>>> Berkshire Hathaway 2013 annual letter

FULL LETTER ATTACHED

Berkshire’s Earnings & Buffett’s Annual Letter

Bloomberg News
For a certain class of investors who look to Warren Buffett for investing advice, today is like Christmas in March. That’s because Mr. Buffett, one of the most successful investors in history, released his annual letter to the shareholders of his Berkshire Hathaway Inc.BRKB +1.05% early this morning.

As our own Anupreeta Das notes, Mr. Buffett typically begins penning his annual letters months ahead of their release. His letters are known for their witticisms, nuggets of advice, and his assessment of Berkshire’s performance the previous year. Often, the letter is the best glimpse the market gets into how Berkshire is faring.

But the letter is widely read well beyond the loyal community of Berkshire shareholders as well because the notes cover a range of topics of interest to retail investors and seasoned businessmen alike. In an advance excerpt from this year’s letter published on Fortune magazine’s website earlier this week, Mr. Buffett warned investors against being swayed by market chatter and pundits exhorting them to buy or sell their investments.


A chart of Berkshire’ top equity holdings on page 16 includes mentions of three investments that don’t get a lot of attention: Munich Re, Sanofi, and Tesco PLC. They’re his three largest holdings of overseas stocks.

Mr. Buffett must disclose Berkshire’s holdings of U.S. equities every quarter, but sometimes can go a year before revealing moves in his largest international holdings. Comparing to last year’s chart, we can see that the Sanofi and Tesco stakes fell and Munich Re was unchanged.

The Tesco decline was previously reported, but we believe the smaller drop in Sanofi hadn’t been disclosed before now. (This chart is a broader look that we normally get of his holding of Sanofi ADRs, a U.S. investment that’s disclosed quarterly.) Please let us know in the comments if we’re wrong about this being new info.

In addition, Berkshire no longer lists POSCO, a massive Korean steelmaker, among its top holdings. Berkshire owned 5.1% of the company a year ago. Again, we’re not sure if this is entirely new information. But it may mean that Berkshire has exited the position.


• 3:08 pm
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• Still Content With Small Prey or Bolt-on Deals
• by Maureen Farrell

Warren Buffett is still hunting elephants, he said, but in the 2013 letter, he wrote much more about bolt-on acquisitions or the hunt for smaller prey to beef up Berkshire Hathaway’s existing portfolio of companies.

Last year, Buffett said that Berkshire Hathaway made 25 such additions to its existing portfolio of companies spending $3.1 billion in aggregate for them.

“Charlie and I encourage these deals,” he wrote, referring to Berkshire’s vice chairman Charlie Munger. “The result is no more work for us and more earnings for you. Many more of these bolt-on deals will be made in future years. In aggregate they will be meaningful.”

Compared to the 25 small, bolt-on deals, Berkshire Hathaway made just two mega-deals last year: financing roughly half of the $23.6 billion buyout of H.J. Heinz Co. and buying all of NV Energy. Mr. Buffett noted that he spent $18 billion on those two acquisitions.

NV Energy, for which Berkshire spent $5.6 billion, was also an add-on to an existing company MidAmerican Energy, Berkshire’s utility subsidiary. NV Energy, Mr. Buffett noted, offers many possibilities for large investments in renewable energy. He specifically called this area one where there will be more “major acquisitions.”

In previous letters, Mr. Buffett has talked much more specifically about his hunger for big buyouts.

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• 3:01 pm
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• 'An Idea Factory'
• by Erik Holm

The bottom of page 8 includes the annual shout-out to Ajit Jain, Mr. Buffett’s insurance lietenant and the man that many Buffett-watchers believe is the leading candidate to bethe next CEO of Berkshire. This year, Mr. Buffett describes Mr. Jain’s prodigious mind as “an idea factory that is always looking for more lines of business he can add to his current assortment.”

