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Buffett scorns tricky Wall Street accounting, but defends buybacks

NEW YORK Billionaire investor Warren Buffett on Saturday attacked what he saw as tricks used by U.S. companies to boost earnings and stock prices, but he defended one oft-criticized practice: share buybacks.

“As the subject of repurchases has come to a boil, some people have come close to calling them un-American –characterizing them as corporate misdeeds that divert funds needed for productive endeavors,” Buffett said in his annual letter to shareholders.

“That simply isn’t the case: Both American corporations and private investors are today awash in funds looking to be sensibly deployed. I’m not aware of any enticing project that in recent years has died for lack of capital.”

Some critics, including BlackRock Inc (BLK.N) Chief Executive Officer Larry Fink, think the practice of companies buying back their own shares to boost earnings has been used to excess.

Repurchasing shares boosts earnings per share by reducing the shares remaining on the market. Critics contend the money can be better used to hire employees or buy equipment.

Buybacks fell to an average $2.3 billion a day during the January-February earnings season, TrimTabs Investment Research Inc data showed on Monday, after spiking to $5.7 billion a day in early-to-mid 2015.

Last month, Fink warned CEOs of SP 500 .SPX companies in a letter that the world’s largest asset manager would be looking for an explanation of how cash from corporate tax cuts touted by U.S. President Donald Trump will be used, especially if it is deployed for buybacks.

Buffett can buy Berkshire’s own shares back at 120 percent or less of book value, but that has “proved hard to do,” Buffett said.

“Our buying out ‘partners’ at a discount is not a particularly gratifying way of making money. Still, market circumstances could create a situation in which repurchases would benefit both continuing and exiting shareholders,” he said. “If so, we will be ready to act.”


Buffett was less sanguine on other practices used by public companies, saying “too many” are deviating from generally accepted accounting principles (GAAP) to present better earnings numbers.

Buffett said it “makes us nervous” that companies regularly leave out what they call “restructuring costs” and “stock-based compensation” from their expenses, boosting profits by deviating from standard accounting practices.

“To tell owners year after year, ‘Don’t count this,’ when management is simply making business adjustments that are necessary, is misleading. And too many analysts and journalists fall for this baloney.”

(Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan)

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TCL carries flickering BlackBerry flame with new phone launch

BARCELONA, Spain Blackberry Ltd (BB.TO) may have exited the device business, but fans of the pioneering email machine need not despair as Chinese smartphone maker TCL Communication (TCCLF.PK) has introduced its first Blackberry-licensed phone with the physical keyboard that was long its key allure.

The KEYone combines a touch display with a physical keyboard to give users more useable space for typing than a typical 5.5-inch all-touch smartphone, along with BlackBerry Ltd’s security and software, TCL said.

TCL cut the new brand-licensing deal in December with BlackBerry Ltd., which now focuses on making the security software that was another key factor underpinning the Canadian company’s phenomenal success in the pre-smartphone era and sustained it with corporate users as the world moved on to smartphones with other features.

The partnership helps address weaknesses for both companies: TCL gives BlackBerry a manufacturer that can still compete at global scale following a decade-long slide in BlackBerry sales, while TCL gains a new brand to shore up its own flagging growth in smartphones.

“We have worked closely with TCL to build security and the BlackBerry experience into every layer of KEYone, so the BlackBerry DNA remains very much in place,” said Alex Thurber, general manager of BlackBerry Ltd’s Mobility Solutions unit.

The new BlackBerry KEYone smartphone was unveiled here ahead of the Mobile World Congress, Europe’s largest annual trade fair, on Saturday.

The first fruits of TCL’s new product line carries a hefty price tag, which could limit its appeal to diehard fans of the device once known as the Crackberry.

The KEYone will be available in April and priced around 599 euros, $549 or 499 pounds, in line with premium phones from Apple (AAPL.O), Samsung (005930.KS) and Huawei [HWT.UL].

TCL, which sells its phones in 160 countries, did not specify which would be first to offer the KEYone.

