FINANCIAL MARKET UPDATE 5.4.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

HIGHLIGHTS FROM THE BERKSHIRE HATHAWAY MEETING

Berkshire Hathaway held its annual shareholder meeting over the weekend and live-streamed the event on Yahoo Finance from Los Angeles. This marks the second year in a row that Omaha has missed out on the tens of thousands of investors that migrate to the city to attend the event. Buffett eluded to a return to normal, saying, “I really hope, and I think the odds are very, very good, that we get to hold this next year in Omaha.” After not attending the meeting last year, Charlie Munger joined Buffett on stage, as did Vice Chairmen Greg Abel and Ajit Jain. The four individuals spent 3 ½ hours answering questions submitted through CNBC’s Becky Quick. Here are some of my top takeaways from the Q&A session.

Greg Able Confirmed as the Heir Apparent 

A question that has been looming for decades has finally been answered. When Buffett steps down as CEO, he will be replaced by Greg Abel. Those are obviously big shoes to fill, and I can’t say that I envy him. Abel rose through the ranks of Berkshire’s energy business and currently runs all non-insurance operations. At 59 years old, his relative youth may have contributed to his selection for the role over Ajit Jain (69), who runs the insurance operations. The announcement seemed to come by accident. When answering a question about the firm’s culture, Munger indicated he believes Berkshire’s culture will remain intact after he and Buffett move on, noting that “Greg will keep the culture.” Later, Buffett submitted a statement to CNBC confirming Abel, saying, “The directors are in agreement that if something were to happen to me tonight, it would be Greg who’d take over tomorrow morning.”

Thoughts on SPACs, Bitcoin, and Robinhood

Buffett and Munger spent some time railing against the speculative environment that exists today. One area, in particular, was the rise of Special Purpose Acquisition Companies (SPACs). SPACs are publicly traded shell companies that raise money with the aim of acquiring a private business and taking them public. Among the benefits for the private company is that it gets to sidestep the daunting regulatory processes and scrutiny of underwriters that accompany an Initial Public Offering (IPO). “It’s a different equation that you have if you’re working with other people’s money where you get the upside, and you have to give it back to them if you don’t do something, and frankly, we are not competitive with that. It won’t go on forever,” said Buffett.

When asked about their opinion on Bitcoin, Buffett dodged the question to avoid receiving grief from cryptocurrency supporters. Munger, on the other hand, did not hold back, saying Bitcoin is “disgusting and contrary to the interests of civilization.”

Buffett suggested Robinhood was “taking advantage of the gambling instincts of society, and it isn’t admirable,” to which Munger added, “I don’t mind the poor fish that gamble, I don’t like the professionals that take the suckers.” Offering some advice to retail investors, Buffett said, “There is a lot more to picking stocks than figuring out what is going to be a wonderful industry in the future.” He used the auto industry as an example. A hundred years ago, everyone knew that cars were the future. Since then, over 2,000 companies in the car-making business have gone bankrupt, according to Buffett.

In Defense of Berkshire’s Moves over the Last Year

Buffett has garnered some criticism for decisions he has made over the last year. Berkshire didn’t make any large acquisitions when prices were spiraling lower last Spring. It also reduced or eliminated stakes in airlines, banks, and Apple, each of which went on to rebound aggressively. “I don’t consider it a great moment in Berkshire’s history, but we have more net worth than any company on Earth,” he said.  He conceded that selling Apple was probably a mistake but indicated that he still doesn’t want to own the airlines based on his view of the future of business travel.

Inflation Pressures

Buffett reported that “we are seeing very substantial inflation” among Berkshire’s underlying businesses. “We are raising prices. People are rising prices to us and it’s being accepted,” he said. In addition to their industrial subsidiaries, Berkshire owns one of the country’s largest homebuilders Clayton Homes, and other home-related supply companies like Benjamin Moore paints and Shaw flooring. They are seeing rising commodity input costs as well as a shortage of labor and rising wages.

WEEK IN REVIEW

  • The Federal Reserve held its monetary policy meeting last week. As expected, the FOMC left interest rates and its bond buying program unchanged. While it acknowledged that economic activity is accelerating, Chairman Jerome Powell indicated that the recovery remained uneven and far from complete. After fielding repeated questions on the timing of winding down the bond purchase program, Powell reiterated that the accommodative policies will remain in place “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
  • Speaking of Maximum employment, the Department of Labor will publish its monthly jobs report this Friday. Economists are expecting another month of strong gains for April but still expect there to be a few million fewer jobs than prior to the pandemic. Yesterday the ISM published its Manufacturing index, which showed another strong month of manufacturing activity growth, although it grew at a slightly slower rate than the previous month. Other data to watch for this week include an update on the services sector on Wednesday and jobless claims on Thursday.
  • As of last Friday, 60% of companies have reported earnings for the 1st quarter. According to FactSet, if you blended the earnings growth rate for companies that have reported with the estimate for those that have yet to report, earnings growth would be 45.8%. If reported earnings growth remains at this level, it will be the fastest quarter of growth since 2010 (55.4%).

HOT READS

Markets

  • A Record Number of Companies are Beating Earnings Estimates (WSJ)
  • Consumer Fueled Economy pushes GDP to 6.4% First Quarter Gain (CNBC)
  • Fed Holds Interest Rates Near Zero, Sees Faster Growth and Higher Inflation (CNBC)

Investing

Other

  • What’s Next for Potential College Football Playoff Expansion (Sports Illustrated)
  • How Pixar Uses Hyper-Colors to Hack Your Brain (Wired)
  • Returning to Work, Redefining Teamwork (Forbes)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

ECONOMIC CALENDAR

Source: MarketWatch

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 12+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. He is also responsible for portfolio trading, research and thought leadership as well as analytics and operational efficiency for the Firm's Financial division. He lives in Omaha, NE, with his wife Kirsten.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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