In 2013, Mr. Jain was instrumental in creating a new insurance division at Berkshire that focuses on business insurance. On page nine, Mr. Buffett heaps praise on Peter Eastwood, the head of the new unit, a high-profile defection from American International Group Inc.

“Peter has assembled a spectacular team that is already writing a substantial amount of business with many Fortune 500 companies and with smaller operations as well,” Mr. Buffett writes. The new unit “will be a major asset for Berkshire, one that will generate volume in the billions within a few years,” he promises.

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• 2:44 pm
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• Combs and Weschler
• by Erik Holm

Mr. Buffett gives a shout-out to his relatively new investment managers, Todd Combs and Ted Weschler, on page five. Each “handily” outperformed the S&P last year, and apparently bested the returns Mr. Buffett made from his own investing activities at Berkshire “by a lot.”

“If such humiliating comparisons continue, I’ll have no choice but to cease talking about them,” Mr. Buffett jokes.

Mr. Buffett has said previously that the two men will handle all the investing duties for Berkshire when he’s no longer running the show. Notably, he reports that each is now managing a portfolio with more than $7 billion in assets. That’s up from the roughly $5 billion mentioned in last year’s letter.

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• 2:38 pm
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• Buffett: Look to Heinz as a Model Berkshire Deal
• by Maureen Farrell

Warren Buffett has written about his hunt for elephants over the past few years, i.e. large acquisitions. In 2013, the purchase of ketchup maker H.J. Heinz was one of the two elephants he and his partner Charlie Munger slayed.

In his annual letter, Mr. Buffett called the purchase and financing of Heinz as a template that Berkshire Hathaway could use in future acquisitions. Mr. Buffett teamed up with the Brazilian private-equity firm 3G Capital, to buy the ketchup maker for $23 billion in February 2013.

He hints that investors might expect Berkshire to jump into more deals with PE firms.

Mr. Buffett admits that Berkshire’s side of the deal looks like a private-equity deal. The crucial difference he says is that Berkshire Hathaway “never intends to sell a share of the company.” Instead by teaming up with a PE firm, Berkshire Hathaway has the option to buy more of it. (He currently owns about half via $8 billion of preferred stock with a 9% coupon).

But Mr. Buffett will likely pick his partners carefully. Mr. Buffett calls the head of 3G Capital Jorge Paulo Lemann a “friend” and deems his associates talented, notably Bernardo Hees, the new CEO of Heinz and its chairman Alex Behring.

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• 2:29 pm
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• And a Geico Ad, Of Course
• by Erik Holm

That’s followed quickly by a plug for Geico. Jeez. That freakin’ gecko is inescapable.

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• 2:28 pm
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• Float Increases
• by Erik Holm

Mr. Buffett mentions on page four that Berkshire’s insurance “float” increased to $77 billion from $73 billion last year. Float, or the policyholder premiums that Berkshire sets aside to pay future claims, are one of the key engines that have driven Berkshire’s growth over the past five decades. Mr. Buffett describes it here as the “money that doesn’t belong to us but that we can invest for Berkshire’s benefit.” That’s because Berkshire gets to keep any profits they make.

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• 2:25 pm
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• Earnings Guidance, Of a Sort
• by Erik Holm

Page 2 includes a prediction that the collection of Berkshire’s five biggest non-insurance businesses could see an increase in earnings of $1 billion before taxes in 2014. Until recent years, Mr. Buffett hasn’t been very specific about his expectations for earnings growth, but he’s clearly very enamored with these “Powerhouse Five” companies, as he calls them here.

The five include the Burlington Northern railroad; Berkshire’s utility, MidAmerican; a chemical company called Lubrizol; an Israeli machine-tool business called Iscar; and a manufacturing powerhouse called Marmon. All but MidAmerican were acquired by Mr. Buffett in the past nine years.

“If the U.S. economy continues to improve in 2014, we can expect earnings of our Powerhouse Five to improve also – perhaps by $1 billion or so pre-tax,” he writes.

