Berkshire Hathaway (BRK)

As the USD weakens, BRK has made more international investments to create a short position against the dollar. This has the added effect of exposing BRK to greater international risk, some of which may not be hedged.

Moody’s Investors Service (MCO), today (Thursday) cut Berkshire Hathaway Inc.’s (BRK.A, BRK.B) top-level Aaa credit rating by two notches, despite Berkshire chief Warren Buffett’s status as the ratings agency’s biggest shareholder.

Moody’s was the last major ratings agency to downgrade the Berkshire, after Fitch Ratings Inc. stripped the company of its top rating almost four weeks ago, saying it believed “AAA ratings are not appropriate at the holding company level for financial-oriented enterprises.”

Standard & Poor’s Inc. followed two weeks later with an announcement it had placed Berkshire’s credit under review.

With the cut to Berkshire’s rating Moody’s no longer has a Aaa rating on any significant financial-services company. In fact, only four companies of any kind still have triple-A ratings from both S&P and Moody’s: American Data Processing (ADP), ExxonMobil Corp. (XOM), Johnson & Johnson (JNJ), and Toyota Motor Corp. (ADR: TM).

Moody’s, whose parent company is 20%-owned by Berkshire, risked losing credibility by standing firm with its credit rating on Berkshire. With the double-notch downgrade, it may have chosen credibility over upsetting its largest shareholder.

Much of BRK's success is a result of Buffett's methodologies, and with no clear successor(s), there is no compelling reason to believe that the superior returns he has produced will continue after he moves on. Warren Buffet turned 78 in 2008 - and the helm and future of Berkshire is uncertain after is eventual departure from the companies leadership.

BRK right now, works as an almost perfect insurance company. In this scenario, the prices it can charge for its services falls. Its margins actually begin to shrink. Then, invariably, there is a shock that causes a large disruption to the business and earnings fall, at times dramatically. The financial crisis has taken a toll on Berkshire Hathaway's results. The company posted a 1Q 2009 loss of $1.53B, mostly due to the insurance sector. BRK's Geico car insurance lost 20% in earnings and the reinsurance component, General Re, posted an operating loss as premiums fell 19%.^[1] These losses are caused by the general decrease in economic activity which harms the insurance industry.

A case against BRK is that it has gotten too big. Because of its size it's hard to "move the needle." Warren Buffett has indicated that an expectation of achieving historic returns in the future is unlikely. This would make you think that BRK will underperform the market as a whole.

According to Warren Buffet: "The party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years."

In November 2008, BRK released $1B in losses from derivatives which caused a 77% decline in profits for the 3Q. The company's derivatives could cause over $37B in losses from 2019 to 2027. Warren Buffet has claimed that these bets will be profitable but the equity values have fallen recently and BRK has been force to reduce the book value of these contracts by $6.73B.

Furthermore, after recording its worst financial results ever last year, they announced it would cut manufacturing jobs and close facilities to buffer itself against the recession. “Berkshire’s operating companies have taken and will continue to take cost reduction actions in response to the current economic situation, including curtailing production, reducing capital expenditures, closing facilities and reducing employment to partially compensate for the declines in demand,” the firm said in a regulatory filing yesterday, Bloomberg reported.