The Weekend Edition # 86

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here’s what we cover:

• Market Recap - Labor report

• Review - Berkshire Hathaway Annual Meeting

• Earnings - A few themes to consider

• Articles of the week - FOMC review

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - Have fun!

Let’s dive in ⬇️

Market Recap - 01 May - 05 May, 2023 📉📈

It seems like not a week goes by that we don’t experience something exciting. JP Morgan took over First Republic Bank on Monday for a cash payment of $10.6B. It’s probably the fastest deal I’ve ever seen, and it will be marginally EPS accretive to JPM.

Treasury Secretary announced the X-date on the debt ceiling as June 1 and the Fed raised rates by 25bps, leaving the door open for possible rate increases, depending on the data. This definitely sent some ripples through the market.

We also had the ECB raise rates by 25bps, slowing the pace of rate hikes but confirming that they were not done hiking.

And on Friday, we got some of that data the Fed looks at, with the Jobs Report. We saw unemployment decline to 3.4% with no change in the labor force participation rate. This is one of the tightest job markets the US has seen in decades. That too in the face of such aggressive rate hikes.

While Chair Powell doesn’t think there is a wage spiral pushing up inflation, the extremely tight labor market can be a contributing factor to inflation. However, as inflation starts to decline, companies will be faced with a situation of lower corporate profits - something we’re already seeing with earnings. Given this situation, companies will be forced to cut costs and that too, in terms of labor. Also something we’re seeing in various parts of the market.

The US has been plagued with a situation of a shortage of workers, particularly in the services sector and some of this is now normalizing. “Employment continued to trend up in professional and business services, health care, leisure and hospitality, and social assistance”1.

However, wages still remain considerably high (rightfully so) to attract employees and compensate for inflation. But, productivity is decreasing. The BLS reported on Thursday, mentioned that productivity had decreased by -2.7% during Q1, 20232. And when labor productivity decreases, higher wages cannot be sustained for long. Higher productivity almost always commands better wages and we're seeing the opposite now.

The commodities market has been slightly muted this week with some of the recession trade positions being put back on. Gold is back above $2000 and oil continues to hover between $69-$71/bbl, falling for the third week in a row.

Review - Berkshire Hathaway Meeting 🌎

I know it’s a cliché for a fundamental analyst to revere Warren Buffett but, it can’t be helped. I must admit though, I think I might be a little more partial to Charlie Munger because of his more direct approach.

Yesterday, was the Berkshire Hathaway Annual Meeting. They sat there for 5.5 hours answering questions. Warren is 93 and Charlie is 99. I can’t imagine I could be doing that at their age. They amaze me.

But, what amazes me most about them is how content they are with their lives. They have no regrets. And while they do sound old, they don’t sound bitter.

As you can imagine there were lengthy discussions on all kinds of subjects. But the words that stuck with me were this:

I am a big fan of Buffett and Munger but not just because of their investing prowess but because of their “simple” wisdom.

I could write a whole tale about what they said during their meeting but, the better thing to do would be for you to watch it for yourself. And since you’re not watching it live, you can watch it at 2x speed. 🙂

But, I will paraphrase some of the more interesting things they said.

• The US Dollar will continue to remain the reserve currency of the world. There is no other option; and nobody understands the situation better than Powell. But he’s not in control of fiscal policy.

• The US will not default on their debt. That would be catastrophic.

• We’ve never made an emotional decision. You definitely want to be a no emotion person in business.

• You don’t need to understand every detail about a company to invest in it. You don’t need to know how an iPhone is made but you need to understand consumer behavior. People would rather give up their $35000 car than give up their iPhone.

• AI will be useful but it can’t replace genes. Charlier Munger: “Good old fashioned intelligence works just as well.”

• The Fed is not the problem. They can’t solve the fiscal problem. I don’t worry about the Fed. It’s fulfilling the functions for which it was established.

• I don’t know where all of this is headed. If you’re going to keep borrowing, printing money and spending it, eventually it’s going to create trouble. We pay a price.

• Praise by name and criticize by category. You don’t need to vilify people to make a point. Stay away from toxic people. Get them out of your life fast. And do it tactfully, if possible.

• Japan has done some strange things there. It’s in economic stasis but the country is not going to hell. They have a cohesive culture.

• Banking: You got a whole lot of people who don’t understand how the system works (including Congress). The American public is as confused about banking as ever. You don’t know what has happened to the stickiness of deposits.

• Also on banking: Deposits are no longer sticky. You can have a run in a few seconds now. The way it hasn’t been addressed properly, who knows where it all goes. You could look at FRC’s 10K and see they were offering non-government guaranteed mortgages - JUMBO loans3 - for fixed rates and sometimes fixed for 10 years. You don’t give options like that. The world ignored it, until it blew up. CEOs and management should be held liable. If you screw it up, you should be punished.

And finally, they came prepared for the banking questions with two signs that they placed in front of their names. You’ve gotta love their sense of humor! 😅🤣

Earnings - Highlights 📝

Here’s the FactSet Summary for the Week:

The blended earnings decline has improved yet again this week to -2.2% from -3.7% last week and -6.2% week prior.

A few themes from earnings season to consider:

• Producer Prices (PPI) for consumer staples have been declining at a faster rate than Consumer Prices (CPI), which has in fact kept margins elevated as I’ve mentioned before. But this gap is now narrowing as CPI starts to decline and companies are losing some of their pricing power.

• Restaurant spending had a tailwind from better weather in January and Cost of living Adjustments. Spending has been declining in March and April.

• Leisure spending is still going strong but, these were 1Q results and will probably not carry through to the rest of the year.

• Inventory still remains a problem for most retailers as the holiday clearance sales didn’t get rid of the problem. Most of big retail reports in two weeks.

• Receivables days will begin to lengthen as companies selling on credit get paid slower.

Articles of the Week 📖

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The Week Ahead 📅

Earnings Calendar 

Economic Calendar in Eastern Time

Closing Thoughts - Have fun!

I started writing this newsletter at a time when my work focused on banking rather than the stock market. Every weekend, I would sit to catch up with the most pertinent news of the week, what happened in the markets, and dive into the economic data.

So, I started writing about it. I figured if I was doing the research anyway, I might as well post it for other people, in case they find it useful. And many did find it useful and the positive reception was wonderful.

I say this now because something in Warren Buffett’s discussion yesterday struck a chord with me. He said all he and Charlie have ever done is their very best. That’s it, that’s the advice - always give it your best. And that’s what I did.

For months, I wrote this Weekend Edition without anyone taking notice but, I still put my heart into it. And it has paid off to a large extent. The experience has certainly been very rewarding.

Sure, it helps that Warren and Charlie are both very talented but, a lot of that talent comes from the years of hard work. The hard work that they continue to put in because there are never any shortcuts in life.

Even now, at an age when they should be retired, they’re working. Because to them it’s never felt like work. They do what they do because it’s their passion. Perhaps, obsession even.

Yes, we need to have goals but, that doesn’t mean that we need to let the outcome define us. Warren said so… not knowing what the outcome is half the fun. But, you don’t play just for the outcome. You do it for the love of the game. That’s what keeps you going. And never forget to have fun!

And we should all be so lucky to find that in our lives.

Here’s wishing you safe investing.

Please take a moment to share and subscribe, if you found this newsletter useful.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.

Full disclaimer: https://ayeshatariq.substack.com/about