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• 2:22 pm
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• And the Results Are...
• by Anupreeta Das

Berkshire Hathaway’s fourth-quarter and full-year profit and revenue jumped as the giant conglomerate’s businesses benefited from the improving U.S. economy.

Net income for the fourth-quarter was $3,035 per Class A share, or nearly $5 billion, up 9.6% from a year ago. For the full year, Berkshire posted net earnings of about $19.5 billion, compared with $14.8 billion for 2012.

Berkshire brought in about $182 billion of annual revenue, exceeding analysts’ expectations of $180 billion, according to Thomson Reuters data.

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• 2:10 pm
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• That Didn't Take Long
• by Erik Holm

Well, we’re a couple paragraphs in and I’m already wrong. My prediction that he’d immediately acknowledge Berkshire’s underperformance versus the S&P since 2009 didn’t pan out. Last year, Mr. Buffett wrote “to date, we’ve never had a five-year period of underperformance” and warned “our streak of five- year wins will end” if the market does well in 2013.

Instead, one the first page, he moves the yardstick! Now he’s talking about beating the S&P since 2007: “Over the stock market cycle between yearends 2007 and 2013, we overperformed the S&P. Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay.”

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• 2:02 pm
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• The Letter
• by Stephen Grocer

The letter is out. If you want to take a look, click here.

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• 1:55 pm
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• Read Page One
• by Erik Holm

Journalists have learned in recent years that Mr. Buffett is unlikely to bury the big news of the letter somewhere on page 27. If he’s got something major to say, it’s likely going to be in the first couple pages. That’s where Mr. Buffett revealed that he was looking for a big deal in 2011, and where he confirmed that Berkshire’s board had identified a single individual to succeed him as chief executive in 2012.

But the loyal Buffett acolytes (the ones who are currently hitting reload repeatedly on Berkshire’s website) will pour over every word of the letter, of course.

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• 1:52 pm
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• What to Expect From the Letter
• by Erik Holm

There are a couple things we can say for certain about Mr. Buffett’s letter, even before it comes out.

The first: He’ll be sure to warn that Berkshire won’t grow as quickly in the future as it has in the past. He’s been alerting shareholders to that reality for years. Berkshire’s current size, he often notes, make it impossible for him to repeat the astronomical growth that he’s achieved for shareholders in the past. The second: That he’ll take a moment to acknowledge that over the past five years, Berkshire’s book-value growth has underperformed the S&P 500. He warned as much in last year’s letter. It’s worth noting because it’s the first time in Buffett’s five-decade tenure

FT : Soros and Paulson each take €92m bet on Spanish real estate

Soros and Paulson each take €92m bet on Spanish real estate

Construction workers are seen on scaffolding at a building site in Madrid, Spain,©Bloomberg
George Soros and John Paulson are taking major stakes in the flotation of a Spanish property group, reflecting an increasing confidence among investors in the eurozone periphery’s economic recovery.
The two hedge fund managers – who were ranked first and fourth in the world for their total earnings in 2013 – have both taken €92m stakes in Hispania Activos Inmobiliarios, said people with knowledge of the deal.

Last week, Hispania announced plans for an initial public offering of remaining shares – having already raised a substantial part of its €500m target from early-stage investors. Its prospectus is awaiting approval from Spain’s regulators.
Hispania is seeking to list on the Madrid Stock Exchange as a real estate investment trust, focusing on property with scope for value growth, primarily in key cities. It is targeting a double-digit annual total return over a six-year period, people familiar with the plans said. The Reit will be managed by Azora, an independent asset manager founded in 2003 that has accumulated €2.8bn of assets across Europe. Azora refused to comment.
Mr Paulson told the FT: “We are impressed with the Azora management and think they are well positioned to capitalise on the opportunities that are likely to arise in the Spanish real estate market.” Mr Soros declined to comment.
If it succeeds with its IPO plan, Hispania will become the second Spanish real estate company to float since the financial crisis, after property investment company Lar España announced its intention to raise €400m two weeks ago.
Real estate assets in Spain – which tumbled more than a third between 2007 and 2013, according to figures from the European Central Bank – have become increasingly popular among investors in recent months, as properties in the UK and Irish markets have become more expensive in the wake of international demand.
Investment into Spanish real estate more than doubled year-on-year in 2013, to €2.7bn, according to data from Cushman & Wakefield – the highest level since the eurozone economic crisis in 2010.

