Buffet’s V-8 Convertible

Date: Mon, 28 Feb 2011 16:22:58 +0800
Subject: Buffet’s V-8 Convertible

 

“A speaker who does not strike oil in ten minutes should stop boring.”    Louis Nizer

Our chief economist, Bill Belchere, today looks at the impact higher oil prices have on individual economies in his “Macro Matters.” (Attached). Bill looks at the problem if oil hits US$120 a barrel (a barrel of oil, by the way, weighs 306 pounds so oil is still “only” $2.55 a pound, or about the price of organic bulk sunflower seeds. What’s the problem?). There are two areas of concern for Asia; the impact on inflation and the current account balance. The average energy weighting in the Asian CPI basket is 8.8% and in India, Indonesia, Thailand and Malaysia fuel accounts for 10% of the CPI.

Believe it or not, $120 oil represents a 50% increase over the average cost last year so if prices are fully passed on to consumers, prices would rise more than 4% on average across the region. For India that would mean inflation would jump to over 10%. But we know those costs won’t be fully passed on so fuel subsidies will have to rise, hitting fiscal budgets. As Bill writes, “The biggest loser is India… its current account deficit is high and rising, its economic growth is oil-intensive and existing fuel subsidies are already a significant drain on gov’t resources.” China comes out smelling like a rose on this one, though, since the bulk of their energy comes from not so sweet smelling coal.

Rising food prices will cause much more pain at the street level as food’s weighting in the average CPI basket is around 33%. Food as a proportion of disposable income for poor people is quite high and people will go out into the streets on this one. Judging by China’s reaction to fears of the “Jasmine Revolution” causing a similar problem in the Middle Kingdom, I would expect any relaxation of tightening measures will be postponed. Beijing will want to kill inflation dead before it takes the boot off the neck of the economy. This might delay a recovery in the A-shares that I have been waiting for.

$$$$$$$$

This week we get a lot of banks reporting: today is HSBC (5 HK, Buy) and Hang Seng Bank (11 HK, Hold). STAN (2888 HK, Buy) reports Wednesday. We will have more commentary after we get the numbers but I would point out in the Weekend FT newly minted CEO of HSBC, Stuart Gulliver, gave his first interview in the “Lunch with the FT” series. He broke the rules by having breakfast (he is a busy man) and on a Saturday (very busy) at the bank’s HK HQ and while the English reporter ordered coffee and croissants, Stu went for the PC congee.

Probably Not the Executive Bathrooms at HSBC

$$$$$$$$

Also over the weekend, Warren Buffet released his much anticipated annual letter to shareholders in which he reviews Berkshire’s performance for 2010. They have a ton of cash ($38 bn) courtesy of insurance float and the fact the company has never paid a dividend in its history but retains all earnings. The letter is always an enjoyable and educational read with memorable quotes, “Our elephant gun has been reloaded, and my trigger finger is itchy,” is the one being bandied about in the press. Despite a remarkable record, Warren retains his admirable mid-western modesty, “I try to look out 10 or 20 years when making an acquisition, but sometimes my eyesight has been poor.

Ironically he is bullish on Wells Fargo (WFC US) because their dividend levels have been frozen by the Fed and that restriction is likely to be removed soon, “Wells Fargo can then reinstate the rational dividend policy that its owners deserve.” Hmm. However, with all that cash burning a hole in his substantial pocket Warren needs to make a big acquisition to increase earnings power rather than sitting on the hoard waiting for interest rates to rise. As the Sage of Omaha puts it, “A girl in a convertible is worth five in the phone book.” (!)

An Idea for Struggling BYD?

My ten minutes are up.

$$$$$$$

You can get our research by typing MASR <Go> on Bloomberg.

Cheers.Derek Hillen, CAIA

Mirae Asset Securities: Risk is to the Upside

Print Friendly

Add a comment

  • Avatars are handled by Gravatar
  • Comments are being moderated

Spring is Sprung | Rehab is a Sobering Experience