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Wed, 23rd August 2017

Anirudh Sethi Report

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Archives of “berkshire hathaway” Tag

Week ahead: Apple, US jobs, Bank of England

Investors are unlikely to catch a summer break next week when the Bank of England delivers its latest monetary policy decision, Apple reports results and markets get the latest update on the health of the US labour market.

Here’s what to watch in the coming days.

Apple

Apple is joined next week in reporting earnings by more than 130 companies listed on the S&P 500, including Pfizer, Time Warner, Chesapeake, Kellogg, Motorola, Kraft Heinz and Warren Buffett’s Berkshire Hathaway. Companies listed on the S&P 500 are expected to post year-on-year earnings growth of 9.1 per cent and revenue growth of 5.2 per cent.

Of the 57 per cent of the S&P 500 that have posted results already, 73 per cent posted better-than-expected earnings estimates, above the index’s five-year average.

Bank of England

Just These Ten Companies Account For Half % Of The S&P’s 2017 Returns

Two weeks ago – as of April 28 – we presented readers with a striking statistic from Goldman Sachs, showing just how much breadth in the market has collapsed and how dominant a handful of large cap companies have become in terms of both overall profitability and market impact:

 Year to date the top 10 contributors have combined to account for 37% of the S&P 500 index return (more than double their market cap representation of 17%). The concentration among the top five is even greater, with those firms – AAPL, FB, AMZN, GOOGL, and MSFT – accounting for 28% of the return and 12% of market cap

Fast forward less than two weeks later when the breakdown has shifted even more dramatically, and according to the latest breakdown from Goldman, as of May 10, just 10 companies are responsible for half, or 46% to be exact, of the entire S&P’s rally YTD.

Warren Buffett Talks Markets, Healthcare, IBM, And Self-Driving Cars: The Key Quotes From Berkshire’s “Pilgrimage”

With the 52nd Berkshire Hathaway annual meeting – dubbed the “Woodstock for Capitalists” which is “unique in corporate America, a celebration of the billionaire’s image and success” – now in the history books, all that’s left are the quotes and avuncular aphorisms.

While Buffett and Munger covered a wide variety of topics, some headlines made a particular splash, such as Buffett’s statement that markets have a “casino characteristic” and that people “still succumb to speculative impulses”, while ignoring that a far more narrow subset of people will also get bailed out by the government when the speculative impulses lead to massive losses. Speaking of hypocrisy, Buffett also slammed Wells Fargo, of which he is the biggest shareholder, for failing to stop its employees from engaging in the bank’s scandalous cross-selling practices, saying you cannot “incentivize bad behavior”, even as it was Buffett’s support of current management and board that was key to ensuring the re-election of the entire board last month.

None of this had an impact on the thousands of shareholders and “value investors” who conducted their latest annual “pilgirmage” to see and hear the 86-year-old Oracle of Omaha.

 Hundreds of shareholders lined up early outside downtown Omaha’s CenturyLink Center for the meeting. Several said they got there nearly five hours before doors opened around 6:45 a.m.

 “Every year it seems I have to come earlier,” said Chris Tesari, a retired businessman from Pacific Palisades, California who said he arrived at 3:20 a.m. for his 21st meeting. “It’s a pilgrimage.”

While a full breakdown of the day’s main events can be found in the following link, for those pressed for time here is a summary of the key quotes and highlights, courtesy of Reuters:

ON OBAMACARE REPEAL

  • “Medical costs are the tapeworm of American economic competitiveness.
  • “Our health costs have gone up (incredibly) and will go up a lot more … that is a problem this society is having trouble with and is going to have more trouble with. It almost transcends (political party).
  • “If you talk about the world competitiveness of American industry, (health costs are) the biggest single variable where we keep getting more and more out of whack with the rest of the world.
  • “(The Obamacare repeal) is a huge tax cut for guys like me … either the deficit goes up or they get the taxes from someone else.”

ON BERKSHIRE’S DURABILITY

  • “I can’t think of anything that can harm Berkshire in a material, permanent way except weapons of mass destruction.
  • “If that ever happens, there’ll be more to worry about than the price of Berkshire.”

CHARLIE MUNGER ON PUERTO RICO

Amazon Stock $100 Away From Making Jeff Bezos World’s Richest Man

Last Thursday, when AMZN stock – currently trading at some ridiculous four or more digit P/E multiple  – made its latest spurt higher, we reported that as a result of the move, Jeff Bezos was now richer than Warren Buffett and fast approaching Bill Gates.

As a reminder, just last Wednesday Bezos added $1.5 billion to his net worth, the day after the e-commerce giant announced it will buy Dubai-based online retailer Souq.com, and has added over $7 billion since the global equities rally began following the election of Donald Trump. As of last week, Bezos had a net worth of $75.6 billion based on the Bloomberg Billionaires Index. That’s $700 million more than Berkshire Hathaway Inc.’s Buffett and $1.3 billion above Ortega, the founder of Inditex SA and Europe’s richest person.

That said, as of last Thursday, Bezos remained just over $10 billion behind Microsoft co-founder Bill Gates, the world’s richest person with $86 billion.

But not for long, because fast forward less than a week later, when following a number of more sellside upgrades, Bezos is nearly there.

The latest catalyst: a “research” report from BMO’s Daniel Salmon who upgraded the company to BMO’s Top Pick, boosting his price target from $900 to $1,200. The alleged catalyst: Amazon is next set to challenge Google on its advertising business, to wit:

Index Investing Unmasked: 96% Of Stocks Are Garbage

Warren Buffett released his annual letter over the weekend, in which he praised Jack Bogle as his “hero” for promoting index investing. The irony is that investors would have been better off buying Berkshire shares. Over the last 10 years, Berkshire stock is up 139% while the S&P 500 is up 71%. The real question is why Buffett just doesn’t tout his own stock rather than promote index investing. He tries to explain himself:

 “Charlie and I prefer to see Berkshire shares sell in a fairly narrow range around intrinsic value, neither wishing them to sell at an unwarranted high price – it’s no fun having owners who are disappointed with their purchases – nor one too low.”

Buffett is doing something every skilled salesman does: managing expectations. Buffett’s own performance is compared against the S&P 500, and what better way to win that game than by putting a floor under the Berkshire price with the promise of share buybacks and then putting a ceiling on the stock by promoting index investing? The real secret is Buffett is talking his book by not talking it: Rather than tell investors to buy Berkshire at any price, he tells people to invest passively through an index, which leads to the very market inefficiencies that he profits from.

The great appeal of index investing is its low fees, but like buying a cheap pair of shoes that falls apart after 6 months, investors will find that index investing is the most expensive thing they ever did. Vanguard promotes its rock bottom expense ratios, but what is not published is market impact costs that are incurred when the fund rebalances. Since these rebalances are often announced ahead of time, they are extremely vulnerable to front running. Christophe Bernard, PhD Senior Scientist at Winton Capital Management, estimates that front running costs index investors 0.20% per year. That’s 4 times the official expense ratio of Vanguard’s S&P 500 ETF.

In his latest research, finance professor Hendrik Bessembinder discovered that 58% of stocks don’t even outperform a Treasury bill. This study was based on 26,000 stocks from 1926 to 2015. Just 4% of stocks accounted for all of the $31.8 trillion in gains during this period. That means 96% of stocks were complete garbage. Even worse, shares of unprofitable companies outperform their profitable counterparts, which is why you have a marketplace that is dominated by Twitters and Teslas.

Index investing means buying a box of garbage stocks sprinkled with a few hope and glamour stocks whose price gains are solely a result of underperforming fund managers grasping for quarterly bonuses and retail investors juicing up their portfolios in a doomed attempt to catch up on their retirement targets.

While mom and pop buy a Vanguard index with their $500,000 and get front run all day by proprietary traders, the capitalist televangelist Warren Buffett will continue to actively trade billions while preaching the miracle of buy and hold investing.

Here’s something to watch out for over the weekend – a letter from Buffett!

Warren Buffett, not Jimmy Buffet, that is – this  weekend he sends his annual letter to Berkshire Hathaway shareholders

Apparently there is a countdown going on, the letter is expected at 8am NY time on Saturday
That’s 1300GMT
What’s gonna be in the letter?

 

Kraft withdraws offer to merge with Unilever

U.S. food company Kraft Heinz Co withdrew its proposal for a $143-billion merger with larger rival Unilever Plc, the companies said on Sunday, raising questions about Kraft’s next steps and whether it could turn its focus to another target.

Kraft had made a surprise offer for Unilever in a bid to build a global consumer goods behemoth that was flatly rejected on Friday by Unilever, the maker of Lipton tea and Dove soap.

 Kraft withdrew its offer because it felt it was too difficult to negotiate a deal following the public disclosure of its bid so early following its approach to Unilever, according to people familiar with the matter who requested anonymity to discuss confidential deliberations.

Some key concerns raised during talks included potential UK government scrutiny as well as differences between the companies’ cultures and business models, one of the people said.

Kraft was forced to publicly disclose its offer to Unilever on Friday to comply with Britain’s takeover regulations, after rumors of its approach to Unilever circulated among stock traders.

