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Watsa's Fairfax has been selling corporate bonds and buying U.S. Treasuries and select muni bonds, both of which have performed very well in the past month, as investors panicked and there was a flight to safety. For munis, 65% of the muni bond portfolio is insured by Berkshire Hathaway, and essentially all of the rest of the muni bonds are from essential services like large airports or transportation systems, or from large states like California.
Prema Watsa has long predicted that government bonds will continue to be the best performing asset class – even though U.S. government debt loads have contributed to the economic turmoil, because it is still a risk-free asset.
Here are Watsa's top holdings currently:
ABH
AbitibiBowater
others
17,008,276 457,012 15.03% +28.52% +3.34% History
DELL
Dell Inc.
Technology Hardware & Equipment
22,693,489 329,283 10.83% -0.04% 0 History
JNJ
Johnson & Johnson
Pharmaceuticals & Biotechnology
5,184,300 307,170 10.1% -24.69% 0 History
SD
SandRidge Energy
Oil & Gas Producers
21,307,600 272,737 8.97% 0 0 History
ICO
INTERNATIONAL COAL GROUP INC.
Basic Resources
22,577,788 254,903 8.38% 0 0 History
LVLT
Level 3 Communications Inc.
Fixed Line Telecommunications
139,276,421 203,344 6.69% 0 0 History
KFT
Kraft Foods Inc. Cl A
Food & Beverage
5,365,751 168,270 5.53% 0 0 History
FTR
Frontier Communications
Fixed Line Telecommunications
18,620,000 152,684 5.02% 0 0 History
WFC
Wells Fargo & Co.
Banks
4,511,530 143,016 4.7% 0 0 History
USB
U.S. Bancorp
Banks
4,448,310 117,569 3.87% 0 0 History
Companies like JNJ, DELL and KFT, are defensive quality securities which should do well even in bad economic times.
The sector weighting also reveals a very defensive posture. In late 2009, Watsa had 56% of the firm's assets in financials; today it is only 9%. Consumer goods, on the other hand, went from 6% in mid-2009 to 25% currently.
In his latest shareholder letter, Watsa stated that:
"We wanted to protect our gains, and we worried about the unintended consequences of increasing our hedge to approximately 100%. Our view was twofold: our capital had benefited greatly from our too much debt in the system – worldwide! If the 2008/2009 recession was like any other recession that the U.S. has experienced in the past 50 years, we would not be hedging today. However, we worry, as we have mentioned to you many times in the past, that the North American economy may experience a time period like the U.S. in the 1930s and Japan since 1990, during which nominal GNP remains flat for 10 to 20 years with many bouts of deflation. We see fiscal deficits. We see the U.S. government embarking on a similar exercise (as it has no other option) and all this many problems in Europe as country after country reduces government spending and increases taxes to help reduce while businesses and individuals are deleveraging from their huge debts incurred prior to 2008."
What a great macro call only months before US debt was downgraded and the euro zone crisis really heated up again!
Below is an interesting excerpt followed by a link to a full article from The Globe and Mail about Watsa's bets paying off:
“We have said for some time that we think this is a 1-in-50-, 1-in-100-year event,” Mr. Watsa said in an interview Wednesday. “Which means that it’s like Japan or the 1930s, because there’s too much debt in the system.”
The recent sharp downward revision of U.S. economic growth in the first quarter, from an already low 1.9 per cent to 0.4 per cent, cemented Mr. Watsa’s view that deflation is all but inevitable. And he believes that U.S. Federal Reserve Board chairman Ben Bernanke has run out of ammunition to prop up the economy, despite the Fed’s promise to hold rates extremely low for two more years.
Mr. Watsa, who has become a fan of Japanese economist Richard Koo, also believes that the Obama administration and U.S. Congress could be making a fatal error by cutting spending.
“The worry is this,” Mr. Watsa said. “You have interest rates at zero per cent, you have had deficits coming down, meaning reduced government spending, which means there’s no ammo left for the governments of the world, particularly the United States. So what do you do next to get the economy going?”
As the U.S. grapples with its debt, Mr. Watsa believes that excessive borrowing in the Chinese property market threatens to take down the world’s second-largest economy. He visited China earlier this year and met numerous people who owned three or four apartments – apartments whose prices had risen fourfold in as many years.
If events unfold as Mr. Watsa thinks they might, Canada will not be immune. If the U.S. economy goes into recession as commodity prices are falling, this country will not skate through unharmed.
“This is not a short-term thing,” Mr. Watsa added. “We think we’ll be going through some tough times for many years.”
Click on the following link for the full article-
[www.theglobeandmail.com]
Disclosure: No position in Fairfax
About the author:
I am VP of Business Development for Sum Zero (http://sumzero.com), the largest community of buy-side analysts; consisting of over 5,900 hf and mf analysts, and over 3,600 extensive investment write-ups. I have prior experience in a value based pe firm focused on PIPE transactions in micro-caps, and at a value based research firm, which focused on smid caps. In my personal portfolio I have outperformed the market by a cumulative ~48% since 3/2008 (inception date). I can be contacted at jacob(at)sumzero.com for sumzero related inquires. My website is http://www.valuewalk.com/ Visit Jacob Wolinsky's Website
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"Mr. Watsa, who has become a fan of Japanese economist Richard Koo, also believes that the Obama administration and U.S. Congress could be making a fatal error by cutting spending."
Exactly what I said in this forum few days back. Govt. should be spending.