TCL is best known as the maker of Alcatel handsets and ranked as the world’s No. 7 phone maker, according to recent data from research group IDC.

It is the third-largest maker of simpler, so-called feature phones popular in Latin America and emerging markets, according to market research firm Strategy Analytics.

TCL has acted as contract manufacturer for earlier BlackBerry devices but now licenses the phone brand and gives the Canadian company a cut of each handset sold.

The device runs Android 7.1 – giving users access to the Google Play store and apps – and receives Google (GOOGL.O) security patch updates, which many Android smartphones lack.

It also runs the BBM secure-messaging system, which BlackBerry earlier this month said it would make available for software developers to build into their own products.

With an aluminum frame and textured backing, the device sports two cameras – 12 megapixels in the rear and eight in front – and a scratch-resistant 4.5-inch screen display.

(Reporting by Eric Auchard; Additional reporting by Alastair Sharp in Toronto)

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Buffett upbeat on American business; Berkshire operating profit down

Warren Buffett on Saturday mounted a forceful and upbeat defense of the prospects for American business, as his Berkshire Hathaway Inc (BRKa.N) reported a higher quarterly profit though operating income fell.

In his annual letter to Berkshire shareholders, Buffett said investors “will almost certainly do well” by staying with the long term with a “collection of large, conservatively financed American businesses.”

Buffett puts Berkshire in that category, using the letter to tout the successes of many of his Omaha, Nebraska-based conglomerate’s more than 90 operating units.

These included businesses such as the BNSF railroad and Geico auto insurance that posted weaker results last quarter.

“American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead,” Buffett wrote. “Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.”

For the fourth quarter, Berkshire’s net income rose to $6.29 billion, or $3,823 per Class A share, from $5.48 billion, or $3,333 per share, a year earlier, helped by a $1.1 billion increase in gains from investments and derivatives.

Operating profit fell 6 percent to $4.38 billion, or $2,665 per share, from $4.67 billion, or $2,843 per share.

Analysts on average had forecast operating profit of $2,716.60 per share, according to Thomson Reuters I/B/E/S.

Book value per Class A share, reflecting assets minus liabilities and which Buffett calls a good measure of Berkshire’s intrinsic worth, rose 11 percent to $172,108.

For all of 2016, profit was virtually unchanged, dropping to $24.07 billion from $24.08 billion.

Operating profit rose just 1 percent to $17.58 billion, despite January’s $32.1 billion purchase of aircraft parts maker Precision Castparts Corp, Berkshire’s largest acquisition.

Buffett has run Berkshire since 1965. The company also owns dozens of stocks including Apple Inc (AAPL.O), Coca-Cola Co (KO.N), Wells Fargo Co (WFC.N) and the four biggest U.S. airlines, and more than one-fourth of Kraft Heinz Co (KHC.O).


Profit from insurance operations rose 7 percent to $1.44 billion, as underwriting gains at the Berkshire Hathaway Reinsurance Group more than offset an underwriting loss at auto insurer Geico, where claims for losses have been rising.

The reinsurance business is run by Ajit Jain, widely considered a potential successor for Buffett, 86, as Berkshire’s chief executive. Buffett said Jain has created “tens of billions of dollars of value” since joining Berkshire in 1986.

“If there were ever to be another Ajit and you could swap me for him, don’t hesitate,” Buffett wrote. “Make the trade!”

The insurance units ended 2016 with $91.6 billion of float, the amount of premiums held before claims are paid, and which Buffett uses to fund acquisitions and other investments.

That sum has since risen to more than $100 billion, likely reflecting a giant transaction last month with the insurer American International Group Inc. (AIG.N)

Profit at BNSF, Berkshire’s largest purchase before Precision Castparts, fell 8 percent to $993 million.

Though the railroad has been hurt by falling coal and industrial volumes, Buffett said society “will forever need huge investments” in transportation, and BNSF is well-served by a strong balance sheet, recent capital upgrades, and a growing emphasis on clean technology.

