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Berkshire Hathaway
Has the Bubble Really Burst

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By gdefelice
June 26, 2002

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I made a post in January entitled "The Accounting Bubble".

Well, it looks like the accounting bubble has finally burst just like the stock market bubble...or maybe NOT.

I think both of these bubbles are far bigger than only a few years worth of dropping prices -- especially when the DOW and S&P really haven't been hurt badly. The only currently burst bubble was in the Nasdaq and hell, we're not even NEAR the bottom there...with a 60 P/E on made up, fraudulent earnings, that don't even include the cost of stock options.

For example, a very earnest discussion of TYCO has taken place on the board -- with everyone constantly (and not entirely illogically...though some might quarrel with there being any logic at all) referencing TYCO's numbers...as if the number printed on TYCO's balance sheet are similar to, say...(stupid drum roll please) Berkshire's.

TYCO is likely (not plausibly, but likely) to also be a fraud -- and THAT'S why Koslowski isn't there anymore -- these guys are smart enough, after ENRON, to get out before the bankruptcy. He takes a little hit on some sales tax -- a game that many people play and that they really can't cream him on, at least not without more behind it -- and at the very, very worst, does a little jail time and pays a little fine -- I doubt jail even happens -- lots of shysters and crooks would happily take that deal for a quarter billion dollars. Yet, he's out, off the hook, scott free -- he'll never have to answer a question about TYCO. I don't really see how it could be worthwhile to look at TYCO's numbers at all. It is not analyzable without insider knowledge, and even then...will anyone explain why we shouldn't assume this is a fraud too -- many are technically -- to my mind -- frauds but won't crack because their debt loads aren't big enough or they're "too big to fail". But, TYCO's got a ticking debt bomb and capital -- in the marketplace -- is slowly/quickly drying up (and it would be dried as a desert without the FED...I suspect that that market will ultimately do the FED's work and "tighten" without there being a rate hike)...who the hell would buy CIT right now...how can you possibly tell what is even in there...how can anyone trust the spin-off.

TYCO's numbers -- as Worldcom's, Qwest's, Global Crossings, all the energy companies, most of the chip companies...hell pick a stock, pick a sector -- are WORTHLESS. Their CEO is a crook and fraud who made hundreds of millions pumping up the stock. This has been played out at company after company after company and there are many, many more to come.

Any company with huge debt and or derivative exposure is suspect. And, while probably too big to fail, Fannie, Freddie, J.P. Morgan Chase and General Electric, to name a few, certainly should scare the hell out of anyone that thinks capital markets will be getting tighter and earnings worse over the coming years. GE can't make the numbers when the remaining assets are of little interest because no one (well, almost no one :) has any capital or cannot pay legitimate prices. Why not bite the bullet in favor of long-term success....answer: stock options...everyone has only so many years to "make theirs" and isn't there a God given right to make money from your stock options at companies like G.E. and Microsoft.

To my mind, the entire disaster has very little to do with the burst internet / Nasdaq bubble and far, far more to do with the what will ultimately become the most hated two words in investing, just ahead of New Economy, will be...stock options.

Far from aligning management's interest with the interest of shareholders (or maybe with the interests of the "shares"...of the company itself), they have precipitated these frauds as giant, condoned, ponzi schemes.

Even for companies that will survive -- like Microsoft or Cisco and even GE or Costco -- the stock option will hurt the companies far more than investors want to accept. Cisco will be a $5 stock and Microsoft a $20 -- maybe I'm being too generous. Costco, and I love Costco and will buy it, gave away about $1 of every $6 earned in the form of stock options and all the while there is no charge to earnings. The fact of this math will catch up to these stocks.

The Bubble hasn't burst -- housing is still to come -- the end of Microsoft and GE is still to come. Could GE's asset sale today have been made to "make the quarter" on revenues?

All this type of behavior will have to end before the bubble has deflated. Housing is still to come...when rates turn the bottom falls out -- who knows, could be 6 months or 2 years and there could be another trigger. Maybe a rate drop scares everyone to pieces -- a drop is still more likely than a hike, to my mind, because the economy won't recover -- no matter what the GDP says -- and unemployment will rise. Don't believe the crap about it being a "trailing indicator" -- watch the trail grow.

When the Bubble has burst, we'll be buying stocks -- and good ones -- for 7, 8 times earnings not 30. When the Bubble has burst, there will be far fewer stock options. When the Bubble has burst, people will be scared to buy stocks. When the Bubble has burst, people won't even consider buying something like TYCO. When the Bubble has burst, things like the TYCO spin-off of CIT won't get done...at any price. When the Bubble has burst, there will -- really -- be some people IN JAIL, not threatened with the prospect, but IN JAIL. When the Bubble has burst, Berkshire Hathaway will be BUYING every day. When the Bubble has burst, all the pundits will be telling us to hold cash. When the Bubble has burst, putting lipstick on the pig won't even be funny. When the Bubble has burst, Berkshire Hathaway will have the largest market cap of any corporation. When the Bubble has burst, Warren Buffett will be the richest man in the world (and ain't it a just world where the richest guy really does deserve it).

When the Bubble has burst, the 1990's will finally be called what they really were:

THE DECADE OF GREED.

gdefelice

p.s. cheers to the next bankruptcy


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