Anne Breen, head of real estate research and strategy at Standard Life Investments, said: “We expect the size of the listed real estate market in Europe to increase significantly in the years ahead. One word of caution would be that investors should be prudent over less experienced managers in some of the smaller IPOs.”
News of the hedge fund managers’ investment in Hispania comes as an increasing number of hedge funds are betting on an economic recovery in Southern Europe. Mr Soros and Mr Paulson have already taken stakes in distressed companies in Spain and Greece. Funds connected to Mr Soros bought into the heavily indebted Spanish builder FCC last month, while Paulson attracted attention for investing in Greece´s banks last autumn.
Financial institutions in the eurozone periphery are also securing new funding at the highest rate since the economic crisis, according figures released this week. A third of eurozone bank debt issuance has come from institutions in peripheral countries so far this year.

FT : Apple software to drive smart Ferrari

Apple software to drive smart Ferrari

First the mobile phone, now the car. Having revolutionised personal communication Apple now wants to change the way we drive.
The technology group will next week launch its first in-car operating system with Ferrari, Mercedes-Benz and Volvo as it attempts to take the lead in a fierce race to dominate tomorrow’s smart cars.
The breakthrough comes amid a swirl of market rumours that Apple could be eyeing a bid for electric carmaker Tesla Motors. Google and other technology companies are already working on plans to develop their own car models alongside traditional automotive manufacturers.

The deal marks the first time that Apple is embedding its software in devices other than its own branded products. The choice of the Ferrari, Volvo and Mercedes-Benz is seen to be in keeping with the US tech group’s high-end phones.
Apple’s head of internet software and services, Eddy Cue, joined the Ferrari board in 2012, saying at the time that he had “personally dreamed of owning a Ferrari since I was 8 years old and have been lucky to be an owner for the past 5 years.”
Cars connected to the internet and seamlessly integrated with personal communication devices are seen as the harbingers of vehicles that can drive themselves, mobile offices and “mobility solutions” for cities where all vehicles are controlled or monitored from a central database.
Carmakers are engaged in a fierce battle for control of car dashboards as incumbents fight with technology companies such as Microsoft and IBM to develop the software systems that will power the connected cars of tomorrow.
Rupert Stadler, chairman of Audi, used his keynote speech at January’s Consumer Electronics Forum, the technology industry’s annual symposium, to herald a new era of “connected cars” that would see automobiles become “the largest social mobile devices we own.”
The official announcement of Apple’s deal will be made at next week’s Geneva Motor Show, sources told the Financial Times. A number of other manufacturers are expected to incorporate it into models in 2014. Apple, and the carmakers declined to comment
Drivers will be able to use Apple Maps as in-car navigation, as well as listen to music and watch films. Calls can be made through the system, which will tie into the Siri voice recognition platform so that messages can be read to the driver who can respond by dictating a reply.
An Apple powered car has been expected since the launch of its updated iOS 7 software. Cars can already play music through Apple devices but this allows the iOS software on the screen to be built into the car.
Apple showed the first images of the “iOS in the Car” platform at a developer conference last year, which in effect mirrors the iPhone on the in-car display.

>>> Moody's revises Luxembourg outlook to stable from negative; affirms AAA sov

 Moody's revises Luxembourg outlook to stable from negative; affirms AAA sovereign rating
- The key drivers of today's outlook change are as follows: 
(1) Moody's believes there is now a lower likelihood that Luxembourg's government balance sheet will need to contribute to further collective support to non-core euro area countries, and in particular to Italy or Spain. Furthermore, Moody's believes that Luxembourg's exposure to contagion risks within the wider euro area has reduced. 
(2) The Luxembourg economy is steadily recovering, with the financial services industry providing a notable contribution. 

