Monday, March 10, 2008

Billion Dollar-Plus Tesco plc. Stockholder Warren Buffett Says U.S. is in a Recession

Legendary billionaire investor and major Tesco plc. stockholder Warren Buffett says that the U.S. economy is basically in a recession even if it hasn't met the technical definition of one.

Buffett, Chairman and CEO of Omaha, Nebraska-based holding company Berkshire-Hathaway Inc., said in an interview last week on the cable business network CNBC the reports he gets from the retail businesses his holding company owns show a dramatic slow-down in consumer purchases.

The legendary stock-picker, and world's second-richest human according to Forbes magazine, said in the CNBC interview millions of people also have lost equity in their homes because home prices have dropped so significantly.

"I would say, by any common-sense definition, we are in a recession," Buffett, who is often referred to as the "Oracle of Omaha," said on CNBC. However, he added it's not clear how far the recession will go because that is near-impossible to predict.

Buffett owns about $1.3 billion worth of Tesco plc. stock, which works out to about a 4% stake in the world's number three retailer, making him one of the company's single largest shareholders.

Buffett's Berkshire-Hathaway holding company owns some 50 company's, ranging from Gieco Auto Insurance, home of the famous "Caveman" television commercials, and the Acme Brick Company, a seller of bricks for residential construction, to Netjets, the world's largest provider of fractional private jet time, and Fruit of the Loom, maker of men's and woman's underwear.

Additionally, the holding company owns a number of companies in the food and grocery industries. These include: confection company See's Candies, convenience store grocery wholesaler and logistics provider McLane Company, The Pampered Chef, a retail chain of upscale kitchen equipment and gourmet products, and International Dairy Queen, the fast-food restaurant chain. [View a complete list of Berkshire-Hathaway-owned companies here.

Through his holding company, Buffett also is one of the largest shareholders in Atlanta, Georgia -based beverage industry giant Coca-Cola. Coke was one of the first companies the "Oracle from Omaha" invested in when he started Berkshire-Hathaway. Buffett also is the single-largest individual shareholder in Kraft Foods, and owns sizeable portions of consumer packaged goods giant Proctor & Gamble and beer maker Anheuser-Bush, marketer of Budweiser brand beer.

Buffett is a "buy-and-hold" investor rather than a trader. He has said he sees strong long-term value (and eventual solid profits) in Tesco plc. In fact, he increased his investment stake in the British retailer late last year, shortly before the company opened its first Fresh & Easy Neighborhood Market grocery stores in the Western United States.

What about Buffett's track record? Well, keep in mind that the U.S. stock market on average has grown historically by about 10% per year. Meanwhile, Buffett's Berkshire Hathaway has grown on average by more than 21% annually since 1965. Today, the holding company is worth more than $200 billion. Ten thousand dollars invested with Buffett in 1965 has grown to be worth more than $36 million today. The "Oracle of Omaha" is personally worth about $45 billion, the majority of which he is giving to the Bill and Melinda Gates Fountation to be used for charitable causes.

Although the legendary investor is calling a recession in the U.S., technically there isn't one at present. The technical definition of a recession most economists' use is two consecutive quarters of negative growth in the nation's gross domestic product.

Last Thursday, the U.S. Commerce Department reported that the gross domestic product increased at a low 0.6% pace in the quarter that ended December 31, 2007. In the previous quarter--July - September, 2007--the U.S. economy grew at a strong 4.9%.

About half of the economists in the U.S. believe the first quarter 2008 growth in the U.S. economy will either be about what it was in the fourth quarter of 2007, or will actually be negative. These economists argue either the U.S. is already in a recession, or heading for one soon.

The other roughly 50% of U.S. economists say they are either unsure, or that its possible the U.S. can avoid a recession completely, especially since Congress passed an economic stimulus package, which starting in May will result in checks ranging from $600 -to- $1,200 being sent to every American who files a 2008 tax return. (This 50-50 split reminds us of the "on the one hand, but on the other hand, joke about professional economists.)

Despite saying the U.S. is already in a recession, the plain-talking Buffet added he believes the U.S. economy will be just fine in the long run. "Over time, my children are going to live better than I do, although they don't believe it," he said on CNBC.

In addition to the dramatic decline in the gross domestic product in the last quarter of 2007, unemployment is increasing in the U.S. This includes the states of California, Arizona and Nevada, where Tesco's Fresh & Easy Neighborhood Market has its small-format grocery stores. In California, the unemployment rate has increased by two full percentage-points since late last year.

Energy costs, especially gasoline, also have gone up significantly in the U.S. in the last year. The per-barrel price of oil is now well-over $100. The average cost of a gallon of gas at the pump is currently about $3.20 per-gallon in the U.S. and about $3.45 per-gallon in California.

Food inflation also is hitting the U.S. economy hard. On average, grocery prices at retail are up nearly 10% in the last year, with prices on commodity items like milk and eggs up nearly 20% from early 2007. For example, Steve Burd, CEO of California-based Safeway Stores, Inc. said two weeks ago in a conference call with supermarket analysts that food and grocery price inflation is currently the highest he has ever seen in his 15 years as CEO of the grocery chain.

Buffett, the "Oracle of Omaha," tends to call things as he sees them, rather than waiting for the "official" word on economic issues like recession. His view is similar to that of the American consumer, who is feeling the pinch from rising energy costs, higher food prices, the financial market's credit crisis and rising unemployment.

Like Buffett, consumers aren't all that interested in waiting to find out if the U.S. economy is really in a recession. Rather, they are feeling the effects of the serious economic downturn--as are the nation's retailers--in their pocketbooks.

No comments: