Warren Buffett's Unusual New Bet
Introducing Stansberry Venture Value... Trump's 'massive tax plan' coming... U.S. inflation soars to a four-year high... Manufacturing is booming... A new record for banks... Why the rally could continue... Warren Buffett's unusual new bet... The legendary investor doubles down on airlines and Apple... A special note from The Atlas 400...
A special thanks to everyone who joined us for last night's event...
It was among the most valuable we've held to date, and the early feedback from attendees has been incredibly positive.
If you missed it, Porter and Stansberry Research senior analyst Bryan Beach walked attendees through their "10x Project" research... and officially unveiled our brand-new Stansberry Venture Value service for the first time.
Unfortunately, we're not able to offer a full replay of the event at this time... But you can learn more about this exclusive research – including how you can put it to use in your own portfolio – right here. (Please note: This does not lead to a long video presentation.)
U.S. stocks matched a 25-year record on Wednesday...
All three major indexes – the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite Index – closed at new all-time highs for the fifth day in a row. This rare feat hasn't occurred since January 2, 1992.
The latest record followed new comments from President Trump that his "massive tax plan" – which will lower rates "very, very substantially" for individuals and businesses – would be announced in the "not-too-distant future."
In the meantime, another "Trump Trade" driver – expectations of higher inflation – continues to strengthen...
Following Tuesday's strong U.S. producer price inflation data, yesterday, the U.S. Bureau of Labor Statistics reported consumer-price inflation rose to a new multiyear high.
The Consumer Price Index ("CPI") jumped 0.6% in January. This is the largest monthly rise in nearly four years. As you can see in the following chart, it's now rising at an annualized rate of 2.5%, its fastest pace since 2012...
The so-called "core" CPI – which excludes more volatile food and energy prices – is now well above 2% as well.
This suggests the Federal Reserve's preferred measure of inflation – the Personal Consumption Expenditures ("PCE"), which tends to lag CPI – could soon rise above the central bank's official target of 2%, too.
In other words, it's a strong sign the Fed could raise rates again sooner than previously believed. As Bloomberg reported yesterday...
A March interest-rate increase by the Federal Reserve, an unlikely scenario just days ago, is now suddenly on the table after an unexpectedly strong inflation print and hawkish testimony from Fed Chair Janet Yellen to Congress.
Derivatives traders are pricing in a 42% probability that the Fed raises rates at its March 14-15 meeting, up from 24% on February 6.
In related news, the Federal Reserve Bank of Philadelphia reported that its regional manufacturing index is soaring...
The Philly Fed's Manufacturing Business Outlook Index nearly doubled to 43.3 this month, up from just 23.6 in January.
This is the biggest one-month gain since June 2009. It's also the index's highest level since 1984, indicating manufacturing in the mid-Atlantic region is growing at its fastest pace in more than three decades.
Today's report follows a similar one from the New York Fed on Wednesday. Its Empire State Manufacturing Index rose to a more modest 18.7 in February. But this still represents a two-year high, and a nearly 200% rise from January's 6.5 level.
Together, these reports suggest the Institute for Supply Management's Manufacturing Index – a more widely followed national gauge of manufacturing activity – could make a surprise move to the upside this month.
As regular Digest readers know, expectations of higher inflation and growth have already been a boon for banks...
The benchmark KBW Bank Index has risen more than 28% since November's election, nearly three times better than the S&P 500...
As a result, several of the biggest and best-known bank stocks just did something they haven't done since before the financial crisis. As the Wall Street Journal reported earlier this week...
Shares in America's banks are booming again, with Goldman Sachs Group Inc., JPMorgan Chase & Co., and Bank of America Corp. hitting fresh trading milestones Tuesday that seemed unreachable during the crucible of the financial crisis.
Shares of Goldman hit a record high, passing a bar first set in 2007 before the financial crisis. JPMorgan also hit an all-time closing high...
Meanwhile, Bank of America traded in line with its net worth – or the difference between its assets and liabilities – for the first time since late 2008. The bank had been trading as low as 15% of this level in March 2009.
