Oracle of Omaha - Annual Meeting

OMAHA, Neb. (AP) -- Billionaire Warren Buffett's shareholders always look forward to the time he spends answering questions at Berkshire Hathaway's annual meeting, a chance to learn from one of the world's most successful investors.

Buffett said the question-and-answer period, when he and Berkshire vice chairman Charlie Munger field any and all queries, is his favorite part of the meeting too because he likes to know what's on shareholders' minds.

"Our attitude is partnership. These people are our partners," Buffett said during interviews about three hours before he was scheduled to take the stage.

Buffett and Munger spoofed the presidential campaign in Berkshire's annual cartoon, which is part of the humorous movie at the start of the meeting.

The cartoon depicted Munger running for president as a write-in candidate. Munger's fictional "Financial Independence Party" was born over a lunch between Munger, Buffett and Bill Gates, who is a Berkshire board member.

At a campaign event, the cartoon Munger delivered real change by offering a boy two dimes for a quarter. Munger had an answer for all the nation's ills, and all of them involved products made by Berkshire subsidiaries.

Global warming? Munger recommended eating a Dairy Queen Blizzard a day. Health care? Munger said eat more See's Candy.

Economic problems? Munger promised to put Buffett in charge of the Federal Reserve, the Treasury Department and the Commerce Department.

Cartoon versions of the real Democratic presidential candidates scoffed at the notion of Munger's candidacy. An animated Hillary Clinton simply laughed while Barack Obama lamented that he thought he was the candidate of change.

But the cartoon of Republican John McCain celebrated Munger's candidacy: "Excellent! A candidate older than I am."

At the meeting later Saturday, shareholders will likely ask about the state of the economy as well as Berkshire's latest earnings report.

On Friday Berkshire reported first quarter net income of $940 million, or $607 per share, in the quarter ended March 31. That's down significantly from the net income of $2.6 billion Berkshire generated a year ago.

The biggest reason for the drop in net income was an unrealized $1.6 billion pretax loss Berkshire recorded on its derivative contracts.

Including the derivative losses, Berkshire's net investment losses in the quarter totaled $991 million. A year ago, the Omaha-based company recorded a $382 million investment gain.

Berkshire officials predicted the crowd at the Qwest Center Omaha would top 30,000 Saturday. The crowd has grown bigger every year as shareholders bring family and friends to hear Buffett and Munger, and more business school groups make the trip to Nebraska an annual pilgrimage.

Some shareholders, like Jack Smith, are attending the Berkshire meeting for the first time. Smith said he traveled from Springfield, Ill., partly out of curiosity and partly for the "entertainment value" of the weekend.

"And for the opportunity to listen to Warren and Charlie," Smith said.

But the age of the two men has some shareholders wondering how many more times they'll be able to listen to Berkshire's chairman and vice chairman hold court. Buffett is 77, and Munger is 84.

That's part of why Michel Paquet and Lorie Armstrong made their second trip to the annual meeting from Calgary in Canada. "We came here to support Warren," Armstrong said.

But that doesn't mean shareholders are all that worried about what will happen to Berkshire once Buffett is gone because of the strong corporate culture Buffett and Munger have established.

"I will expect some volatility on the transition, but I'm ready for that," said Paquet, who plans to hold his Berkshire stock for many years to come.

Smith said the key question is how will the public and the stock market judge Berkshire whenever the transition happens.

"I'm pretty comfortable the company is in good hands once they're (Buffett and Munger) no longer here," Smith said.

To replace Buffett, Berkshire plans to split his job into three parts -- chief investment officer, chief executive officer and chairman.

In his letter to shareholders, Buffett said the company's board now has three internal candidates for CEO and four external candidates who could take over managing the company's $75 billion stock portfolio and $35.6 billion cash.

Berkshire's board knows who to choose for the jobs once Buffett can no longer do the job. Buffett has refused to publicly identify the candidates.

Buffett has said previously that when he dies, his son will take over as chairman to ensure Berkshire's culture is preserved. Howard Buffett already serves on the board.

Berkshire Hathaway Inc.: http://www.berkshirehathaway.com

Bill Gross - All Quiet on the Western Front

"He fell in October 1918, on a day that was so quiet and still
on the whole front, that the army report confined itself to the
single sentence: All quiet on the Western Front. He had fallen forward
and lay on the earth as though sleeping. Turning him over one saw
that he could not have suffered long; his face had an expression
of calm, as though almost glad the end had come."

Erich Maria Remarque’s 1929 masterpiece quoted above stands tall in its eloquent soliloquizing of the horrors of war. "The wisest were just the poor and simple people," he wrote. "They knew the war to be a misfortune, whereas those who were better off…were beside themselves with joy." His description of WWI’s life in the trenches could not envision the multipartheid fronts of modern-day Iraq with its randomly spaced IEDs and computer-directed flying drones, yet the carnage is the same and probably just as futile. Remarque’s Western Front has migrated to the Middle East, but the human condition with its conflicted politics remains unchanged: there are combatants – each with God on their side and a cause to die for. Yet for the soldiers, only survival and camaraderie seem to prevail once in the trenches. "We have lost all sense of other considerations," wrote Remarque in describing the horrors of his day’s impenetrable line. "Only the facts are real and important to us. And good boots are hard to come by." They remain so, I suppose, although in recent years the scarcity has morphed to bulletproof vests and steel-plated Humvees. Still, they die, and we are the poorer because of their loss. May the living fly home in their boots and plant them once again on American soil.