“Charlie and I love our railroad, which was one of our best purchases,” Buffett said, referring to longtime Berkshire Vice Chairman Charlie Munger.

Berkshire Hathaway Energy, another major business, posted a 2 percent increase in profit, to $432 million.

In Friday trading, Berkshire’s Class A shares closed at $255,040, and its Class B shares closed at $170.22. Both were record closing highs.

The shares outperformed the Standard Poor’s 500 stock index including dividends by 11.4 percentage points in 2016, after lagging by 13.9 percentage points in 2015.

(Reporting by Jonathan Stempel in New York; Editing by David Gregorio)

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Warren Buffett rails against fee-hungry Wall Street managers

NEW YORK Billionaire Warren Buffett, whose stock picks over several decades have turned Berkshire Hathaway Inc (BRKa.N) into one of the most successful conglomerates, delivered another black eye to the investment industry on Saturday, saying investors should “stick with low-cost index funds.”

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” Buffett, widely considered one of the world’s best investors, said in his annual letter to shareholders.

“Both large and small investors should stick with low-cost index funds.”

Buffett, whose annual letter is scrutinized by investors who consider him “the Oracle of Omaha,” estimated that the search for outperformance has caused investors to “waste” more than $100 billion over the past decade.

On Saturday, he called Vanguard Group founder Jack Bogle “a hero” for his early efforts to popularize index funds.

His own Berkshire Hathaway gained 20.8 percent per year from 1965 to 2016, compared to the SP 500’s 9.7 percent gain, the company said.

Yet Buffett has often said he believes most stock investors are better off with low-cost index funds than paying higher fees to managers who often underperform.

In 2014, Buffett said he plans to put 90 percent of the money he leaves his wife when he dies into an SP 500 index fund and 10 percent in government bonds.

During the financial crisis, Buffett bet a founder of the asset management company Protege Partners LLC $1 million that a Vanguard SP 500 stock index fund would outperform several groups of hedge funds of over the 10 years through 2017. The index fund is up 85.4 percent, Buffett said, while the hedge fund groups are up between 2.9 percent and 62.8 percent.

On Saturday, Buffett said the figures leave “no doubt” that he will win the bet. He plans to donate the money to Girls Inc of Omaha, a charity.

It looks like some investors are following Buffett’s advice. Despite a roaring stock market in the United States, actively managed mutual funds bled $342 billion last year, their second straight year of losses. Passive index funds and exchange-traded funds attracted nearly $506 billion.

But Tim Armour, CEO of Capital Group Cos Inc, said index funds can expose investors to losses when markets turn sour. Capital, the active manager behind American Funds, is a top shareholder in Berkshire and oversees $1.4 trillion altogether.

“It’s important to say that we don’t dispute the data that has led Mr. Buffett and others to form their views,” Armour said in a statement.

“However, a fairly simple fact has gotten lost in the debate. Simply put, not all investment managers are average.”


Buffett’s Berkshire Hathaway Inc on Saturday said its fourth-quarter profit rose 15 percent from a year earlier, as gains from investments and derivatives offset lower profit from the Burlington Northern Santa Fe LLC [BNI.UL] (BNSF) railroad and other operating units.

Buffett has run Berkshire since 1965. The company also owns dozens of stocks including Apple Inc (AAPL.O), Coca-Cola Co (KO.N), Wells Fargo Co (WFC.N) and the four biggest U.S. airlines, and more than one-fourth of Kraft Heinz Co (KHC.O).

This year’s letter and annual report gave no clues about who will succeed the 86-year-old Buffett, a question that shareholders and Wall Street have speculated about increasingly in recent years.

    But Buffett lavishly praised Berkshire executive Ajit Jain, widely considered a candidate to succeed Buffett as chief executive, for smoothly running much of the conglomerate’s insurance businesses.

