Global Market Comments
March 4, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or THE RECESSION HAS BEGUN),
(SPY), (TLT), (GLD), (AAPL)
Posts
Global Market Comments
March 1, 2019
Fiat Lux
Featured Trade:
(OH, HOW THE MIGHTY HAVE FALLEN),
(BRK/A), (AXP), (AAPL), (BAC), (KO), (WFC), (KHT),
(AMGEN’S BIG WIN), (AMGN), (SNY), (REGN)
Going through Warren Buffet’s letter to the shareholders of Berkshire Hathaway (BRK/A) you can’t help but notice that his performance nosedived from a breathtaking 21.9% in 2017 to a much more sedentary 2.8% last year. That is with an S&P 500 down -4.4%, including dividends.
That compares to my own 23.67% profit for 2018. But Warren has a much higher bar to reach. He does this with a staggering market capitalization that was pegged at $496 billion as of today. At best, the combined buying power of my Trade Alerts is only about a billion dollars.
And here is the stunning piece of information that should have been the headline. Warren has $112 billion in cash and equivalents, some 22.58% of the total, and an all-time high. That means buying stocks at these levels is the least attractive in the fund’s 57-year history.
Buffet would much rather buy back his own stock. He is willing to pay a premium to book value but only when it trades at a discount to intrinsic value, as he did in size during the fourth quarter of 2018.
Which raises one screaming great question. If Warren Buffet isn’t buying stocks, why should you?
Buffet isn’t even buying Apple, which he only started soaking up in 2017. It now is his second largest holding, with an average cost of $140. I’m amazed that the stock didn’t get crushed on this news, but then we live in a constantly amazing world these days.
The big change in Berkshire Hathaway over the years is that it is becoming more of an operating company and less of an investing one. That is because Buffet is increasingly buying entire companies, rather than exchange-traded stocks. One of the reasons for his cash hoard that an effort to buy a company for high double-digit billions of dollars fell through last year.
Still, Warren bought $43 billion worth of public stocks in 2018 and only sold $19 billion worth. These are his five largest public shareholdings and his percentage of outstanding shares:
American Express (AXP) – 17.9%
Apple (AAPL) – 5.4%
Bank of America (BAC) – 9.5%
Coca-Cola (KO) – 9.4%
Wells Fargo (WFC) – 9.8%
Warren likes to break up his entire holdings into five “groves”, as there are too many companies to follow individually.
1) Wholly owned companies where Berkshire has 80%-100% stakes, such as the BNSF railroad and Berkshire Hathaway Energy.
2) Publicly listed equities like those listed above
3) Companies controlled with third parties, like Kraft Heinz (KHT)
4) US Treasury bills
5) Property/Casualty Insurance operations like GEICO that generate an enormous free cash float
Buffet described the enormous tax benefits his company received from the 2017 tax bill. It amounted to the government’s indirect ownership of Berkshire shares falling, which he humorously calls “AA” shares, from 35% to 21% at no cost whatsoever. That greatly increased the value of the remaining shares.
Warren spent the rest of his letter talking about the Great American Tailwind. Since he started investing on March 11, 1942, one dollar invested in the S&P 500 has grown to an eye-popping $5,288! That works out to an average annualized compound return of 11.8% a year.
The end result has been the greatest creation of wealth and rise in standards of living in human history.
That is a tough record to beat.
Global Market Comments
December 13, 2018
Fiat Lux
Featured Trade:
(WHAT’S THE MATTER WITH APPLE?),
(AAPL), (MSFT), (KO), (AMZN), (CLX), (NFLX),
(WHY YOUR OTHER INVESTMENT NEWSLETTER IS SO DANGEROUS)
It was 38 years ago today that Apple (AAPL) went public and has generated a 43,000% return since its $22 IPO price. If you bought one share of Apple way back then for $22 it would be worth a breathtaking $95,000 today.
I waited until the next crash and then bought it at $4, and it sits in one of my “no touch” ultra-long-term retirement portfolios today.
Suddenly, the torture I endured taking Steve Jobs around to visit the New York institutional investors during the early 1980s was worth it.