Next Week -Watch out :Week ahead: Greece, Fed minutes, Buffett letter

Don’t be fooled by the the holiday-shortened trading week in the US. Next week promises to give investors plenty to watch, including the Greek bailout, minutes of the Federal Reserve’s last meeting, Bank of England governor Mark Carney’s testimony, retail earnings and Warren Buffett’s annual letter.

Here’s what to look for in the coming days.

Greece

The meeting has also gained additional significance, as the last major one slated before European elections begin next month, starting with the Dutch.

“With the two largest eurozone economies facing elections this year, we believe it is in
their policymakers’ interests to contain any potential risks from Greek disruption,” said economists at Nomura. “We therefore expect some transitory agreement to be reached at least at the eurozone level, with the IMF decision on programme participation likely to be delayed even further”.

Carney testimony

Following Federal Reserve chair Janet Yellen’s semi-annual testimony to Congress, investors get to hear from her UK counterpart when Mark Carney testifies before the UK parliament’s Treasury Committee on Tuesday. Mr Carney’s testimony comes after the BoE upgraded its economic forecast, while leaving its inflation forecast and interest-rate policy on hold.

“Since the inflation report was published two weeks ago, we’ve seen downside surprises to wage growth, inflation, and retail sales,” said strategists at TD Securities. “So even after the IR was more dovish than markets expected, we may see a further dovish tone with the IR testimony given the soft tone of the recent data releases.”

Fed minutes

The Federal Reserve will release the minutes of its last monetary policy meeting on Wednesday, though they may seem dated since investors have just heard from Ms Yellen. In her testimony to Congress this week, she painted an upbeat view of the US economy and warned that it would be “unwise” to wait too long before raising interest rates.

Bank of America economists say they believe the minutes will reflect “a great deal of focus on both upside and downside risks,” even as Fed officials “become increasingly constructive on the outlook for the economy.”

Moreover, any discussion on the Fed’s balance sheet is likely to garner interest. “Yellen reiterated the view that the primary tool remains rates and that the balance sheet will only be addressed once the normalization of the fed funds rate is well under way,” said the folks at Bank of America. “We expect the minutes to reinforce this view, but there might be some discussion among members on the issue.”

Betting On Trump: Buffett Bought $12 Billion In Stocks Since The Election

Count one of Hillary Clinton’s biggest financial backers, billionaire Warren Buffet, among the biggest fans of the “Trump rally.”

In an interview with Charlie Rose recorded on Friday, Warren Buffett said that since the election day, Berkshire Hathaway bought $12 billion in stock. This was a change in strategy for Buffett, who as it turns out was a net seller in the first nine days of the month, when Hillary seemed like a guaranteed winner in the November election, one which Buffett was selling into.

“We’ve, net, bought $12 billion of common stocks since the election,” he said in an interview with Charlie Rose that aired on Friday. Buffett didn’t identify the securities that he picked. As of Sept. 30, Berkshire had an equity portfolio valued at $102.5 billion.

Purchases of that magnitude represent a major pickup in activity for Omaha, Nebraska-based Berkshire. During the first nine months of last year, the company bought $5.2 billion and sold or redeemed roughly $20 billion worth of stocks, according to a regulatory filing. In 2015, Berkshire bought about $10 billion of equity securities

For now, Buffett’s bet has proven wise: stocks have rallied since the Trump victory as investors speculated that the Republican’s policies will stimulate the economy. However, in recent days gains have been pared as the Trumpflation rally is rapidly cooling. On Monday, after the turbulent rollout of an immigration order raised concern that the new administration may follow through with isolationist policies, stocks plunged by the most in 2017.

Buffett also told Rose he was skeptical that the U.S. could increase output at a 4 percent annual clip, as the president has said he’s aiming to achieve. “That’s pretty high,” Buffett said. “Two percent will produce miracles.”

Some more details: 

Rose asked if Buffett’s most-recent purchases included airlines. Buffett ducked the question, saying only that Berkshire held stakes in airlines as of Sept. 30.

In November, Berkshire disclosed that it held in American Airlines Group Inc., Delta Air Lines Inc., and United Continental Holdings Inc. at the end of the third quarter. The billionaire said that month that Berkshire also bought a stake in Southwest Airlines Co. since Sept. 30.  Buffett told Rose he wouldn’t get into why Berkshire bought the shares, but said that it was “in large part” his decision.

Previously Buffett said he’s confident in the U.S. economy’s long-term prospects no matter who wins an individual election, although he had a clear preference for Hillary winning.

The Dow Is The Most Overbought In Over 20 Years (And Options Traders Have Never Been More Bullish)

The Dow Jones Industrial Average has only been more overbought than it is today four times in the last one hundred years.

Having risen for 21 of the last 25 days, The Dow is the most overbought since 1996: