Is Buffett Buying?

Rumors abounded Tuesday that the Oracle of Omaha was getting out of bonds, and getting into stocks.

October 15, 2002
By Justin Lahart, CNN/Money Staff Writer

Does Warren Buffett think the worst is over?

According to several sources, rumors abounded Tuesday that Buffett's Berkshire Hathaway was unloading a big position in zero-coupon Treasurys and shifting into securities tied to the stock market.

"I'm hearing this from enough areas that I'm giving credence to it," said D.A. Davidson bond trader Mary Ann Hurley of the rumor. "Buffett is definitely a person who likes to play the odds, and in this case the bet seems reasonable -- he's playing the thought that interest rates aren't going to go much lower from a 40-year low."

Zero-coupon bonds are constructed in a way that makes their prices more sensitive to interest rates than standard bonds. Zero-coupon prices have soared as interest rates have declined.

Buffett is known for being active in the zero-coupon market. In his 1997 annual letter to shareholders, he disclosed that Berkshire had made a $600 million paper gain on an investment in zero-coupon bonds, or STRIPS. Berkshire's present position in zeros is unknown, but according to its latest annual report it held $8.8 billion in Treasury and agency debt at the end of 2001, up from $3.7 billion at the end of 2000.

"Buffett has made timely purchases of STRIPS in the past, so people pay attention" noted Miller Tabak bond strategist Tony Crescenzi.

If Buffett has made the switch out of bonds into equities, it would be a fresh signal that the well-known investor, who was incredibly skeptical of the market during the latter stages of the bull market, is finding value in stocks. Earlier this year Buffett put money in two beleaguered firms -- Williams and Level 3 Communications.

In betting against interest rates falling further, Buffett would signal a reluctance to believe that the economy is on its way to a double-dip recession, like some investors fear.

Crescenzi cautioned about putting full faith in the rumors just yet, but said that if Buffett was really getting out of zeros, we'd likely hear about it later. As much as they can, the traders involved in the sale will try to keep mum about it until the sale is finished.

"If it really is going on now, we'll hear more, rather than less, about it later," said Crescenzi.

http://money.cnn.com/2002/10/15/markets/buffett/index.htm