First with Financial Comment from Arabia

Buffett dumps $26bn T-bonds for private equity

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warren-buffett-richest-man-in-americaStock market observers have been mesmerized this week by the biggest deal of Warren Buffett’s long and highly successful career as an investor, his $26 billion in cash and $10 billion in debt acquisition of US railroad Burlington Northern Santa Fe.

Clearly the Sage of Omaha is one step ahead of the game as usual. Perhaps the trick to understanding his move is to think what is he exchanging for this acquisition.

Bond exit

Actually Buffett will not have his $26 billion in cash. It will largely be held in treasury bonds. So rather than see this as a vote in favor of an over-valued stock market, you could see this as a vote against bonds.

US bonds pay very little return and are denominated in a devaluing currency, or one that was devaluing until its recent uptick. Viewed in this light exchanging bonds for a US railroad – with stable and possibly rising income and solid assets that will inflate in value over time – does not look so stupid.

At the same time, Buffett is taking this public company private, or at least into his conglomerate where it will no longer be valued as a railroad. It will be re-rated to become a part of Berkshire Hathaway.

So is Buffett out to dump a very large bond position in advance of some sort of coming bond crisis over US debts and devaluation?

Bond crisis

If you read the history of major financial crises then they have never ended before a crisis in the bond market. If you were the Sage of Omaha sat on billions dollars of bonds would you not seek an exit before that particular crisis hit the fan?

And what if you could find a way of achieving that while being able to trumpet a pure investment in America Inc. like Burlington Northern Santa Fe?

Repositioning in current markets is a game for the experts, and it is not for nothing that Warren Buffett was voted the world’s wisest investor in a Bloomberg poll last week. But you need to dig deeper to get a handle on what he is really doing.


Written by Peter Cooper

November 5, 2009 at 8:22 am

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