This morning, CNBC had an unusually good interview with billionaire investor Warren Buffett. They talked to him about a variety of topics including Berkshire Hathaway's 50-1 stock split, Wells Fargo's earnings and the economic picture. I wanted to note a few of the most interesting things he said, which included President Obama's banker tax, the stock market recovery and the Kraft-Cadbury deal.
First, I was really surprised how adamantly opposed Buffett was to the bank tax. I wasn't shocked so much because it's such a great idea. Actually, I think it's a pretty ridiculous idea, for the same reason that Buffett does. He says about the tax:
No, I don't understand that. If it's some kind of a guilt tax or something of that sort because banks were among the whole United States that were saved back in 2008, everybody was taken care of then. And the banks, basically, somebody like Wells, it's cost them a lot of money to be in the TARP and it was basically forced upon them. (They) didn't want to take the money, but really had no choice. So that's cost Wells a lot of money. The government's made a lot of money off Wells. They've made a lot of money off Goldman. They've made a lot of money off J.P. Morgan. And where they're going to lose money, at least where its possible they'll lose money, is in the auto companies. So if you're going after the people you saved, you might say GM shareholders didn't get saved, the GM bondholders didn't get saved. What happened there is they kept employment. I'm the last guy to suggest that you should go and put a special tax on autoworkers. (Laughs.) If you're really looking for the people who benefited from government losses, you'd have to look there. Or if you look at Fannie or Freddie. Are you going to go and tax the members of Congress who ran Freddie and Fannie?
So it's not his logic that surprised me -- I completely agree with him -- but more that he'd so transparently reject an Obama administration proposal. You may remember, during the 2008 election, Buffett was a staunch supporter of Barack Obama. At the end of the day, Buffett is obviously more of an investor than a political operative, but I was still surprised that he wasn't a little more diplomatic about his stance, given his allegiance to the administration.
Of course, it's also important to remember that Buffett is a bank investor. So really, the tax on banks is a tax on Buffett. In fact, I would argue that the tax will affect bank shareholders more than bank employees, even though it was likely created mostly as a response to large banker bonuses. As I've noted in the past, those bonus numbers detract from the revenue that could be provided to shareholders in the form of dividends or firm growth. Yet, it's hard for banks to pay its employees less, because they worry about their departure to hedge funds or other financial services firms that can offer better pay. As a result, it's easier to provide shareholders with smaller dividends or slower growth, both of which ultimately hurt long-term investors like Buffett. For that reason, Buffett also implied that he'd like to see bonuses smaller, so to provide greater returns for shareholders -- as you might expect.
Buffett also made a rather interesting remark about the stock market. He was asked whether or not its recovery since last spring is justified. I found this a very good question, since I have hypothesized that irrational exuberance is driving those stock gains, not fundamentals. I believe the economy has an awfully long way to go before the U.S. feels very low employment and overall prosperity again.
Yet, Buffett didn't seem too concerned about the stock market's recovery, despite weak fundamentals. And his reasoning made sense: he's a long-term value investor. And in the long term, he believes the U.S. will be fine, and the stock market will ultimately go up. I completely agree, but that doesn't change the fact that, in the short-term, there could still be a correction downward from recent highs. So really, Buffett didn't answer the question about the current rally, because he doesn't much care about it. He's looking decades down the road, not at the next few years.
Finally, there's been a lot of talk about his stance regarding the Kraft-Cadbury deal. He owns a whopping 9% of Kraft, so his opinion should matter. He initially opposed the acquisition. He still does. But in this case, Kraft doesn't need shareholder approval. Here's his take:
Now they mentioned paying 13x EBITDA for Cadbury, but they're paying more than that. For one thing, EBITDA is not the same as earnings. Depreciation is a very real expense. But on top of that they've got a billion-three they're going to spend in terms of various rearrangements of Cadbury. They've got $390 million of deal expenses. They're using their own stock, 260 million shares, or something like that, that their own directors say is significantly undervalued. And when they calculate that 13, they're calculating Kraft at the market price, not at what their own directors think the stock is worth. So the actual multiple, if you look at the value of the Kraft stock, is more like 16 or 17, and they sold earnings at 9x. So it's hard to get rich doing that. And I've got a lot of doubts about the deal.
That 9x earnings he's talking about above was the price he earlier complained that Kraft recently sold a pizza business for to Nestle. Meanwhile, he sees Kraft buying Cadbury for around 16x or 17x earnings. In other words, Buffett sees Kraft buying high and selling low, which is precisely the opposite of what good investors do. It's no wonder why Buffett isn't pleased. And the market must agree, as Kraft's stock is down 2.5% as I write this.
Buffet talks at length about the economy and banking as well. In case you want to see the entire 56 minutes, check out the two parts below.