- Moody's affirmed Luxembourg's Aaa rating due to: 
(1) The continued soundness of public finances, as reflected in low debt metrics and high financial flexibility. 
(2) Moody's expectation that medium to-long-term challenges in the economic and public finance sphere will continue to be proactively addressed by the authorities.

>>> Moody's revises Germany outlook to stable from negative; affirms AAA soverei

Moody's revises Germany outlook to stable from negative; affirms AAA sovereign rating
- The key drivers for today's outlook change are: (1) Diminished risks that Germany's government balance sheet will be affected by further collective support to other euro area countries, in particular to Italy (Baa2 stable) or Spain (Baa2 positive), along with reduced contagion risks within the wider euro area. (2) Progress with respect to fiscal consolidation as reflected in nearly balanced budgets in 2012 and 2013 and a declining debt-to-GDP ratio. (3) Diminished risks that Germany's government balance sheet will be affected by a further crystallization of contingent liabilities from the German banking system. 
- Moody's has affirmed Germany's Aaa rating due to the country's advanced and diversified economy, very high debt affordability and a history of stability-oriented macroeconomic policies.

>>> US Gapping down

Gapping down

In reaction to disappointing earnings/guidance: NIHD -24.4%, ELGX -22.2% (also downgraded to Perform from Outperform at Oppenheimer), APEI -15.7% (also downgraded to Market Perform from Outperform at BMO Capital), DECK -13.8% (also downgraded to Hold from Buy at Jefferies; tgt lowered to $75 from $100; upgraded to Positive from Neutral at Susquehanna ), YUME -13.8% (YuMe downgraded to Neutral from Buy at Citigroup), KBR -11.5% (also downgraded to Hold from Buy at BB&T Capital Mkts ), BONA -10.7%, MDVN -10.1% (also downgraded to Underperform from Mkt Perform at Cowen), CHUY -9.7%, PSO -7%, SQNM -6.6%, ENDP -4.3% (Endo Health announces departure of Chief Scientific Officer), PIR -4.3%, AVD -4.1% (light volume), SWN -3.8%,PKT -3.3%, ACAD -3.3%, CLNE -3.2%, DRRX -2%, BID -1.8% (also Third Point LLC Responds to Sotheby's Conclusion That Daniel S. Loeb Would Be an Appropriate Member of the Company's Board of Directors), AMAP -1.8%, SPLK -1.6%, KOG -1.5%, CEMP -1.4% (light volume), OLED -1.2%, GPS -1.2% (Gap's Old Navy opens its first store in Mainland China; upgraded to Neutral from Underweight at Atlantic Equities), HALO -1.1%, NOG -0.9% (light volume), ROST -0.4%.

Select financial related names showing weakness: RBS -1.8%, HSBC -1.1%, SAN -1%, BCS -0.7%.

Airline names lower following UAL Q1 update: UAL -3.7% ( lowers Q1 capacity outlook due to weather), JBLU -0.9%, DAL -0.7%, AAL -0.6%

Other news: MTL -15.6% (down on financing speculation -- co has responded and says it is pure speculation -- see 646 comment for color), IMI -16.9% (light volume, Intermolecular announced that the development activity related to the Collaborative Development Program agreement with SanDisk (SNDK) and Toshiba (TOSBF) has reached its successful conclusion), CGEN -7% (announces proposed public offering of ordinary shares), MGIC -6.2% (announces proposed public offering of its ordinary shares, size not disclosed), NEPT -4.4% ( announces common stock offering ; number of shares to be determine by price of offering), CLNY -2.4% (prices $13 mln shares of common stock), AMPE -2.4% (prices 8.5 mln shares of common stock at $7.00 per share), P -1.5% (following AMZN news), QCOR -1.4% (following yesterday's 7 point decline; reports out indicate the FDA will review lab results discussed in Citron Research article), RDY -1.3% (still checking), RIO -1% (still checking for something specific), NE -0.6% (provides update on the status of drilling rig in Brazil; 77 non-essential personnel were evacuated from the rig without injuries, and no pollution has been reported), DPM -0.4% (prices offering of 12.5 mln common units at $48.90 per unit).

