Berkshire Hathaway released its 2nd quarter 10-Q and operating earnings this morning. Despite little activity on the capital allocation front, Berkshire’s key businesses produced generally solid profitability, and FAR BETTER than is being generally reported. A brief summary: 1/5 Most observers reported operating earnings declined by 3.8% from $11.6 billion in 2024’s second quarter to $11.16 billion. When properly assessed, operating earnings in fact increased 7.9% from $11.2 billion to $12.0 billion when excluding a mark-to-market currency translation to U.S. dollars on Berkshire’s $22 billion foreign-denominated borrowings.

Berkshire releases a supplemental non-GAAP presentation of its operating earnings which logically excludes realized and unrealized investment gains and losses. Prior to 2018, unrealized gains and losses were not included in the income statement. The operating earnings presentation does include foreign currency gains and losses in each reporting period relating to translating the face value of debt borrowed in three foreign currencies for the period’s change in the exchange rate. Berkshire includes the loss or gain in operating earnings because as its balance sheet carrying value for the debt liability fluctuates, the unrealized, non-cash gain or loss is also included in SG&A on the income statement.

But think about what investments the internationally-denominated debt finances. In the case of Berkshire’s $14 billion of Japanese yen borrowed (long-term at an average 1.1% interest rate) the proceeds were used to purchase shares in five publicly-traded Japanese trading companies. The five companies had a combined market value of $23.6 billion at March 31. They have gained in price above Berkshire’s evolving cost basis and it has also increased position sizes in each. The dollar declined 4% against the yen during the second quarter. Berkshire includes any market value changes on the stocks trading on Japanese exchanges for each quarterly and yearly reporting period. It also includes any currency change in the translation to U.S. dollars in the market value of each stock position. In a period such at 2025’s second quarter, the declining dollar will add value to reported market value of the stocks, but will create a loss on the carrying value of the debt Berkshire borrowed in yen. Because Berkshire excludes the gains and losses on the stocks in each period (both from price change in yen but also from currency change), the analyst should also exclude the losses and gains on the debt translation. Berkshire’s debt footnote 16 in the 10-Q quantifies the underlying face value of borrowings in euros, British pounds and Japanese yen, the period U.S. translated carrying value, and the pre-tax gain or loss flowing through SG&A. The operating earnings supplement found in each quarter’s press release quantifies the after-tax quarterly gain or loss from currency on the debt in an italicized footnote, making the needed adjustment straightforward.

Long story short, properly excluding currency changes on foreign-denominated debt, operating earnings rose 7.9% in the second quarter and 3.1% for the first half, where most are reporting a 3.8% decline in the quarter and 8.9% decline in the first half.

It’s also being reported that Berkshire’s substantial cash holdings declined $3.6 billion in the quarter, from ~$348 billion to ~$344 billion. NO! Berkshire occasionally purchases a T-bill position on the final trading day of a quarter. When doing so, cash and the T-bill BOTH appear as assets on the first page (asset side) of the balance sheet and an offsetting liability for the purchase amount appears on the second page of liabilities and equity. On the next business day, cash and the liability disappear. Berkshire’s balance sheet had no liability for T-bills purchase at June 30 but did have liabilities of $12.8 billion at year-end 2024 and $14.4 billion at March 31. 2/5

A $5.8 billion offer is at hand to take Macy's private at ~$21 a share, a 32% premium over Friday's $17.39 close. Bidders call the stock “undervalued,”down from $74 in 2015. The retail graveyard is full of turnarounds. Good luck. How bad is this one? Some stunning statistics: 1/ At the proposed buyout price the $5.8 billion offer values Macy’s at roughly 7x FY 24 profit. The retailer earns an apparent 20% return on $4.1 billion in equity (much less on capital given $5.8 billion in net debt). But how profitable is M really and where have profits gone? 2/

Berkshire reported 2Q results this morning. As always, there's more under the hood than the reported results. A few thoughts on what is a very mixed bag. BRK is a good proxy for the US economy. The industrial economy is weak, consistent with what other companies are reporting. 1/ For starters, operating income was $10.0 billion for the quarter, up 6.7% over 2Q 22 and up 9.2% for six months. However, properly excluding forex gains on non-US denominated debt, profit rose from $8.3 billion to $9.6 billion in the quarter, up 15.2% and 17.9% for six months. 2/

Ark Invest, the bucket shop EFT promotional “investor,” the one whose founder CEO told a CNBC audience a year ago that ARKK would earn 50% a year (correct if she said minus), is back with its 3rd annual Tesla “research report” with a fresh $2,000 price forecast by 2027. Amen. 1/ That’s a $7 trillion market cap, or a mere 21% of the S&P 500's current cap. MSFT, AAPL, GOOGL, AMZN and META have a combined $7.7 trillion market cap today, up from $6.2 trillion at yearend. From today’s $165 share price, $2,000 in 4.75 years is 69% per year. Makes sense. 2/

