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Buffett: $29B tax cut windfall boosts Berkshire Hathaway

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Investor Warren Buffett on Saturday disclosed that the tax legislation signed by President Trump netted a $29 billion windfall to the shareholders of Berkshire Hathaway, the Omaha-based conglomerate he leads.

The one-time benefit comes from savings on future taxes the company would have to pay if it sold about $170 billion in equities, which run from American Express to Apple to the Coca-Cola Company. The taxes on the gains that in some cases have been piling up over decades, have dropped from 35 percent to 21 percent under the new tax law.

Berkshire’s 2017 gain “was far from standard: A large portion of our gain did not come from anything we accomplished at Berkshire,” Buffett wrote in his annual letter. The $29 billion “was delivered to us in December when Congress rewrote the U.S. Tax Code.”

Berkshire doesn’t pay a dividend, but the $29 billion increased the value of the company. He called the gain “nonetheless real — rest assured of that.”

The 17-page missive issued Saturday morning is eagerly awaited by investors, shareholders and others who find the billionaire’s advice, insights and approach to life appealing.

“My main takeaways are the underlying businesses continue to do extremely well, the cash continues to pile up, an additional $30 billion in the last year alone” to a total of $116 billion, said Whitney Tilson, a Berkshire shareholder for more than two decades and a close follower of Buffett, 87, and his longtime business partner and sidekick, Charlie Munger, 94.

The letter went on to caution investors to stick to “simple fundamentals” and lamented the Buffett braintrust’s inability to find acquisition targets at what he called “a sensible purchase price.”

The lack of a comfortable purchase price “proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.”

Buffett and Munger are known for their aversion to risk. That theme remains steadfast in the Berkshire culture even with $116 billion in cash and rock-bottom prices for debt.

“I’m glad to see Buffett and Munger are being disciplined and not putting ⅛the cash hoard⅜ to work in a richly valued market,” Tilson said.

“Our aversion to leverage has dampened our returns over the years,” Buffett said. “But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold it today after a million or so ‘partners’ have joined us at Berkshire.”

Despite its equity investments, its $116 billion-plus in dry powder and ownership of dozens of other businesses, small and large, Berkshire Hathaway is primarily an insurance company. Buffett built a large portion of the company based on “float,” which is the money he collects and holds from insurance premiums before he must pay it out in claims. Buffett uses the float — now in the billions of dollars — for Berkshire Hathaway investments.

Buffett loves to talk about insurance, and the 2018 letter was no exception. He said Berkshire Hathaway’s exposure to the three hurricanes that hit Texas, Florida and Puerto Rico last September will be $2 billion after taxes.

He said the damage to Berkshire and other insurers could have been “far worse: Had Hurricane Irma followed a path through Florida only a bit to the east, insured losses might have well been an additional $100 billion.”

That said, “no company comes close to Berkshire in being financially prepared for a $400 billion” mega-catastrophe — known as “mega-cat.”

“Our unparalleled financial strength explains why other (property and casualty) insurers come to Berkshire — and only Berkshire” for reinsurance.

Buffett also used his letter to take a victory lap over winning his $1 million bet with a hedge fund that a passively managed index fund would achieve a superior return than a basket of hedge funds.

“The bet illuminated another important investment lesson: Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon,” he wrote. “What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”

Tilson said it was significant that Buffett pointed out in the letter that two longtime Berkshire executives — Ajit Jain and Gregory Abel — had been elevated to vice chairs on the board of directors of the $500 billion conglomerate.

“It’s old news, but the fact that he mentioned in the annual letter is an indication that one or both of them will likely be his successor,” Tilson said.

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City reacts to Aurora Cannabis announcement

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“I’ve been talking a lot about Aurora around Medicine Hat since April of 2018 and celebrating the fact that they came here, chose us over Quebec or anywhere else in Canada they could have gone, and what a great thing it is for the community and the jobs and just the optimism,” he said. “I’ve sensed an increase of optimism in the community.

“When I heard this news yesterday, it was a setback, and I’m disappointed. They’re a private company, this has nothing to do with the City of Medicine Hat. They’re free to make any decision they need to make.”

In its report, Aurora cited lower than expected revenue from cannabis as a reason for the decision.

The decision about the construction will save Aurora a total of $190 million dollars.

Lisa Kowalchuk, executive director of the Medicine Hat and District Chamber of Commerce, says she believes Aurora remains committed to Medicine Hat.

“Aurora has very much been committed to our community and very invested in our community,” she said. “They re very engaged within our community and with our chamber. So I don’t see them going away anytime soon.”

CHAT News attempted to speak with Aurora Cannabis on Friday, but were instead provided a statement, which clarified its position from Thursday.

“There has been no halt to construction at the facility,” wrote Michelle Lefler, VP Communications at Aurora, on Friday. “We are continuing to build with adjusted timelines that are more closely aligned with how cannabis markets develop.

The statement continues, “We expect to have at least six flower rooms completed and in operation in 2020, for a total of 238,000 square feet, which includes the mother room. As was done with Aurora Sky and is the case with all Sky-Class facilities, we will pursue a phased approach to bringing additional grow rooms online, and still intend to build 30 grow rooms at Sun.”

“Additional operations at the facility will be activated as global demand develops, with a target date for full operations in 2021. Previously, we had intended to build at an accelerated speed. This is a more normalized pace for a project of this size and is aligned with how markets are growing.”

The company adds they remain committed to investment in Medicine Hat, and still intends to hire around 800 people to work at the facility once its completed.

Clugston adds he remains optimistic about the facility being completed.

We remain committed to investment in the Medicine Hat community as planned. At this time, we still intend to hire a final staff complement of around 800 people upon facility completion. We want to make sure that all local and government partners continue to work with us to support our commitments to significant investment in Alberta’s economy.

“As an optimist, they’ve shown interest and invested obviously a lot of money in the facility, and I really do hope and believe that it will be up and running at 100 per cent,” he said.

Clugston says council will meet with Aurora executives in a closed-door session prior to Monday’s city council meeting. He adds the meeting was planned before Thursday’s announcement.

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CN conductors union gives 72-hour strike notice

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Canadian National Railways conductors, trainpersons and yardpersons have given strike notice ahead of a Tuesday deadline.

The union, which represents 3,200 workers, provided the 72-hour notice today as contract negotiations continue over the weekend.

The Teamsters Canada Rail Conference warned in October it was prepared to launch job action after over six months of unsuccessful talks.

A strike could begin at 12:01 a.m. on Nov. 19 now that the notice has been provided.

The company says its offer to enter into binding arbitration was declined by the union.

The workers, who are mostly located in major urban centres across Canada, have been without a contract since July 23.

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CN Rail confirms layoffs

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CN Rail has made the “difficult decision” to lay off an unspecified number of workers and take other measures to reflect demand.

A spokesperson for CN said some employees would be placed on furlough and management and union job numbers would be cut “due to a weakening of many sectors of the economy.”

“These adjustments have already started to take place across the network,” senior media relations adviser Alexandre Boulé said in an emailed statement.

“CN would like to express gratitude to the employees who will be leaving the company and thank them for their service.”

He would not confirm how many jobs would be affected.

The news was first reported by the Globe and Mail on Friday afternoon, citing a source that was not authorized to speak publicly. The Globe reported that there would be roughly 1,600 job losses in North America.

According to its website, CN transports more than $250 billion worth of goods annually across its 32,000-kilometre rail network within Canada and the U.S.

The company says it has about 24,000 staff.

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