Mick Weinstein The Week's Best Stock Blogs

There was nowhere to hide as the latest wave of selling crashed down this week. Even Warren Buffett's Berkshire Hathaway got smacked hard. Shares of the Oracle from Omaha's conglomerate fell 23% over the last four sessions, and have declined a whopping 43% in the last year. So much for Berkshire representing a safe haven for risk averse value investors or Buffett being a market untouchable.

The latest decline in Berkshire stock has an element of mystery to it. David Gaffen of WSJ.com's MarketBeat blog explains: "Berkshire's credit-default swaps [CDS], a measure of insurance against default on [Berkshire's] debt, have risen dramatically in the last few weeks, and reflect a higher cost of insurance than the remaining brokerage firms like Morgan Stanley. As of Thursday it cost $490,000 to insure $10 million in [Berkshire] bonds against default..." That's a huge figure, and while that lack of confidence in Berkshire's ability to pay off its obligations has certainly contributed to its recent stock price decline, nobody's quite sure who's actually buying the CDS at these high levels, or why. Meanwhile, the debate rages among bloggers as to whether Berkshire stock at a 5-year low represents a once-in-a-lifetime investment opportunity or fool's gold.

Who's Afraid of Buffett's Solvency?

One source of concern on Berkshire that everyone's focusing on now: In recent (and better) times, Buffett sold put options on world stock exchanges, reaping an immediate $4.85 billion windfall while betting that those indexes would not decline substantially over a 15-20 year period ending 2019-2027. With global markets now in freefall, there's some concern that Berkshire will be on the hook for up to $37 billion in losses from these derivative contracts (it's already taken mark-to-market losses of nearly $2 billion on the puts).

Portfolio.com's Felix Salmon explains why the very owners of those put options issued by Berkshire may be jacking up its CDS price: "The people who bought derivatives from Berkshire weren't worried about counterparty risk at the time. But now, looking at what's happened to triple-A counterparties such as AIG and the monolines, everybody is worried about counterparty risk. And nowhere is counterparty risk higher than in these derivative contracts written by Berkshire Hathaway -- because even if [Berkshire's debt is] downgraded, it only has to put up a negligible amount of collateral... [so] anybody needing to hedge their BRK counterparty risk has no choice but to buy CDS protection, whatever the price."

Gaffen raises another factor: "in recent weeks, the credit-default swaps [market] has seen a marked decline in liquidity and trading, so a smaller amount of insurance contracts purchased can still cause large shifts in prices of a particular credit-default swap."

And Jeff Matthews, author of a recent book on Buffett's annual gatherings, speculates that the CDS buyers "might be insurance companies that have purchased reinsurance from Berkshire (Berkshire does a huge business in catastrophic reinsurance-hurricanes and such), hedging their exposure in case the 'Oracle of Omaha' suddenly loses his touch."

So Is Berkshire Now a Screaming Buy?

Hedge fund manager Whitney Tilson takes a careful look at Berkshire's books and statements and brushes off most of these concerns: "Berkshire is among our largest positions, so the decline has been painful, but we're delighted to have the opportunity to add to our largest investment at such attractive prices, and have been doing so aggressively... Berkshire's freefall in the past few weeks is certifiably crazy - and a buying opportunity that will long be remembered."

A year ago, fund manager Chad Brand agreed with Barron's magazine that Berkshire appeared overvalued, but now Brand concurs with Tilson that Buffett's stock is attractive: "wouldn't you agree that even 1.5 times tangible book would be a solid entry point for a long term investment in Berkshire Hathaway? I certainly think so. Well, guess what? [On Wednesday] the stock closed at $84,000 per share, which just happens to be both a new 52-week low and exactly 1.5 times tangible book value of $86.6 billion. Not only does that look cheap, but all of us non-billionaires can buy the class "B" shares for only $2,783 each."

Todd Sullivan reminds us this isn't the first time the market's turned bearish on Buffett: "The current environment reminds me of when I first bought Berkshire shares late in 1999... Buffett then was being called 'out of touch' and Berkshire shares had taken a beating as folks rushed into tech stocks." Yet from late 1999 to late 2007, Berkshire shares were up nearly 100%. But Sullivan's not buying here - yet: "I still think there is more downside to shares, maybe another 10% to 20%... If I see that, I will be buying."

Eddy Elfenbein provides some perspective with a helpful chart indicating that despite Berkshire's big decline, it's still way up against the broader market over the past 8 years: "Not a bad slump."

But with so many fundamentally strong companies down so much this year, maybe there are better opportunities than Buffett's Berkshire? Back to Salmon: "If Warren Buffett isn't buying back his own shares at these levels, then that must be because he sees better uses for Berkshire's capital elsewhere. Which in turn means that you and I might be better off elsewhere, too... So yes, Berkshire might be looking cheap -- but other stocks are looking cheaper, and always remember that Berkshire, like any insurance company, is very highly leveraged, with contingent liabilities many times higher than its asset base."

And NYT's Dealbook reminds us of another concern - how deeply underwater Buffett's recent investments in Goldman Sachs and General Electric are: "Even Warren E. Buffett gets cut trying to catch a falling knife."

Amidst all this skepticism and turmoil, I'll give the Oracle himself the last word and link - given his track record and character, he deserves it. While Buffett hasn't commented publicly on this latest downturn in his company's stock or the CDS price jump, he did give a interview to Charlie Rose in early October at the time of his GE investment. If you haven't caught that yet, you should: view it here.