35 FACTS NOT LIKELY FOUND ON ARKK YET UNRELEASED 12/31/2022 FACTSHEET

1. Loss from 2/12/2021 Peak: -80.1%
2. CNBC Appearances Since 2/12/2021 Peak: 23
3. Cumulative NET Assets Raised Since 10/31/2014 Launch: $17.1 Billion ($14.5B in 2020 and 2021)
4. Assets at 12/31/2022: $6.0B 5. Cumulative Management Fees Earned: $300 Million
6. Market Value at 2/12/2021 Peak: $29 Billion
7. Dollar Loss Since Peak: $23 Billion
8. Annual Return vs S&P 500 Since 10/31/2014 Launch: 5.4% vs 10.3%

Who could forget the C-Suite high jinks when Elon and CFO Zach Kirkhorn invested $1.5 billion in Bitcoin and added the titles "Technoking of Tesla" and "Master of Coin?" Since the March 15, 2021 rebranding, Tesla and Bitcoin are down 48% and 70%, respectively. Great fun.🎄 1/ While the Bitcoin position and the Tesla outside shareholders have suffered mightily, how have the INSIDERS fared? If you guessed considerably better you are correct. Collectively the brass at Tesla appear to have unloaded 126 million Tesla shares for more than $41 billion. 2/

Unlocking this valuation genius. When offering to buy Twitter on April 14 for $54.20, $44 billion, the 3-mo T-bill yielded 0.77%. Today, at 4.20% (what are the odds), it’s reported Twitter is seeking a new equity “funding round” at the same $44 billion valuation. Fascinating. 1/

https://twitter.com/elonmusk/status/1604009105563484160

Given the purchase closed on October 27, solidly in Q4, curious as well if Twitter will open the interim books to prospective “investors.” As a public company, Twitter naturally wouldn’t publish financials until 12/31. It’s reported the money needs to be raised before yearend. 2/

Bernie Madoff was charming. Ponzi operators generally don’t begin as crooks, but once losses develop and they first steal to finance the “makeup trade,” their new criminal career is set. Imagine the sociopathic charm required to raise sustaining capital from ongoing victims? 1/ Ponzis work as long as incoming money is sufficient to finance withdrawals. At the point SBF took customer money to cover losses at Alameda, he was now Madoff. If Ackman believes the kid, and Mr. Wonderful believes Ackman, look into how many sophisticates believed Madoff. 2/

On 3/20/21 ARK released a “research report” suggesting Tesla would trade for $3,000 ($1,000 post-split) in 5 years. The stock at $169.91 is down 24%.

On 4/15/22 ARK raised its 5-year target on Tesla to $4,600 (1,533 post-split). The stock is down 49%. 1/

https://twitter.com/business/status/1595172217268371456

On 11/24/22 @CathieDWood predicted, on national TV, that ARKK would earn a 40% annual return over 5 years. The ETF is down 67%.

On 4/12/22, again on national TV, ARKK increased its 5-yr return expectation to 50%, suggesting a 659% or 7.6x gain. The ETF is down 41%. 2/

Charles Ponzi and Bernie Madoff are smiling. Nobody should be surprised at multi-billion dollar holes in balance sheets and “missing” assets. Truth: An attestation is NOT an audit. It is a point in time measurement. Don’t believe it? Listen to Tether’s attestation accountant: 1/ The accounting firm makes clear that they are engaged solely to attest for the existence of assets and liabilities on ONE DATE as compared to the prior attestation date. Not a day before. Not two days before. No income statement. No cash flow statement. No trade blotter. 2/

Berkshire Hathaway released its 3Q 10-Q and earnings release this morning. In what was a very quiet quarter on the capital allocation front, there are a number of interesting developments in the filing and particularly the MD&A. A few comments on the quarter and developments. 1/ Typical of Berkshire’s earnings, profits are reported by observers with little understanding of the underlying economics of the company. Headline reported GAAP profit for the quarter shows losses of $10.4 billion for the quarter and $50.0 billion for the first nine months. 2/

Twitter departed the world of public companies just shy of its 9th birthday. To the question of who won and who lost, the answer should be obvious. From a start of $45 on 11/7/13 to Elon's buy this week at $54.20, the shareholder made 20.4%. That's cumulative. 2.1% per year. 1/ Over the same stretch, the S&P 500 earned 157.4%, 11.1% per year. While revenues at Twitter grew from $665 million at year-end 2013 (post-IPO) to an annual run rate of $5.2 billion at 6/30, an impressive 26% per year, expenses exceeded revenues in 7 out of 9 years. Losses. 2/

Capital Allocation, Silicon Valley Style. Myriad reasons for $META's 74% Faceplant, but consider the abuse of the shareholder for capital allocation gone haywire. 2017 was apparently the right time to initiate repos. EVERY share bought, by the firm, or anybody, is underwater. 1/ In the span of 5.75 years, Zuck and Co. spent $112B buying FB/META shares, a not insignificant 78% of cumulative $143B profit and fully half of $222B in cash flow from operations. Price seems to have not been an object, buying 435 million shares for an average $257 per share. 2/

You can lose badly buying unprofitable companies at 18 times sales, but what mental giant paid €101.73 for the 100-year Austrian bond 6 months after it was issued at €65.96 to yield 0.42%? Guesses on today’s price? Here’s a hint: The 98-year yield is now up to a rich 3.29%. 1/ The answer: Behold the Austrian Zero of 6/10/2120, on sale at €4.25. That’s right kids, four-point-two-five, 93.6% off its 6/10/2020 birth and a stunning 95.8% from 12/11/2020 when it traded at €100.73 and a negative nominal yield for 99.5 years. So much for safety in bonds. 2/

When the bond and bitcoin guys come for Berkshire, they pick cherries, and in the world of knocking BRK, @biancoresearch is a professional cherry picker. Jim pulls this chart out occasionally to “prove” Warren Buffett is washed up, but only does so from rare selective points. 1/

https://twitter.com/biancoresearch/status/1578928983340904449

20 years is selected as "proof" today because it FOLLOWS 2000, 2001 and 2002 when the S&P lost 37.6% and BRK gained 29.7%. Look at Jim’s chart. 20 years ago Friday, Berkshire’s relative performance happened to peak. Convenient time to harvest tree fruit. 2/

Justifying an expected annual return of 50% for 5 years, on @CNBC no less, this is the perversion used as basis. Insanity or intentionally corrupt? $1,500 on Zoom Video from 6/8 implied a 75.4% ANNUAL return to 2026. With the stock down 26% post “report,” the CAGR is now 87%. 1/ $ZM earned $677 million on trailing 12-month sales of $4.3 billion. At $1,500 per share in 2026, ARK tells you the market cap will grow from $26 billion today to $460 billion in less than 4.5 years. Yet, the pandemic pulled forward tremendous demand. 2/

You have $100 million that you have to invest in a single asset for 246 years. The beneficiary requires 2% of the ORIGINAL CAPITAL per year. What do you own and WHY? Would you own a different asset if the required distribution were 0% per year? 5%? Options:
1. Pound Sterling 1/ Sterling is the oldest currency still in use. ~928 AD.
2. Russian Ruble. 2nd oldest, though with different iterations.~1700 or 1998.
3. US Dollar. 3rd oldest. 1776
4. Japanese Yen. 4th oldest. 1871
5. Gold
6. Silver
7. Prime Farmland (specify where)

Random observations on Berkshire Hathaway's quarterly which dropped this morning. Lots to like. Those following Berkshire know reported earnings are impacted in the short term by movements in the stock portfolio so are largely useless as an indication of business condition. 1/ While the headline GAAP earning figure reported as a $43.8 billion loss, operating profit totaled a positive $8.2 billion gain. You arrive at the $52 billion difference by excluding $53 billion in after-tax losses on investments and a $1.1 billion gain on currency translation. 2/

Pour a stiff🥃or two for a🧵on why a 1% tax on stock buybacks would be terrible policy. If you need further proof that elected politicians, lifetime bureaucrats and think tank tax “experts” lack an understanding of capital and business, look no further than this bad proposal. 1/ First, share repurchases DO NOT create wealth. Yes, they increase share prices, but lost is the fact that the cash spent buying shares REDUCES the economic value of the corporation by the amount of cash spent buying the shares. Stock price up. Business value down. They offset. 2/

A $400 million, 12.7% pop on MicroStrategy earnings? Must have been a huge quarter. But was it? You'd have to look far and wide for a management so determined to mask reality. I don't recall a more deceitful and puffed earnings release and call. By any company. Maybe Enron. 1/ You also don’t see many companies have the IR person ask questions of management during an analyst call! In theory they are “screened,” but with pure softballs and no attribution as to which analyst asked the questions, it’s hard to believe the questions asked are even legit. 2/

It seems the MicroStrategy faithful have conditioned themselves to believe they own a levered long call on #Bitcoin, with a profitable software company supporting it. Reason, and apparently basic valuation math, is not their bailiwick. So, what DO they own, and at what price? 1/ Let's start with the software company, public since 1998. On revenues that steadily declined over the last decade from $580 million to just over $500 million today, the company produces operating cash flow of roughly $35 million, net of stock-based compensation (or dilution). 2/