    Jain joined Berkshire in 1986, and Buffett immediately put him in charge of National Indemnity’s small, struggling reinsurance operation. Jain has since “created tens of billions of value for Berkshire shareholders. If there were ever to be another Ajit and you could swap me for him, don’t hesitate. Make the trade!”

Berkshire, which became one of the top 10 Apple Inc. (AAPL.O) investors in 2016, reported a gain on that investment of more than $1.6 billion after shares of the iPhone maker surged, the annual report showed.

Berkshire’s airline investments suggest that Buffett has overcome his two-decade aversion to the sector after an unhappy – though, he has said, profitable – investment in US Air Group.

Unlike last year, Buffett, who was a vocal supporter of Hillary Clinton, did not mention U.S. President Donald Trump by name. Buffett did, however, talk up the vibrancy of U.S. society and its inclusion of immigrants, one of the most polarizing issues under the Trump administration.

“One word sums up our country’s achievements: miraculous,” Buffett said.

“From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.”

(Reporting by Trevor Hunnicutt and Jonathan Stempel in New York; Editing by Jennifer Ablan and David Gregorio)

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Gundlach expects U.S. 10-year T-note yield to drop below 2.25 percent

NEW YORK Jeffrey Gundlach, chief executive of DoubleLine Capital, said on Friday he expects the yield on the benchmark 10-year U.S. Treasury note to drop below 2.25 percent as global investors seek safety.

“There is a stealth flight to safety going on. German bond yields are leading the way down,” Gundlach said in emailed comments. “Gold is rising. Speculators remain massively short bonds and the market is going to squeeze them out.”

Late on Friday, the yield on the 10-year note US10YT=RR was near 2.32 percent, compared with 2.388 percent late on Thursday. Yields fell as low as 2.313 percent, the lowest since Jan. 17.

Gundlach, who oversees $101 billion, first introduced his view on the 10-year yield’s bottom in January. He then said on an investor webcast: “I think the 10-year Treasury will go below 2.25 percent … not below 2 percent” before edging up again.

Gundlach said with the recent rally in the bond market, the U.S. Treasury should consider issuing ultra-long-term obligations.

“I’d issue the longest maturity Treasuries that the market accepts,” Gundlach said. “Start with 40-year, then keep extending if the market allows it. Do 100 if you can get there. The timing is good right now.”

Wall Street diverged from the bond market and edged higher on Friday, with the Dow extending its streak of record-setting gains to 11 days. [.N/C]

Gundlach noted: “Stocks are out of synch with the stealth flight to safety. Lots of hope built in.”

Gundlach, known on Wall Street as the ‘Bond King’, said in December: “The bar was so low on Trump to the point people were expecting markets will go down 80 percent and global depression – and now this guy is the Wizard of Oz and so expectations are high. There’s no magic here.”

DoubleLine Total Return Fund, the Los Angeles-based firm’s flagship fund with $54.7 billion in assets, has trailed its peer category so far this year.

According to Morningstar data on Friday, DoubleLine Total has posted year-to-date returns of 0.70 percent, lagging 73 percent of its peer category.

On a three-year basis, however, DoubleLine Total Return Fund has posted returns of 3.67 percent, easily surpassing 92 percent of its peer category, according to Morningstar.

(Reporting by Jennifer Ablan; Editing by Chris Reese and James Dalgleish)

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Record-setting stock rally faces test in Trump speech

NEW YORK U.S. President Donald Trump’s planned economic agenda has fanned the flames for Wall Street’s record-setting run, but some investors worry that his first major address to Congress next week risks dousing it if his plans look slow to execute or are overly vague.

The benchmark SP 500 .SPX has surged 10 percent since Trump’s Nov. 8 election, with optimism running high over the Republican administration’s domestic proposals, including plans to reform taxes paid by businesses.

But there have been few specifics so far, and some investors believe Trump may need to provide more than just generalities when he gives his first major presidential address on Tuesday.

“If he comes out next week and there are little or no details other than that it is going to be great, that is going to be a time where we could have the first sort of crack in the armor,” said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.

Trump has said enough so far to help propel major stock indexes to all-time highs. The Dow Jones Industrial Average .DJI this week marked its longest run of consecutive record-high closing prices in 30 years.

With stock valuations expensive, many market participants are bracing for a pullback. The SP 500 is trading at nearly 18 times forward earnings estimates versus the long-term average of 15 times, according to Thomson Reuters data.

In Tuesday’s speech, “the market wants to hear about concrete tax reform plans that have traction either across the Republican base or have the potential to reach across to moderate Democrats,” said Alan Gayle, director of asset allocation with RidgeWorth Investments in Atlanta.

“If the market begins to doubt Trump’s ability to follow through on his promises, then I would think that we would see a 5 percent market correction fairly easily,” Gayle said.

Investors are also watching for hints about timing of Trump’s economic plans. U.S. Treasury Secretary Steven Mnuchin on Thursday laid out an ambitious schedule to enact tax relief by August.

“The one thing that could stall this rally would be any sort of indication that we won’t see the bulk of the effects this year,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. “I think that would take some of the air out of the enthusiasm.”

Investors will also be listening for comments about the border adjustment tax being pushed by Congressional Republicans, about which Trump spoke positively in a Reuters interview on Thursday after having previously sent mixed signals.

Ahead of Trump’s address, the stock options market was not yet foreseeing a huge reaction to the speech, bracing for a move of 0.9 percent in either direction by Wednesday’s close, according to pricing on at-the-money straddles on SP 500 index options.

Investors appeared to show comfort wading into the stock market, according to Lipper data released on Thursday, with U.S.-based stock funds attracting $2.7 billion in the latest weekly period, their fourth consecutive week of inflows.

However, one high-profile investor, Jeffrey Ubben of activist investor ValueAct Capital, told Reuters on Wednesday that his firm had been taking money out of the capital markets as valuations have become overextended.

Beyond tax reform, investors will be eager to learn more about Trump’s plans for repealing the Affordable Care Act, reducing regulations on businesses and increasing infrastructure spending.

Just this week, shares of engineering and construction companies gave up some of their post-election gains on concerns Trump’s infrastructure package would be put off until next year.

But while some investors are eager for policy specifics, the bigger picture is the change in the White House, said Bruce Bittles, chief investment strategist at Robert W. Baird Co in Sarasota, Florida.

“This whole rally in the stock market is based on the premise that we have moved to a pro-business administration in Washington, D.C. from an anti-business administration,” he said. “The details, I think, are just noise.”

(Additional reporting by Chuck Mikolajczak; Editing by Meredith Mazzilli)

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Wall Street edges higher to give Dow 11th straight record

NEW YORK Wall Street edged higher on Friday, with the Dow extending its streak of record-setting gains to 11 days, as increases in utilities and other safety plays outweighed declines in financials.

Major Wall Street indexes have rallied to record levels since the election of Donald Trump as U.S. president, boosted by pledges of tax reforms, reduced regulations and increased infrastructure spending.

Equities were in negative territory for a majority of the trading session, however, as investors grew hesitant after recent comments from the Trump administration indicated its pro-growth policies may have a longer route to implementation.

As details remain scarce on Trump’s plans, including one announced on Thursday to bring millions of jobs back to the United States, markets have kept to tight daily trading ranges. The benchmark SP 500 index has not registered a move of at least 1 percent in either direction since Dec. 7.

Analysts have become more leery of stocks as they have run up without concrete details and are becoming more expensive. The forward price-to-earnings ratio of the SP 500 is 17.8.

“Certainly the sentiment is improving much faster than the actual activity so we’ve seen valuations probably get a little bit ahead of themselves,” said Brant Houston, managing director at Atlantic Trust Private Wealth Management in Denver.

“Ultimately we need to see those fundamental changes come through to validate that improved sentiment.”

U.S. Treasury Secretary Steven Mnuchin said on Thursday any policy steps would probably have only a limited impact this year. Investors will look for clarity on Trump’s plan on Tuesday when he addresses a joint session of Congress.