Yet despite the big rally so far, there could much larger gains ahead...
Why? Because after years of record-low rates, banks have cut expenses to the bone... meaning profits could soar if rates continue to rise. More from the Journal...
All the belt-tightening at banks means each extra dollar of revenue should be more profitable than the last. "They've come out of this thing lean and mean," said Ed Wachenheim of Greenhaven Associates, a $6 billion investment firm that counts Goldman, Citigroup Inc., and JPMorgan as its three biggest holdings. Once revenue starts increasing, "there's a ton of upside," he said.
Hopes for such positive "operating leverage" – when revenue grows at a faster pace than expenses – were in evidence during the bank-earnings season that wrapped up last month. The phrase was mentioned 11 times on Bank of America's call with analysts, nine times on Goldman's, and six times on Citigroup's.
Banks could also be among the biggest winners of Trump's proposed corporate tax plan...
This is because they typically qualify for fewer deductions than other businesses.
In fact, Bloomberg reports the effective federal tax rate for the biggest banks averaged 28% for the three years ending in 2015, compared with just 14% for the average large company.
If Trump reduces the nominal corporate tax rate from 35% to just 15% as promised, the six largest U.S. banks could see annual profits rise by a combined $12 billion – or an average of 14%.
Legendary investor Warren Buffett made headlines this week, following his firm's latest regulatory filings with the U.S. Securities and Exchange Commission...
Buffett's Berkshire Hathaway reported it owned 8 million shares – worth nearly $1 billion - of Stansberry's Investment Advisory portfolio holding Monsanto (MON) as of December 31.
As Digest readers may recall, Monsanto agreed to be purchased by German conglomerate Bayer AP last year for $66 billion, or $128 a share. Yet the deal is still awaiting regulatory approval. And MON shares are still trading for less than $109 per share – more than 15% less than the agreed-upon price – indicating the market is skeptical the deal will be approved.
What's notable in this case is that Berkshire bought this entire stake in the fourth quarter of 2016... after the deal was made. As Bloomberg merger-and-acquisitions columnist Brooke Sutherland noted on Tuesday, this suggests Buffett and/or Berkshire execs are making a big bet the deal will go through...
The quickest and cleanest way for Berkshire to realize a return on its investment would be for that takeover premium to be fully realized with a deal that's approved by both shareholders and regulators – especially because Berkshire's dumping of its stake in tractor maker Deere & Co. signals it's not too keen on the agriculture industry as a stand-alone investment.
It's a merger arbitrage play, essentially, on a deal that's far from a slam dunk... We don't know for sure if it was Buffett himself or one of his stock-picking deputies who made the investment. Either way, he no doubt gave his blessing. When the Oracle of Omaha turns arb, perhaps it's time to follow suit.
Depending on when Berkshire made its purchases, it could earn up to 30% – or more than $250 million – if the deal is approved. As of today's close, Stansberry's Investment Advisory subscribers are up more than 15% on the trade.
Buffett's firm also "doubled down" on some existing positions...
Berkshire reported it had increased its positions in the four biggest U.S. airlines by nearly seven times. It disclosed total stakes of more than $2.1 billion each in American Airlines (AAL), Delta Air Lines (DAL), Southwest Airlines (LUV), and United Continental (UAL).
Longtime readers may recall this is a significant departure for Buffett, who long considered airlines to be among the worst businesses in the world. As he wrote in Berkshire's 2007 annual letter to investors...
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
The airline industry's demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.
And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice.
Berkshire also nearly quadrupled its position in consumer-electronics giant Apple (AAPL) to 57.4 million shares, up from 15.2 million shares in the third quarter of last year.
Assuming Berkshire hasn't sold shares this quarter, the position – worth nearly $8 billion at today's share price – would make Buffett a top-10 shareholder in the world's most valuable company.
We'll close today with a short note from Gray Zurbruegg, director of The Atlas 400...
