(Warren Buffett, Berkshire Hathaway annual letter story, updated for Monday tradin)
NEW YORK (
, CEO of
and unofficial cheerleader for the U.S. economy, said the business environment is getting better for Berkshire Hathaway in 2011 and American capitalism is far from being in decline.
Buffett's aggressive stance on more mega-acquisitions -- some market pundits have been predicting that last year's purchase of Burlington Northern would be his last -- his bullish commentary about the U.S. economy, and the impressive performance from Berkshire Hathaway in the fourth quarter, sent shares to a new 52-week high on Monday morning, recently trading at $86.87.
Buffett's annual results, released on Saturday morning, included impressive fourth-quarter numbers, led by recent railroad purchase Burlington Northern and derivatives gains of $1.4 billion. The fourth quarter profit at Berkshire Hathaway rose 43% year over year. Burlington Northern added $1 billion to Berkshire Hathaway net earnings in the fourth quarter. Overall, net income was up 61% in 2010 for Berkshire. Buffett estimates that the railroad will generate more than 30% of after-tax earnings for Berkshire Hathaway.
Berkshire Hathaway's net income increased to $4.38 billion, or $2,656 per Class A share, in the fourth quarter, up from $3 billion, or $1,969 per Class A share, a year earlier. Book value, Buffett's preferred metric for charting company performance, rose in the last three months of 2010 to $157.3 billion, from $149.7 billion on Sept. 30.
One key aspect of Buffett's optimism about the U.S. economy is tied to Berkshire's spending plans and his continued aggressive stance toward mega-acquisitions.
Buffett wrote in the annual letter, "Last year -- in the face of widespread pessimism about our economy -- we demonstrated our enthusiasm for capital investment at Berkshire by spending $6 billion on property and equipment. Of this amount, $5.4 billion -- or 90% of the total -- was spent in the United States.... In 2011, we will set a new record for capital spending -- $8 billion -- and spend all of the $2 billion increase in the United States. Money will always flow toward opportunity, and there is an abundance of that in America."
Buffett also decided to break out Burlington Northern and energy utility MidAmerican Energy in a new reporting segment for Berkshire Hathaway annual letter purposes, as "regulated, capital intensive" businesses.
The tone of Buffett's comments about these two businesses, though, also shows why they are set apart. With Burlington Northern a key player in the U.S. infrastructure and MidAmerican a key provider of energy to Americans in many states, Buffett, as he has stated previously, sees not just a set of American businesses on which Berkshire will spend heavily, but a social contract with America for Berkshire Hathaway.
"All of this adds up to a huge responsibility. We are a major and essential part of the American economy's circulatory system.... At MidAmerican, we participate in a similar 'social compact,'" Buffett wrote. "We are expected to put up ever increasing sums to satisfy the future needs of our customers. If we meanwhile operate reliably and efficiently, we know that we will obtain a fair return on these investments ... Obviously, many millions of Americans depend on us every day."
Buffett was less enthusiastic about the U.S. housing market in which Berkshire has exposure to suppliers, homebuilders and home financing.
"Our businesses related to home construction, however, continue to struggle ... their profits are far below the levels of a few years ago," he wrote. "Combined, these operations earned $362 million pre-tax in 2010 compared to $1.3 billion in 2006, and their employment has fallen by about 9,400."
Buffett predicted that a housing recovery will "probably begin within a year or so," but hedged his bets, writing, "In any event, it is certain to occur at some point."
Buffett pointed to spending plans for these companies as a sign of his confidence, though.
For example, Berkshire subsidiary Shaw Industries, a flooring company, will spend $200 million in 2011 on plant and equipment, all of it situated in America, according to the annual letter.
"These businesses entered the recession strong and will exit it stronger. At Berkshire, our time horizon is forever," Buffett wrote in the annual letter.
Buffett also included some well-timed words on the U.S. housing market, as the Obama administration considers the most significant changes ever to government support of mortgages through
, changes that some critics say will wipe out the dream of home ownership for many Americans.
Buffett clearly wants to have a seat at the table as an overhaul of government policy on home ownership ensues. "We finance more manufactured-home buyers than any other company. Our experience, therefore should be instructive to those parties preparing to overhaul our country's home-loan practices. Let's take a look," Buffett wrote in the annual letter.
"Home ownership makes sense for most Americans, particularly at today's lower prices and bargain interest rates," he added. "All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come."
Buffett seems to be striving for a compromise between killing the home ownership dreams of many Americans and making the home ownership process function better than it has under current lending practices and government support schemes. "A house can be a nightmare if the buyer's eyes are bigger than his wallet and if a lender -- often protected by a government guarantee -- facilitates his fantasy. Our country's social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford," Buffett wrote.
At the same time, Buffett takes the long view of the U.S. economic situation, writing in his typical glass-half-full fashion that investors should not let fear or uncertainty dictate their thinking.
"Commentators today often talk of 'great uncertainty.' But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001. No matter how serene today may be, tomorrow is always uncertain," Buffett wrote in the 2010 annual letter.
Buffett continued, "Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential -- a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War -- remains alive and effective. ... We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America's best days lie ahead."
-- Written by Eric Rosenbaum from New York.
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