The great rule of thumb I have learned after 50 years of investment is that if you hold a stock long enough, the dividend will exceed your original capital cost, giving you a 100% a year annual cash flow.
Three months ago, Apple was the Teflon stock of the entire market, the company that could do no wrong, the only “safe” stock that traded. Any selling met a wave of buying from Oracle of Omaha Warren Buffet and Apple itself, limiting corrections to a feeble 4%.
What a difference three months make!
Now the shares have become a market pariah, targeted by algorithms and hedge funds alike, and beaten like the proverbial red-headed stepchild. As a result, the shares have plunged an eye-popping 29.61%, vaporizing $311 billion in market capitalization.
Which begs one to ask the question, “What’s the matter with Apple?” How can things go from so right to so wrong?
Just like success has many fathers, failure is an orphan.
The harsh truth is that Apple became too much of a good thing to too many people. Expectations had become excessive and it had become too widely owned by traders with weak hands. In other words, people like me.
I had been cautious of Apple for a while because if its massive China exposure. You don’t want to own a company that relies entirely on Middle Kingdom production during a running trade war. Apple sold an incredible 216 million iPhones in 2017, and all of them are made at the Foxconn factories in southern China.
Apple has become the whipping boy for both sides in the trade conflict. The company has always run the risk of its Foxconn workers arriving at work late someday, or not showing up at all at the prodding of Beijing. Recently, Trump said iPhones imported from China could be subject to the current 10%, soon to be 25% tariff.
The final nail in the coffin came on Monday morning when we learned of a lower Chinese court’s ruling against Apple in a lawsuit from QUALCOMM (QCOM). Never mind that the suit was years old and applied only to the company’s older phones. With the shares in free fall, that is just what investors DIDN’T want to hear.
However, Apple is not dead, it is just resting. Or, call it ripening.
Not only could Apple recover strongly from these abysmal levels, IT COULD DOUBLE IN VALUE.
The core of my argument (no pun intended) is that Apple is in the process of fundamentally evolving its business model. It is rapidly morphing from a one-time sale only hardware company to a recurring subscription services company. And that is where the big money is in the future.
Microsoft (MSFT) is already doing it, so are Amazon (AMZN) and Netflix (NFLX). In fact, everyone is doing it, even the Diary of a Mad Hedge Fund Trader.
In fact, Apple's services revenue could balloon to $100 billion in five years, compared to its estimated total sales this year of $265 billion.
This accomplishes several important things. It moves the company out of a 30% gross margin business to a 70% gross margin. It converts Apple from a highly cyclical to stable earnings growth. Stable earnings growth companies are awarded much higher share price multiples.
Look no further than my next-door neighbor, Clorox (CLX), which trades at a much loftier 23X multiple and Coca-Cola (KO) which can be found at generous 19X multiple. Earnings visibility is worth its weight in gold. This could make Apple’s current 14X multiple a thing of the past.
Of course, we are not going to see a straight line move from one dominant business to another, and the road along the road could be bumpy. We could easily see one more meltdown which takes us to the subterranean $160 handle.
But $10 of downside risk versus $170 of upside? I’ll take that all day long. I bet you will too!
Time for a Nibble?
Global Market Comments
September 4, 2018
Fiat Lux
Featured Trade:
(WEDNESDAY, OCTOBER 17, 2018, HOUSTON GLOBAL STRATEGY LUNCHEON),
(DON’T MISS THE SEPTEMBER 5 GLOBAL STRATEGY WEBINAR),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or
THE WAR WITH CANADA STARTS ON TUESDAY),
(MSFT), (VXX), (TLT), (AAPL), (KO), (GM), (F)
I have spent all weekend sitting by the phone, waiting for the call from Washington D.C. to re-activate my status as a Marine combat pilot.
Failure of the administration to reach a new NAFTA trade agreement by the Friday deadline makes such a conflict with Canada inevitable.
And while you may laugh at the prospect of an invasion from the North, the last time this happened Washington burned. You can still see the black scorch marks inside the White House today.
