FINANCIAL MARKET UPDATE 5.5.2020

STORY OF THE WEEK

FIVE HIGHLIGHTS FROM THE BERKSHIRE MEETING

Berkshire Hathaway held its annual shareholder meeting in Omaha this past Saturday. The event, frequently referred to as the “Woodstock for capitalists,” typically attracts tens of thousands to the city for a chance to see Warren Buffett and Charlie Munger speak. Like many other facets of life, however, this year’s meeting was dramatically altered by the coronavirus outbreak. “It doesn’t look like an annual meeting, it certainly doesn’t feel like an annual meeting,” Buffett said as he addressed an empty arena. While it may have lacked the typical crowd and festivities, there was no shortage of headlines from the live-streamed event. Below are a few highlights from the meeting.

1. Omaha Impacted by Lack of Berkshire Attendees

According to Visit Omaha, the city’s tourism bureau, the annual meeting generates $21.3 million for the local economy. With the event essentially canceled for visitors, businesses already reeling from the coronavirus response missed out on a major revenue opportunity. Other significant events that have been canceled in Omaha this year include the U.S. Olympic Swimming Trials and The NCAA baseball College World Series. The economic impact of those two events is estimated at $74 million and $70 million, respectively, according to Visit Omaha.

2. The Cash Pile Grew to $137 billion

During the Financial Crisis of 2008/09, Berkshire took advantage of its strong balance sheet and made investments in many distressed companies at attractive rates. With the market in turmoil during the 1st quarter, many people expected Berkshire to put some of its massive cash hoard to work in a similar fashion. When asked about this, Buffett responded: “We have not done anything because we don’t see anything that attractive to do.” According to Buffett, the support programs enacted by the Federal Reserve (which he commended) opened the door for companies to obtain financing at levels Berkshire deemed inadequate. Additionally, the pace at which Berkshire repurchased its own shares slowed during the quarter and was concentrated in the period before market volatility spiked.

3. Berkshire Exited the Airline Business

Berkshire sold its roughly 10% stakes in the country’s four largest airline companies: American, Delta, United, and Southwest. “A low probability event happened, and it particularly hurt… the airline business,” said Buffett. While he indicated the companies and their management teams were not at fault for their predicament, Buffett believes the fundamentals for the airline industry have changed. Beyond the 90%+ drop in air traffic that the industry is currently battling through, if travelers are slow to return, issues with excess capacity could persist. Additionally, the large amount of debt the companies are taking on to survive the crisis will weigh on future earnings.

4. Buffett and Munger are in Good Health

Adding to the unusual feel of this year’s meeting was the fact that Charlie Munger was not on stage. Instead, Warren Buffett was joined by Greg Abel, vice chairmen of Berkshire’s non-insurance operations. Buffett indicated that they did not think it would be wise for Munger (age 96) to make the trip from his home in California, given current conditions and that Munger would be back next year. He joked that Charlie had surpassed him technologically after becoming a daily user of the Zoom video conferencing app, comparing the feat to “stepping over a peanut or something.” “Charlie is in good health, I’m in good health,” said Buffett.

5. Nothing Can Stop the American Economy

Buffett struck a cautious tone when discussing the near-term outlook, noting that we still face an “extraordinarily wide” range of possibilities given the coronavirus outbreak. This caution was evident in Berkshire’s action (or lack of) during the 1st quarter, as Berkshire largely kept its equity portfolio unchanged (aside from the airlines). Buffett then went on to reiterate his faith in the long term prospects of the U.S. economy: “But even facing that, I would like to talk to you about the economic future of the country. Because I remain convinced, as I have — I was convinced of this in World War II, I was convinced of it during the Cuban Missile Crisis, 9/11, the Financial Crisis – that nothing can basically stop America”.

WEEK IN REVIEW

  • Data published last week by the Bureau of Economic Analysis showed that GDP shrank by 4.8% during the 1st quarter. The decline was more than economists forecast (-3.5%), marks the 1st negative reading since 2014, and represents the largest drop since the financial crisis. The market reaction to the data was muted, as investors widely expected a negative reading, and there were some positive news reports related to progress on a COVID-19 drug treatment. Economists expect the 2nd quarter GDP will be even worse since the lockdowns did not really begin until late in Q1.
  • Last week the Federal Reserve held its Federal Open Market Committee meeting, which directs the central bank’s monetary policy. As expected, the committee voted to leave its benchmark interest rate (federal funds rate) between 0.00% and 0.25%. The official post meeting statement indicated that they expect to maintain that target range until they are confident the economy has recovered from the crisis, employment returns, and inflation moves towards their 2% target. In addition to lowering the benchmark rate to near-zero, the Fed launched an unprecedented array of other economic support programs. In his post-meeting press conference, Chairmen Powell indicated that they do not intend to withdrawal those programs until they are confident the economy is well on the way to recovering.
  • The weekly jobless claims figure came in at 3.8 million last week, lifting the total number of claims filed to 30 million. As of April 18, 12.4% of the labor force was covered by unemployment benefits. One positive, in what is otherwise very painful data, is that the number of new claims has declined in each of the past four weeks.

HOT READS

Markets

  • US GDP Shrank 4.8% in the First Quarter Amid Biggest Contraction Since the Financial Crisis (CNBC)
  • Fed Pledges to Keep Rates Near Zero Until Full Employment, Inflation Come Back (CNBC)
  • U.S. Services Sector Posts Biggest Contraction Since 2009 as Coronavirus Halts Economic Activity (CNBC)

Investing

  • Finding Your Balance in a Topsy-Turvy Market (Zweig)
  • What Happens When the Parts Are Bigger than the Whole? (Irrelevant Investor) Why the FANG stocks can’t grow this fast forever
  • How Will the Crisis Impact Housing Prices? (AWOCS)

Other

  • Coronavirus Canceled Warren Buffett’s Shareholder Party. Omaha is Suffering. (WSJ)
  • ESPN Study: Fans Favor Sports Returning Without Spectators Rather Than Wait (ESPN)

ECONOMIC CALENDAR

Source: MarketWatch

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)

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402.763.2967

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

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