Buffy the Bozo Buffett Blows his Baloney Wad in Rails? He must have Another Sweetheart Done Deal in the Bag. II

Abstract: This is a continuation of my pervious blog[1] published Nov 4, 2009 after Warren Buffett purchased the Burlington Northern Santa Fe railroad with funds from Berkshire Hathaway. He paid $34 billion and a premium price of 30% beyond the value.  BH’s performance was dismal [2]in 2009 even as the market soared since Mar 9. Buffett apparently has numerous schemes to buy tax credits from Fannie Mae and has secret deals with Goldman Sachs and other banks that are in with Tim Geithner and Bernanke.  This heavy rail system he bought is an old aged disaster in terms of the ecology and must lose untold millions of dollars on commuter rail systems that may well be replaced by light rail in direct competition with Buffett. There is no way he can make money in my view without help from greedy politicians and bailouts to this business from the federal government in the manner of GM and Chrysler. This looks like the next GM disaster to me.

Updates [and changes] from previous blog in blue:

The Buffet performance against the SP500 as of 04 Jan 2010:

“Shares in Berkshire Hathaway, the company that Mr Buffett has run for more than four decades, rose 2.7pc on the New York Stock Exchange last year compared with a 23pc gain in the Standard & Poor’s 500 Index, according to Bloomberg data.

It was the weakest showing by Berkshire, which is based in Mr Buffett's home city of Omaha, Nebraska, since it declined 20pc in 1999 and the S&P gained 20pc. Berkshire has beaten the S&P500 in 15 of the last 22 year.”[3]-- Warren Buffett delivers worst performance versus the S&P 500 in a decade Warren Buffett delivered his worst performance against the US stock market in a decade last year. 04 Jan 2010 [Emphasis is mine in all quotes.]

Update: My fear is this guy can [1] make his own markets and [2] get favors and support from governments and unions to subsidize those markets as they are frantic to ‘add jobs’ and restore the economy to normal. He can apparently lead a flock around at will like the Pied Piper. He paid a huge 31% premium [known as good will] for the rail company on the remaining 77% of stock he didn’t own at the time and what this is based upon is not clear but looks like a mistake on a pure business and growth basis.[4] This is potentially a classic case of back-integration of the sort that sank The Great Atlantic and Pacific Tea Company. Heavy rail is out of date and only suited to carry very heavy cargo such as ships might deliver to our ports.  In the future we expect to see things like robot trucks guided by GPS with no drivers moving freight safely along sparsely traveled roads using methane gas or hydrogen for fuel. Since our imports must decline from the world trade problems [after all, our dollar is sinking and India and China know their dollar reserve surpluses are decaying] it is less likely we will take on more heavy cargo from Asia. It is also a commuter line from many places such as Chicago’s “Metra, on what is known as the BNSF Railway Line to Aurora. Other commuter rail systems are operated by local authorities on trackage either owned by BNSF or operated under an exclusive freight easement: Coaster (San Diego), Metrolink (Southern California), New Mexico Rail Runner Express, Northstar Commuter Rail, and Sounder (Puget Sound)”[5] to Chicago westward[6] and Chicago is the  second most corrupt city outside of New Orleans in the US. No commuter line can make money in the US [Septa in Philly given the union influence and the low fares mandated by local politicians.  This is the age of working at home on your computer not spending hours on the trains commuting to some dingy city. It tracks apparently also accommodate Amtrak; it moves about 10% of the nations coal and much of the grain. The most unsuccessful rail system on the planet for 1/3 of a century is Amtrak because it is polluted with unionism, leftist politics and has never made a dollar since its inception in 1970. Nobody was surprised when the Penn Central crashed.

This is not a progressive, green or high tech business that can add new and novel jobs. This is very old technology that is undermined by politics, greed and corruption.  Their right-of-ways are enormous tax targets for frantic cities.  Their engines leave enormous carbon foot prints. The only basis for making a profit here are government favors, union deals, high government subsidies and preferential government rules, regulations and tax breaks. This is such a tangled mess I cannot see how the scan might work but if it loses money then we can expect the government and unions to jump in and this might be the very next GM or Chrysler that is ‘too big to fail’ and some TARP money might fly that way to bail out Buffett, make him some juicy profits and stick the taxpayer with the rest of the trash as they have done with GM.

