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The Weekend Edition # 63
The Fed's message; No Fedspeak; Berkshire Hathaway Earnings; Calendars; Rumor vs. Reality
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover:
Market Recap - The message was clear
Macro - No Fedspeak
Earnings Results - Summary; Berkshire Hathaway
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Rumor vs Reality
Let’s dive in ⬇️
Market Recap - Oct 31 - Nov 04, 2022
“It is very premature to be thinking about pausing our rate hikes.” - Fed Chair Powell. The Fed Chair didn’t hold back in his message and couldn’t have been clearer. Stocks tumbled hard once the FOMC press conference was in full flow, on Wednesday Nov 02.
We’ve seen some recovery since then driven in part by the Jobs numbers on Friday which showed a slight increase in the employment rate from 3.6% to 3.7% and in part by the rumors of the re-opening of China. This also gave commodities quite a boost on Friday. Oil soared 4.84% on Friday alone.
Sector Rotations still remain bearish though - Energy and the Defensive Sectors still lead the way. As for the markets, we remain at an interesting point, where Friday saw somewhat of a recovery but, there seems to something of a shift in positioning after the Fed’s message and earnings season.
Next week we have CPI data coming out on Thursday but, after what the Fed said, I am skeptical of whether a slight decrease in the CPI is enough to give the markets a bullish boost. But, never say never.
So, let’s see what the Fed said.
Macro of the Week - No More Fedspeak
Alan Greenspan famously said: “If I turn out to be particularly clear, you've probably misunderstood what I've said.” That was the era of Fedspeak. A time when the Fed held meetings and their speeches were so complicated, people had a hard time analyzing every sentence.
We’ve come a long way since then and this time around, there was absolutely no confusion about what Fed Chair Powell said. They are not thinking about slowing down, let alone cutting rates any time soon. Fed Chair Powell repeated the message several times that there was “ways to go” and that they would “keep at it until the job is done”.
Here are a few key takeaways from the Fed press conference:
The unemployment situation is still not where the Fed wants it to be. While Job Vacancies have moved down from its peak there is still an imbalance of demand and supply. The Employment Cost Index numbers that I discussed last weekend was called “disappointing”.
The GDP growth rate turned positive last quarter which is a good sign that the economy is strong enough to withstand tightening. But, it would seem like this measure would need to come down as well as further consumption is destroyed in the economy.
When discussing overseas markets, they acknowledged that the tightening would make conditions difficult in other countries (with a soaring dollar and higher interest rates). But, they also said that leaving inflation unchecked would be a bigger problem. [The world is not going to be better off if we pause rates. Price stability will pay dividends for decades. And price stability in the US will benefit everyone.]
The Fed seems to be shrugging off concerns about the imminent inversion of even their own favorite recession indicator - the 3-month vs the 18-month yield curve and quite frankly confirmed that they don’t foresee a soft landing.
They’re also not particularly concerned with the stock market and sent the message that financial conditions need to tighten.
The incoming data suggests a higher terminal rate than what they had projected in the September meeting. The Summary of Economic Projections in the December meeting will show what that look likes.
The Fed’s message was decidedly hawkish which led to most analysts revising their terminal rate estimates upwards from the 5% estimate prior to the meeting. Larry Summers thinks the Fed’s terminal rate could reach 6%.
Earnings of the Week
Berkshire Hathaway $BRK-A / $BRK-B
Berkshire Hathaway - Warren Buffett’s company reported its earnings on yesterday for Q3, 2022. Here are some brief highlights:
The bottom-line showed a loss of -$2.58B as expected since unrealized profits and losses have to be included in Net Income. As Buffett keeps saying, a better measure is to look a the Net Operating Income After-Tax which came out at $7.8B for the quarter.
Berkshire’s equity portfolio amounted to $306.2B and the pre-tax unrealized losses stood at $12.9B as of Q3, 2022.
EPS to Class B shareholders for the quarter was -$1.22 vs $4.59, a year ago.
Share repurchases for the quarter was $1B but BRK still had $105.2B of cash and treasury bills.
The company did however, take a hit to their insurance business which took a pre-tax underwriting loss of $1.15B in Q3, with GEICO’s loss ratio at 97%, i.e., for every $100 of premium taken in, $97 has been paid out. This is quite high.
Occidental’s (OXY) earnings were included in this quarter’s results. But, since OXY reports after Berkshire, they will always have a one-quarter lag. (OXY reports earnings next week).
The Week Ahead
Economic Calendar - This calendar has an error. US Midterm elections are on Tuesday Nov 08, 2022
Closing Thoughts - Rumor vs. Reality
The rumors surrounding China’s re-opening seem to be getting out of hand now. The rumors have been denied over and over again but, there seems to be some hope attached to the prospect of China’s reopening as economic conditions have deteriorated to a level where people are speculating that there has to be a re-opening.
While the market is happy to act on rumors, it would seem that they’re more resistant when in comes to the reality of what the Fed and Central Bankers have to say about not pivoting.
While the Fed just reaffirmed their message about tightening, the BoE also raised their rates by 75 bps - the highest in 33 years. Over in Europe, there was some speculation of a dovish message which has now been put to rest by Lagarde who also reaffirmed that they are not done with hiking and will soon discuss balance sheet tightening measures.
Inflation remains the biggest evil across most economies and central banks can’t afford to loosen monetary policy at the moment. This brings with it the perils of asset valuations coming undone not just directly but, also indirectly by breaking the housing market, destroying demand and ultimately hurting corporate profits.
We’re in for a bumpy ride.
Here’s wishing you a happy weekend and safe investing.
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Ayesha Tariq, CFA
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None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $BRK-B of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.