s float was flat at approximately $147 billion versus the level on December 31, 2021, and above the $138 billion on December 31, 2020. Though float is not as valuable in a low interest rate environment, its value increases as yields rise. Float per share has increased to $99,961 from $98,960, aided by share repurchases.
Railroad: Berkshire owns the Burlington Northern Santa Fe (BNSF) railroad operating in the U.S. and Canada. Net operating earnings rose 10% over the same quarter in 2021 and 24% over pre-covid 2019. Revenue was higher due to higher pricing and a fuel surcharge driven by higher fuel prices, while volume was slightly lower.
Utilities and Energy: This business generally provides steady and growing earnings, which one would expect from what primarily consists of regulated utilities and pipeline companies. In June 2022, Berkshire bought the Berkshire Hathaway Energy Company (BHE) common stock owned by Greg Abel, Berkshire’s Vice Chairman – non-insurance operations, for $870 million, and Berkshire now owns 92% of BHE. A question about a possible conflict of interest stemming from Abel’s partial direct ownership of a Berkshire subsidiary was asked at the annual meeting, so this transaction ends any concern in that area. Interestingly, this group also operates Berkshire Hathaway HomeServices (BHHS), the largest residential real estate brokerage firm in the country. The slowdown in housing activity is evident in the results. The 2022 earnings suffered from lower mortgage and refinance activity thanks to higher interest rates and a decline in closed brokerage transactions.
Manufacturing, Service and Retailing: This segment consists of many diverse businesses, so this analysis will focus on a few significant themes when looking at this segment. Berkshire’s aerospace exposure remains substantial despite selling its publicly traded airline holdings earlier in 2020. Berkshire previously took a $10 billion impairment charge on the Precision Castparts (PCC) business due to its exposure to the COVID-disrupted aerospace industry. PCC’s pre-tax earnings rose in the second quarter relative to 2021, primarily due to higher demand for aerospace products. Berkshire sounded more optimistic about the outlook of PCC with a rebound in domestic flight and the need for narrow-body aircraft. Management suggested that future growth is predicated on the ability to increase production since the company has suffered from worker shortages and a restart in Boeing 787 production. Berkshire’s FlightSafety and NetJets continued to see a sharp rebound, with training hours up 29% and customer flight hours rising 25% year-to-date versus 2021. Unfortunately, the earnings of aviation services were dented by increased costs, including those for subcontracted aircraft, due to the sharp jump in customer flight hours.
Housing-related businesses like Clayton Homes, Shaw, Johns Manville, Acme Building Products, Benjamin Moore, and MiTek posted sharply higher earnings relative to 2021. Berkshire continues to note that prices were increased to offset cost pressures, and supply chain disruptions remain an issue. Perhaps the early signs of a slowing housing market are showing up in the group, with higher selling prices due to higher costs being the primary driver of revenue growth rather than unit volume and product mix. The most significant portion of the retailing segment is Berkshire Hathaway Automotive (BHA), owning over 80 auto dealerships. BHA had lower quarterly revenues despite a higher average unit sale price. Unit sales were lower, reflecting significant new vehicle supply shortages attributable to the global computer chip shortages and other supply chain disruptions. Berkshire noted that second-quarter apparel and footwear revenues plunged relative to 2021. In addition, earnings were lower for their furniture retailers, including Nebraska Furniture Mart, with prices higher due to increased costs but lower transaction volumes. This weakness in some of the retailing exposed businesses is not a surprise, given similar statements from others in the industry. Berkshire’s McLane unit had lower profits in 2022 versus 2021. McLane is a wholesale distributor to retailers and restaurants. The decline in earnings was primarily due to supply chain constraints, labor shortages, truck driver shortages, and higher inventory costs. Berkshire continues to expect the challenging environment for McClane to continue through 2022.
Other: The segment has a significant profit for the second quarter and year-to-date 2022 primarily due to foreign currency gains and an increase in equity method earnings at Kraft Heinz (KHC) and Pilot. The foreign currency exchange rate gains were generated from bonds issued by Berkshire Hathaway and denominated in British Pounds, euros, and Japanese Yen. Investment losses from non-U.S. dollar investments generally offset these gains. These foreign currency liabilities are not a concern as Berkshire has significant assets and earnings denominated in these foreign currencies. This segment includes companies’ profits that must be accounted for under the equity method due to the size of ownership and influence on management. The after-tax equity method earnings have Berkshire’s proportionate share of profits attributable to its investments in Kraft Heinz (KHC), Pilot, Berkadia, Electric Transmission of Texas, and Iroquois Gas Transmission Systems.
