Berkshire Buying Defies Market Pessimism - TheStreet

Berkshire Buying Defies Market Pessimism

The market seems uncertain about the outlook for the U.S. economy on Thursday, but Berkshire Hathaway shares are nonetheless evidencing market optimism.
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(Berkshire Hathaway story updated for market close, Berkshire announcement)

OMAHA, Neb. (

TheStreet

) -- The recent 50-to-1 stock split in

Berkshire Hathaway's

(BRK.B) - Get Report

B shares was expected to increase trading in shares of the Warren Buffett investment company -- but should Berkshire Hathaway share performance be defying the general sentiment on the U.S. economy?

The news on Tuesday that Standard & Poor's was going ahead and adding Berkshire Hathaway to the S&P 500 Index was expected to

give Buffett shares a boost -- and it did, with close to 20 million shares traded yesterday.

While all of these events related to Berkshire Hathaway's stock split have, more or less, played out according to expectations, it is interesting to note that Berkshire Hathaway shares traded up again on Thursday, a day when all the broad market indexes -- including its new index home, the S&P 500 -- are down.

Late in the day on Thursday,

Berkshire Hathaway also announced that it would not issue any new shares -- or what is known as an "index add" -- in response to its addition to the S&P 500. What's more, Berkshire said it issued the statement due to the inquiries it had received in the past few days about adding more shares.

There has long been academic research and market evidence that

inclusion in the S&P 500 adds pop to a stock, but that pop usually occurs ahead, not after, the anticipated S&P move.

So why is Berkshire receiving such a sustained pop in share price, while the broad U.S. equity market that its holdings reflect trade down again? On Wednesday, it was just that Berkshire Hathaway's 5% gain was a much larger gain than the broad markets.

At the close on Thursday, however, Berkshire Hathaway shares were up 3.6%, while the S&P 500 and the Dow Jones Industrial Average were both down by more than 1%. Financials were down half a percentage point.

On Thursday, Berkshire Hathaway also eclipsed its previous 52-week high -- just achieved on Jan. 21, of $73.43. Berkshire Hathaway finished Thursday at $73.88.

Berkshire Hathaway's portfolio reflects, in several important respects, an outlook on the U.S. economy. Most famously, Warren Buffett recently said that his acquisition of

Burlington Northern

(BNI)

was "an all-in wager on the U.S. economy."

The

Berkshire Hathaway portfolio represents some of the biggest publicly traded stock among the U.S. corporate elite, as well as privately owned operating subsidiaries spread across big U.S. cyclical industries, including housing, furniture and jewelry.

Consumer discretionary spending indexes were down on Thursday, as were major U.S. real estate market indexes. Berkshire, on the other hand, up for the second consecutive day, and again trading at high levels, with more than 14 million shares traded on Thursday.

A bet on Berkshire is a bet on

Coca Cola

(KO) - Get Report

,

Wal-Mart

(WMT) - Get Report

,

Wells Fargo

(WFC) - Get Report

,

American Express

(AXP) - Get Report

, and

Kraft

(KFT)

, among others. All of these stocks save Wells Fargo were down on Thursday -- with American Express down more than 3% -- though while their losses mirrored the general market pessimism on Thursday, they represent a fraction of the Berkshire value.

Of course, the Berkshire Hathaway portfolio is a lot more than a pool of publicly traded big-cap U.S. stocks, or it would really be no more than a large-cap mutual fund struggling to beat the index in which it is now a component company.

Dow Jones Newswires

noted on Thursday afternoon that some investors may be betting on a cyclical turn in the reinsurance business. Buffett has struck two big deals in the past week related to Berkshire's reinsurance business -- including upping the Berkshire stake in Munich Reinsurance above 3% -- and reinsurance is a key profit driver for Berkshire.

Is it just speculative activity ahead of expectations that index funds will be buying up Berkshire shares in droves? One would think that, given the likelihood of its addition to the S&P 500, this kind of speculative activity would have already occurred in the weeks preceding the announcement.

Bill Bergman, a Morningstar analyst among the select group of analysts who cover Berkshire Hathaway -- though that select group is likely to grow in a hurry -- said there may be some crowd-psychology at work.

"It's an exciting event, and it opens peoples' eyes, and crowd-psychology can work in interesting ways. Investors may be looking at Berkshire more closely, and they like what they see, and don't want to be left behind the curve," Bergman said, adding, "there can be a tipping point in crowd-psychology." Bergman stressed, however, that no conclusions should be drawn by investors by this anomalous divergence between U.S. economic bet Berkshire and the U.S. economy itself.

Technical traders have already zeroed in on the $70 threshold as a key indicator of a durable price target for Berkshire Hathaway. On Tuesday, before the S&P announcement, Berkshire Hathaway was still trading in the high $60s, even though it had reached above $70 last week when the B shares split.

Technical traders indicated that Berkshire Hathaway shares' ability to remain above the $70 level may indicate that it is a good long bet in the near-term.

-- Reported by Eric Rosenbaum in New York.

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