This is all a replay for me, when in 1991, I enjoyed an all-expenses paid vacation courtesy of Uncle Sam. That’s when I spent a year shuttling American fighter pilots from RAF Lakenheath to forward bases at Ramstein, Aviano, Cyprus, and Dharan, Saudi Arabia.
It may seem unlikely that our nation’s military would require the services of a decrepit 66-year-old. However, in my last conflict I ran into another draftee who was then 66. It seems that the Air Force then had a lot of F-111 fighter bombers left over from Vietnam that no one knew how to fly.
That’s the great thing about the military. It never throws anything away. Not even me. The life of our remaining B-52 Stratofortress bombers at their final retirement in 2050 will be 100 years.
Perhaps Canada will decide that discretion is the better part of valor, and simply wait for the World Trade Organization to declare the Trump tariffs illegal, which they obviously all are.
That would then force the administration to withdraw from the organization the U.S. created at the end of WWII to regulate fair trade and go rogue. But then what else is new?
And while there was immense media time devoted to the NAFTA talks, which only oversees trade with partners with around $2 trillion each, China, the 800-pound gorilla, is still lurking out there. It has a $12.2 trillion GDP and Trump is imposing tariffs on another $200 billion of their imports there today.
The corner that Trump has painted himself into is that he has made himself SO unpopular abroad, insulting virtually everyone but Russia, that no leader is willing to risk doing a deal with him lest they get kicked out of office.
I certainly felt this in Europe this summer where the discussion was all about Trump all of the time. When you insult a nation’s leader you insult everyone in that country. I haven’t received that kind of treatment since the Vietnam War was running hot and heavy in 1968.
I’ll tell you, I’d much rather be flying combat missions over enemy territory without a parachute than trading a market like we had last week. For months now, it has been utterly devoid of low risk/high return entry points for all asset classes.
It’s been a slow-motion melt-up virtually every day against the most horrific news backdrop imaginable. Such is the wonder of massive global excess liquidity. It Trumps everything.
NASDAQ topped 8,000, proving that if you aren’t loaded to the gills with technology stocks, as I have been pleading all year, you are out of your freaking mind. If you don’t own Apple, you are doubly screwed.
I doubt that such data is available, but I bet the illiterate and the uneducated have been beating more literate types in performance by a huge margin.
The unresponsiveness to news isn’t the only thing afflicting this market. As the summer coughs and sputters its way to a close, we enter September, notorious as the most horrific trading month of the year. And we are launching into it with the Mad Hedge Market Timing Index stuck in the 70s, overbought territory, for weeks now.
Blockbuster earnings, the principal impetus for rising share prices in 2018, are now firmly in the rearview mirror, and won’t make a reappearance for another month. Then they die completely in 2019.
Perhaps this is why my long volatility position in the (VXX) is doing moderately well, even though the indexes have been hitting new all-time highs, with the S&P 500 briefing kissing $292. I rather practice my golf swing rather than try to outtrade this market, even though I don’t play golf.
Other than NAFTA, there was little to trade off of last week. Apple (AAPL) shares continue to break new records, hitting an incredible $228, in front of their big iPhone launch this month. Trump announced he was freezing wages on 1 million-plus federal employees next year. That will solve their tax problems for sure.
Coca-Cola (KO) bought British owned Costa for $5 billion, where I regularly breakfast while traveling abroad, in the hopes that perhaps its 501st new drink launch this year will be successful.
Amazon (AMZN) is within sofa change of becoming the next $1 trillion market cap company, making the parents of founder Jeff Bezos the most successful angel investors in history, worth $30 billion.
U.S. auto sales are in free fall. Car company shares (GM), (F) continued their slide as they are pummeled on every side by administration economic policies. One has to ask the question of how long the American economy can survive after losing a major leg like this one. Home sales, another vital component, are also suddenly awful.
Trump attacked big tech. The market yawned.
With the Mad Hedge Market Timing Index at 71 and bounces around in the 70s all week, I am not inclined to reach for trades here. All three of my current positions are making money, my longs in Microsoft (MSFT) and volatility (VXX) and my short in the U.S. Treasury bond market (TLT).
