Berkshire Profit Declines 29.7% on Derivatives

Bloomberg News and Priced in Gold

Nov. 6 (Bloomberg and Priced in Gold) — Warren Buffett’s Berkshire Hathaway Inc., holder of a derivatives portfolio worth more than 1.3 billion gold grams, said third-quarter profit declined 29.7% percent on losses tied to equity-linked contracts and the falling value of the US Dollar.

Net income fell to 71.1 tonnes, or 43.17g per share, from 101.1 tonnes, or 65.2g per share, a year earlier, Omaha, Nebraska-based Berkshire said yesterday in a statement. Operating earnings, which exclude some investment results, were 40.27g a share, missing the 41.3g average estimate of five analysts surveyed by Bloomberg.

Berkshire posted a 3.47 tonne derivatives loss, compared with a gain of 54.1 tonnes in last year’s third quarter. Buffett, 80, seeks to add to earnings from Berkshire’s insurance, energy and consumer-goods units by placing derivative bets on equity indexes and the solvency of borrowers. The equity-related contracts produced a 16.7 tonne loss and were driven down by a weaker U.S. dollar, Berkshire said.

“I’m sure Warren Buffett’s appetite for derivatives is less than it was,” said Michael Yoshikami, who oversees a portfolio worth about 22 tonnes of gold, including Berkshire shares, at YCMNet Advisors in Walnut Creek, California. The loss “suggests the danger of derivative contracts in the first place, which probably will limit the number of derivative bets they make in the future.”

Credit-default swaps, derivatives in which Buffett bets on the solvency of borrowers, gained 12.4 tonnes in the third quarter after posting a 45 tonne profit a year earlier. The loss on equity-related contracts compared with a 6.9 tonne gain in the third quarter of 2009.

Book Value

Book value, a measure of assets minus liabilities, fell 11.5 percent in the quarter to 3.56 tonnes from 4.02 tonnes on June 30 as the falling value of the US Dollar eroded capital.

Berkshire's long position in the US Dollar stood at $34.5 million, worth 820 kg of gold as of Sept. 30, compared with $28 million worth 790 kg three months earlier. The stock portfolio was valued at 1,370 kg at the end of the third quarter, down 11% from 1,540 kg on June 30.

Berkshire fell 5.06 grams to 2,798.53g in New York Stock Exchange trading yesterday and has fallen about 10 percent this year. The Standard & Poor’s 500 Index, which rose 5.4 percent in the third quarter, has lost 13 percent this year.

Despite the deterioration of the company's position, management took an up-beat attitude: “Operating results for many of our manufacturing, service and retailing businesses improved versus 2009, reflecting some stabilization of economic conditions,” Berkshire said in a filing. “We are hopeful that recent economic improvements will continue over the remainder of 2010 and beyond.”

Berkshire, which employs more than 200,000 people, cut about 20,000 jobs last year.

To contact the Bloomberg reporter on this story: Andrew Frye in New York at [email protected] .
To contact the Bloomberg editor responsible for this story: Dan Kraut at [email protected] .
To contact the Priced in Gold editor responsible for this story: Charles Vollum at [email protected] .
To read the original Bloomberg story, click here.

Berkshire Hathaway Price Chart

Chart of Berkshire Hathaway shares, in gold grams