Berkshire Hathaway, whose chairman is Warren Buffett, recently saw their profits fall around 9% due to losses that they received from their derivatives portfolio. You must understand that the derivative losses are actually unrealized (meaning that the position hasn’t been sold yet) since they are long-term positions in European, Japanese and United States equity markets. The maturity dates on these derivatives are in 2018 or later. Buffett has been very outspoken about the issues going on with financial derivatives, and he also mentions that it’s not likely that he will add more to his derivative positions since they changed the way they do the financial accounting for these items.
Even though he doesn’t have any plans to purchase more derivatives, this is the typical type of position that you would traditionally get from a value investor like Warren Buffett. He’s expecting Japan, Europe and the US to see some growth throughout the upcoming years. One strategy that could be quite simple to do would be to purchase index ETFs, even though this is nothing new, or you might want to take a look at the two sectors below since Warren Buffett believes that future economic growth will fuel both of these industries where they will receive a big benefit.
Housing – as early as last month, Warren Buffett mentioned that he is increasingly optimistic about the US housing market overall. He understands that there is obviously still weaknesses, but he clearly believes that the housing market is going to rebound over the next few years (you have to remember that Warren Buffett is a long-term investor, and he rarely speculates anything three months or less).
The various real estate indices, which include the S&P/Case-Shiller 20-City, are all showing month-to-month growth consecutively after having such a prolonged drought. One of Berkshire Hathaway’s positions includes Clayton Homes, which is a company that insures, finances, builds and sells homes. Continued growth in housing would be a great way to stimulate the overall economy in the United States.
Buffett recently mentioned during an interview that he believes the financial issues in Europe are also having a negative impact on the United States, as well as weak residential housing holding back our economic growth. Recently Buffett has made it a point to bid to get large amounts of distressed loans in the housing market from the bankruptcy offering of ResCap.
If he were to win the bidding war, this will give access to a big portfolio of loans (around 4 billion worth) that has the potential to see some serious upside if the housing market is ever going to recover. So obviously you have to realize that Buffett believes that housing is going to recover, so he’s looking at this time right now as an excellent place to start purchasing these cheap assets.
Some companies that would definitely benefit from an increase in housing are Caterpillar and Wells Fargo. Right now, Wells Fargo is the second-largest position that Warren Buffett owns, and they are also the largest US home lender at this time.
Railroads – the next sector that would certainly benefit tremendously from a recovering US economy is the transportation section. Buffett and Berkshire Hathaway made the headlines in 2009 when they decided to buy out BNSF (Burlington Northern Santa Fe Corp.). This is actually the largest purchase that Buffett has ever made, and it tells you that he clearly predicts and believes that US economic growth will eventually come soaring back, and railroads and the freight business are going to benefit from it tremendously.
The United States produces many different economic goods that need to be transported, and railroads happen to be more efficient than the trucking business to move goods in large quantities across great distances.
The 2011 Berkshire Hathaway purchase of Lubrizol, which is a company that sells machinery and engine lubricant, shows us that the $9 billion that Warren Buffett spent was not in error since he believes that the usage of this lubricant is going to increase. This is often a sign that economic growth is in full swing. Lubrizol also happens to provide goods that they sell to emerging markets, and this demand is also expected to increase as well.
Recently, the transportation industry has undergone a change in which commodities it is servicing. Since natural gas has been a lot cheaper, and in more demand, the use of coal has become less and has slowed down. Coal is normally transported by railroads, and because of this the BNSF revenues were impacted, as well as the Union Pacific Corp. revenues too.
Even though the usage of coal has dropped, they have picked up other business in the area of crude oil, petroleum and shale. The shipments have increased dramatically, but the demand for coal is still a big driver for transportation, even though the increased demand for the shale products are seeing double-digit growth in the upcoming years and they will also diminish the coal demands which will allow the transportation industry to see some strong growth as the US economy begins to pick up again.
Some transportation plays that would definitely benefit from the shale demands and economic growth include the Union Pacific Corp. out of the Midwest, which is currently trying to take advantage of the demand for shale.
There are other railroad companies that may be worth looking at, but remember that not every railroad has access to the low-cost coal out there that they could transport. And the continued drop in coal’s demand is going to obviously impact the railroad companies that are transporting the expensive coal right now.
The 2009 buyout of BNSF was a good move and Buffett deserves praise for it. BNSF has access to clean and cheap coal from the Powder River basin, and they also have access to numerous shale fields which is going to make this a very profitable investment.