August finally brought in a performance burst in the final days, leaving us with a respectable return of 2.13%. My 2018 year-to-date performance has clawed its way back up to 25.30% and my nine-year return appreciated to 303.48%. The Averaged Annualized Return stands at 34.35%. The more narrowly focused Mad Hedge Technology Fund Trade Alert performance is annualizing now at an impressive 28.59%.
This coming week housing statistics will give the most important insights on the state of the economy.
On Monday, September 3, there was a national holiday, Labor Day.
On Tuesday, September 4, at 9:45 AM the PMI Manufacturers Index is out. August Construction Spending is out at 10:00 AM.
On Wednesday, September 5 at 7:00 AM, we learn MBA Mortgage Applications for the previous week.
Thursday, September 6 leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 3,000 last week to 213,000. Also announced at 9:45 AM are the August PMI Services Index.
On Friday, September 7 the Baker Hughes Rig Count is announced at 1:00 PM EST.
As for me, the high point of my weekend was the funeral services for Senator John McCain. Boy, the Squids really know how to put on a ceremony. I suspect it may market a turning point for our broken American politics.
In the meantime, King Canute sits in his throne at the seashore ordering the tide not to rise.
Good luck and good trading.
Global Market Comments
April 26, 2018
Fiat Lux
Featured Trade:
(WEDNESDAY, JUNE 13, 2018, PHILADELPHIA, PA, GLOBAL STRATEGY LUNCHEON)
(WHY CONSUMER STAPLES ARE DYING),
(XLP), (PG), (KO), (PEP), (PM), (WMT), (AMZN),
(WHY YOUR OTHER INVESTMENT NEWSLETTER IS SO DANGEROUS)
Sometime in the early 1970?s, a friend of mine said I should take a look at a stock named Berkshire Hathaway (BRKA) run by a young stud named Warren Buffett.
I thought, ?Why the hell should I invest in a company that makes sheets??
After all, the American textile industry was in the middle of a long trek toward extinction that began in the 1920?s, and was only briefly interrupted by the hyper prosperity of WWII. The industry?s travails were simply an outcome of ever rising US standards of living, which pushed wages, and therefore costs, up.
It turns out that Warren Buffett made a lot more than sheets. However, he is not a young stud anymore, just an old one, like me.
Since then, Warren?s annual letter to investors has been an absolute ?must read? for me when it is published every spring.
It has been edited for the past half century by my friend, Carol Loomis, who just retired after a 60-year career with Fortune magazine. (I never wrote for them because their freelance rates were lousy).
Witty, insightful, and downright funny, I view it as a cross between a Harvard Business School seminar and a Berkeley anti establishment demonstration. You will find me lifting from it my ?Quotes of the Day? for the daily newsletter over the next several issues. There are some real zingers.
And what a year it has been!
Berkshire?s gain in net worth was $18.3 billion, which increased the share value by 8.3%, and today, the market capitalization stands at an impressive $343.4 billion. (Sorry Warren, but I clocked 30% last year, eat your heart out).
The shares are not for small timers, as one now costs $214,801, and no, they don?t sell half shares. This compares to a 1965 per share market value of $23.80, and is why the media are always going gaga over Warren Buffett.
If you?re lazy and don?t want to do the math, that works out to a compound annualized return of an eye popping 21.6%. This is why guessing what Warren is going to do next has become a major cottage industry (Progressive Insurance anyone?).
Warren brought in these numbers despite the fact that its largest non-insurance subsidiary, the old Burlington Northern Santa Fe Railroad (BNSF) suffered an awful year.
Extensive upgrades under construction and terrible winter weather disrupted service, causing the railroad to lose market share to rival Union Pacific (UNP).
I was kind of pissed when Warren bought BNSF in 2009 for a blockbuster $44 billion, as it was long my favorite trading vehicles for the sector. Since then, its book value has doubled. Typical Warren.
Buffett plans to fix the railroad?s current problems with $6 billion in new capital investment this year, one of the largest single capital investments in American history. Warren isn?t doing anything small these days.
Buffett also got a hickey from his investment in UK supermarket chain Tesco, which ran up a $444 million loss for Berkshire in 2014. Warren admits he was too slow in getting out of the shares, a rare move for the Oracle of Omaha, who rarely sells anything (which avoids capital gains taxes).