Analyst comments: ITMN -2.1% (downgraded to Neutral from Outperform at Credit Suisse), PAAS -1.4% (downgraded to Hold from Buy at Deutsche Bank), MWE -1.1% (downgraded to Market Perform from Outperform at Wells Fargo; downgraded to Equal-Weight from Overweight at Morgan Stanley), VNR -1% (downgraded to Market Perform from Outperform at Wells Fargo; downgraded to Sector Perform at RBC Capital Mkts), MYL -0.5% ( downgraded to Hold at Needham; even deal fever eventually breaks).

>>> US Gapping up

Gapping up

In reaction to strong earnings/guidance: CETV +19.9% (also announces refinancing of 2016 notes with proceeds from a rights offering and financing provided by Time Warner), OVTI +15.4%, IG +13.1%, YOKU +11.1%, WUBA +10.7%, MELI +10.4%, NMBL +9% (also assumed with a Buy at Needham; tgt $62; strong F4Q & F1Q outlook), REGI +7.2%, SLXP +4.7%, EVC +3.8% (light volume), EPZM +3.7%, AT +3.6%, AL +3.5%, (light volume), TUMI +3% (light volume), JOE +3% (light volume), GLOG +2.9%, BCEI +2.9% (ticking higher), PMC +2.8% (light volume), FNHC +2.7% (thinly traded), MNST +2.6%, QUNR +2.4%, CLVS +2.1%, AUXL +2.1%, DDD +1.8%, SFM +0.8%, CRM +0.6% .

M&A related: SOHU +7.3% (Sohu and Tencent video segment merger speculation), JOSB +3.6% and MW +2.9% (Jos. A. Bank rejects $63.50 per share tender offer; agrees to meet with the Men's Warehouse - willing to consider a higher price), ARIA +1.1% (continued strength following late push higher on M&A speculation).

Other news: MEIP +24% (Treatment of acute myeloid leulemia received orphan designation), CLSN +8.1% (announces positive interim data from Phase 2 DIGNITY trial in breast cancer), CARA +6% (continued strength), NVAX +5.3% (Announces Extension of Contract for Advanced Development of Recombinant Influenza Products and Pandemic Preparedness With HHS-BARDA), QIWI+4.8% (may be attributed to Ukraine plans to limit FX cash withdrawals to UAH15K per day), PRKR +4.3% (. announces Qualcomm (QCOM) dismisses counterclaims against ParkerVision), GLUU +4% (may be attributed to MAT buying MEGA Brands), ZU +2.2% (continued momentum), ESI +2.1% ( S.A.C. Capital discloses 5.0% passive stake in 13G filing), ALU +1.9% (still checking for anything specific), ACT +1.7% (ticking higher; confirms that it has filed an Abbreviated New Drug Application with the FDA seeking approval to market Dronedarone Hydrochloride Tablets 400 mg), WDAY +1.2% (following positive MadMoney mention),WHR +0.7% (ticking higher following positive MadMoney mention), PEP +0.4% (Director Cook in letter to activist Nelson Peltz: Board and mgmt are comfortable and in complete alignment in rejecting your proposal), HOT +0.1% (following positive MadMoney mention).

Analyst comments: MITT +1.4% (upgraded to Buy at Wunderlich; tgt raised to $19), CS +1.1% (upgraded to Overweight from Equal Weight at Barclays), TOT +0.7% (upgraded to Buy from Neutral at UBS), TRIP +0.6% (upgraded to Neutral from Negative at Susquehanna)