One trip down... eight to go.
I (Gray) and several Atlas members just returned from our fifth annual visit to Cabin Bluff.
Cabin Bluff is a sprawling, 24,000-acre hunting lodge in southern Georgia. We hunted quail and wild boar... shot trap and skeet... and the weather even allowed for saltwater fly-fishing. Some folks also played 18 holes on the property's private course, designed by legendary professional golfer Davis Love.
But we're just getting started this year.
Right now, 20 members are preparing to race through Baja California, Mexico.
The home of the famed Baja 1000 off-road race is just 75 miles south of San Diego in the coastal city of Ensenada. We'll begin our exploration of northern Baja's wide-open spaces from this world-class racing destination.
The trip launches from San Diego. We'll meet our fleet of helicopters in the city's harbor marina for the short flight to Ensenada.
As members tackle the 500-mile drive, they'll have access to pristine beaches... beautiful desert vistas... steep inland canyons... and quaint villages on the Pacific Ocean. Each team must navigate tight, narrow trails and jagged mountain passes filled with boulders. They'll charge forward on flat roads and spin tires in lush agave fields. Our vehicles are the same high-performance rally cars used by professional drivers.
All of this takes place before the end of February.
Later this year, we're exploring the Galapagos Islands... heli-fishing in British Columbia... and trekking Antarctica's otherworldly terrain, before heading to the South Pole.
On average, only 75 people actually visit the South Pole each year – Atlas 400 members are filling 11 of the spaces.
But these trips are only a way to facilitate the true meaning of Atlas...
To get people out of their daily routines, out of their comfort zones... and place them in a faraway land with a group of like-minded people.
That's the way to build friendships and make lasting relationships.
It's easy to open up when you've spent the day in a race car with someone, or zip-lined across Patagonia. It's different from your typical business-conference interaction.
We aren't looking for a lot of people to join Atlas. We're looking for the right people.
We want members who are positive... who see the value of building great relationships with other extraordinary people... and who want to contribute to one of the world's best and most exclusive groups.
This club is for successful people. The initiation fee is substantial ($30,000), and our excursions aren't cheap. But if you're at a point in your life where meaning is paramount, and you're in a position to enjoy the fruits of your labor, I urge you to apply.
We only accept new members twice a year. And our spring window is now open.
To access our membership application, click here. If you'd like to learn more about The Atlas 400, please give me a call at (410) 864-0878 or send me an e-mail at gzurbruegg@theatlas400.com
New 52-week highs (as of 2/15/17): China Construction Bank (0939.HK), Agricultural Bank of China (1288.HK), Industrial & Commercial Bank of China (1398.HK), Bank of China (3988.HK), Apple (AAPL), American Financial (AFG), AMETEK (AME), American Express (AXP), Axis Capital (AXS), Boeing (BA), Bancroft Fund (BCV), iShares MSCI BRIC Fund (BKF), Bank of Montreal (BMO), Berkshire Hathaway (BRK-B), CBRE Group (CBG), C.H. Robinson Worldwide (CHRW), First Trust Nasdaq Cybersecurity Fund (CIBR), CommScope (COMM), Cisco Systems (CSCO), iShares Select Dividend Fund (DVY), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), Cedar Fair (FUN), Goodyear Tire & Rubber (GT), Huntington Ingalls Industries (HII), PureFunds ISE Mobile Payments Fund (IPAY), JD.com (JD), 3M (MMM), AllianzGI Equity & Convertible Income Fund (NIE), Procter & Gamble (PG), PNC Financial Warrants (PNC-WT), Shopify (SHOP), Stanley Black & Decker (SWK), ProShares Ultra Financials Fund (UYG), Wabtec (WAB), and W.R. Berkley (WRB).
A slow day in the mailbag... Did you join us last night? We'd love to hear what you thought at feedback@stansberryresearch.com. And be sure to check out today's essay from political satirist and Digest contributing editor P.J. O'Rourke, below...