Warren increased his investment in all of his ?Big Four? holdings, American Express (AXP), Coca-Cola (KO), IBM (IBM), and Wells Fargo (WFC).
In addition, Berkshire owns options on Bank of America (BAC) stock, which have a current exercise value of $12.5 billion (purchased the day after the Mad Hedge Fund Trader issued a Trade Alert on said stock for an instant 300% gain on the options).
The secret to understanding Buffett picks over the years is that cash flow is king.
This means that he has never participated in the many technology booms over the decades, or fads of any other description, for that matter.
He says this is because he will never buy a business he doesn?t intrinsically understand, and they didn?t offer computer programming as an elective in high school during the Great Depression.
No doubt this has lowered his potential returns, but with the benefit of much lower volatility.
That makes his position in (IBM) a bit of a mystery, the worst performing Dow stock of the past two years. I would much rather own Apple (AAPL) myself, which also boasts great cash flow, and even a dividend these days (with a 1.50% yield).
Warren will be the first to admit that even he makes mistakes, sometimes, disastrous ones. He cites his worst one ever as a perfect example, his purchase of Dexter Shoes for $433 million in 1993. This was right before China entered the shoe business as a major competitor.
Not only did the company quickly go under, he exponentially compounded the error through buying the firm with an exchange of Berkshire Hathaway stock, which is now worth a staggering $5.7 billion.
Ouch, and ouch again!
Warren has also been mostly missing in action on the international front, believing that the mother load of investment opportunities runs through the US, and that its best days lie ahead. I believe the same.
Still, he has dipped his toe in foreign waters from time to time, and I was sometimes quick to jump on his coattails. A favorite of mine was his purchase of 10% of Chinese electric car factory BYD (BYDDF) in 2009, where I have captured a few doubles over the years.
Buffett expounds at great length the attractions of the insurance industry, which today remains the core of his business. For payment of a premium up front, the buyers of insurance policies receive a mere promise to perform in the future, sometimes as much as a half century off.
In the meantime, Warren can invest the money any way he wants. The model has been a real printing press for Buffett since he took over his first insurer in 1951, GEICO.
Much of the letter promotes the upcoming shareholders annual meeting, known as the ?Woodstock of Capitalism?.
There, the conglomerate?s many products will be for sale, including, Justin Boots (I have a pair), the gecko from GEICO (which insures my Tesla S-1), and See?s Candies (a Christmas addiction, love the peanut brittle!).
There, visitors can try their hand at Ping-Pong against Ariel Hsing, a 2012 American Olympic Team member, after Bill Gates and Buffett wear her down first.
They can try their hand against a national bridge champion (don?t play for money). And then there is the newspaper-throwing contest (Buffett?s first gainful employment).
Some 40,000 descend on remote Omaha for the firm?s annual event. All flights to the city are booked well in advance, with fares up to triple normal rates.
Hotels sell out too, and many now charge three-day minimums (after Warren, what is there to do in Omaha for two more days other than to visit PayPal?s technical support?). Buffett recommends Airbnb as a low budget option (for the single shareholders?).
I was amazed to learn that Berkshire files a wrist breaking 24,100-page Federal tax return (and I thought mine was bad!). Add to this a mind numbing 3,400 separate state tax returns.
Overall, Berkshire holdings account for more than 3% of the total US gross domestic product, but a far lesser share of the government?s total tax revenues, thanks to careful planning.
Buffett ends his letter by advertising for new acquisitions and listing his criteria. They include:
(1) ?Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) ?Demonstrated consistent earning power (future projections are of no interest to us, nor are ?turnaround? situations),
(3) ?Businesses earning good returns on equity while employing little or no debt,
(4) Managemen
t in place (we can?t supply it),
(5) Simple businesses (if there?s lots of technology, we won?t understand it),
(6) An offering price (we don?t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
Let me know if you have any offers.
To read the entire history of Warren Buffett?s prescient letters, please click here: http://www.berkshirehathaway.com/letters/letters.htm.
