Interesting Tidbits From Buffet's Annual Shareholder Letter

Some interesting observations and excerpts from Berkshire's annual shareholder letter:

* Re-enforced that Berkshire will invest in businesses where profits can be reasonably predicted.

"In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.

Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes.

 * Possible hinting of Berkshire successor?

"If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit."

  * Feels good about the record low housing starts as it's easing the supply of homes and believes that the housing problem will be behind us in a year or so.

"The industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy is to recover. This reason concerns U.S. housing starts (including apartment units). In 2009, starts were 554,000, by far the lowest number in the 50 years for which we have data. Paradoxically, this is good news."

 * Defended issuance of Berkshire's stock for BNI (Burlington Northern Santa Fe Corp.) purchase.

"In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and liked for the long term."

 * Funny end to an insightful letter.

"P.S. Come by rail", asking shareholders to use BNI rail while coming to the annual shareholder meeting.

Chicago PMI Inches Higher But Unemployment Drops Sharply

Chicago PMI released earlier today and the overall index inched higher from 61.5 in January to 62.6 in February (the consensus however called for a decline to 59.7). The report is surprisingly strong on all fronts except employment - Employment sharply declined from 59.8 to 53.0, though any reading above 50 still represents growth. The sharp increase in weekly unemployment claims this month along with this weak employment report doesn't bode well for the BLS reported unemployment rate due next week.

On the bright side, the rate of growth in production and new orders declined slightly in February, and the indices both remained above 60 at 65.2 and 62.2, respectively. Even if growth continues to slow at its current pace, it would take at least 6 months before production and new orders turn negative.

Leading Indicators Show Different Trends

I am looking at the leading indicators from two different sources:
First one is the the Conference Board's Leading Indicator Index (LEI) that was released yesterday. This index comprises of 10 different components with different weights:

i) Average Weekly hours, manufacturing

ii) Average weekly unemployment claims

iii) Manufacturer's new orders, consumer goods and materials

iv) Index of Supplier deliveries

v) Manufacturer's new orders, non-defense capital goods

vi) Building Permits

vii) Stock Prices

viii) Money Supply, M2

ix) Interest rate spread, 10-yr Treasury less federal funds rate

x) Index of Consumer expectations

This US Leading Economic Index (LEI) has been on a roll since Jan-09. It increased 0.3 percent in January'10, following a 1.2 percent gain in December'09, and a 1.1 percent rise in November'09 - all painting a rosy picture.

On the other hand, if I look at the ECRI's Weekly Leading Index (WLI), I see the index topping out almost a month ago. In fact, the index has dropped 2.9% since it's top from the week ending Jan 15th 2010. The index released today dropped 1.2% from last week suggesting continued weakness.

Only time will tell if this is a temporary blip in an otherwise upward trend or the beginning of a new downtrend. Let's keep watching!

Nasdaq down 99.99% as per Yahoo Finance

Yahoo Finance momentarily depicted a staggering 99.99% drop for Nasdaq after the markets close today. The issue is fixed within half an hour but I did manage to take a snapshot for this bug.

NFP Unemployment Rate Due Tomorrow

After the bloodbath in the markets today, all eyes are going to be on tomorrow's NFP unemployment no.s. Few interesting links to read up on the upcoming  BLS Birth/Death adjustments and other NFP data:
- Bloomberg Birth/Death Adjustment Model
- BLS Payroll Revision Announcement
- Good Summary of what to expect tomorrow

Jan US Light Vehicle Sales Drop 4% From Dec (SAAR)

As per the estimates from Autodata Corp., US Light Vehicle sales dropped 4% from Dec (11.25M SAAR) to Jan (10.78M SAAR). The chart below depicts monthly SAAR no.s from Jan'09 to Jan'10. Note that the spike in August is due to the effect of "Cash for Clunkers" program. Although year over year comparison looks good due to a weak first half of 2009, this no. is really low on an absolute scale if we compare it to over 16M SAAR in 2007. It's going to take us a lot of years to reach the peak of 2007.

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