IB Net Payout Yields Model

Why is everybody selling when Buffett is loading up?

It intrigues me when the greatest investor of our times has been on a buying spree and yet the markets have just had the worst week in 7 years per CNBC. Guess the heard mentality in the financial markets continues to live strong. After all we're just now coming off commodity and real estate bubbles. Why not have an overdone stock market sell off?

Below our the highlights of the recent Buffett purchases:

  • 9/19: MidAmerican Energy and Constellation Energy (CEG) reached a definitive merger agreement in which MidAmerican will purchase all of the outstanding shares of Constellation Energy for a cash consideration of approximately $4.7 billion, or $26.50 per share. Berkshire Hathaway (BRKA/BRKB) owns 87.4% of MidAmerican.
  • 9/23: Berkshire Hathaway is paying $5 billion for Goldman Sachs (GS) preferred shares that pay a 10% dividend. Berkshire also gets the right to pay $5 billion more in Goldman common shares at $115 each.
  • 9/29: MidAmerican Energy today announced it has agreed to purchase 225 million shares, representing approximately a 10 percent interest, in BYD Company Limited (1211.hk). The investment is valued at 1.8 billion HK dollars, or approximately $230 million U.S. dollars.
  • 10/1: Berkshire Hathaway agreed to buy $3 billion of preferred General Electric (GE) stock. This stock pays a generous dividend of 10%. On top of that, Berkshire gets the option to buy $3 billion of GE common stock at $22.25 per share, well under the current trading price of around $25 a share.
  • 10/3: Wells Fargo (WFC) said early Friday that it would pay 0.1991 of a share of common stock in exchange for each common share of Wachovia Bank (WB) in a deal worth $15B. Berkshire Hathaway is the largest shareholder of WFC.
Thats a whopping potential for over $30B in deals with up to $16B in cash.

News by Bloomberg of the worst month ever for hedge funds in September might be a big reason for such a negative market this last week. As those redemptions come in the market might have faced a lot of forced selling this week. After all, we know the rescue plan passed on Friday should've been net positive to the market. Todays action after the passage in the House smelled of desperate hedge funds attempting to sell at the best valuation they could get prior to redemption payments.

Buffett may have been early in the market, but I'll be surprised to see him down much on any of his investments. Of course, his cash deals with GE and GS were clearly better deals then any small investor could get, but it's hard to see why anybody would be a net seller when Buffett has gone on a widespread buying spree. Heck, Buffett has even come out on more then one occasion and stated that the rescue bill approved on Friday would likely be profitable to the government. Yet, most taxpayers are overwhelmingly negative on the bill.

As he is famous in saying:
Be fearful when everybody is greedy and greedy when everybody is fearful.
Everybody is fearful right now.

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