Warren Buffett Thinks the Market is Cheap

Berkshire Hathaway BRK announced this morning that it would be buying back stock for the second time in at least the last thirty five years. In the press release, Berkshire wrote, "Our Board of Directors has authorized Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise. If we are correct in our opinion, repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest. Berkshire plans to use cash on hand to fund repurchases, and repurchases will not be made if they would reduce Berkshire's consolidated cash equivalent holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire." Both class A and class B shares are eligible for the buyback program, but it speaks more about what Warren Buffett says about the stock market, especially his own stock. Buffett has always said that he would always look to invest in other equities, as opposed to paying a dividend or a buyback of the company's own stock. Whitney Tilson, of T2 Partners was on CNBC, and share some thoughts on the announcement. Tilson is an investor in Berkshire Hathaway. He said, "I'm almost in shock," referring to the buyback announcement this morning. Tilson said this was "totally unexpected." Tilson was asked about what he thinks of Buffett doing this, for the first time since the NASDAQ bubble in 2000. The fund manager said that he believes it is a reflection of how cheap Berkshire Hathaway stock is. It also reflects the reality that it is hard to put large amounts of money to work. It also gives the Omaha-based company time to look for companies it would like to own as a whole. The company has three options, including this buyback announcement. Buffett, Charlie Munger, and the rest of the company would much rather own companies as a whole. Buying undervalued securities is also something he would rather do with his near $60 billion in "dry powder", (he recently bought stock in Bank of America BAC) but according to Tilson, "This is a powerful third option." Whitney also said that he believes that this means that Warren Buffett is somewhat bullish on the view of the world. He does not think this is late 2008 or 2009, as he did not announce a buyback back then when the world was crashing. He can buy back a lot of his own stock, and still "bag an elephant", to quote Buffett. Tilson said that the economic data is still very murky, and it is not clear yet the U.S. is in a recession. Buffett is sitting in Omaha, seeing Berkshire's businesses still doing well, and the company is "drowning in cash." As of the end of the second quarter, it had $45 billion in cash, and $35 billion in short term bonds earning nothing. That $60 billion is one third of the company's current market cap, so it will allow it to do other things while it is buying back stock. Buffett is telling you something. He's bullish, and he likes his own stock. ACTION ITEMS:

Bullish:
Traders who believe that Buffett is right might want to consider the following trades:

• The buyback will benefit both classes of stocks, so both classes could see a nice pop on this announcement.

Bearish:
Traders who believe that Buffett is wrong may consider alternate positions:

• If you believe the world is slowly turning back in a 2008 moment, Buffett is wrong, and could be wasting his money here. Berkshire shares are likely to get cheaper if the world sees a double-dip recession.
  
  

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