There have been multiple fronts in the investment markets in recent years with varying strategies – much like we are witnessing in Iraq. For PIMCO though, at least from the standpoint of my biased and vulnerable memory bank, there has been a consistent and easily definable plan ever since late 2006:

1. Avoid the subprime mortgage meltdown and prepare portfolios for the consequences of a housing downturn. (Mission accomplished!)
   
2. Anticipate the monetary policy changes of the Fed by purchasing high quality front-end investments that would benefit from Fed Funds cuts to as low as 2%. (Mission nearly accomplished!)
   
3. Reinvest in high-quality financial institutions which suffer capital impairment during the anticipated recession. (Mission uncertain!)
   
4. Ultimately invest in lower quality bonds as corporate defaults rise to peak levels. (Mission for the future.)
   
5. Be mindful at all times of the effects of a globalized economy/financial marketplace and its consequences for real interest rates, inflation, and currency levels. (Mission ongoing.)

While this plan has obviously been quite successful to date, it hasn’t come without risk nor sleepless nights. The first half of 2007 was fraught with self doubt and hundreds of "expletives deleted" amongst the PIMCO platoon pinned down in the trenches of a bulled-up credit market where seemingly nothing could go wrong to shake the confidence of levered investors. In order to avoid getting our heads shot off, we had to go without the plentiful L+ 25 basis point rations that were feeding an entire universe of soldiers strung out along the same impenetrable trench of risk taking. Ah, but then the pivotal turning point – the collapse of the Bear Stearns hedge funds in June of 2007, the horrific days of mid-August, and now the aftermath of another Bear Stearns debacle one year later. We have not only survived, but gained territory and are eager for further advances.

It is here, however, where battlefield generals have to pause and consider whether to mount an all-out attack or wisely assess the enemy’s flank in addition to its hollowed center. PIMCO has two CIO generals now, and for several months, Mohamed El-Erian has been counseling to at least consider a fat-tail possibility that could stop us in our tracks at #3 on the list of our strategic battle plan.

Mohamed suggests the possibility, not the probability, that recent euphoric moves in equity prices and credit market spreads might be premature. The market’s justification may rest on the two-barreled conclusion that, 1) the delevering of the financial system is reaching a natural culmination as prices stop going down and banks and investment banks recapitalize their balance sheets, and 2) that numerous and previously unthinkable policy responses have restored enough liquidity to relubricate our finance-based economy. That may well be the case he counsels, but these are changes centered on Wall Street and "The City." Life on Main Street, U.S.A. and its English counterpart may be another matter. Recession, and its vicious-cycle effect on employment and consumer spending, remains a threat and this recession, although currently mild and as of yet not even officially validated, may not be your garden-variety, father’s Oldsmobile-type of downturn.

To that possibility, PIMCO’s Investment Committee (IC) turns to member Paul McCulley whose Keynesian roots are fertilized even more so by the less famous Hyman Minsky, himself a Keynesian but with a financial system orientation. In retrospect, it was McCulley who introduced PIMCO’s IC to Minsky’s Stabilizing an Unstable Economy back in 2002, and thus laid the groundwork for step #1 in our strategic plan – avoiding the subprime mortgage meltdown. That book, Paul’s endorsement, and a lot of collective commonsense and internal research have been worth billions. But to the point: Main Street instability in the form of consumer spending – itself a function of a destabilizing downward spiral in home prices – must be contained, or else the current giddiness of the markets’ premature armistice may remorph into the guns of August (2007). Home prices and their real economic fallout are the financial markets – and PIMCO’s – vulnerable flank. And it is Minsky with his analysis of prior 20th century financial crises who serves as a key observer from his outpost of decades past.

To be brief and blunt, the reason that home prices are so critical, he would claim, is that they are at the forefront of potential asset deflation. Because the U.S. and selected other economies are now substantially asset-based and dependent on stable and upward tilting prices, a deflation of an economy’s primary financial asset can be ruinous. Its deflationary thrust must be countered, wrote Minsky, or else the battle might be lost. If so, the real economy as Mohamed El-Erian suggests, might become so shell-shocked that financial markets once again turn down instead of up.

Minsky, McCulley, El-Erian, Gross, Feldstein, Summers, and a host of others would likely argue that additional policy measures are required to support home prices which have fallen by 10% over the past 12 months and are set for a repeat by this time in 2009. Lower Fed Funds? They would, in PIMCO’s opinion, likely do more damage than good from this point forward. Foreign and domestic investors are being fleeced with negative real interest rates, and the weak dollar, stratospheric commodity prices and steadily rising import inflation are the result. The better alternative is to initiate a limited mark-to-market write-down of private mortgage debt as envisioned in the Dodd-Frank Congressional proposal combined with government-subsidized loans at below market rates. Look at it this way: you can allow a home to fall in price from $400,000 to $300,000 and force an upside-down "short sale" foreclosure, or you can reduce the homeowners’ $400,000 mortgage to $350,000, refinance the loan through the FHA at 4% and stabilize the neighborhood and its home prices. Surely Republicans, Democrats, AND Wall Street mortgage holders (PIMCO included) can recognize that stability as opposed to freefall market clearing is the better alternative, especially if the pain is shared by all parties. It is our best chance to cushion Minsky’s asset-based deflation.