Berkshire bought back $1 billion of its stock in the second quarter. Until an announcement in mid-2018, Berkshire had only made repurchases when the stock was trading at less than 1.2 times the price to book (P/B) ratio. While that constraint is now relaxed, it is still a good indicator of the general range when aggressive repurchases will likely be seen. Berkshire’s P/B ratio was between 1.2 times to above 1.5 times during the quarter, so it makes sense that the pace of repurchases slowed. Berkshire only intends to repurchase shares when the “repurchase price is below Berkshire’s intrinsic value, conservatively determined.” The P/B ratio remains a reasonable proxy for gauging Berkshire’s intrinsic value. It worked well this quarter since Berkshire only acquired shares in June, and the price-to-book didn’t fall below 1.2 times until then. Still, Warren Buffett and Charlie Munger’s judgment about its intrinsic value versus other available uses of capital could differ from that simple measure in the future.
In addition, Berkshire made other purchases. Berkshire made $6.2 billion in stock purchases for its portfolio while selling $2.3 billion in stocks for a net additional investment of $3.9 billion in publicly traded equities. One purchase was additional shares of Occidental Petroleum OXY (OXY). Berkshire now owns approximately 17% of the outstanding shares of Occidental, with a market value of $9.3 billion at the end of June. More about the possible reasons for the Occidental investment is here. Berkshire expects to close on the purchase of Allegheny Corporation (Y) in the fourth quarter for approximately $11.6 billion in cash. Allegheny shareholders approved the transaction on June 9.
Summary: Quarterly results are generally not meaningful for Berkshire since it is managed with a focus on increasing long-term value and not meeting quarterly hurdles. This ability to take advantage of time arbitrage has served the company and shareholders well over the years. The goal in looking at the results is to see if the segments are generally operating as expected and consider the capital allocation decisions made by Warren Buffett and Charlie Munger.
Operating earnings for the second quarter of 2022 grew by 39% over 2021. In addition, 2022 operating earnings are 51% above pre-pandemic 2019 levels. 2022 year-to-date operating earnings growth is similarly impressive at 51% and 40% above 2021 and 2019, respectively. In recent years, a significant capital allocation decision was made to increase share repurchases. This activity signals that Buffett and Munger believe Berkshire Hathaway’s price is below their intrinsic value estimate. If they are correct (and there is no reason to doubt them), the purchases are a value-creator for the remaining shareholders. Operating earnings per share for 2022 are now 68% above 2019, benefiting from the share repurchases! The slowing repurchases in the second quarter reflect the higher valuation of Berkshire until June and the ability of the duo to find some other opportunities with an attractive risk versus reward for investing capital.
One of Berkshire’s crown jewels in insurance businesses, GEICO, continues to be challenged by the impact of the pandemic. The underwriting loss at GEICO was disappointing, but results should improve as auto claims normalize with auto pricing. The performance differential versus Progressive (PGR) will also be part of the equation to get the business back on track. The better news was the investment income from the insurance business continued to rebound sharply as the Federal Reserve aggressively raised short-term interest rates. Excluding the insurance business and consistent with the S&P 500 data, cost pressures have caused profit margins to decline relative to second quarter 2021 levels. Even though non-insurance margins are lower than 2021, margins remain higher than the pre-pandemic second quarter of 2019.
Berkshire’s stock price trailed the S&P 500 in the second quarter, declining by almost 23% versus a total return of -16% from the S&P 500. Year-to-date through the end of June, Berkshire’s price is almost -9%, while the S&P 500 has a total return of nearly -20%. Despite additional investment purchases, cash levels were above last quarter. Berkshire retains a fortress balance sheet with cash and equivalents of over $101 billion, which provides flexibility to take advantage of opportunities, including repurchasing its own stock. Berkshire has stated that there would be no stock repurchases if it would cause cash levels to fall below $30 billion.
Despite the headline loss in the second quarter, Berkshire’s businesses are performing exceptionally well, aside from woes at GEICO and some slowing due to macroeconomic headwinds. Shareholders should take comfort in knowing that the firm continues to be managed to survive and emerge stronger from any economic or market downturn. Berkshire retains its Fort Knox balance sheet and a diversified mix of businesses. The firm maintains the unique ability to take advantage of significant opportunities when disruptions or crises provide them.
Bitcoin Prices Are Trading At An ‘Extreme Discount,’ Says Bloomberg Analyst
Bitcoin is currently trading at a substantial discount, according to Bloomberg Intelligence senior commodity strategist Mike McGlone.
He provided this assessment as the digital currency, the most valuable in terms of market value, has been stuck below $25,000 since June, TradingView data shows.
McGlone relied on several observations when making his case, and he also cited technical analysis, focusing on a specific indicator.
“The benchmark crypto reached the lowest ever vs. Its 100-week moving average in July,” he noted, describing this situation as being an “extreme discount within an enduring bull-market.”