Regards,
Justin Brill
Baltimore, Maryland
February 16, 2017
My Worries About the Opposition to Trump – Part I
If you worry about politics (and that's my job at Stansberry Research), you have a wide selection of things to worry about these days.
I worry about some of the amateur-hour performances at the Trump White House.
For instance, the appointment of a national security advisor, Michael Flynn, who Trump fired because he got caught playing Post Office with Russia's ambassador to the U.S.
Or hastily conceived executive orders on immigration that are now bogged-down in federal courts... leaving America's already-swamped immigration system spinning its wheels in legal mud.
Or a foreign policy that seems to go back and forth between channeling John Wayne and John Kerry.
But – so far – Trump worries me less than the strident, shrieking, raging, and sometimes violent opposition to Trump. (Not that there hasn't been some ugly, loud, and angry behavior from Trump supporters... But I've decided to face my anxieties one worry at a time.)
I can't imagine waves of Trump supporters setting a limousine on fire if Hillary had won. A Tesla, maybe, to protest the California vote... But no. Most Trump supporters respect property rights, and anyway, Teslas seem to set themselves on fire.
Part of the opposition to Trump is, of course, a rational political disagreement. And such disagreements can be bruising. We have the last eight years of Obama in a cage match with Congress to prove it.
I'm not worried by the fact that President Trump faces opposition. That's proof democracy is functioning. We don't want a robotically programmed electorate. Voters would be like the "hosts" in Westworld, and when we started to malfunction we'd all get "wiped." (Never mind that some political commentators think this is what happened to voters in Rust Belt states.)
I'm not worried by opposition to Trump as a person. He is a bit of a goof. Though I'm not sure he's the goofiest person to ever sit behind the Oval Office desk. There was Jimmy Carter – Barney Fife if Barney had been Mayberry's local crackpot liberal instead of Mayberry's local crackpot deputy sheriff.
And I'm certainly not worried by opposition to Trump's policies. I oppose his immigration stance myself. My family's from Ireland, which used to be a major source of terrorists. And I'm skeptical about Trump's protectionist ideas about foreign trade. We shanty Irish could wind up paying $1,000 a sheet for Canadian plywood to build our shanties.
But another part of the opposition to Trump appears to be... frankly... insane.
Hysteria and fanaticism have infected part of the Trump opposition. It's a prominent part, or at least it's getting prominent coverage in the news.
The first indication of hysteria and fanaticism was Trump opponents branding Trump supporters as "fanatical" and "hysterical."
Psychologists call this projection. I'd call it: The fox is the finder. The stink lays behind her.
Trump opponents were the ones who fanatically backed Hillary or hysterically felt the Bern.
Although let's be fair... plenty of people voted for Hillary because of general ideological agreement with her... or because she looked to have a lower "volatility index" than Donald... or because she had the sheer guts to wear those big purple pants suits.
And plenty of people backed Bernie because he was clear and consistent in his convictions – an honest man, by Washington politician standards. (Which is like saying it's warm outside, by Vermont February standards.)
But let's also be fair to the Republican Party...
If you review Republican primary and caucus vote totals and track the ups and downs of Republican presidential hopefuls' poll standings, you'll see that support for Trump was the result of a long, slow, and often painful deliberative process. Watching Republicans choose a presidential candidate was like watching a C- college student writing a term paper.
Every campaign attracts a few fanatics and hysterics. But I covered the election cycle for nearly two years. Fanaticism and hysteria weren't the major factors in Trump's party nomination or electoral victory any more than Trump's very bad personal barber was the major factor in Trump's loss of the popular vote. (Having attended any number of Democratic campaign rallies I can tell you that, at the least, most Bernie supporters have worse haircuts than Trump does.)
The people who voted for Trump (or who, anyway, did not vote for Hillary) were determined to change America's political diet. But many of those voters picked Trump with much the same enthusiasm that husbands at the grocery store pick a green leafy vegetable for dinner... Marco Rubio spinach?... John Kasich kale?... Ted Cruz turnip greens?... Gary Johnson arugula?... Or, yuck, Jeb Bush broccoli?...