Other policy initiatives such as the Bank of England’s 100 billion dollar term funding of their own mortgage market as well as the continued potential for U.S. agencies or the Fed to participate in similar maneuvers are promising alternatives with a unified objective in mind: support home prices. A continued housing deflation of several trillion more dollars now threatens to impact the real economy which in turn might produce a reversal of financial market fortunes. For now, all is quiet on our investment front and the war appears to be winding down. We remain on the alert however as we seek to implement step #3 and eventually step #4 of our investment battle plan. Remarque wrote of his WWI soldiers: "We live in the trenches…we fight. We try not to be killed. Sometimes we are. That’s all." At PIMCO, with a much less dangerous but perhaps equally probabilistic occupational outcome, we will keep our heads low in hopes of fighting for another day.

William H. Gross
Managing Director

Warren Buffett

Financier invited to join candy deal by Goldman Sachs.

Mars Inc's planned acquisition of Wm. Wrigley Jr. & Co. carries a familiar script for Warren Buffett, who during a previous market rout said he felt like a kid in a candy store. The $23 billion deal will create a company that will reshape the global sweets business and got done because the three strongest financial firms in the US wrote the checks.

Last month, JP Morgan Chief Executive James Dimon encouraged clients to seek financing. "Leveraged finance is still there, give us a call," Mr. Dimon urged. Bankers are willing to lend, albeit to good clients. It isn't just talk. Mr. Dimon himself approved a $11 billion loan package to longtime client Mars to help the candy maker capture Wrigley.

Approval, wasn't accompanied by a lot of hand-wringing; this one took the approval of only about five people and just five days to arrange.

Goldman Sachs banker, Byron Trott, an adviser to Wrigley and a longtime adviser to Mr. Buffett, made the connection.

Wrigley had rebuffed Mars several times because the price wasn't high enough. The financing let the buyers pay a premium - 28% over the current share price, that the sellers accepted.

Buffett is in for $6.5 billion. His company throws off so much cash, that despite investments such as the $4 billion for 80% of Iscar, an industrial group based in Israel, and last year's $4.5 billion purchase of 60% of Marmon Holdings - Berkshire's cash balances has held stubbornly between $43 billion and $45 billion at the end of each of the past three years. Mr. Buffett concedes the problem is, the company prefers to invest $5 billion to $20 billion in its deals.

Berkshire Hathaway (BRK-A) $128k per share - up 18% the past year.

Kitchen-Table Talks.......

On April 11th, Bill Wrigley Jr. - the 4th generation to lead the company, goes to Virginia for a meeting with Paul Michaels and Oliver Goudet, both of Mars. They ate sandwiches. By the early hours of Monday, they had finalized a deal. Wrigley shareholders will receive $80 per share. Paying 32 times Wrigley's expected earnings for 2008.

Chocolate Confectionary Rankings ($74 billion):

1. Mars...$11 billion
2. Nestle...$9 billion
3. Hershey...$6 billion
4. Kraft Foods...$6 billion
5. Cadbury Schweppes...$5 billion

Sugar Confectionary Rankings ($43 billion):

1. Cadburry Schweppes...$3 billion
2. Perfetti Van Melle...$3 billion
3. Nestle...$1 billion
4. Haribo...$1 billion
5. Mars...$1 billion

Gum Rankings ($19 billion):

1. Wrigley...$7 billion
2. Cadbury Schweppes...$5 billion
   

NFL Draft Database

www.nfl.usatoday.com

Covers past 20 years - 5395 players drafted.

Food Costs A Major Worry

Consumer food inflation has been running at a 5.3% annual rate in the past three months, the Labor Department says. The largest price increases are white bread 16%, milk 13%, eggs 35%, bananas 17% in 12-months.

Economists predict a third of the US corn crop will be diverted to government subsidized ethanol production.

Americans devote about 10% of take-home pay for food.

Online Learning has greater credibility

Online education is booming, and is becoming increasingly accepted by employers. A survey by Zogby International finds that 83% of CEO's and small-business owners who are familiar with online education (also called "distance learning") believe that online degrees are as credible as those earned on a college campus.

Online courses are now offered by more than two-thirds of all US colleges and universities, and 35% of schools offer programs that are entirely online, according to the 2007 Sloan Survey of Online Learning.

About 20% of the USA's 17 million college students say they have taken at lease one course online.

New Conforming Loan Limit

So what is it? Done, all but signed. Right? High cost areas to be mapped out, complicated mathematical calculations to be done. New conforming loan limits, up to $730,000. To be in effect, beginning July 1st and ending December 31st.