This one smells.

There was a famous scam that continues to be reinvented and it goes like this: Somebody calls you up and gives you a guaranteed bet on some stocks. This will work! When the stock goes up, as he promised, he calls back and gives you a second pick and makes the same guarantee. When that pick goes up he calls you back and offers you the Big One. Only a fool would pass up this new tasty morsel so the sucker buys in and the stocks drops.  What has happened is that the scammer had made phone calls to several thousand people using a dozen different stock picks and only called back the marks on the list when their particular assigned stock hit. Same process was used for the second round to provide ‘proof’ that this guy was a stock wizard. The third pick, with very few remaining marks in tow was actually some phony off shore shell where they cashed promptly in the sucker’s money and fled the Caymans. This is a boiler room art form. I wonder if Berkshire Hathaway is playing this game with our government.

A more appealing version of this scam is to observe that some people can apparently just pick the best stocks from a market array and that there must be something innate or magical about this person given their ‘record.’ Might I recall for discussion one Joseph Granville[7] for all of you to wonder about who ‘controlled’ his own markets with his recommendations and then he picked the wrong direction and the whole scam went suddenly crashing down. His Granville Market Letter produced average loses of 20% per year for a quarter century. [8] Nevertheless his calls produced remarkable results on April 22, 1980 (+4.05%) and on January 6, 1981. That was all the ‘proof’ that he needed. Jean Dixon was like that and gained fame with a single prediction about JFK. We must survey a broad picture of all the picks from the celebrated pickers and perform some analytical work or we invite disaster under the conception of the "the Jeane Dixon effect,” which refers to a tendency to acknowledge a few correct predictions while ignoring a larger number of incorrect predictions.”[9] “She predicted that World War III would start in 1958 over some offshore Chinese Islands and that labor leader Walter Reuther would run for president in 1964 and that the Russians would land the first man on the moon.”[10]

Buffy the Bozo does not go so far as to run a freak show “…featuring a trained chimpanzee … could play Granville's theme song "The Bagholder's Blues," on piano” in his works. But the investment world has never had  a sage that lasted very long as we find from  Elaine “Go-Go“ Garzarelli’s predictions of the 1987  stock market crash[11], (along with me). She has done poorly since.[12] I have done better. She called “it” weeks before the crash and I sold out on Wednesday of the week before the Black Monday[13] crash. Her crystal ball must have gone murky as her predictions since then have been spotty. See footnote.[14] She did pick Lehman and Bear Stearns for 2007 and 2008 stock picks, but nobody is perfect. My record is spotty too with picks like Texas Instruments at $86 and Oracle at the wrong time and then Sun. My Arriba pick did soar from $25 at IPO to some $145 with a couple of splits along the way producing a $14,000 return on a measly 25 shares that I paid 525$ for including commissions and a flip or Red Hat was fun—owing the stock for 11 min and making $1100 dollars on the opening of the IPO. But, what heck—that was just luck. There is a limit to luck and sooner later we must find that the ‘luck’ is manufactured if it looks too promising and that is the subject of today’s blog: nobody is that good or that lucky in the long term.

Not to get us too far off the track with personalities we need to make something clear: nobody can predict the markets and most take a big hit along the way like Garzarelli and Granville and many others have done.  The fund manager for my old mutual fund Wellington Fund lost money for 11 years in a row since its inception in 1960 and he is considered one of the best. I can give a wide margin for allowing for guesses for most stock pickers until somebody wants me to dive under a steaming freight train for a nickel or two. The current euphoria about rails by Buffett apparently ignores the salient facts that the unions in league with the Democrats poisoned the rail business in the last 150 years and the whole mess crashed and morphed in the soggy stinky messes now known as Amtrak and Conrail. They were regulated to death by politicians and unions. Union feather bedding and work rules and the mandate that the rail companies keep running empty passenger cars wrecked the business.[15] The worthless Amtrak system has never made a profit since 1970. Nada—zip and their cars stink, are windy and drafty and cold and the food is crap. Here is some political history on train wrecks:

From the New York Times of July 6, 1970. we read:

“THE nation's largest railroad succumbed last week to a lethal combination of politics [Time  blames Nixon here--ed], tight money, mismanagement and fumbled Government rescue efforts. A federal court ordered the tottering Penn Central Transportation Co. into a bankruptcy reorganization.”[16]

Does this sound familiar?