In this, the first of two columns where I'm the self-appointed chief worrywart about fanatical and hysterical opposition to Trump, I'd like to focus on the hysteria.
My Webster's defines "hysteria" as [with my commentary in brackets]:
...variously characterized by emotional excitability [yes], excessive anxiety [and how], sensory and motor disturbance [the "Women's March on Washington" could be so described if you were trying to get around D.C. that day], or the unconscious simulation of organic disorders, such as blindness [to the issues that gave Trump his election victory], deafness [to the voters talking about those issues], etc.
In the "etc." department, I spent the first few days of the Trump administration collecting news and editorial headline hysterics about Trump. I got my headlines from the Washington Post, not because the Post is anti-Trump (most big-city newspapers are), but because the Post specializes in political coverage.
The Washington Post is to politics what the Wall Street Journal is to economics. Therefore, one would expect the Post (although pro-liberal) to try to cast a cool and dispassionate eye on the world of politics the way the Journal (although pro-business) tries to cast a cool and dispassionate eye on the world of economics.
And yet, the following:
News stories:
"In the home of NATO and the European Union, dismay as Trump takes power"
"Trump's first day full of reminders of potential business conflicts"
"Elected on words, Trump faces collision with deeds"
"Fact-checking President Trump's inaugural address"
"The president painted a portrait of the United States that often was at variance with reality"
"Book about Trump for sale at National Museum of American History is riddled with falsehoods"
"Fury and internal power struggle mark Trump's tumultuous first days in office"
"Trump's disregard for truth threatens his ability to govern"
"Secret Service agent may face disciplinary action after suggesting she would not 'take a bullet' for Trump"
Opinion pieces:
"Is this what we've come to, America?"
"Trump couldn't see that Friday [the day of his inauguration] wasn't about him"
"In his inaugural address, Trump leaves America's better angels behind"
"This weekend, America can use all the prayer it can get"
"Trump completes hostile takeover of Washington, puts both parties on notice"
"An early surprise from Trump's team: Shame"
"Trump is Nixon without the polish"
But... What if we had elected Trump's polar opposite president? (Or since we're discussing mental illness, his "bipolar" opposite?) What if we had elected Elizabeth Warren?
Warren's administration might have gotten off to a bumpy start remarkably similar to Trump's. She could have issued an immigration ban every bit as sweeping if she invalidated the visas of anyone she considered an "oppressor" – males, to start with, especially those from countries where Sharia law prevails and women don't have equal rights.
Trade barriers would be raised higher than anything Trump has considered if Warren forbade imports from nations where workers aren't unionized, lack OSHA-approved working conditions, and don't receive a $10-per-hour "living wage."
No doubt there would have been a flurry of executive orders from the pen of President Warren. Medicare beneficiaries forbidden to smoke or drink and required to exercise daily. Students participating in school-choice voucher programs told to drop their books and march right back to inner-city Smith & Wesson Senior High where they came from.
Her cabinet nominees would make Trump's seem lukewarm and wishy-washy:
- Michael Moore for Secretary of Labor
- George Soros for Secretary of the Treasury
- Ralph Nader (yes, he's still alive) for Secretary of Transportation
- Bernie Sanders for Secretary of Defense
- Hillary... No, Bill... No, Chelsea Clinton for Secretary of State
She would have had plenty of opposition. But would it have been hysterical? I suppose there might have been a "Men's and the Little Women's March on Washington" with tens of thousands of protestors wearing red "Make America Great Again" ball caps instead of pink "Pussy Hats."
But I doubt it. I have a feeling that most of the people who deeply opposed President Warren would have been at work instead – trying to figure out how to make enough money to cover the upcoming Warren tax hikes.
Going back to my Webster's, I find another definition of "hysterical" – "extremely comical."
The hysterical opposition to Trump has been pretty funny so far. Let's hope that those who are in their right minds get the last laugh.
Regards,
P.J. O'Rourke