[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
The Bloomberg analyst also highlighted the importance of equities, which have repeatedly displayed a notable correlation to bitcoin.
“The bottom line is there are few more powerful forces in markets than when the stock market drops at high velocity like it did in 1H,” he stated.
McGlone also stressed the key role played by the Federal Reserve, which has been making aggressive rate hikes in 2022.
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This development could potentially provide headwinds for risk assets like cryptocurrencies and stocks by boosting the yields paid by lower-risk securities and making them more appealing.
“Don’t fight the Fed has been my mantra for risk assets since late last year,” he stated.
“Bitcoin and cryptos were a key part of the 2021 rush and thus part of the 2022 flush, but I see Bitcoin and Ethereum coming out ahead.”
“Bitcoin is well on its way to becoming global digital collateral in a world going that way and Ethereum is a primary driver of the digital revolution as evidenced by making possible the most widely traded cryptos — dollar tokens,” McGlone stated.
Bitcoin ‘Incredibly Oversold,’ Says Analyst
Budd White, cofounder and chief product officer of crypto software company Tacen, also weighed in on the matter, claiming that the digital currency is currently trading far below its true value.
“I’m still very much of the opinion that Bitcoin is not only incredibly oversold but also in a major accumulation zone. With every run up of price with Bitcoin, we both its market value and its utility value grow,” he stated.
“If you look at Bitcoin’s Market Value to Realized Value, or MVRV, we see it around one, which suggests the market value of this asset has fallen to its actual utility value,” White noted.
“This also suggests to me that because of the massive liquidations that we have experienced in recent months because of Terra, Three Arrows and the lot, the number of remaining forced sellers in the market is relatively small. Bitcoin, therefore, does seem to have a pretty sturdy bottom at or around $18,000.”
White noted that in spite of having strong support near the aforementioned price level, bitcoin has been “hovering” close to $23,000 lately.
“So far – and beware that crypto prices can change quickly and dramatically – it has very much held up despite a jobs report that came out that was way, way higher than expectations,” White added.
“Markets appear to already be pricing in even more aggressive monetary tightening to be taken by the Federal Reserve as a result of these soaring numbers. Stocks have dipped and yields have surged,” he noted.
“And, again, Bitcoin is just hovering,” said the market observer.
“I’m not saying that we are experiencing a decoupling of Bitcoin from the equities. Certainly we could be in for another leg down in terms of Bitcoin’s price.”
“But this relative strength tells me that the bulk of the Bitcoin selling might be behind. And barring any exogenous shock to markets – such as credit markets looking to be on the verge of breaking – I’m thinking that investors are still looking at Bitcoin as a decent buy at these levels,” White stated.
While White spoke to bitcoin’s recent price resilience, Tim Enneking, managing director of Digital Capital Management, stated that the cryptocurrency could once again fall to its recent low below $18,000, which it reached in June.
“Bitcoin has made a nice, if not totally convincing, move from $20k being recent resistance (until July 15) to being support (after that date, tested once on July 26-27, and solidly above since),” he stated.
“While that has been a nice move, it’s been quite slow and, seemingly, uncertain, especially given the summer doldrums,” said Enneking.
“As a result, most people are still hedging their bets as to whether BTC will again try to test the June 18 bottom at $17.6k.”
“Going forward, I would expect more generally slideways, slightly positive movement and that the recent bottom will not be retested. It’s a 50-50 proposition whether $20k will be retested,” he claimed.
This index, which ranges between zero for “Extreme Fear” and 100 for “Extreme Greed,” currently stands at 31, a figure that denotes “Fear.”
This figure has been following a steady, upward trend since June 19, when it reached a value of six, indicating a state of “Extreme Fear.”
Further, the index has stood at 20 or higher since July 18.
The picture below provides the latest reading for the measure.
Armando Aguilar, an independent cryptocurrency analyst, commented on how this measure has changed in recent weeks.
“The Fear and Greed Index has recovered from the low 20s after the major collapse of some protocols and crypto service providers,” he stated.
“Investors have returned to purchasing digital assets and the fear gauge has trended towards yellow/buy territory,” said Aguilar.
“Historically, the market has seen price momentum when the index reaches mid 30s,” he noted.
An Uncertain Outlook
Aguilar went on to provide a broader analysis, assessing the big picture.
“There is still macroeconomic and geopolitical pressures lurking so Bitcoin could hit previous lows if equities take a hit and investors retreat from risk-on assets,” he stated.
“Yet, given the current environment and if Bitcoin can break upper resistance levels, it could experience some positive price momentum.”
Disclosure: I own some bitcoin, bitcoin cash, litecoin, ether, EOS and sol.
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