“Many Congressmen and Senators [read Democats here too ed.] questioned whether the Government ought to come to the aid of any private company—large or small—with a record of sloppy management.”[17] [Emphasis is mine in all quotes.]

Now, we spring the trap: More money is apparently need to infuse this corpse so Buffy has decided to split his Class B shares 50:1 to get more “ordinary investors” to buy in. Does this sound like a Three Card Monte game[18] yet?

“Buffett's decision to conduct a 50-for-1 split of Class B shares of his Berkshire Hathaway Inc lowers the price of entry for ordinary investors who long found it prohibitively costly to buy the stock”--More people now likely to invest with Buffett

Tue Nov 3, 2009 3:15pm EST 

Well, there is a sucker punch for you. Can you follow the peanut as it bounces along between the magical walnuts?

He might, but he ignores the economic fundamentals here.  But, he could do this with union help and the Democrats of course, groveling stooges to unionism. The several states where he now owns right of ways are bound to see this as a tax target and the regulators and such will pile on new restrictions and fees and such as what happens when the bandwagon comes to town with a trailer full of fresh straw and all the hookers and cops and politicians grab a sausage sandwich, some beer and jump in the pile for a great ride. He can probably get around these hurdles with some political assistance and make a pile. My view of this wreckage is that Buffett is betting [or is assured] that he can make money in spite of the unionism and regulatory costs and the offensive sputum of the EcoNazis who will rail and bawl over his heavy rail system and cite light rail options instead. He must have a deal cooking here.

Buffet is also in a scam to buy tax credits from the phony and bankrupt Fannie Mae, a disgraceful plundering of the US taxpayer by left liberals. Partnered with his usual crony Goldman Sachs [involved in some complicated preferred stock deal[19]], he is apparently indirectly seeking a tax subsidy with TARP money.

“The credits are virtually worthless to Fannie Mae and require the company to take losses each quarter as their value declines. Companies such as Berkshire Hathaway and Goldman Sachs could use them to offset federal tax expenses.” [20]--Buffett Joins Goldman in Bid for Fannie Mae Tax Credits November 4, 2009

The Bozo has other ‘deals’ with the government or some of their TARPies[21]:

[1] A deal with MidAmerican Energy and Constellation Energy (CEG). This is a nukie pooh Power Company and is allied in some way with the French.[22]

[2] He paid “$5 billion for Goldman Sachs (GS) preferred shares that pay a 10% dividend.” Isn’t that sweet! Another TARPIE Sweetie! [Emphasis is mine in all quotes.]

We currently get 0-0.25% from government bonds. How sweet? Or, how sour??

[3] His company “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.”

[4] “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. That's a whopping potential for over $30B in deals with up to $16B in cash.” A quickie 100% deal falling something short of Hillary Clinton’s 1000X cattle futures deal.[23] Isn’t Wachovia a TARPie?

This is not the program of an ‘enlightened’ investor this is what a political crony does. There is the stench of insider trading swirling around here.

Somewhere buried deep in this rail road junket is some artificial sweetness that has yet to surface. To think that he can make money in an industry polluted by unionism and a myriad of state laws and his offensive energy systems that burn oil and coal for their electricity and fuel is an insult to the Green Weenies[24][25][26][27][28][29][30][31][32][33][34]. They will keep silent only if they are bribed.

Buffy is not an ‘investor’ --he is a political opportunist [like the Harpy—e.g.-- “…one of the winged spirits best known for constantly stealing all food from Phineas [the “government”, ed]”] who swims in the sleazy political latrines of corruption. I suspect these are just fixed insider deals and have little to do with ‘investing.’

I think this railroad gig is a fait accompli and the taxpayers will provide him with huge profits. Buffet’s chimp, played by Goldman Sachs, is playing new versions of The Bagholder's Blues” for the suckers and taxpayers and I think the taxpayers are going to wind up holding an empty bag.

rycK [a 5^th generation Californian in exile]

Comments to: ryckki@gmail.com