The Dow Jones Industrial Average .DJI rose 11.44 points, or 0.05 percent, to end at 20,821.76, the SP 500 .SPX gained 3.53 points, or 0.15 percent, to 2,367.34 and the Nasdaq Composite .IXIC added 9.80 points, or 0.17 percent, to 5,845.31.

Utilities .SPLRCU, up 1.4 percent were the best performing of the 11 major SP sectors, lifted by a 3.1 gain in Public Service Enterprise Group (PEG.N) after its quarterly results.

Financials .SPSY, the best performing SP sector since the election, weighed on both the Dow and SP 500 with a decline of 0.75 percent as Treasury yields weakened. Also dragging the group lower was a 1.5 percent decline in Goldman Sachs (GS.N) to $247.35 after Berenberg cut its rating on the stock to “sell.”

The Dow extended its run of record-setting gains to 11, the longest streak since 1987.

Shares of Hewlett Packard Enterprise (HPE.N) fell 6.9 percent to $22.96 after the company cut its full-year profit forecast.

J.C. Penney (JCP.N) fell 5.8 percent to $6.46 after the department store operator reported a bigger-than-expected drop in same-store sales for the holiday quarter.

Advancing issues outnumbered declining ones on the NYSE by a 1.11-to-1 ratio; on Nasdaq, a 1.16-to-1 ratio favored decliners.

The SP 500 posted 41 new 52-week highs and two new lows; the Nasdaq Composite recorded 88 new highs and 54 new lows.

About 6.75 billion shares changed hands in U.S. exchanges, compared with the 6.8 billion daily average over the last 20 sessions.

(Reporting by Chuck Mikolajczak and Tanya Agrawal; Editing by Meredith Mazzilli and James Dalgleish)

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Citi says U.S. regulators are investigating its hiring practices

Citigroup Inc (C.N) on Friday said that U.S. government and regulatory agencies are investigating the bank’s hiring practices.

U.S. agencies, including the U.S. Securities and Exchange Commission, are looking into whether or not the bank hired candidates “referred by or related to foreign government officials” over other candidates, the filing said. (

“Citigroup is cooperating with the investigations and inquiries,” the company said in the filing with the SEC.

JPMorgan Chase Co (JPM.N) agreed to pay $264 million in November to resolve allegations that it hired relatives of Chinese officials in order to win banking deals.

(Reporting by Subrat Patnaik in Bengaluru; editing by Grant McCool)

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BCBS, Cigna among insurer groups to meet with Trump on Monday

NEW YORK The Blue Cross Blue Shield Association, which represents insurers in every state, Cigna Corp and Humana Inc said on Friday they would attend a meeting between the health insurance industry and President Donald Trump on Monday.

Cigna’s chief executive officer, David Cordani, and Humana CEO Bruce Broussard will attend, spokesmen for both companies said.

Bloomberg reported earlier on Friday that top executives from U.S. health insurers would attend a meeting, based on unnamed sources. The White House has not confirmed the Bloomberg report.

Trump has pledged to repeal and replace Obamacare, former President Barack Obama’s national healthcare law that redesigned the U.S. insurance market for individuals. It is not clear yet what Republicans will agree upon to replace the current insurance. Insurers say any new plans are not likely to hit the market before 2019.

Insurers have also asked for changes to the individual insurance market that would go into effect for 2018 to make the market more attractive to the industry, where some plans have lost hundreds of millions of dollars because member costs were higher than they expected.

The Trump administration proposed a rule last week to address some insurer concerns, but insurers would also like to see the elimination of an industry-wide tax on health insurance premiums – though the tax is on hiatus this year – and a promise that the government will continue to provide cost-sharing subsidies to certain individual insurance members.

Since taking office on Jan. 20, Trump has held a series of White House meetings with executives from different sectors including those from manufacturing companies, pharmaceutical makers, technology businesses and car makers.

(Reporting by Caroline Humer; Editing by Leslie Adler)

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